In recent years the various King Reports on Corporate Governance have recommended more accountability for directors of companies. These recommendations have found their way into the new Companies Act which was signed in April 2009 and is set to become law within the next 18 months.
The Act introduces a number of important changes to the roles and duties of persons acting formally or informally as directors. The changes have been anticipated by most directors holding office in public companies. However, directors of smaller private companies are still going about their business as usual.
With the threat of criminal sanctions and personal liability, we encourage all our clients who act as directors of their companies or other companies to come up to speed with the requirements of the new Act before it takes effect.
Duties of directors
The Act provides for the following statutory fiduciary duties for directors:
- To act in good faith and for a proper purpose;
-To act in the best interests of the company; and
-To act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and who has the general knowledge, skill and experience of that director.
The Act also places a positive duty on a director to disclose any material information to the board regarding any business or contract the company may be interested or involved in; and not to use his position to gain a personal advantage or to knowingly cause harm to the company.
A defence – the business judgment rule
The “business judgment rule” provides a director with a defence to a contravention of his statutory duties. A director will have fulfilled his duties if:
- He has taken reasonably diligent steps to become informed of the matter;
-He had no material personal interest in the matter (or he has disclosed an interest); and
-He had a rational basis for believing and did believe that the decision taken was in the best interests of the company.
A director is allowed to rely on the performance or information provided by third parties (managers, employees, professional advisers) when making a decision. If that information turns out to be incorrect, he may still be excused from liability.
Disclosure of personal interests
If a director (or his wife, family member, or other company which he controls) has a personal financial interest in any matter, business or contract in which the company is also involved or has an interest, he must disclose that interest in writing to his fellow directors.
If that interest relates to a matter to be considered at an upcoming board meeting, he must do the following:
- disclose the interest and its general nature before the matter is considered at the meeting;
-disclose to the meeting any material information relating to the matter and known to the director;
-disclose any observations or insights relating to the matter if required to do so by the other directors;
-must leave the meeting immediately after making any disclosure and not take part in the consideration of the matter;(For the purposes of maintaining the necessary quorum at that meeting, the absent director is still to be regarded as being present)
- not execute any document on behalf of the company in relation to the matter.
Liability of directors
Directors will still be liable under the common law for any breach of their duties or for any negligence when carrying out such duties. However section 77(3) of the new Act also provides for certain specific liabilities, including:
- A director will be liable if a distribution to shareholders is approved by him despite him knowing that the company will not comply with the solvency and liquidity test (i.e. company’s assets exceed its liabilities and the company is unable to pay its debts within 12 months of the date the distribution was made);
-A director will be liable if the company provides financial assistance for the purchase of its own shares when he knows that doing so was inconsistent with the Act and the company’s memorandum;
-A director acting on behalf of the company despite knowing that he lacked the authority to do so will be liable;
-If a director signs any financial statements that were false or misleading, he will be liable.
Section 77(9) does provide an escape from this liability under certain limited circumstances (other than for wilful misconduct or wilful breach of trust). If it appears to the court that:
- The director is or may be liable, but has acted honestly and reasonably; or
-Having regard to all the circumstances, including those connected with the appointment of the director, it would be fair to excuse the director.
A director who is found liable under the common law or new Act can either be fined, imprisoned, ordered to pay damages or repay the value of any opportunity lost by the company as a result of the director’s conduct.
The company may not pass any resolution waiving any right or claim against directors whose conduct is found wanting. The company is also prohibited from indemnifying the director against any claims made against him or from paying any fine on his behalf.
