Directors of companies: Liability, Indemnification and Insurance

In terms of the previous Companies Act directors could generally only act with the consent or approval of shareholders in a number of cases. The Companies Act 71 of 2008 (“the Act”) grants more default powers to directors than the previous Company Act. The increased powers come at a cost to directors: they are more exposed to personal liability should the company suffer harm or loss due to the actions of a director.

One of the most important sections of the Act is Section 77 which sets out the liability of directors for various contraventions of certain sections of the Act. Three of the subsections imposing liability will be briefly highlighted below.

Section 77(2) provides that the director of a company may be held liable in accordance with the principles of the common law relating to breach of a fiduciary duty for any loss, damages or costs sustained by the company as a consequence of any breach by the director of the duty as envisaged in the Act.

A director can furthermore be held liable in terms of Section 77(2)(b) in accordance with the principles of a common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty of care, skill and diligence.

Section 77(3) also provides that a director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of a director having amongst others acquiesced in the carrying on of the company’s business, despite knowing that it was being conducted in a manner which could be reckless, grossly negligent or fraudulent. In the context of reckless trading it is important to bear in mind that the question is very relevant when the company incurs debts at a stage when it is insolvent.

To guard against the possibility of liability, a director may wish to be indemnified by the company for any damages caused by the director, or, alternatively, to be covered by insurance, paid for by the company, to hold the directors harmless against any claim by the company for damages caused by the director. The Act regulates the circumstances under which such indemnity and the purchase of insurance are possible.

Should you wish to obtain advice on any of the issues raised in this article, you may contact any of the following people:

Richard Stevens – richards@cluvermarkotter.law
Max Loubser – maxl@cluvermarkotter.law
Luzanne Brink – luzanneb@cluvermarkotter.law
Anton Melck – amelck@cluvermarkotter.law
Marieke Wild – mariekew@cluvermarkotter.law

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)