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Thread: Unpaid Salary : Co Act, Kings Commision, Director Liability? any insight?

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    Unpaid Salary : Co Act, Kings Commision, Director Liability? any insight?

    Any insight?

    In terms of this section of the Companies Act No 71 of 2008 liability extends to an alternate director, prescribed officer or member of a board committee or of the audit committee of the board.
    If a director breaches his fiduciary duty (duty to disclose personal interests, abuses power, does not act in good faith and for proper purpose in the best interests of the company) he will be liable for any loss, damage or costs sustained by the company as a consequence of any breach by the director.
    If a director fails to exercise the requisite due care, skill and diligence, or breaches any other provision of either the Company’s Act or the Memorandum of Incorporation, he will be delictually liable for any loss, damage or cost sustained by the company as a result of the breach.
    Broadly speaking, a director will be liable for direct or indirect loss, damage or costs sustained by the company if:
    a) he/she acts beyond the scope of his authority;
    b) he/she allowed the company to carry on business with the knowledge that it was being conducted recklessly, negligently and fraudulently, or with the knowledge that the company traded under insolvent circumstances (see Section 22);
    c) being party to an act or omission of the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder, or had another fraudulent purpose;
    d) he/she signed, consented to, or authorised any financial statements, prospectus or written statement that is false, misleading or untrue. Here the director’s knowledge and the materiality of the misrepresentation would be factors for consideration in assessing the liability of the director;
    e) Failing to vote against, or participating in, the issue of unauthorised shares, the issue of authorised securities, the granting of options, the provision of financial assistance, approval of a distribution, acquisition by the company of its shares, or that of its holding company, or allotment by the company in contravention of the Companies Act.
    Liability extends jointly and severally but a director does have at his disposal a mechanism to apply to court to set aside a decision of the board for which he may be held liable. The court has the discretion to set aside the decision in whole or in part, and to make any further order, for example rectify the decision, reverse a transaction and even indemnify the director for the costs of the proceeding. Recovery of loss, damage or costs, is limited to a prescription period of three years after the act or omission that gave rise to that liability.
    Section 78 limits the extent to which a company may indemnify a director.
    The role of a director is very onerous and is to be regarded in a rather serious light. Anyone accepting such an appointment must at all times ensure that they are fully aware of their rights, duties and obligations, and ensure that every question in their mind is answered prior to taking a decision.

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    Platinum Member sterne.law@gmail.com's Avatar
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    This has always been the case but is gaining momentum or rather getting more emphasis due to Kings Commision and the new company act etc.
    The jist is - that a company can lose it's limited liability where negligience occurs.
    The Directors in turn can be held liable for their actions or lack thereof
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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    Site Caretaker Dave A's Avatar
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    Proving action or inaction as cause for piercing the corporate veil can get a bit tricky in marginal situations. However, the knowledge that the company traded under insolvent circumstances can be pretty clear cut.

    My concern here is that the extent of the insolvency (and thus the extent of the directors' potential liability) could be far greater than that reflected under "going concern" accounting if the company is liquidated. And if the insolvency arises from a cause that could not be reasonably anticipated, and there's a fair chance that the insolvency is temporary and the company can be traded out of insolvency, what should a director do?

    My thought is if you're a director in this situation and the company is temporarily under water - whatever else you might do, make sure there are sufficient subordinated loans to cover the gap. At least that way you put a limit on your potential personal losses...

    Would that do the trick?
    The trouble with opportunity is it normally comes dressed up as work.

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    Platinum Member sterne.law@gmail.com's Avatar
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    Some general notes on Director responsibilities


    Fiduciary duty towards the company
    Statutory and common law duties
     A director stand in a fiduciary relationship to his company with the result that he has the duty to act in good faith towards the company, to exercise his powers as director for the benefit of the company and to avoid a conflict between his own interests and those of the company.
     A director cannot be relieved of his duty:
    o In the articles
    o In a contract
    o In any other way
     The SCA suggested that no distinction should be drawn between the fiduciary duty of executive and non—executive directors.
     It is in the existence of this duty that the company and its members in their best protection against exploiting their office.
     If as a result a director’s breach of his fiduciary duty the company suffers a loss or the director derives a benefit, the company may set the transaction aside and recover the loss or benefit from the director.

    Basis of liability for breach of fiduciary duty
     The basis on which a director is held liable by his company for a breach of his fiduciary duty is the general principle that a person standing in a fiduciary relationship to another commits a breach of trust if he acts for his own benefit or to the prejudice of that other.

