Consequences of non-compliance with director duties

What is a director?

In terms of the Companies Act No. 71 of 2008 (“the Companies Act”), a “director” means a member of the board of a company (“the Board”), as contemplated in section 66 of the Companies Act, or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.

In terms of section 66 of the Companies Act, the business and affairs of a company must be managed by or under the direction of its Board, which has the authority to exercise all of the powers and perform any of the functions of the company.

Duties and responsibilities of a director

In terms of section 76 of the Companies Act, a director—

• must not use the position of director, or any information obtained while acting in the capacity of a director, to gain an advantage for the director, or for another person other than the company or wholly owned subsidiary of the company, or to knowingly cause harm to the company;
• when acting in that capacity, must exercise the powers and perform the functions of a director 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 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.

Consequences of non-compliance with director duties

In terms of the Companies Act, a director may incur civil liability for any loss, damages or costs sustained by the company as a direct or indirect consequence of—

• acting on behalf of the company without proper authorisation;
• engaging in reckless trading;
• participating in actions or omissions with the intent to defraud;
• participating in false and misleading financial statements;
• issuing written statements or a prospectus containing false information;
• being present at a meeting and failing to vote against actions that are unauthorised or inconsistent with the Companies Act.

In terms of the Companies Act, a director of a company may also incur criminal liability for—

• disclosing confidential information about the affairs of any person obtained while performing duties under the Companies Act;
• falsifying the company’s accounting records;
• providing false or misleading information;
• participating in actions or omissions with the intent to defraud;
• issuing written statements or a prospectus containing false information;
• failing to comply with a compliance notice issued under the Act.

Conclusion

Given the serious and far-reaching consequences of non-compliance with the duties of a director as set out in the Companies Act, it is imperative that a director takes the time to understand and adhere to their obligations in terms of the Companies Act.

Any queries regarding the consequences of the non-compliance of a director with his or her duties in terms of the Companies Act can be directed at pty@asl.co.za.