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)

Implications of estate duty

Estate duty is charged on the dutiable value of the estate in terms of the Estate Duty Act. The general rule is that if the taxpayer is ordinarily resident in South Africa at the time of death, all of his/her assets (including deemed property), wherever they are situated, will be included in the gross value of his/her estate for the determination of duty payable thereon.

The current estate duty rate is 20% of the dutiable value of the estate. Foreigners/non-residents also pay estate duty on their South African property.

To minimise the effects of estate duty you need to understand the calculation thereof. The following provisions apply in determining your liability:

  1. Which property is to be included.
  2. Which property constitutes “deemed property”.
  3. Allowable deductions: the possible deductions that are allowed when calculating estate duty.

Property includes all property, or any right to property, including immovable or movable, corporeal or incorporeal – registered in the deceased’s name at the time of his/her death. It also includes certain types of annuities, and options to purchase land or shares, goodwill, and intellectual property.

Deemed property

  1. Insurance policies
  • Includes proceeds of domestic insurance policies (payable in South Africa in South African currency [ZAR]), taken out on the life of the deceased, irrespective of who the owner (beneficiary) is.
  • The proceeds of such a policy are subject to estate duty, however this can be reduced by the amount of the premiums, plus interest at 6% per annum, to the extent that the premiums were paid by a third person (the beneficiary) entitled to the proceeds of the policy. Premiums paid by the deceased himself/herself are not deductible from the proceeds for estate duty purposes.
  • If the proceeds of a policy are payable to the surviving spouse or a child of the deceased in terms of a properly registered antenuptial contract (i.e. registered with the Deeds Office) the policy will be totally exempt from estate duty.
  • Where a policy is taken out on each other’s lives by business partners, and certain criteria are met, the proceeds are exempt from estate duty.

      2. Donations at date of death

Donations where the donee will not benefit until the death of the donor and where the donation only materialises if the donor dies, are not subject to donations tax. These have to be included as an asset in the deceased estate and are subject to estate duty.

      3. Claims in terms of the Matrimonial Property Act (accrual claim)

An accrual claim that the estate of a deceased has against the surviving spouse is property deemed to be property in the deceased estate.

     4. Property that the deceased was competent to dispose of immediately prior to his/her death (Section 3(3)(d) of the Estate Duty Act), like donating an asset to a trust, may be included as deemed property.

Deductions

Some of the most important allowable deductions are:

  1. The cost of funeral, tombstone and deathbed expenses.
  2. Debts due at date of death to persons who have their ordinary residence in South Africa.
  3. The extent to which these debts are to be settled from property included in the estate. This includes the deceased’s income tax liability (which includes capital gains tax) for the period up to the date of death.
  4. Foreign assets and rights:
  • The general rule is that foreign assets and rights of a South African resident, wherever situated, are included in his/her estate as assets.
  • However, the value thereof can be deducted for estate duty purposes where such foreign property was acquired before the deceased became ordinarily resident in South Africa for the first time, or was acquired by way of donation or inheritance from a non-resident, after the donee became ordinarily resident in South Africa for the first time (provided that the donor or testator was not ordinarily resident in South Africa at the time of the donation or death). The amount of any profits or proceeds of any such property is also deductible.
  • Debts and liabilities due to non-residents:

5. Debts and liabilities due to non-residents are deductible but only to the                      extent that such debts exceed the value of the deceased’s assets situated                outside South Africa which have not been included in the dutiable estate.

  1. Bequests to certain public benefit organisations:
  • Where property is bequeathed to a public benefit organisation or public welfare organisation which is exempt from income tax, or to the State or any local authority within South Africa, the value of such property will be able to be deducted for estate duty purposes
  1. Property accruing to a surviving spouse [Section 4(q)]:
  • This includes that much of the value of any property included in the estate that has not already been allowed as a deduction and accrues to a surviving spouse.
  • Note that proceeds of a policy payable to the surviving spouse are required to be included in the estate for estate duty purposes (as deemed property), but that this is deductible in terms of Section 4(q).
  • Section 4(q) deductions will not be granted where the property inherited is subject to a bequest price.
  • Section 4(q) deductions will not be granted where the bequest is to a trust established by the deceased for the benefit of the surviving spouse, if the trustee(s) has/have discretion to allocate such property or any income out of it to any person other than the surviving spouse (a discretionary trust). Where the trustee(s) has/have no discretion as regards both the income and capital of the trust, the Section 4(q) deduction may be granted (a vested trust).

Portable R3.5 million deduction between spouses

The Act allows for the R3.5 million deduction from estate duty to roll over from the deceased to a surviving spouse so that the surviving spouse can use a R7 million deduction amount on his/her death.

Life assurance for estate duty

Estate duty will also normally be leviable on these assurance proceeds.

Source: Moore Stephens’ Estate Planning Guide.

The application of the talem qualem rule

In situations where a wrongdoer causes some form of damage to a victim, the victim might suffer more damage than one might usually expect. This might be caused by the specific circumstances in which the victim finds himself/herself, which leads to the victim suffering more damage than the average person. Would this be an acceptable defence for the wrongdoer, or must the victim’s existing circumstances be ignored when establishing the liability of the wrongdoer?

An example of the abovementioned is where the victim is in such an adverse financial position that he/she is unable to mitigate the damage caused by the Defendant.

The case of Smit v Abrahams 1994 (4) SA 158 (K) dealt with the matter at hand and is still the leading authority relating to the aforementioned question. In the case of Smit, the Plaintiff was involved in a motor vehicle accident in which the vehicle he owned was damaged beyond economical repair. The Plaintiff not only claimed the market value of the vehicle as damages from the Defendant, but also the cost of a rental vehicle for a period of three months in order to conduct his business. The extent of the Plaintiff’s damage was therefore partly caused by his own financial position and the fact that he could not afford a replacement vehicle at the time. These type of situations are known as thin-skull (or egg-skull) cases, where the circumstances of the Plaintiff influence the amount of damages suffered. In general, the thin-skull rule dictates that a Defendant cannot use the extraordinary vulnerability of the Plaintiff as a defence. This is also referred to as the talem qualem rule. The rule is based on the principle that you take your victim as you find them.

In the judgement, the thin-skull question is discussed as part of the court’s enquiry into the issue of legal causation. With regards to legal causation it is held that a rigid approach should not be followed, but rather a more flexible approach. This flexible approach should be based on reasonableness and fairness and each case should be dependent on its own facts. The fact that the Plaintiff’s damage was partly caused by his own financial vulnerability, is merely one of the factors to be considered when establishing whether or not the damage suffered was sufficiently relevant to the wrongdoer’s conduct.

It was held that, considering the facts at hand, the Plaintiff was entitled to hire a replacement vehicle in order to conduct business and that this would satisfy the criterion of reasonableness and fairness. Because of the fact that the Plaintiff was not in the financial position to buy a new vehicle after the accident and a vehicle was necessary for him to conduct the business, it was regarded as fair and just that the Defendant should carry the expense of hiring a replacement vehicle.

In cases where the thin-skull rule comes into question, the court will have to determine whether it is reasonable and fair to state that the damage suffered by the Plaintiff and particularly the extent thereof, was caused by the Defendant’s conduct.

The thin-skull rule, as originally contemplated and formulated, is not directly applied in South African law. However, the applicable principle, namely that the Plaintiff’s vulnerability does not serve as an acceptable defence, is considered as a factor when the element of causation is considered.

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)