Duties of directors

Directors’ duties arise from the following sources:

• the common law

• statutes
• the memorandum and articles of association of the company
• service agreements specifically entered between the director and the company
• resolutions passed at members’ or directors’ meetings
• the rules of a regulatory body, if any

Common law duties:

A director's fiduciary duty

'Every director is bound at common law by a separate and distinct fiduciary duty to the company (the
term ‘fiduciary’ being derived from the Latin ‘fiduciarius’ meaning ‘of trust’). Directors owe their fiduciary duty
to the company as a corporate being in its own right and not to the members individually, not even to a
member who is a majority shareholder. Even if a director occupies his position on the board by virtue of
another position he holds (for instance, where he is appointed by a major shareholder or is entitled to a seat
on the board by virtue of an executive position in the company), a director’s fiduciary duties rest upon him
as an individual. The fiduciary duty is likewise not owed directly to creditors, employees or other
stakeholders of the company, although there is a range of circumstances in which a director may, by virtue
of the neglect of his fiduciary duty to the company, be held personally liable to the company’s
stakeholders.' †

In this fiduciary capacity, a director assumes two roles, as an "agent" acting on behalf of the company,
and as a trustee who controls company assets.

These roles give rise to the following directors’ duties:

• to act in good faith towards the company

• to act only within their powers and use their powers only for purposes which benefit the
organisation. Directors who act outside their powers bind the company to the transaction
but may be held personally liable if a loss results
• not to use for personal gain any information acquired in their capacity as a director
• to act in the best interests of the company and to avoid a conflict between personal and
company interests
• to exercise independent judgment in decision-making. A director who is appointed to
represent an interest group, for example employees, is nevertheless obliged to act in the
best interests of the company as a whole

Conflict of interests
A conflict may sometimes arise between a director’s personal circumstances and that of the company. The
law is unequivocal as to the course of action a director who has a conflict of interests must follow and a
director may never prefer his interests over that of the company he is entrusted to direct. A director who
does so may be liable to account to the company in respect of any profits he makes as a result of such a
transaction.

Directors may often sit on the boards of several companies and conflicts may also arise between the
divergent interests of these companies, thus presenting a problem to the individual who sits on the boards of
both companies. It is important to note that where a director is simultaneously a director of a holding
company and its subsidiary, he owes a separate and distinct fiduciary duty to both entities as legal
individuals in their own right. A director must guard against a conflict of interests developing in a situation
where he is a director of both the holding company and a subsidiary. Should a conflict arise which prevents
him from discharging his duty to both companies properly, he should consider resigning from either or both
boards.

Duty of care and skill

The degree of care and skill required is determined objectively by considering how a reasonable person with
similar knowledge and experience would have acted, and then comparing this to the director’s actions. Each
case is considered individually taking into account the nature of the business and the director’s specific
obligations. As indicated earlier, no distinction is made between executive and non-executive directors.

Statutory Duties :

A director's duties in terms of the Companies Act

Directors have to comply with a number of obligations in terms of the Companies Act. These are dealt with
in Annexure A.

Duties in terms of the memorandum and articles of association

The memorandum of association determines the scope of the company’s objects and powers, while the
articles of association is a contract between members themselves and between members and the company.
The articles therefore contain the internal rules by which a company is governed. The Companies Act
provides a standard set of articles that many companies use as a basis but may amend to meet their
specific needs. The memorandum and articles are integral to the company and directors should familiarise
themselves with their contents since they invariably impose duties on directors.

Directors and shareholders – Decision making authority

Whilst shareholders retain ultimate responsibility for the company and have the power to remove or not
to re-appoint directors, they in effect delegate the day-to-day running of the company to the directors who in
turn appoint and supervise management. The board of directors must manage the company within the limits
of legislation and the memorandum and articles.

