Directors

LU 4_Theme 1

(C) S KOOT 2020

 Who is a director?
Is as a member of the Board of the
Can also include company.
certain persons
who are not
members of the
DIRECTOR
The Board manages the day
Board of the
to day business activities of
company.
the company.

May conclude a separate

service / other contract Must run the company according
with the company, to the standards and obligations
but is not necessarily an set out in the Companies Act (s 76)
employee of the company. and the common law.

Giles, J Directors vs Shareholders 15 February 2016 https://www.michalsons.com/blog/director-vs-shareholder/20662 (accessed 7 July 2020)

Other types of
directors an alternate
director

Non-Board
a related person
member a prescribed officer
directors
include

a member of a
committee of the
Board (regardless
of whether or not
the person is also a
member of the
Board

Giles, J Directors vs Shareholders 15 February 2016 https://www.michalsons.com/blog/director-vs-shareholder/20662 (accessed 7 July 2020)

Images: https://www.123rf.com/clipart-vector/company_directors.html?oriSearch=care&sti=m00fq8l5m06ty8xonw|&mediapopup=88772675 (accessed 10 July 2020)
 The different types of
directors

Executive Temporary
directors directors
Non-executive (or Alternate
outside) directors directors

are appointed on a
temporary basis or
to fill a vacancy
are salaried and
run the
company on a are not part of the act of behalf of a director
day-to-day executive management when they cannot
basis team. They play an personally fulfil their
important role in duties.
providing objective
judgement independent of
management on issues
facing the company.

Giles, J Directors vs Shareholders 15 February 2016 https://www.michalsons.com/blog/director-vs-shareholder/20662 (accessed 7 July 2020)

 NUMBER OF DIRECTORS

Private companies and Public and non-profit

personal liability companies
companies must have at must have at least
least

1 3
director directors

The MOI can specify a higher number that the minimum number of directors
required in terms of the Companies Act.

Schulze, H. Kelbrick, R. Manamela, T. Stoop, P. Hurter, E. Manamela, E. Stoop, C & Masuku, B. General Principles of Commercial Law 8th ed (2016) Juta: Claremont, (hereinafrter Schulze et al), p 329
 Directors’ rights and duties
Determined by:
an existing contract with the company;
the company’s constitution;
legislation and
common law. fiduciary duties
obligations of care and skill

The Companies Act:

introduced a partial codification of directors’ duties (similar to common law
fiduciary duties.) and the duty to perform their duties with reasonable care and skill.

Common law will apply for as long as it is consistent with the provisions of the
Companies Act.
The result:
A very high standard is set for directors.
Legislature’s intention is to encourage directors to act honestly and to be
accountable for their decisions and actions.

Schulze et al 329
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(Accessed 10 July 2020)
 Codified duties of a director are:

• To disclose to the board any personal financial interest in company matters;

• Not to use the position of director or info obtained as a director, to gain an advantage for himself
or for another person, or knowingly to cause harm to the company or a subsidiary of the company.

• To disclose to the board of directors any material information that comes to a director’s attention

• To act in good faith and for a proper purpose.

• To act in the best interests of the company.

• To act with reasonable degree of care, skill and diligence.

Schulze et al 329 - 330

 A Fiduciary is a person who is in a special position of trust.

A director is a fiduciary and therefore must act in good

faith and fulfil the duties of his office honestly.

His fiduciary duty has four aspects:-

a duty to exercise his
misuse of company a duty to act in powers for a proper
property good faith purpose

A director must not put himself in a

conflicts of interest. position where there is an actual or
potential conflict between his duty to
the company and his personal interests;

Norton Rose Fulbright South Africa Duties and Responsibilities of Company Directors 28 October 2005 http://www.mondaq.com/southafrica/contracts-and-commercial-law/35736/duties-and-
responsibilities-of-company-directors (accessed 7 July 2020)
How can the duty of reasonable care be described?

The non-executive
director must display
the same care a layman
might be expected to
take in the same
circumstances on his
own behalf. An executive
director's service
Degree of care required
contract will normally
is different for
stipulate that he must
executive and non-
devote his full
executive directors.
attention to the
business of the company.

degree of
care

Norton Rose Fulbright South Africa Duties and Responsibilities of Company Directors 28 October 2005 http://www.mondaq.com/southafrica/contracts-and-commercial-law/35736/duties-and-
responsibilities-of-company-directors (accessed 7 July 2020)
 Why is the independence of a board of directors so
important?

