Liability of Directors

In discussing liability of directors, one has to understand who or what a director is. A director is an appointed or elected member of the board of directors of a company. Being a director for many people is a high position which is associated with status and class. Such a position comes with a lot of responsibilities.

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A person needs to be equipped with the necessary skills and requirements for him or her to be placed in such a position. For the ordinary person when they see a director they picture executive cars, five star treatment in hotels and luxurious holidays etc. As much as all these things may be attractive a lot of responsibility is required from a person who is appointed to such a position. A director is tasked with various duties when he is appointed. In terms of section 76 of the Companies Act the director has a duty to exercise care, skill and diligence when carrying out his duties. This meaning that he is expected to exercise the care, skill and diligence that is expected of a reasonable person who is in that office. Failure on his part to do this will result in him being liable and having to pay damages. Section 76(3) (b) of the Companies Act states that the Director must act in the best interests of the company, therefore the decisions made by the Director should benefit the company e.g. make money for the company. The Director should not pursue his own interests at the expense of the company and if he does so, he is liable for his actions. Section76 (3) (a) further states that the director must act within his powers and for a proper purpose. The Director should therefore not exceed the power given to him, for instance by making decisions which he does not have the authority to make.

The director must be able to exercise independent judgement. He may have advisers who are experts in various fields and they may advise him but the final decision must be his own and he should not be easily swayed or influenced by others. The director must avoid having a conflict of interest when carrying out his duties. Section 75 (4) of the Companies Act states that in the event that he has an interest in a particular matter he should disclose the interest to the board and shareholders as failure to do so may result in him being held liable for wrong decisions made. The duties placed on a director require a high amount of responsibility and if the director fails to perform his duties well and the company suffers as a result of his actions he becomes liable. Directors can face civil or criminal liability depending on their actions. They may face criminal liability if the matter is of a serious nature, such that criminal proceedings will have to be instituted. An example of this is a situation where the director has defrauded the company of huge sums of money. Directors may face civil liability in a situation where the director makes a decision but did not have the required authority to make it and the company suffers damage as a result. In such a situation the director may be sued for damages by the company. It is possible for a director to avoid being held liable for the acts of the company. As a director it is wise not to place yourself in a situation where you have a conflict of interest. You must be impartial at all times. If a conflict of interest does arise it is your duty to put the interests of the company first .If you have a personal interest in a business deal which the company is involved in, it is important to make this known to the board and shareholders of the company and in doing so you are safeguarding yourself from being held liable. When handling the company business it is important that you have a duty of care. Having a duty of care is the duty of a person to avoid acts or omissions which can be reasonably seen and which are likely to cause harm to others. As a director it is important that you are adequately informed about a business decision. In making a decision as a director you must ensure that you are informed about the matter and the decision you make must be one, which in the opinion of a reasonable person, is a fair decision. Acting in good faith does assist in avoiding liability. Good faith is acting honestly without the desire to defraud others. As a director it is important that you act in good faith and the acts being taken are in the best interests of the company. Good Corporate Governance does assist in avoiding liability as a director.

Good Corporate Governance assists the company in ensuring that actions agreed at board meetings are properly documented and it will serve as proof that the director did not make some decisions on his own but acted on the instructions of the board. Section 77 of the Companies Act does allow a director to seek relief where he acted unreasonably. In terms of this section the director may be relieved either wholly or partly. The director may be relieved if it is shown that he has acted honestly and reasonably or having regard to all the circumstances of the case, including those connected with the directors appointment, it would be fair to excuse the director. As directors of companies today it is possible to safeguard yourself from being liable but in the event that you are section 77 of the Companies Act may come to your defence.

Article by: Noma Dube

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