Liability of Directors and Prescribed Officers

Liability of Directors and Prescribed Officers

Written on 04/01/2021
MJ Minter Inc

Doing business in South Africa can be daunting given the complex raft of regulations and company law. Section 77 codifies liability for directors and prescribed officers. It sets out civil liability (delict and breach of fiduciary duty), and then in sub-section 3, sets out specific statutory liabilities.

Section 77 is applicable to an extended definition of director. The liability that is incurred in terms of Section 77 is joint and several with any other person who may be held liable for the same act. Any person with a claim can bring it against all the directors or any one particular director. A single director can therefore be held liable for the totality of damages suffered by a third party as a result of a breach of fiduciary duties. An action to recover loss, damages or costs may not commence more than three years after the act or omission.

Specific Statutory Liability

Section 77(3) lists specific instances when a director is liable for loss, damages or costs sustained by the company as a direct or indirect consequence of him having acted in the name of the company despite knowing he did not have the authority to do so, or agreeing to the carrying on of company's business despite knowing that it was being conducted recklessly, or being party to an act or omission by the company despite knowing that it was calculated to defraud a creditor, employee or shareholder, or had another fraudulent purpose, or even for signing or consenting to the publication of any financial statements that were false or misleading in a material respect despite knowing that the statement was false or misleading or untrue (conditions apply). He can also be held liable for being present at a meeting of the board and failing to vote against certain actions which in are contravention of the provisions of the Act [as listed in Section 77(3)(e)], such as voting in favour of providing financial assistance to a director despite knowing that the providing of such financial assistance would have been inconsistent with the Act or the company's MOI.

Section 20 (4) and (5): Restraining Orders

One or more shareholders, directors or prescribed officers or the trade union representing employees of the company may apply to the High Court for an appropriate order to restrain a company from doing anything inconsistent with the Act, or from doing anything that is inconsistent with any of the limits, restrictions, or qualifications of the MOI.

Each shareholder may have a personal claim for damages against any person, including a director, who intentionally, fraudulently, or due to gross negligence causes the company to do anything inconsistent with the Act, or to do anything that is inconsistent with any of the limits, restrictions or qualifications of the MOI (unless the action does not contravene the Act and has been ratified by shareholders).

Section 218: Civil Actions

A shareholder (and any other stakeholder) can also have a claim against the directors or any person who contravenes the Act for damages for any loss or damaged suffered as a result of that contravention. The action does not need to be fraudulent or carried out with gross negligence for a valid claim in terms of this Section.

The Act does however provide some form of relief to directors – by way of Indemnity and Insurance for Directors.

In terms of the Act, a possible defence is open to a director who asserts that he/she had no financial conflict, was reasonably informed and made a rational business decision in the circumstances. This is known as “the business judgement rule”.

Sections 20 and 218 of the Act enable shareholders to sue directors/officers for civil damages, or any losses suffered by them.

If a company is a personal liability company, the directors (including past directors) are jointly and severally liable together with the company for any debts and liabilities of the company that contracted during their respective periods of office.