This article provides a practical overview of the duties imposed on directors by the Companies Act 71 of 2008 (“the Act”), the circumstances in which a director may be held personally liable for the company’s losses or debts, and the steps owner-managers can take to reduce that exposure. It is written for the owner of a small or medium-sized business who is also a director, which in practice describes most South African company directors.
Background: Why This Matters to Owner-Managers
Many business owners incorporate a company on the understanding that it provides a shield between the business and their personal assets. That understanding is broadly correct: a company is a separate legal person, and its shareholders are generally not liable for its debts.
The shield protects the shareholder, however, not the director. Where the same individual occupies both roles, as is almost always the case in an owner-managed business, the distinction is easily overlooked. The Act imposes significant personal duties on directors, and a director who breaches them may be ordered to compensate the company or third parties from their own pocket.
It is also worth noting that the Act’s definition of “director” extends beyond those formally appointed. Prescribed officers, members of board committees and alternate directors are subject to the same standards, as, in substance, are persons who act as directors without having been appointed.
The Statutory Duties of Directors
Section 75 of the Act deals with personal financial interests. A director who has a personal financial interest in a matter before the board must disclose that interest, and must not participate in the consideration of the matter. This provision is frequently overlooked in family and owner-managed companies, where transactions with related parties are common.
Section 76 codifies the core duties. A director must:
- not use their position, or information obtained as a director, to gain an advantage for themselves or another person, or to knowingly cause harm to the company;
- communicate to the board any information that comes to their attention, unless they reasonably believe it is immaterial or subject to a legal or ethical obligation of confidentiality; and
- exercise their powers and perform their functions in good faith and for a proper purpose, in the best interests of the company, and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out those functions and having the general knowledge, skill and experience of that director.
The standard of care is therefore partly objective and partly subjective. A director with particular expertise, for example a qualified accountant serving on the board, will be held to the standard that expertise implies.
The Business Judgment Rule
Section 76(4) provides a measure of protection for directors who make honest commercial decisions that turn out badly. A director will have satisfied the duties of good faith, proper purpose and care where they:
- took reasonably diligent steps to become informed about the matter;
- had no disqualifying personal financial interest, or complied with the disclosure requirements of section 75; and
- had a rational basis for believing that the decision was in the best interests of the company.
The practical significance of the business judgment rule is that it rewards process. Directors who inform themselves, take advice where appropriate, declare conflicts and record their reasoning are well placed to rely on it. Directors who decide informally, without minutes or supporting information, are not.
Section 76(5) allows a director to rely on the performance of employees, professional advisers and board committees, provided the director reasonably believes them to be reliable and competent in the relevant area.
When Is a Director Personally Liable?
Section 77 of the Act sets out the circumstances in which a director may be held liable. In broad terms, a director may be liable to the company for any loss, damages or costs sustained as a result of a breach of the fiduciary duties in sections 75 and 76, or a breach of any provision of the Act or the company’s Memorandum of Incorporation.
A director may also be held liable for specific conduct, including where the director was present at a meeting, or participated in a decision, and failed to vote against:
- the company carrying on business recklessly, with gross negligence, with intent to defraud, or for a fraudulent purpose, in contravention of section 22;
- the acquisition by the company of its own shares, or the provision of financial assistance, otherwise than in accordance with the Act;
- the making of a distribution that did not satisfy the solvency and liquidity test; or
- the issuing of unauthorised shares, options or securities.
Two further provisions deserve particular attention. Section 218(2) provides that any person who contravenes a provision of the Act is liable to any other person for loss or damage suffered as a result. This is a broad liability provision that has been used to found claims by third parties against directors. Section 22 prohibits a company from carrying on its business recklessly, with gross negligence, or with intent to defraud any person, which becomes a live concern where a company continues to trade while financially distressed.
Business owners should also be aware that personal liability can arise outside the Act altogether: under tax legislation in respect of a company’s tax debts, in relation to unpaid employee contributions, and, most commonly of all, under personal suretyships signed in favour of banks, landlords and suppliers.
Delinquency and Probation Orders
Section 162 of the Act empowers a court to declare a director delinquent, or to place a director under probation, on the application of the company, a shareholder, a director, the Companies and Intellectual Property Commission or certain other parties. A delinquency declaration disqualifies the person from acting as a director, in serious cases for life.
The Companies Amendment Act 16 of 2024 made an important change in this area. With effect from 27 December 2024, the period after a person has ceased to be a director within which such an application may be brought was extended from two years to five years, and the extension applies retrospectively. A director who resigns in the hope of putting past conduct beyond reach now has considerably less comfort.
The same amendments provide that the three-year prescription period applicable to claims under section 77 may, on application to court, be extended on good cause shown.
Practical Steps for Business Owners
Directors of owner-managed companies can materially reduce their exposure by attending to the following:
- hold and minute board meetings, recording the information considered and the reasons for significant decisions;
- declare personal financial interests in writing and recuse yourself from the relevant decisions, however obvious the interest may seem;
- monitor solvency and liquidity continuously, and take advice early where the company is in financial distress rather than trading on in hope;
- before declaring a dividend or repurchasing shares, apply and record the solvency and liquidity test;
- keep company and personal finances strictly separate, and document all loans to and from directors;
- ensure statutory filings, including annual returns and beneficial ownership information, are up to date;
- review whether directors’ and officers’ liability insurance is appropriate for the business; and
- maintain an up-to-date register of the suretyships and personal guarantees you have signed.
Conclusion
The Companies Act does not seek to deter people from serving as directors. It seeks to ensure that those who exercise the power to direct a company do so honestly, on an informed basis and in the company’s interests. Directors who meet that standard, and who can demonstrate that they met it, are well protected.
The exposure arises where governance is informal, where decisions are undocumented, and where a company in distress continues to trade without proper consideration of its position. For the owner-manager, the cost of getting this right is modest compared with the cost of a personal liability claim.
How O’Reilly Law Can Assist
Directors’ liability is an area in which prevention is far cheaper than defence. Most claims that succeed against directors do so not because the underlying commercial decision was wrong, but because the process behind it cannot be demonstrated.
O’Reilly Law advises directors and boards on their duties under the Companies Act, establishes proportionate governance frameworks for owner-managed companies, and advises on specific decisions such as distributions, financial assistance, related-party transactions and trading through financial distress. Where a claim or a delinquency application is brought, we act for directors in defending it.
Speak to a Corporate and Commercial Law Specialist
If you are a director who would like to understand and reduce your personal exposure, or you are facing a claim, it is essential to obtain advice early.
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Our team advises directors and boards on governance, statutory compliance and the defence of personal liability claims.