Article 3 of 3 in a series on financially distressed companies.

In order to fully comprehend directors’ liability, it is important to consider Section 76 of the Act, which setsout the duties of directors when conducting business. Section 76 addresses the standards of directors’ conduct and extends the common law fiduciary duties, which require directors to exercise and perform their duties –

  • in good faith and for proper purpose;
  • in the best interests of the company; and
  • with the degree of care, skill and diligence that may be reasonably expected of a person in carrying out the same function in relation to a company as carried out by a director, and having the general knowledge, skill and experience of that director, which is an objective test.

Section 76 further provides that a director will be regarded to have satisfied the requirements above if the director:

  • has taken reasonably diligent steps to become informed about a matter;
  • has made a decision, or supported the decision of a committee or the board with regard to that matter; and
  • had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

Furthermore, a director is required to communicate to the board, at the earliest practicable opportunity, any material information that comes to his/her attention unless he/she –

  • reasonably believes the information is publicly available or known to other directors; and
  • is bound by a legal or ethical obligation of confidentiality.

Section 77 of the Act sets out the statutory liability imposed on directors. A director of a company may be held liable for the following:

  • breaching his/her fiduciary duties relating to non-disclosure or personal interests; misusing the position as director to gain personal advantage; or not acting in good faith and for proper purpose or in the best interest of the company;
  • not acting with the requisite care, skill and diligence (Non-Fiduciary Duty, but is based on delictual or Aquilian liability for negligence);
  • acting in the name of the company despite knowing he/she does not have the authority to do so;
  • reckless trading (including trading under insolvent conditions);
  • an act calculated to defraud a creditor, employee or shareholder of the company, or that had another fraudulent purpose;
  • signing, consenting to or authorising the publication of financial statements that are false and misleading in a material respect;
  • issuing unauthorised shares or securities;
  • providing financial assistance contrary to the provisions of the Act;
  • approving a distribution or acquiring the company’s own shares contrary to the provisions of the Act;
  • breaching the provisions of the Act or the company’s Memorandum of Incorporation (“MOI”);
  • failing to vote against certain decisions as required by the Act; and
  • any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty contemplated in Section 76 of the Act.

The above list is non-exhaustive and, as set out in Section 77(3)(b), a director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having –

  • agreed in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by Section 22(1);
  • being a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose.

For all purposes, Section 22(1) of the Act stipulates that a company must not carry on its business in a reckless manner, with gross negligence, with intent to defraud any person, for any fraudulent purpose or to trade under insolvent circumstances.  Therefore, in the strictest sense, directors may be held personally liable to the company for any loss or losses incurred through knowingly carrying on the business of the company recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose.

The above list is lengthy in nature and may be seen as dissuasive. Section 77(9) of the Act however brings some relief to directors whereby they can raise the defence of honest and reasonable behaviour. This section states that in any proceedings against a director other than wilful misconduct or wilful breach of trust, the court may relieve the directors either wholly or in part from liability set out in Section 77 or on any terms the court deems just, if –

  • it appears to the court that the director has acted honestly or reasonably; and
  • having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.

CONCLUSION

Business rescue is recognised as a valuable part of the Act. Section 7(k) of the Act provides that among the objectives of the Act is the aim to “provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders”.

There has been a move away from a culture of liquidation to a culture of rescue, in that if a company is not able to be restored to a position of solvency, then the next best option is for it to at least achieve a better result for the creditors than what would arise from liquidation. Liquidation is still an option, but it is the last resort.

Business rescue is still an option if a company has been placed in liquidation, however, this is only permitted prior to the final winding up of the company.

For guidance and assistance in these unprecedent economically challenging times, feel free to contact our experienced team of lawyers to assist you in taking the right actions at the right time to protect your company and its directors.

Berna Koch                                   
BCom (Law); LLB
Head of Litigation                           
E-mail: Berna@sstlaw.co.za                        
Phone: 012 361 9823

Etienne Fourie
LLB
Litigation Department
E-mail:  ca1@sstlaw.co.za