    Typical breached of directors’ fiduciary duties
    1. conflict of interest – a director may obtain no other advantage from his office than that to which he is entitled by way of director’s remuneration
    Robinson v Randfontein Estates – Robinson the chairman of the board, purchased a farm in his own name after his company, which was anxious to acquire the farm, could not finality with the sellers. He purchased the farm through an agent for R60 000 and thereafter sold it to the company for R 275 000. the AD held that R was not justified in making a profit from his office or in placing himself in a position where his personal interests conflicted with the duties arising out of his fiduciary position. He was consequently ordered t repay to the company the profit of R215000 which he had made.
    The decisive factor is whether the advantage arose from the Director’s occupation of his office, whether or not the company itself has been deprived of any advantage is immaterial.
    On the same principle a director may not, for personal gain, make use of information acquired in his capacity as director.
    Industrial Development Consultants v Cooley – the MD, Cooley, unsuccessfully tried to obtain a building for his company – the client was simply not prepared to enter into a contract with that company. The client approached C to form his own company to take up the contract, which C then did. Despite the fact that the client was not prepared to contract with C’s former company, C was nevertheless held liable to account to that company for his profits since the profits were made as a result of information which C obtained in his capacity as its MD.
    Atlas fertilizers v Pikkewyn Ghano, a MD was held to have breached his fiduciary duties where he sabotaged his company’s chances to obtain a contract and later, after severing connections with his company, subverted and took over that contract for his new company.
    In Sibex Construction v Injectaseal CC a provisional interdict was granted against I, because their directors who used confidential information to prepare tenders in competition with their former company, acted in breach of their fiduciary duties towards Sibex
    As a general rule – a director, is not prohibited from serving as a director of other companies, apparently not even if the other company is a competitor of the first company, but he then occupies an almost untenable position in that he may not use or disclose confidential information of the one company for the benefit of the other.

    2. Exceeding limitation of powers – a director has a fiduciary duty to observe limitations of the powers of the company as well as the limits of his own authority to act on behalf of the company. Should a director enter into a transaction on behalf of the company which falls beyond the capacity of the company, neither the company nor the other party can claim that the transaction is void. However, within the company, directors may incur liability to the company. Thus if a director made payments as a result of transactions beyond the capacity of the company (ultra vires) he may be called upon to compensate the company.

    i. Estoppel – a director can bind his company even when not authorized to perform a particular act, provided it is a situation covered by estoppel or the Turquand rule.

    ii. Unauthorized Acts – a company can also recover any loss suffered as a result of unauthorized acts by a director on behalf of the company.

    3. Failure to maintain and exercise an unfettered discretion
    Contractual limitation of discretion - a director must consider the affairs of the company in an objective manner. He must therefore not contract as director to act in a certain manner. For this reason an undertaking to vote in a certain way cannot be enforced against a director.
    In Coronation syndicate v Lilienfeld, the directors contracted with a non-member to call a general meeting and to launch a proposal for increasing the capital. The judge stated that the directors have a fiduciary duty to the company, and it is their duty to do what they consider will best serve the interest of the shareholders. If they have bound themselves to contract to do a certain thing and thus bona fide have come to the conclusion that it is not in the interests of the shareholders that they should carry out their undertaking, I do not think that the court would be justified in interfering with their discretion and compelling them to do what they honestly believe would be detrimental to the interests of the shareholders.
    Rule – the ability to act in the best interest of the company should not be fettered
    Exception to the rule – if the interests of the company required that a particular contract be entered into and one of the implications is that the directors must undertake to vote in a certain way, such a contract would nevertheless be valid – Fisheries development corporation v Jorgenson.
    Interest of others – the practice of appointing a director as nominee representing certain shareholders or other interests within the company is legally recognized but such nominee is nonetheless obliged to exercise his discretion without being fettered.

    4. Failure to exercise his powers for the purpose for which they were conferred
    Specific meaning – a director has a duty to exercise his powers for their true purpose
    Defeating of pre-existing majority – as the bd of directors must use its powers for their true purpose and not for e.g. frustrating the wishes of the majority, it follows that they will not be allowed to use their powers to allot shares in the company with the object of defeating the pre-existing majority.

