Notes on Company Directors and the Companies Act

  • Introduction

    • Definition of a company as an 'artificial person'
    • Roles of directors likened to 'brains and arms' of the company
    • Directors think and act for the company, being instruments of its will
    • Directors significantly influence business operations within the constraints of the Memorandum of Incorporation (MOI)
    • Accountability of directors for their actions

  • Section 66 of the Companies Act

    • The board of directors is responsible for managing the business and affairs of the company
    • The board must exercise all powers and functions granted by the Act or the MOI
    • Board composition:
    • Private or personal liability companies: at least one director
    • Public or non-profit companies: at least three directors
    • MOI may require a higher number of directors

  • MOI Provisions (Section 66)

    • May authorize named persons to appoint/remove directors
    • Provision for ex officio directors
    • Appointment or election of alternate directors

  • Ineligibility and Disqualification of Directors (Section 69)

    • Ineligibility includes:
    • Juristic persons or minors
    • Failure to meet MOI qualifications
    • Disqualification causes include:
    • Declared delinquent
    • Unrehabilitated insolvent
    • Removed for dishonesty or criminal conviction (fraud, misrepresentation)

  • Directors' Remuneration

    • Directors may be compensated, pending approval by a special resolution
    • Special resolutions must be approved by shareholders within the last two years

  • Directors’ Duties

    • Governed previously by South African common law
    • Duty to act with utmost good faith, in the company's best interests
    • Must exercise care, skill, and diligence for company success
    • Liability for failing common law duties could result in monetary damages

  • Standard of Conduct (Section 76)

    • Extends expectations beyond common law duties
    • Emphasis on acting honestly and in good faith
    • Directors must:
    • Act for proper purposes and in the company's best interest
    • Exercise due care, skill, and diligence equivalent to a reasonably competent director
    • Obligation to stay informed and communicate material information to the board

  • Board Committees (Section 72)

    • Right to appoint board committees and delegate board authority
    • Committees may include non-directors but must not be disqualified

  • Liabilities of Directors (Section 77)

    • Directors can be liable for company losses due to duty breaches (fiduciary duty)
    • Directors cannot exclude liability for wrongful actions
    • Liabilities include:
    • Acting without authority
    • Authorizing misleading actions/statements
    • Liability is joint and several with others involved
    • Legal actions for liability must commence within three years after the breach

  • Reckless Trading (Section 22)

    • Prohibits conducting business recklessly or fraudulently
    • Directors face liability if the company incurs debts without reasonable payment prospects

  • Business Rescue (Section 142)

    • Directors must provide records and statements of affairs to business rescue practitioners
    • Duties to cooperate with business rescue procedures

  • Criminal Acts (Section 214)

    • Directors can face criminal charges if knowingly involved in fraudulent actions

  • Defense Against Liability

    • Provision for 'honest and reasonable' behavior as a defense against liability
    • Court may relieve directors from liability based on circumstances of their actions

  • Assessment of Reasonable Behavior

    • Depends on specific circumstances facing the director
    • Standard of conduct assessed under objective reasoning for a 'reasonable director'

  • Who May File Applications (Section 162)

    • Various stakeholders (companies, shareholders, employees) may seek court intervention for delinquency declarations against directors

  • Gross Negligence and Delinquency

    • Directors risk delinquency declarations from gross negligence or misconduct
    • Personal advantage from information contrary to the Act leads to delinquency risk

  • Remedies for Delinquent Directors

    • Courts can mandate remedial actions such as education, community service, or compensation payments to affected parties
    • Opportunities to apply for suspension or setting aside delinquency orders exist after certain timeframes.