Directors have the duty to

always act in the best interests of the company and
never to use their position at the company to gain an advantage for
either themselves or persons related to them

Compliance with this duty requires each director to apply an

independent state of mind and objective judgement. Personal
interest should never cloud their judgment
In order to ensure that no one individual, or group of individuals yield
unfettered power on the Board, King IV proposes the appointment of
independent non-executive directors.
Some directors are classified as ‘independent’ directors based on
the level of their association with or interest in the company.
This classification is particularly relevant to ensure a balance of power on
the board, and is a key consideration in the composition of the board
Deloitte, King IV | Independent directors How to assess independence https://www2.deloitte.com/za/en/pages/africa-centre-for-corporate-governance/articles/kingiv_independent_directors.html
(accessed 7 July 2020)
 What requirements does the King IV Report set out,
regarding the composition of the board of directors?

The composition of Boards is created to ensure not only a

balance of power, but also to ensure the inclusion of a
diverse group of directors.
King IV points out that a balance can only be created if the
composition of the Board accounts for a balance of:
required skills,
experience,
diversity,
independence and
Knowledge of the company and industry.

All of these factors (including independence) collectively yield a

balanced Board.

Deloitte, King IV | Independent directors How to assess independence https://www2.deloitte.com/za/en/pages/africa-centre-for-corporate-governance/articles/kingiv_independent_directors.html

(accessed 7 July 2020)
 Which test(s) would be used to determine whether a director
has acted with reasonable care, skill and diligence?

BUT but there is also a subjective

An objective test is element in that the general
applied to determine what knowledge, skill and
the reasonable director experience of the
would have done in the particular director in
same situation question are taken into
account.

Note: Section 76 thus provides that a director must act with the degree of care and skill that may reasonably be
expected of a person carrying out the functions of a director and having the general knowledge, skill and
experience of that director.
Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-
electronic.pdf (accessed 7 July 2020)
 Is available to directors as a defence
Is used to determine whether a
for escaping liability for a suspected
director should be held liable for
breach of the statutory law of
decisions that they make which yield
‘Standards of directors’ conduct’, (the
undesirable results for the company.
partial codification of directors’ duties).
(S 76 of the Act)

Directors need to A director will not be held liable for their decision if
measure their they made an
decisions and actions • informed decision,
against the business • in good faith,
judgement rule or test. • after due diligence,
• where the director honestly
believed that the decision would benefit the company.

Truter, A , SchoemanLaw Inc The Business Judgment Rule 2016 https://www.schoemanlaw.co.za/wp-content/uploads/2016/10/The-Business-Judgement-Rule.pdf (accessed 7 July 2020)
What conditions must be met for a director to have
fulfilled their statutory duties?

In terms of section 76(4)(a) of the Act – when:

he/she takes the reasonable and

diligent steps to become sufficiently
informed about the specific matter in
question or topic under consideration by
the board;

he/she rationally believes he/she has no material personal

financial interest in the subject
that the decision taken was in matter of the decision taken, or
the best interests of the he/she discloses such interest to
company. the board or shareholders, and/or

Truter, A , SchoemanLaw Inc The Business Judgment Rule 2016 https://www.schoemanlaw.co.za/wp-content/uploads/2016/10/The-Business-Judgement-Rule.pdf (accessed 7 July 2020)
LIABILITY OF DIRECTORS:
The Companies Act, provides that a director may be held personally liable.

A company may recover loss, damages or costs sustained by the company from
the director where:

He/she has Where he/she has breached Where the director

breached a common the duty to act with condoned the reckless/
law fiduciary duty care, skill and diligence fraudulent conduct of the
business

Where he/she is party to an act or

an omission by the company Where the director acted on behalf of
knowing that the act or omission the company knowing that he did not
was calculated to defraud a have the authority to do so
stakeholder of the company

Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-electronic.pdf (accessed 7 July 2020)
Images: https://www.123rf.com/clipart-vector/company_directors.html?alttext=1&oriSearch=company%20directors%20r&start=110&sti=nly5sykdvc4aln1fc8|&mediapopup=145170838 (accessed 10 July 2020)
 Limitation of liability, indemnification and
directors’ insurance

A company may, in terms of section 78(5) of the Act,

indemnify a director in respect of any liability arising,
(except where the MOI provides otherwise).
This is except for liability arising from:
wilful misconduct or wilful breach of trust on the part of the
director; or
where a fine has been imposed as a consequence of a director
having been convicted of an offence; or
where a director acted recklessly, or
despite knowing he or she lacked authority, or with the intent to
defraud creditors, or
with any other fraudulent purpose.
Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-
electronic.pdf (accessed 7 July 2020)
Section 78(7) of the Act provides that a company may
(subject to its MOI) purchase insurance to protect:
a director against liability or expenses for which it is permitted
to indemnify a director; and the company against any liability for
which the company is permitted to indemnify a director, or

any contingency including any expenses it is permitted to

advance in respect of the defending of litigation by a director, or

to indemnify a director for such expenses.

Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-electronic.pdf
(accessed 7 July 2020)
Image: https://www.123rf.com/clipart-vector/company_directors_protection.html?oriSearch=company+directors&sti=ls2g6pbajfc2stw545|&mediapopup=66280295 (accessed 10 July 2020)
 Ineligibility and Disqualification of Directors

Such person is
INELIGIBLE prohibited
completely from being
a director

Such person may still be

permitted to be a
DISQUALIFIED
director if the court
sanctions (authorises)
such appointment.

Schoeman Louw, N Schoeman Law Inc Ineligibility and Disqualification of Directors 20 September, 2013 https://www.schoemanlaw.co.za/employee-share-schemes-inter-vivos-trusts-shareholders/
(accessed 7 July 2020)
 juristic persons

a person who does not

satisfy the minimum
requirements set out in the
MOI

Categories of persons
who are expressly minors
ineligible to be
company directors persons suffering from some
and these are: legal disability, (i.e. being
declared by a court
incapable of managing their
own affairs)

a person disqualified in terms of

any other additional grounds of
ineligibility as set out in the MOI.

Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-electronic.pdf (accessed 7 July 2020)
Image: https://www.123rf.com/clipart-vector/ineligible.html?oriSearch=company+directors&sti=n5cyl38dhesbmkjc07|&mediapopup=23964599(accessed 10 July 2020)
 A person may be disqualified from being a director in any
one of the following instances:

A person who is prohibited

by a court or any other A person who is declared an unrehabilitated
public regulation from delinquent by a court insolvent
becoming a director

A person who has been convicted and imprisoned

A person who has been removed
without an option of a fine, or has been fined more
from an office of trust on grounds
than the prescribed amount for theft, fraud, forgery,
of misconduct involving
perjury or other offences specified in section
dishonesty;
69(8)(b)(iv) of the Act.

Werksmans Attorneys Companies Act No. 71 of 2008 Duties and Liabilities of Directors http://www.werksmans.com/wp-content/uploads/2013/04/Director-duties-and-liabilities-FINAL-updated-
electronic.pdf (accessed 7 July 2020
 Grounds of delinquency
s 162(5) of the Act: a court ‘must’ make an order declaring a
person a delinquent director if he –

consented to serve as a director, 2 while under an order of

1 probation, acted as a
or acted in the capacity of a
director or prescribed officer, director in a manner that
while ineligible or contravened that order;
disqualified to be a director;

while a director, took personal

4 advantage of information or an
3 while a director, opportunity, or intentionally or by gross
grossly abused negligence inflicted harm on the
this position; company or a subsidiary of the
company;

Cassim, R DEREBUS "Delinquent directors under the Companies Act 71 of 2008." Jan/Feb 2013 http://www.saflii.org/za/journals/DEREBUS/2013/14.html (accessed 7 July 2020)
5 6
while a director, acted in a has at least twice been
manner that amounted to gross personally convicted of an
negligence, wilful misconduct offence or subjected to an
or breach of trust, administrative fine or penalty in
(unauthorised acts, reckless terms of any legislation; or
trading or fraud);

8 within a period of five years, was a director

of one or more companies or was a
has repeatedly managing member of one or more close
7 been subject to a corporations, or controlled or participated
compliance notice in the control of a juristic person that was
or similar convicted of an offence or subjected to an
enforcement administrative fine or similar penalty in
mechanism; terms of any legislation.