The board may delegate certain powers to managers and at the same time impose appropriate restrictions
and conditions which can be varied or revoked at any time. The directors have a duty to monitor
management's performance and ensure that management work within their delegated power. In the
absence of specific cause for suspicion, directors are generally entitled to trust management to perform their
duties honestly and to accept and rely on the judgment, information and advice of management when
reaching their own decisions. Directors should not lose sight of the fact, however, that they remain ultimately
liable, both jointly as a board and individually, for the well being of the company.

Directors’ power to bind the company

'Normally the powers and duties of directors are left undefined and it is implied that directors possess all
powers necessary to enable them to direct the affairs of the company. The articles may sometimes seek to
limit these powers or to specify particular duties, in which event these limitations must be strictly complied
with. A director may not enter into transactions on behalf of the company which arebeyond the
powers conferred upon him by the articles, the Act and common law.

In some circumstances where directors have acted beyond their powers as directors, the shareholders may
subsequently ratify their action by special resolution. Ratification is not possible, however, where the action
falls outside the object of the company as defined in the company’s memorandum of association. Directors
will be liable to the company for any financial losses incurred by it as a result of them having acted outside
the scope of their authority. Any member of the company may institute action against any incumbent or
previous director where the company has suffered damages due to a breach of trust or a wrongful act by
that director. [§266]

Loans to directors

Loans made either directly or indirectly to directors are prohibited unless:

• all members give their consent

 • a special resolution approves a specific loan
• the loan is to enable a director to perform his or her duties
• the business of the company is to make loans
• the loan is to provide assistance to enable the director to participate in a company’s
share incentive scheme
• the loan is for directors' housing
• the loan is made to a director of a subsidiary who is not also a director of the lending
company [§226]

Indemnifying directors

A company may take out insurance to indemnify its directors or officers for negligence, default, breach
of duty or breach of trust. [§247] This provision was introduced by a 1999 amendment to the Companies Act
and it is suggested in King II that directors persuade their companies to take out this insurance.

' In terms of §248, if, in any proceedings for negligence, default, breach of duty or of trust against a director,
officer or auditor, it appears to the court that the person has acted honestly and reasonably, the court may
relieve him, wholly or partially, of his liability. The burden of proof to show that he acted honestly and
reasonably in the context of surrounding circumstances is on the director seeking relief.' †

Dissenting Directors

Where a director strongly disagrees with a board decision, he has several ways to indicate this
dissatisfaction. A dissenting director may:

• prepare a memorandum setting out his objections

• raise these concerns at a formal board meeting, requesting that a meeting be convened if
the matter needs urgent attention and the next board meeting is too late to give proper
attention to the issue
• insist on a full hearing at the meeting and request that detailed objections be recorded in
the minutes of the meeting
• seek professional advice if this is appropriate. (King II recommends that the company
should have a procedure for the director to be able to do so at the expense of the
company).

If the matter is not resolved at a board meeting, the dissenting director could call a general meeting (if
authorised by the articles) or rally shareholders to call a general meeting as the shareholders hold the
ultimate power in the company. If this is not possible and the director is not prepared to abide by the majority
board decision, he may have no alternative but to resign

Duties and Liabilities of the Directors

Fiduciary Duties

To act honestly and with good faith

 Not to use confidential information of the company for their own purpose

 Duty of Care and to act reasonably while acting for the company

Statutory Duties
 Not to contract with company, where he/she or his relative has an interest in the
contract

 where he/she has a interest, they need to inform the board or seek prior approval
while entering into contract, otherwise the contract is voidable

 Duty to attend and convene meetings

 Duty not to delegate

The directors liabilities

 The liability of the directors can be either civil or criminal.

 If provided in the MOA, the liability may be unlimited, for a limited company,
otherwise
it may be altered.

 Liability may be for breach of fiduciary duties

 The directors are personally liable for the following:

a) Ultra vires acts
b) malafide acts
c) negligent acts
d) liability for the acts of third parties

Criminal Liability

 Liability of the director for any untrue statement in the prospectus

 Inviting any deposits in contravention of the law
 Liability for false advertisement
 Failure to repay the application money, which was excess
 Concealing the names of the creditors
 Failure to lay the balance sheet.
 Failure to provide information to the auditor etc