    Duty to act with care and skill
    Definition of ‘care and skill’ – a director must exercise his powers and carry out his office bona fide and for the benefit of the company. To do so he must exercise the required degree of care and skill.
    Fisheries development – * the extent of a director’s care and skill depends to a considerable degree on the nature of the company’s business and any particular obligations assumed by or assigned to him. * a director is not required to have special business acumen or expertise, or ability or intelligence or experience in the business of the company. He is expected to exercise the care which a reasonably be expected of a person with his knowledge and experience. * in respect of all duties that may properly be left to some other official, a director, is in the absence of specific grounds for suspicion, justified in trusting that official to perform such duties honestly. He is entitled to rely the judgment, information and advice of management.

    Basis of liability for breach of duty
    A director who does not observe his duties of care and skill towards his company is liable to it in delict for damages, if in addition there had been a contract between the company and the director he could be guilty of breach of contract as well.

    Conduct towards members
    No fiduciary duty towards individual members - There is no fiduciary duty that exists between a director and individual members of the company. It is a matter of impossibility for a director to maintain a fiduciary relationship towards both the company and the individual members. The interest of the company and members may diverge with the result that a director would be an untenable position if he were to observe fiduciary duties towards both.

    The rights to deal shares – a director having inside information of company affairs at his disposal may buy and sell shares in his company for his personal gain without being required to disclose that information to the other party. There should be no unfair dealing on the part of the directors, that the directors did not approach the member but the member approached them, and that the transaction was concluded at the member’s price. The court should not interpret so widely as to absolve directors from all responsibility towards a buyer or seller of the shares of their company.

    Prohibition on insider trading - S2 – it is an offence to trade with inside information. “Offence” means any person possessing inside information and using that information to trade in securities or financial instruments shall be guilty of an offence. “inside information’ means a specific or precise information which has not been made public and which is obtained and learned as an insider, and if it were made public would be likely to have a material effect on the price or value of any security or financial instrument. The fine is a fine of not exceeding R2 million or imprisonment for a period not exceeding 10 years or both. There is also a statutory civil action available to those who acted to their detriment because of inside information.

    Contract between a director and a company
    Statutory provisions and common law rules – S234-241
    Principle – due to his fiduciary position, a director may not place himself in a position where his interests conflict with those of the company.
    Should the director nonetheless contract with his company, the contract may, subject to contrary provisions in the articles, be voidable at the option of the company.

    Avoidance of voidability – the voidability of the contract can be overcome either by the articles permitting contracts between a director and the company or by obtaining the approval on the contract at a general meeting after the full disclosure.

    Statutory provisions for disclosure – S 234 -241 are designed to ensure that a director with a material interest in the more important contracts of his company discloses full particulars of his interest. The contracts concerned are those which:
     Are of importance in relation to the company’s business
     Are entered into:
    o In pursuance of a resolution of the bd of directors, or
    o By one or more directors or officers authorized by the bd of directors to enter into a particular contract or type of contract.

    General written notice – a director may experience the problem that he is a member of a company or firm which contract with his company more or less regularly. Repeated identical disclosures can be avoided by a general written notice to the effect that he is a member of the company or firm and is to be regarded from then on as having interests in such contracts.

    Failure to disclose – failure by a director to disclose his interest in these types of contract constitutes an offence and the contract may be voidable, while the profits may be recoverable from the director.

    Time of disclosure – the declaration of interest must be made at or before the meeting of directors at which the question of entering into or confirming the contract is first considered. Must be given in writing and read at the meeting, unless each director present states in writing that he has read the declaration. A written resolution which circulates among the directors and concerns the types of contract is valid if the declaration of interest was made in the prescribed manner. When a director of officer who has been authorized specifically to enter into contracts on behalf of the company has a personal interest in the contract to be concluded by him, prior approval by way of a director’s resolution is required.

    Manner of disclosure – audible utterance or tacit assent to and acceptance of assertation as to a director’s interest in a contract is considered proper disclosure.

    Recording of a disclosure – all declaration of interests must be recorded in the minutes of the relevant meeting of the bd of directors and, unless copies of the minutes are circulated to the directors, the minute recording the declaration must be read out at the next meeting. A register of the declarations must be kept, and open for public inspection.

    S 247 –Indemnity of Directors
    Limitation on indemnity – no provision in the articles or stipulation in a contract can validly indemnify a director, officer or auditor of a company against any liability towards the company which would normally result from their negligence, default, breach of duty or breach of trust. A general meeting may, notwithstanding S247, still ratify or condone certain breached of fiduciary duties by directors.

