Director’s liability for breach of their duties - CIPC

1 Director s liability for breach of their duties By : Adv. Tina Rabilall28thMay 2018 Agenda a fiduciary 2. directors duties Sources Common law Companies Act liability Sources Companies Act, 2008 Memorandum of Incorporation King III / King IV 3. Director liability (cont) Reckless trading Piercing the corporate veil Derivative action Impositions liabilities checklist 4. Questions and Answers Being a fiduciary Being a exactly does this mean & entail? Fiduciaryduty=Faith,Trust,Holdingaperson intrustAsafiduciary, a fiduciaryDirector duties Directors have responsibility to consistently represent the best interests of the :Introduction Directorsareappointedasfiduciaries;assuc htheymustdirecttheorganisation saffairswithadutyofdiligence,loyalty&obe dience.

2 Directorshavemanyfiduciarydutiestowardth eorganisation theymaybeheldpersonallyliableforbreachof theirfiduciaryduties Underthedirectionoftheboard,directorshav eauthoritytoexercisealltheirpowers&perfo rmtheirdutiesasprovidedforbytheCompanies Act2008,aswellastheorganisation sMemorandumofIncorporation(MOI) duties It director , *: executivedirector non-executivedirector( NED ) leadindependentdirectortheActdoesn tmakedistinctionbetweenexecutive,NEDS&in dependentdirectorsinpracticethere sareimportantdifferencesbetweentheseposi tions ex-officiodirector includes members of a board committee & alternate directors. Also see Companies Act 08: S1, S66, S75-76 & Reg. 38. Also see King III Annex & King IV A quick word about being a director Theroleofadirectorencompassesseveraldive rseduties itisimpossibletodictaterulestodirectorst hatgoverneverysituationaseachissueisjudg eddifferently Dutiesareextendedtovarioustypesofdirecto rs,includingprescribedofficers&membersof theorganisation sauditcommittee Directorsmustallocatesufficienttimetopro perlyfulfillingtheirduties&responsibilit iestowardtheorganisation theymustensurethattheyarefullyinformedab outthe;financial,social&politicalissuesr elativetotheorganisation&industrybeingse rvedThe source of a director s duties are essentially found in 4 primary areas.

3 ( theAct )otherstatutes,includingregulationswhich regulateorganisations(asapplicable) sMemorandumofIncorporation( MOI ), , (KingIII&KingIV ),beingasetofrecommendedbusinessguidelin eswhicharerecognisedinternationallyA distinction Director sfiduciarydutiesareunderpinnedbycompanyl aw&theAct,whilsttheiradditionaldutiesowe dtotheorganisationmaybeestablished&agree dthrough,forexample:theorganisation sMOIthedirector sLetterofAppointmentthedirector sServiceLevelAgreementswiththeorganisati onthedirector sJobDescriptionThefiduciarydutiesattache dtodirectorsaremandatory,irrespectiveoft hesizeoftheorganisationthedirectorserves Common law is one of the main sources to understand a director s duties .. There are essentially six (6) main common law duties , namely the duty to: i.

4 Exercise reasonable care, skill & diligence ii. act in the best interest of the organisation iii. act within their powers & for a proper purpose iv. exercise independent judgement v. avoid conflicts of interest vi. not accept benefits from third parties/the no-profit rules the main purpose of the common law is to protect the organisation any failure to fulfillthese duties could potentially result in the fiduciary being held liable for the damages suffered by the organisation or a third party as a result of such failure Unpacking elements of common ,skill& expectedtoapplythesamedegreeofcare&skill thatisreasonablyexpectedfromanypersonwit hthesameknowledge&skills musthonestlyapplytheirmindwhenmakingbusi ness-relateddecisions mustensuretheyarefullyinformedpriortomak ingadecisionregardingthebusiness areentitledtoseekopinionsfromtheirco-dir ectors&expertsoutsideoftheorganisation, isexpectedtodevotereasonabletimetotheaff airsoftheorganisationUnpacking elements of common.

5 Mustmakealldecisions&actsolelyforthebene fitoftheorganisation ; maynotexercisethepowersgrantedtothemfora nyunauthorisedorimproperpurpose maynotexceedtheirpowers& ; mustalwaysexerciseindependent&unbiasedju dgementwhenreachingadecisionfortheorgani sation shouldavoidbeinginfluencedbyotherparties involvedinthedecisionmakingprocessUnpack ing elements of common ; shouldnotplacethemselvesinpositionsinwhi chtheirpersonalinterestsconflictwiththeo rganisation sinterests mustfullydisclosefactsrelatedtowhattheyb elievemaybecomeaconflict mayneverplacetheirowninterestsbeforetheo rganisation sinterests directorsmaynotprofitintheirpersonalcapa cityusingtheirpositionasdirectorstodoso( withtheexceptionoffulldisclosure&consent fromshareholders)Director s common law duties have been partially codified in the Companies Act There ssignificantoverlapofadirector sfiduciarydutiesfoundincommonlaw;someoft hembeingpartiallycodifiedintheCompaniesA ct.

