Directors' Duties: When the Company's Interest Comes Before Yours

A director who signs on behalf of a company is not signing for himself. The law treats a director as the person entrusted to look after someone else's money and someone else's business, and it holds that trust to a legal standard. Section 76 of the Companies Act 71 of 2008 sets out what the standard means in practice, and it matters to every director, from the founder of a one-woman company to the chair of a listed group.

The duties in plain words

A director must act in good faith and in the best interests of the company, and must exercise care, skill and diligence. That sounds simple, but it produces answers most directors do not expect:

The business judgment rule

• The company's interest comes before the majority shareholder's interest, and before the director's own interest. A decision that benefits the person who appointed you is not automatically a decision that benefits the company.
• Conflicts of interest must be declared, and a conflicted director must withdraw from the discussion and the vote on the matter.
• Your expertise is measured against the office you hold. A financial director cannot claim to have missed a red flag that a competent financial director would have caught.

The law does not punish a director for a decision that turns out badly. A director who acted on a properly informed basis, without a conflict, and with a rational belief that the decision was in the company's interest is protected by the business judgment rule, even if the outcome is a loss. What is not protected is a decision taken without information, or taken for a personal reason, or taken with the knowledge that the company cannot pay its debts.

Where directors get caught

The patterns we see in practice are consistent:

• The controlling shareholder treats the company bank account as his own and takes drawings without resolution.
• Directors sign contracts backdated, or sign on behalf of a company that has not yet been formed.
• A director with a conflict votes, and later the transaction is attacked.
• The company slides into insolvency and the directors keep trading and keep taking new deposits.

In an insolvency, the conduct of directors is examined line by line. A breach of the directors' duties can lead to personal liability, and the protections of the company form do not extend to a director who acted against the company's interest.

Practical habits

How We Can Help

• Hold the meetings and take the minutes, even in a small company. The minutes are the record that the decision was informed.
• Disclose any conflict in writing and recuse yourself from the vote.
• Never sign a contract you have not read and understood.
• Watch solvency: if the company cannot pay its debts as they fall due, the duties tighten and the risks rise.
• Take advice before the decision, not after the litigation begins.

OM Baloyi Inc assists directors, shareholders and boards across the commercial and corporate field, from incorporation and shareholder agreements to director conduct and dispute resolution. If you are stepping into a directorship, or a decision is being challenged, speak to us before the position hardens.

OM Baloyi Inc | Attorneys, Conveyancers, Notaries, Properties, Tax, Mining 51 Bouvet Avenue, Bellairspark Ext 5, Northriding, 2162 T: 087 265 1059 | E: info@ombaloyi.co.za | www.ombaloyi.co.za