Your focus as a director right now will no doubt be on keeping your business afloat through these trying times.
Don’t lose sight however of the fact that the onerous obligations and duties placed on all directors by the Companies Act still apply. Failure to live up to the required standards exposes you not only to a significant risk of personal liability for company debt, but also to criminal prosecution.
We recap in summary what the Act requires of you, we discuss the impact of King IV on your risk profile, and we end off with a caution on the extent to which you can rely on indemnity insurance for cover.
There are significant obligations placed on directors by the Companies Act and personal and criminal liabilities if they fail to meet these obligations.
As a director you will no doubt be focusing on critical issues like keeping your business afloat and solvent (the CIPC has waived its right to intervene when a company becomes temporarily insolvent due to the lockdown and other restrictions imposed. This concession will be withdrawn 60 days after the lifting of the National Disaster regulations), don’t forget that the Companies Act is still in force.
The coronavirus has created an unprecedented situation which demands swift, decisive action by directors – for example, the President only gave the country 72 hours’ notice before the lockdown came into effect, which gave little time for directors to react to the new reality.
No change in your duties or liabilities
Despite the coronavirus there is no change to the duties or liabilities of directors. They must perform their role:
- “in good faith…,
- in the best interests of the company
- with the degree of care, skill and diligence that may reasonably be expected of a person –
(i) carrying out the same functions in relation to the company as those carried out by that director; and
(ii) having the general knowledge, skill and experience of that director.”
“Good faith”, “best interests” and “care, skill and diligence” are onerous terms. For a director to be protected against falling foul of these provisions that director needs to show that he/she took diligent steps to be informed of the issue and made a rational decision in the best interests of the company. This is known as the Business Judgment Rule and courts look to this when considering a director’s personal liability.
The impact of the King IV Report
When considering the Business Judgment Rule, the courts have relied on whether a director followed the King IV Code of Good Governance when reaching their decision.
One issue that will arise with the coronavirus is that King IV mandates that a company be a good corporate citizen and part of this is to look after the health and safety of employees (following the requirements of the Occupational Health and Safety Act and now government’s Disaster Management Act Regulations) – for example, were adequate steps taken in terms of the National State of Disaster declared by the President such as social distancing (working from home where feasible) and ensuring employees had access to masks, hand sanitisers and so on at work?
Failure to comply with King IV in this scenario means directors will not be able to rely on the Business Judgment Rule and can be held personally liable for losses incurred.
Will your indemnity insurance cover you?
Directors can take out indemnity insurance, covering claims awarded, in their personal capacity, when they commit “wrongful acts”. However, the insurance will not apply if there is “wilful misconduct or wilful breach of trust” by the director (check your policy’s exact wording). An example might be the director being convicted under the Occupational Health and Safety Act.
As a director you could find yourself being held personally liable for your decisions and being denied access to your indemnity insurance cover.
Dealing with the pandemic increases the pressure on directors but doesn’t absolve them of their liabilities.