The importance of knowing your fiduciary duties as a director
The importance of knowing your fiduciary duties as a director
All too often the fiduciary responsibilities of holding the title of “director” are grossly underestimated. All it takes is one resolution, a few signatures, a copy of your ID, proof of address and contact details to become one. Surely it should be easy enough to be a director, right?
Unfortunately, it is far from being so simple.
The stereotypical characteristics associated with being a director is that you are in charge, have the power to make decisions, significantly influence the operations of an entity and receive a large amount of remuneration. Although the former has some truth to it, the reality is that holding that position includes a significant number of responsibilities, binding in a personal capacity that most directors are not aware of.
As contemplated in section 66 of the Companies Act, a director means a member of a board of a company or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.
Set out below is some of the more common responsibilities and circumstances that may cause liability.
The responsibilities
The core duties of a director are set out in the Companies Act and includes, amongst others:
- Disclosing any conflicts of interest
- Disclosure of material information to the relevant parties
- Performing duties in good faith
- Acting in the best interest of the company by using the position and information for the benefit of the company
- Acting with due care, skill and diligence that may be reasonably expected of a person in that position
- Acting in the best interests of the shareholders and other affected stakeholders
For strategy and the corporate structure and administration, a director has the duty to:
- Manage the business affairs of the company in all its aspects, including operational, strategical and in terms of any applicable legislation including but not limited to:
- Income Tax Act
- Tax Administration Act
- Basic Conditions of Employment Act
- Skills Development Levies Act
- Unemployment Insurance Contributions Act
- Value-Added Tax Act
- Protection of Personal Information Act
- Promotion of Access to Information Act
- Prevention and Combating of Corrupt Activities Act
- Comply with the memorandum of incorporation of the company
- Comply with the Companies Act in all its respects as far as it relates to the type of company
- Carry on the business without trading recklessly
- Not carry on the business under insolvent conditions
- In terms of section 61 of the Companies Act call and convene shareholders’ meetings
- In terms of section 73 of the companies Act call and convene directors’ meetings
The directors are responsible for the structure of the board and has the duty to appoint:
- Board committees as required in section 72 of the Companies Act
- An audit committee in terms of section 94 of the Companies Act when requirements are met
- A company secretary as set out in section 84 and 84 of the Companies Act when requirements are met
The accountability and assurance of the company including but not limited to the following is also the responsibility of the director:
- Keeping company records in line with requirements of section 24 of the Companies Act
- Keeping accounting records in line with requirements of section 28 of the Companies Act
- Appointing auditors in terms of section 90 and 92 of the Companies Act when required
- Paying directors remuneration in terms of the MOI, after approval of the shareholders by special resolution as required in section 66 of the Companies Act
The director is required to adhere to disclosure and transparency requirements set out in the Companies Act such as:
- Preparing annual financial statements as required by section 29 and 30 of the Companies Act
- Disclosing information regarding directors’ remuneration in terms of Section 30 of the Companies Act
- Filing of the annual return to CIPC as required by section 33 of the Companies Act
The above is but a few of the duties resting on the shoulders of a director. Most of these duties also has their own underlying technicalities, which require a higher level of knowledge and in depth understanding of the procedural steps required to fulfil those duties in terms of legislation.
The liabilities
A company may recover losses, damages or costs sustained by the company from the directors in, among other things, the following circumstances:
- Being present at a meeting or participating in taking a decision where the formalities of the Companies Act has not been adhered to
- Being party to any act or omission that was constructed to defraud an employee of the company, a creditor, any other stakeholder or had any fraudulent purpose
- Breach of fiduciary duties in terms of the principles of common law or the provisions of the law of delict
- Signing any documents on behalf of the company, authorising any transactions, or acting in the name of the company while knowingly lacking the authority to do so
- Signing, consenting to, or authorising the publication of financial records which the director is aware are materially misstated, false, and/or misleading
- Signing, consenting to, or authorising the publication of a written statement that contains false statements which is the director is aware of
The liability claim is limited to three years after the actions have taken place.
Although directors may appoint a third party on their behalf to tend to some of the requirements set out above and further included in the Companies Act, this does not absolve them of their responsibilities and obligations towards the duties and they may still be held personally liable if not complied with.
The Companies and Intellectual Property Commission (CIPC) issued Notice 52 of 2019 introducing the Compliance Checklist. The Compliance Checklist was rolled out on a voluntary basis for a period of four months from 1 September 2019 and became mandatory for all companies whose annual returns are audited or independently reviewed, from 1 January 2020.
The purpose of the implementation of the Compliance Checklist was 3-fold:
- Ensuring compliance with the Companies Act
- To gently remind the directors of their duties and serve as an educational tool for directors and company secretaries with regards to their responsibilities in terms of the Companies Act
- Monitoring and regulating proper compliance with the mandatory provisions of the Companies Act
Unfortunately, the above compliance checklist has been side-stepped by most directors through outsourcing of the function to another party, dismissing the whole purpose of the checklist.
It is furthermore worth mentioning that anyone who knowingly provides false information to the CIPC is guilty of an offence under section 215(2)(e) and could be liable for a fine, imprisonment not exceeding 12 months, or both a fine and imprisonment in terms of section 216(b) of the Companies Act.
As stated above the board of directors of a company are personally responsible for compliance with the Companies Act, and as such, it is necessary to draw directors’ attention to their responsibilities in respect of the Companies Act including CIPC Compliance Checklist and the accurate completion thereof.
In conclusion, legislation does not prescribe what qualifications, knowledge or experience a director should have, which in my opinion is a material deficiency in the legislation. I strongly advise in line with King IV Code of Corporate Governance, that any person currently holding a director position or intending to do so, should familiarise themselves with the duties vested in them upon accepting the position. This is purely to ensure they have the necessary knowledge to fulfil their fiduciary duties in their capacity as a director and don’t unwittingly find themselves on the wrong side of the Companies Act.
With great power comes great responsibility.
Author: Luzandri Barnard CA(SA)
Associate Director – Gauteng
luzandrib@bvsa.ltd
011 252 2600