    Indemnity against costs of litigation – the only indemnity which can still be provided for in the articles is indemnity against liability incurred by a director, officer or auditor in defending himself in any court proceeding which was decided in his favour.

    S248 – relief by the court – the court may relieve from liability a director who has acted honestly and reasonably and in its opinion ought fairly to be excused when proceedings are pending against him for negligence, default breach of contract or trust. Special circumstances will have to prevail before the court will grants this relief.

    S323 – personal liability – when it appears in winding-up, judicial management or otherwise that any business of the company was carried on:
     Recklessly, or
     With intent to defraud creditors of the company or any other person, or
     For any fraudulent purpose
    The court may declare that any person, who was knowingly a party to the carrying on of the business in that manner, is personally responsible, without liability, for all or any of the debts or other liabilities of the company.
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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    The fact is that many directors of private companies have in the past, and in some instances still stand, stood reckless towards the effect that their decisions or actions had on the company and especially its creditors. Many directors have regarded companies as being a tool to escape personal liability for their actions or decisions.

    Unfortunately, the conduct of these directors could no longer be condoned, and therefore the new Companies Act was introduced. The way I see it is that the honest director now suffers under the same burden as the dishonest director.

    However, taking into consideration the provisions of the Act, the honest director should not fear "personal liability" for as long he has acted in the best interests of the company and is not in breach of his fiduciary duty towards the company, he cannot be held personally liable for the debts of the company.

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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by manhav View Post
    However, taking into consideration the provisions of the Act, the honest director should not fear "personal liability" for as long he has acted in the best interests of the company and is not in breach of his fiduciary duty towards the company, he cannot be held personally liable for the debts of the company.
    This part is the most difficult to attack and defend. I am not sure that as a director, no matter how hard they tried to prevent failure will escape the hunt to repay the loses.

    I think that to be a director in future will be the same as signing an open indefinite unlimited surety, as there is no way to defend the fact of failure.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
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    Platinum Member sterne.law@gmail.com's Avatar
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    Quote Originally Posted by Justloadit View Post
    This part is the most difficult to attack and defend. I am not sure that as a director, no matter how hard they tried to prevent failure will escape the hunt to repay the loses.

    I think that to be a director in future will be the same as signing an open indefinite unlimited surety, as there is no way to defend the fact of failure.
    i think the emphasis should not be on the liability but rather when liability kicks in -

    S323 – personal liability – when it appears in winding-up, judicial management or otherwise that any business of the company was carried on:
     Recklessly, or
     With intent to defraud creditors of the company or any other person, or
     For any fraudulent purpose
    The court may declare that any person, who was knowingly a party to the carrying on of the business in that manner, is personally responsible, without liability, for all or any of the debts or other liabilities of the company.

    It does not mean if a bussiness fails or struggles that the director will be liable. Reckless is a fair road down from negligient or mistakes.
    Intent to defraud and fraudelent I think are pretty clear.
    Of course the other side would be that ministers should be treated as the equivalent of Directors and where they contravene any of the Director provisions should be liable along the same lines. I dont think examples are required!!!!!!
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by sterne.law@gmail.com View Post
    Intent to defraud and fraudelent I think are pretty clear.
    The problem with this statement, is the interpretation of the word 'intent'. Who decides that a specific action was 'intent' or bad judgment? This is usually done by a Magistrate or judge depending on the gravity of the situation. These people have never been in business, yet they will make a decision on the action you have taken. Frankly I find this extremely uncomfortable.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Site Caretaker Dave A's Avatar
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    What is the test level - balance of probabilities or beyond reasonable doubt?
    The trouble with opportunity is it normally comes dressed up as work.

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    Platinum Member sterne.law@gmail.com's Avatar
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    if it is in a civil matter, balance of probabilities.
    the criminal issue, such as fraud, beyond reasonable doubt.

    Unlikely that a matter like this would be in front of a magaistarte court, due to the financial limitations of jurisdiction. Even if it were, probably better to take it to high court with a judge.
    As to the ability of a judge to determine intent, that is the job of your defence team. And it is relevant to any litigation - the judge can not be experienced in every facet, they rely on the information presented before them and make a decision based on that.,

    the converse or interesting point of departure is that in retrenchments, the court is hesitant to rule on the substance or reasoning of a retrenchment. They take the stance that; how are they to determine what is good or bad for the business or what is or is not required
    Anthony Sterne

    www.acumenholdings.co.za
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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