Authority on directors’ duties may be found in common law and have been partially codified in Section 76 of the Companies Act 71 of 2008. Landmark cases on common law directors duties provide authority that a director has the duty to observe utmost good faith towards the company and in doing so, to exercise reasonable skill and diligence in order to protect the interests of the company (Howard v Herigel & Another NNO 1991 2 SA 660 A). Furthermore, that a director has an obligation not to make a secret profit at the expense of the Company or to place himself in a position where his interests conflict with his duty and/or to disclose any conflict of interest (Robinson v Randfontein Gold Estate Mining 1923 AD 155 ).

Section 76 of the Companies Act has partially codified directors’ duties which means that some director duties may still be found in common law. In terms of Section 76 of the Companies Act, director’s owe a fiduciary duty to act in the best interests of the company, to exercise their powers and perform their functions with the degree of care, skill and diligence that may reasonably be expected from a person carrying out the same functions in relation to the company as those carried out by that director, and having the general knowledge, skill and experience of that director.

Some of the common law duties of a director include, but are not limited to, the obligation to disclose any personal financial interests, not to acquire opportunities intended for the company, for their own benefit (known as the “No Corporate Opportunity Rule”), not to use their position to acquire personal benefits (known as the “No Profit Rule”) and to avoid a situation where their own interest’s conflict with those of the company.

The level of diligence and skill that is expected from a director is directly proportional to their skill and experience. African Claim & Land v WJ Langermann 1905 TS 494 stated that a director is bound to render the level of diligence which an ordinary prudent and careful man would display under the circumstances.

In Fisheries Development Corporation of SA Ltd v Jorgensen and Another; Fisheries Development Corporation of SA LTD v AWJ Investments (Pty) Ltd and Others, an authoritative case on Director’s duties, the court stated that the duty of a Director is to observe the utmost good faith towards the company and in discharging this duty he is required to exercise independent judgement and to take decisions according to what is in the best interests of the company.

In discharging their fiduciary obligations, Section 76 of the Companies Act provides that directors are entitled to rely on, inter alia, the performance of any person whom the board may reasonably have delegated, formally or informally with the authority or duty to perform one or more of the board’s functions that are delegable under law, the employees of the company, legal counsel and/ or accountants. This is known as the Business Judgement Rule. It encourages directors to rely on the advice of other persons in discharging their professional obligations and in the event that a decision made on the strength of such expertise advice is found to be misdirected or incorrect, directors may be exempt from liability.

However, the fiduciary duty directors owe to the company necessitates that they do not blindly accept the advice given by such persons. The Companies Act requires that directors should take reasonably diligent steps to become informed about the matter, they should exercise their own independent judgement on the reliance that may be placed on the advice. As such, the Business Judgement Rule does not abdicate a director’s responsibility to act with skill and circumspection on the reliance that they afford to the information that they receive from persons responsible. It will not suffice for Directors to merely accept the advice or recommendations made by any professional without applying their minds thereto as the first requirement for reliance on the Business Judgement rule is that the director must take reasonably diligent steps to become informed about the subject matter.

In the wake of growing director liability, it is becoming an established practice for Boards to make use of expert advice and opinions on issues that they do not have expertise knowledge in. The Company Secretary is expected to advise and encourage the Board to make use of expertise professional services where needed, and to make same available to the Board.

Section 162 of the Companies Act permits the court to make an order declaring a director delinquent if they, inter alia, acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s duties.

Where Section 76 of the Companies Act provides for the overarching objective requirement for the director to carry out their duties with the care, skill and diligence that may be expected from a person carrying out those functions, Section 162 of the Companies Act extends the duties of a Director in various respects but also adds elements of intention and gross negligence. The court may declare a Director delinquent for failing to discharge their fiduciary duties to the Company however, given the severe impact of a declaration of delinquency, only conduct which exceeds the ordinary threshold of negligence i.e. gross conduct, will warrant a declaration of delinquency.

A declaration of delinquency has the potential of subsisting for the duration of the director’s lifetime. At a minimum, it subsists for a period of seven years but may be longer. It may be subject to any condition that a court may deem fit including limiting the application of the declaration to more than one company. Companies are encouraged to assist directors to discharge their fiduciary duties by consistently upskilling and providing training on the standard of care expected from them as directors, which standard is consistently developed in case law.

Author
Laura Sedibe (Candidate Attorney)