Greater personal liability on company’s officers and directors with the new Companies Act.

Johannesburg,  September 2011

With the implementation of the new Companies Act in May this year authorities are seeking to provide better protection for investors and prevent the kind of reckless corporate behaviour that can threaten the stability of industries, countries and even, as we have recently seen, the entire global financial system. It is a company’s officers and directors who are ultimately responsible for ensuring that their organization adheres to this burgeoning body of regulation.

“It’s more than just an added burden of responsibility for a company’s directors and officers,” says Heather Morris, financial lines underwriter at ACE Insurance. “The new Companies Act and other statutes like the Competition Act and more recently Consumer Protection Act are intended to promote the efficient and responsible management of companies, but they also impose much more onerous personal liability on a company’s officers and directors in the event of a breach. In terms of the New Companies Act the definition of who would be liable has been extended and now includes alternate directors, ex officio directors, prescribed officers and members of the audit committee. More importantly, the Act widens the definition of liability to include what a director or officer ‘ought’ to have known if he or she had been acting as a responsible board member.”

Against this background, it is obviously vital that directors and officers make every effort to inform themselves of the potential liabilities they face. Morris recommends the following approach:

• Understand your duties and responsibilities. Joining the Institute of Directors is probably a smart thing to do, says Morris. It is the Institute’s business to help directors fulfil their responsibilities better and give them access to the experiences of their peers. Adherence to the recommendations of King III is also recommended, in terms of good corporate governance.
  
• Keep up to date with your exposure to liability. Knowledge is vital, but that knowledge needs to be current. Directors and officers may be easily distracted by their day-to-day duties so the board needs to put measures in place that will keep directors and officers updated on their areas of vulnerability in terms of liability. Such measures would mean keeping on top of statutory obligations—for example, the new Companies Act as well as industry-specific acts.

“Another key factor is remaining on top of the company’s risk management activities,” says Morris. “In the event of a company failure, the creditors will come after the directors.” Independent non-executive directors must make a point of attending board meetings regularly to help grow their understanding of the business—and their possible liabilities.

Make sure the company has a directors and officers policy in place.

“The new Companies Act removes some of the grey areas when it comes to insuring directors against personal liability,” notes Morris, adding that, of course, no policy would protect a director or officer who acted in bad faith. “However, remember that all members of a board can be held severably liable for one member’s actions if it could reasonably be assumed they ought to have known about it—one needs to be very clear about what is expected of a board member or officer because that will determine the extent of his or her liability. That said, it can be a real comfort to know that one’s legal costs are taken care of, even if the company goes insolvent, in the event of legal action,” Morris concludes. “A good insurance policy is the essential first step.”

Contact Information
Wendy van den Heever +27 11 722 5700
wendy.vandenheever@acegroupx.com