The liability of company directors

“A friend of mine has a good business concept and he has asked me to come on board as a partner. He wants to set up a company and make both of us directors in the company. I want to be part of the business but I’m not sure about being a director and what my liability may be?”

A company is a reliable and well known vehicle to use for a business. That said, many company directors are not always aware of the nature and scope of their duties as directors and their liability should these duties not be complied with.

A director of a company is a member of the board of directors of the company. The board is responsible for the management of the affairs of a company and must exercise all of the powers and perform all of the functions of the company, in accordance with the Companies Act 71 of 2008 (the “Companies Act”) and the company’s Memorandum of Incorporation (“MOI”).

Directors must comply with the various duties they have in terms of the Companies Act, failure of which could expose them to potential liability. The approach adopted by the Companies Act is that directors who fail to comply with their duties should be held personally liable for losses incurred by the company. 

Directors are exposed to the following forms of potential liability:

Civil liability. A director who breaches his or her duties may be held jointly and severally (fully and equally) liable together with any other person for commiting certain acts.
Criminal liability. Section 214 of the Companies Act provides for criminal liability of those directors trading a company in a manner which is calculated to defraud a creditor.
Breach of fiduciary duties. In the event that a director breaches his fiduciary duties to the company, such director may be held personally liable for any loss, damages or costs sustained by the company as a result of such breach.
Breach of the duty of care, skill and diligence. Directors may be held liable in terms of civil action for any loss, damages or costs sustained by the company as a result of the breach of a director’s duty of care, skill and diligence.
Liability for breaching the Companies Act. The Companies Act stipulates that a director will be liable for any loss, damages or costs sustained by the Company as a direct or indirect consequence of the director having breached certain provisions of the Companies Act.
Liability towards the shareholders of the company. Directors of a company may potentially be held liable by the shareholders of the company for breach of their duties in certain circumstances.

Clearly, becoming a director is no casual decision. It should not mean that you should shy away from becoming a director, but rather that it should make you aware that a thorough understanding of the responsibility of being a director is vitally important, as a breach of your duties as director can hold serious consequences. If you are still unsure about your decision, contact your attorney to discuss your concerns and responsibilities towards the business should you wish to take on the role of director in the new business venture.

October 4, 2018

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