Being appointed as a director comes with more than just decision-making authority. Directors have important legal duties towards the company they serve, and in certain circumstances, they can be held personally liable for losses or damages caused by their conduct.
Understanding these responsibilities is essential for anyone serving on a company’s board.
What Are a Director’s Duties?
Under Section 76 of the Companies Act, directors are generally required to act:
- In good faith and for a proper purpose;
- In the best interests of the company; and
- With the degree of care, skill and diligence reasonably expected of a person in their position.
Directors must therefore make informed decisions and exercise independent judgement. A director cannot simply follow instructions from fellow directors or shareholders without considering whether a decision is in the company’s best interests.
The Business Judgement Rule
Not every business decision that turns out badly will result in personal liability.
South African company law in Section 76(4) recognises that business involves risk. Directors are generally protected where they have taken reasonably diligent steps to become informed, have no relevant personal financial interest in the matter, and honestly believe that their decision is in the best interests of the company.
In other words, a director is not automatically liable simply because a business decision was unsuccessful.
When Can a Director Be Personally Liable?
A director may, however, face personal liability where they breach their duties or act unlawfully. This can include situations where a director:
- Acts negligently or recklessly;
- Fails to act in the best interests of the company;
- Has an undisclosed conflict of interest;
- Improves their own position at the expense of the company;
- Knowingly approves unlawful or improper conduct;
- Causes the company to trade recklessly; or
- Fails to exercise reasonable care and diligence.
Depending on the circumstances, a director may be required to compensate the company or another party for losses suffered as a result of their conduct.
Directors Cannot Always Hide Behind the Company
One of the main advantages of operating through a company is that the company has a separate legal personality from its directors and shareholders.
However, this does not provide directors with complete protection.
Where a director breaches their statutory or fiduciary duties, acts fraudulently, recklessly or negligently, personal liability can arise. The fact that a decision was made on behalf of the company does not necessarily protect the individual director responsible for the conduct.
The Importance of Proper Governance
Good corporate governance is not simply about ticking boxes. Directors should ensure that important decisions are properly considered, conflicts of interest are disclosed, meetings and decisions are appropriately recorded, and the company complies with its legal and financial obligations.
Taking advice before making significant decisions can also help directors understand their responsibilities and manage potential risks.
Final Thoughts
Serving as a director brings significant responsibilities. While directors are allowed to make commercial decisions and take reasonable business risks, they must always act honestly, carefully and in the best interests of the company.
Understanding your duties, and the circumstances in which personal liability may arise, is an important part of protecting both yourself and the company.
At FDP Law we assist businesses and directors with corporate governance, directors’ duties, shareholder disputes and a range of other commercial and company law matters.