Companies are the lifeblood of our economy and directors provide the requisite direction to these corporate bodies. Section 66 of the Companies Act 71 of 2008 (“Companies Act” or “Act”) in particular, vests a substantial amount of authority in the board of a company. The section provides that—
“[the] business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that [the] Act or the company’s Memorandum of Incorporation provides otherwise”.
It is, however, important to consider some of the mechanisms that the Act has put in place to mitigate against the potential abuse power by directors. This legal insight will therefore briefly discuss some of the Act’s remedies against abuse of power.
Section 77 of the Act provides for the liability and is applicable to directors, alternate directors, prescribed officers and board committee members. For purposes of this contribution, the focus will be on directors. In terms of this section, it is possible for a director to be held liable for:
• Breaching certain provisions of section 75 (director’s personal financial interest) or section 76 (standards of director conduct);
• Breaching any other provision of the Act;
• Breaching any provision of the company’s Memorandum of Incorporation;
• Acting without the requisite authority, whilst purporting to do so; and
• Failing to vote against certain transactions that require compliance with the Act.
Liability of directors in terms of this section is joint and several with other persons that may also be held liable for the same conduct. However, the liability is subject to a three-year prescription period that commences from the date of the conduct that gave rise to the director’s liability. Nonetheless, it is possible for the court to excuse the director from liability in certain instances, but this consideration by the court would not be taken into account where the director’s conduct constituted wilful misconduct or wilful breach of trust.
Section 162 of the Act makes provision for a director to be declared delinquent in instances of: (i) gross abuse of position; (ii) taking personal advantage of information or an opportunity; (iii) intentionally, or by gross negligence, inflicting harm upon the company or a subsidiary of the company; (iv) acting in a manner that amounts to gross negligence, wilful misconduct, breach of trust; or (v) acting dishonestly, recklessly or fraudulently. An application for delinquency may be made by the company itself, a shareholder; another director; a company secretary; a prescribed officer; or registered trade union that represents employees of the company. Section 157 of the Act also caters for extended standing and allows, amongst others, those approaching the court in the public interest, to bring forward an application for a director to be declared delinquent. The immediate effect of a delinquency declaration is that a director is barred from serving as a director for a minimum period of 7 years in any company. In certain instances, this may extend to a lifetime delinquency declaration.
This remedy is provided for in section 163 of the Act. The section provides that a shareholder or a director of a company may apply to a court for relief in a number of instances. These instances include scenarios where a director’s powers are being exercised in a manner that unfairly disregards the interests of the applicant concerned. Both shareholders and directors are able to make use of this remedy. The section provides the court with wide remedial powers, including the power to restrain the conduct in question by way of a court order, to appoint a liquidator where necessary or to place the company under supervision and business rescue proceedings, to name a few.
The action under section 165 of the Act originates from circumstances where an alleged wrongdoer uses her control of the company to prevent the company from instituting legal proceedings against her, in order to remedy any wrong that she may have perpetrated against the company. In terms of the derivative action, a shareholder or a director may serve a statutory demand upon a company to: (i) commence or continue legal proceedings, or (ii) to take related steps provided that it can be established that such steps serve to protect the legal interests of the company. The key focus with the derivative action is to ensure that the legal interests of the company are protected.
Director liability, the delinquency declaration, the relief from oppressive or prejudicial conduct and the derivate action are some of the remedies that are available under the Companies Act to hold directors accountable. As a director of a company, big or small, you should at least, be aware of these provisions as the implications thereof may be far-reaching. Exercise the authority that has been entrusted to you by law responsibly.