6 Commonlawdutieshavenotbeenalteredbythisc odificationintheAct codificationofdutiesintheActisintendedto makethesedutiesmoreaccessibletodirectors (&others)sharingsimilarliabilities,andsh areholderswhowouldwanttoholddirectorstot hoseduties thecommonlawdutiesintheActprevailoverany conflictingcommonlawdutiesifthereisnocon flict,thecommonlawremainsapplicableStatu tory duties by directors Mostimportantstatutorydutiesbydirectorsa reto: actingoodfaith&properpurpose actinthebestinterestsoftheorganisation avoidusingtheirpositionasdirectororusing corporateinformationfortheirownadvantage wheretheyknowinglycauseharmtotheorganisa tion conveyinformationtoorganisationwhichmayb eofimportance exercisereasonablecare,skill&diligencein performingtheirduties declareanypersonalfinancialinterestssuch wheretheorganisationmaybeaffectedand/ori nterested TheActcategoricallyplacesonerouslegaldut iesupontheshouldersofnon-directors( ),despitethemnothavingdecision-makingpow erssuchasthecasewithdirectorsStatutory duties by directorsTheActmakesdirectorsmoreaccount able&.

7 Requiresincreasedtransparency,accountabi lity& ,thedirectordutieshaveincreasedwithgreat errisks hasgivendirectorspowers,whichwerepreviou slyreservedforshareholders,increasingdir ectors'exposuretogreaterrisks& liability Directorsmustavoidconflictbetweentheirdu ties,theirpersonalinterests&thoseoftheor ganisation, of the most important statutory duties is ensuring directors act in best interests of the organisation .. TheActspecificallydoesnotspelloutwhatism eantbyadirectoractingintheorganisation sbestinterests,butleavesthisforthecourts todecidebaseduponourcommonlaw theActplacesemphasisoncorporatesocialres ponsibility,aswellasconstitutionalrights &obligationsaccordingly,directorsareexpe ctedtoapplytheirgoodjudgement,coupledwit htheself- replacesKingIII;howevermuchofthecontext& IV makes specific reference to the duties of directors OtherprinciplesinKingIV whichspeakdirectlytothedutiesofdirectors includethatthegoverningbody(board)should .

8 Governtheethicsoftheorganisationinawayth atsupportstheestablishmentofanethicalcul ture (Principle2) ensurethattheorganisationis&isseentobear esponsiblecorporatecitizen (Principle3) appreciatethattheorganisation scorepurpose,itsrisks&opportunities,stra tegy,businessmodel,performance&sustainab ledevelopmentareallinseparableelementsof thevaluecreationprocess (Principle4) ensurethatreportsareissuedbytheorganisat iontoenablestakeholderstomakeinformedass essmentsoftheorganisation sperformance,anditsshort,medium&long-ter mprospects (Principle5) serveasthefocalpoint&custodianofcorporat egovernanceintheorganisation (Principle6)Director liability The Companies Act holds directors & POs liable in numerous circumstances where they fail to comply with their duties .. Wheredirectors&prescribedofficers( POs )failintheirfiduciarydutiestowardtheorga nisation(orareatfaultintheorganisationth eyserve)whichcauseslossestotheorganisati on,theymaybeheldpersonallyliabletotheorg anisation,withconsequencesattachedtothei rnon-performanceandornegligencetoactDire ctor (statute) ,orfailuretoact(whetherintentionallyorno t)resultsinanyformofdamage,loss.

9 Directors should familiarise themselves with the statutory duties imposed upon them through the Act The Companies Act sets out numerous circumstances wherein directors & prescribed officers (POs) may be held personally liable, including: breaching their fiduciary duties breaching their duty to act with reasonable care & skill acting without authority directly or indirectly agreeing to a matter / action despite knowing that it was prohibited by the Act defrauding a creditor, employee or shareholder knowingly signing, issuing, authorising or consenting to untrue, false or misleading financial statements or prospectuses when attending or participating in a meeting, or when required to make a decision, and knowingly failing to vote against: issuing of unauthorised shares or securities Source: Companies Act 2008 (Sections 22, 44, 45, 46, 55, 77, 78, 95, 98, 104, 105, 106, 214).

10 Acting recklessly, or with gross negligence may also attract liability granting of options despite knowing that the options were unauthorised in terms of the Act s provisions providing financial assistance to acquire the organisation s shares despite knowing that the assistance contravenes the Act or the organisation s MOI a resolution being approved for a distribution despite knowing that the distribution contravenes the Act & does not meet the solvency & liquidity test acquiring the organisation s own shares --or that of its holding company --despite knowing that it contravened the organisation s own share re-purchase requirements share allotments to the public despite knowing that it contravened the requirements of the Act The Act further states that an organisation