Cassim, R DEREBUS "Delinquent directors under the Companies Act 71 of 2008." Jan/Feb 2013 http://www.saflii.org/za/journals/DEREBUS/2013/14.html (accessed 7 July 2020)
In terms of s 162(7) of the Act, a court ‘may’ declare a person under
probation if the person –

while a director, acts in or

supports a decision of the while a director, acts in a
company to act in a manner manner materially
which results in oppressive inconsistent with the
Grounds duties of a director;
or unfairly prejudicial
of
conduct; or
Probation

within ten years after the effective date (1 May 2011) was a director
of more than one company or a managing member of more than one
close corporation and during that time two or more of those
companies or close corporations failed to fully pay all of their
creditors or meet all their obligations
(except in terms of a Business Rescue plan as contemplated by the
Act or a compromise with creditors in terms of Section 155 of the
Act)

Cassim, R DEREBUS "Delinquent directors under the Companies Act 71 of 2008." Jan/Feb 2013 http://www.saflii.org/za/journals/DEREBUS/2013/14.html (accessed 7 July 2020)
Delinquency v Probation order
An order for probation
applies to directors who
were present at meetings
Any declaration of of companies and failed to
delinquency will subsist vote against a resolution
for the lifetime of the despite the inability of the
person declared company to satisfy the
delinquent. solvency and liquidity test as
set out in the Act.

An order for probation

(similar to a suspended
sentence) may subsist for a
period not exceeding five
years.

Eric Levenstein The Delinquent director: no tolerance for errant directors 24 February 2013 https://www.werksmans.com/legal-updates-and-opinions/the-delinquent-director-no-tolerance-for-errant-directors/
(accessed 7 July 2020)
Image: https://www.123rf.com/clipart-vector/delinquent.html?oriSearch=company+directors+delinquent&sti=mxh32schqskg72mxq4|&mediapopup=99696013 (accessed 10 July 2020)
 What recourse does a person - who has been
declared delinquent - have to challenge that status?

May apply to court to at any time more than

suspend the order of three years after the
delinquency and order of delinquency was
substitute an order of made or
probation;

to set aside an order of

an order of probation at delinquency at any time
any time after such order more than two years
was made. after it was suspended or

Eric Levenstein The Delinquent director: no tolerance for errant directors 24 February 2013 https://www.werksmans.com/legal-updates-and-opinions/the-delinquent-director-no-
tolerance-for-errant-directors/ (accessed 7 July 2020)
Winding-up, dissolution and deregistration

The existence of a company is terminated by its dissolution.

Winding up/liquidation = the process of dealing with the

company’s affairs before its dissolution.

This entails:
the tracing and realising of the company’s assets;
applying the proceeds to pay creditors of the company, (according to
their order of preference) and
to distribute any residue among the shareholders (in accordance with
their rights).

A company that has ceased to trade may be de-registered.

Schulze et al 332
 Liability of directors
(winding up of a company)
Liquidator has a duty to investigate whether any person may be
personally liable for the way in which its affairs were being carried on.

Liability may arise in the case of a company, in the following

instances:

If there has been a breach of faith
/ trust in relation to the company
or
if any property of the company has
been misapplied or retained.
Any person who was knowingly a
party to the carrying on of the
company’s business in a reckless
way/with intent of defrauding
creditors.

A promoter, director or officer may be ordered by court to May be declared liable by a court for any / all of
repay money / restore property to the company the debts and liabilities of the company

Schulze et al 488 - 489

 Liability may arise in the case of a close corporation in the following instances:
Joint & several liability of member/s with the CC
Any person who was knowingly a party to the
carrying on of the CC’s business in a reckless
way/with intent of defrauding creditors or for a
fraudulent purpose
If there is a gross abuse of the separate juristic
personality of the CC
If CC is unable to pay its debts
If CC is unable to pay its debts
If a member/former member, officer, accounting
officer or person involved in the formation of the
CC has misapplied or retained money /
property of the CC or is guilty of a breach of
faith in relation to the CC,
where the Close Corporations Act uses
personal liability as a sanction for non-compliance
with its provisions.
May be declared liable by a court for any / all of the
debts and liabilities of the CC.
Court may disregard separate existence and order that
the person is personally liable.
payments made to the members by reason of
their membership may be recovered by liquidator if
the payments were made within 2 years before the
winding up and while the CC did not comply with the
solvency and liquidity requirements;.
liquidator may recover any salary paid to a member in
his capacity as officer / employee within 2 years before
the winding up if payment was not bona fide /
reasonable;
court may order such person to contribute to the
assets of the CC
Schulze et al 488 - 489
 The effect on company directors when
winding up a company

Directors to comply with

Directors are divested
of all their powers
certain statutory duties,
Provisional liquidator such as:
furnishing a statement of the company’s
and later the liquidator, affairs, and
takes control of the in the case of a company unable to pay
company’s affairs its debts, attending meetings with
creditors.

(This also applies to members of a CC).

Schulze et al 487