A guide to responsibilities and duties of directors in the South African context.
Congrats! You are now the director of a company, which, at this stage probably sounds equal parts exciting and intimidating. Luckily, that’s exactly why we are here. We’re going to guide you through the responsibilities of your new role. If you have any questions, just give us a shout.
When it comes to the responsibilities of a director, there are two significant sources of information:
the Companies Act 71 of 2008, which we’ll refer to as “the Act” and came into operation in 2011, and
your company’s Memorandum of Incorporation (commonly referred to as the company’s MOI). This document is almost like the company’s constitution; a set of rules that tells you – amongst other things – what to do and what not to do.
It’s fair to say that the provisions of the Act trump the provisions of your companies MOI. This is because the MOI isn’t allowed to contain anything that is inconsistent with the Act, and it also can’t alter any of the unalterable provisions of the Act. Where it does, the provisions are void. That’s exactly why it is a good idea to understand what is expected of you in terms of the company’s MOI and the Act. Before we dive into what you have to do and what you’re not allowed to do, we should take a look at why your actions – and sometimes your omissions – as director of the company are so important.
Section 1 of the Act defines a director as, in essence, a member of the board of the company. Section 66 of the Act, in turn, explains that “the business and affairs of a company must be managed by or under the direction of its board”. As the company is an artificial legal entity, the only way that it can function is through human agency, and that’s where the directors come in.
Directors are, simply put, the hands and feet that run the company.
Of course, there are usually employees who do the dirty work; people who know more about certain aspects of the business than you ever will. But as a director, you are responsible — sometimes alone, sometimes as part of a group — for making big decisions that will ultimately determine the direction in which the company is steered.
It's important to understand that the Act not only prescribes what directors should and should not do; but also how to do them. In this regard, sections 75 and 76 list the most significant duties of a director. As a director of a company, you must:
Disclose any personal financial interest in advance. A good approach is to disclose interest if there’s something that you are worried about. Rather be safe than sorry.
Use your position as director and the information obtained as result thereof to the benefit of the company. Don’t use corporate opportunities to your own benefit; your responsibilities lie towards the company.
Act in good faith and for a proper purpose, in the best interests of the company. Here, we apply the reasonable person test. You have to act with the degree of care, skill and diligence that may reasonably be expected of someone acting as the director of that specific company and having the general knowledge, skill, and experience as that director. We refer to this as the reasonable person test.
Communicate material information to the board as soon as practically possible. Take
reasonably diligent steps to become informed about the relevant matter. No one expects you to know everything about everything. It’s your job to keep yourself informed to enable you to make decisions that are in the best interest of the company.
As with most things in life, there are also consequences if you do not act in line with your responsibilities as director. Without turning too many pages of the Act, we arrive at section 77, which explains to us the liability of directors. In line with this section, you, as director, may be held liable for any loss, damages or costs sustained by the company as a result of any breach if you:
Act in the name of the company despite knowing that you lack the authority to do so;
Act in a manner despite knowing that it is prohibited;
Are party to an act or omission by the company, knowing that it is calculated to defraud someone;
Sign or consent to or authorise the publication of materially false or misleading prospectus or financial statements; or
Are present at a meeting or some sort of decision-making and fail to vote against the issuing of unauthorised shares or any of the other provisions contained in section 77(3) of the Act.
A director’s liability is joint and several with any other person who is or may be held liable for the same act. This means that you can be held liable for all of the damages suffered by someone as a result of the relevant breach of duties.
It can sound quite scary, we know. If you’re ever unsure about what to do (or what not to do!) reach out and we’ll be there to help.