Personal liability of directors in terms of the companies act

When can an executive director be held personally liable for his/her conduct in a company in terms of the companies act , 71 of 2008?

  1. To answer this question it is necessary to first look at the relevant provisions of the Companies Act,71 of 2008 ( “the Act”).
  1. This article will not deal with all the relevant provisions of the Act or all instances when a director may be held liable but the salient portions thereof.
  1. Prior to dealing with the issue of liability, we will deal with the duties of directors as imposed by the Act.
  1. The Act partially codifies the common law fiduciary duties, in the event that that the Act does not cater for an instance then the common law will prevail – in all other instances the Act is the determining authority.
  1. Section 76 of the New Companies Act addresses the standard of conduct expected from directors and extends such conduct beyond the common law duty of directors by prescribing that directors are required to act honestly, in good faith and in a manner that they reasonably believe to be in the best interest if, and for the benefit of the company.
  1. Section 76(3) states that a director of a company, when acting in that capacity, must exercise the powers to perform the functions of a director, which include inter alia acting:
  • In good faith and for proper purpose; and
  • In the best interest of the company.
  1. Directors may be held liable, during the course of employment by way of:
  • Disregarding juristic personality, for example, in terms of the old Companies Act ( Act 61 of 1973) and New Companies Acts; and
  • Piercing the corporate veil in terms of common law and legislation.
  1. The juristic personality of a company may be disregarded in terms of legislative provisions and common law.
  1. The common law position will not be elaborated on in this article but may be viewed at the following link :
  1. The Companies Act of 1973 made provision for instances in which creditors could hold directors liable regarding “reckless behaviour” but mainly on the winding up of the judicial entity.
  1. Section 424(1) of the Old Companies Act reads as follows:

“4242(1) When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct”.

  1. The Act contains the following provisions pertaining to the liability of directors, which include inter alia:
  • Section 20(6) – this section states that each shareholder has a damages claim against ANY person ( including a director) who intentionally, fraudulently or due to gross negligence causes the company to act against the provisions of the Act;
  • Section 77 – this section pertains to the liability of directors and liability of directors and prescribed officers. Many circumstances are listed in which a director can be held liable in the following circumstances, including but not limited to:
  • Section 77(2)(a) and (b) states that the directors can be held liable in accordance with common law relating to a breach of fiduciary duties or delict for any loss, damage or cost incurred as a result of the breach by a director[2]; or
  • Section 77(3)(a) states that a director can be held liable if the director knowingly acts outside the scope of his/her authority;
  • Section 77(3)(b) reads as follows:

“77. A director if a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having.

(b) acquiesced in the carrying on of the company’s business despite knowing that it was conducted in a manner prohibited by section 22(1)”

Section 22(1) reads as follows:

“22(1) A company must not carry on its business recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose.”

  • Section 77(3)(c) states that a director will also be held liable if the director:

“…has been 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.”

  • A director may be held liable for Signing off/consenting to false or misleading financial statements and a prospectus/written statements relating to secondary offers to the public; and/or
  • Being present at a meeting and failing to vote against the issuing of unauthorized shares, issuing of authorised securities without shareholder approval, granting of options not authorised, provision of financial assistance to persons as well as directors inconsistent with the MOI or Act, allowing for unauthorized distributions, acquisitions of company or child company shares inconsistent with the provisions of the Act and or an allotment which is inconsistent with the provisions of the Act.
  1. It must be noted that in terms of section 77(7) such claim arising from section 77 is subject to a three-year prescription period.
  2. The question as to the liability of a director depends on the facts of the particular matter. The Court has a discretion to find that the director may be liable, but that he/she acted honestly and reasonably or that, in the circumstances, it would be fair to excuse the director for his/her conduct.
  1. In addition to the above Section 218(2) the Act prescribes that any person who contravenes the Act is liable to any person for any loss or damage suffered by that person as a result of that contravention.
  1. Further to this, a shareholder may ,in terms of Section 81(1)(e) it is prescribed that a shareholder can apply for the winding up of a company in the event that the directors have acted in a manner that is fraudulent and illegal OR that the company’s assets are misapplied and mismanaged;
  1. The Act also makes provision for a “defence” in terms of Section 77(9) and Section 76(4) that may be raised by a director when there are allegations of his/her impropriety.
  1. Section 76(4) states that if the directors have acted in good faith and in the best interest of the company the section determines that the director will have satisfied his/her duty as a director if:

“In any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve the director, wither wholly or partly, from any liability set out in this section, on any terms the court considers just if it appears to the court that-

  1. The juristic personality of a company will only be disregarded in the circumstances as set out in the sections mentioned above, in all these circumstances it is evident that the directors, who are to be held liable in their personal capacities, should have acted in a manner contrary to the best interest of the company and should it be shown that the directors have not discharged their fiduciary duties in circumstances where the director has acted unreasonably and dishonestly and instances ( depending on the fact of the specific case), it would be fair to excuse the director.
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