Running a business comes with many challenges, and as a director, your role carries significant responsibilities under South African law. The Companies Act 71 of 2008 outlines specific instances where directors can be held personally liable for negligence, and understanding these risks is essential for protecting both your company and yourself.
When Can Directors Be Held Liable?
Breach of Fiduciary Duty
Directors have a legal duty to act in the best interests of the company. This means acting honestly, with due care, and skill. Common breaches include:
- Neglect of Duties – Failing to attend board meetings, ignoring financial reports, or not supervising company affairs can expose directors to liability.
- Acting in Bad Faith – Making decisions that serve personal interests rather than those of the company.
Gross Negligence
- Every director must act with reasonable care and diligence. Gross negligence occurs when a director:
- Makes reckless decisions without reviewing financial or operational risks.
- Ignores important information that could prevent financial losses.
- Approves transactions or policies without proper due diligence.
Unauthorized Conduct
- Directors must act within their legal authority and comply with relevant laws. They can be held liable if they:
- Make unauthorized financial commitments.
- Enter into contracts outside their powers.
- Fail to comply with tax, labour, or environmental regulations, leading to business penalties.
What Protects Directors?
Business Judgment Rule
The law recognizes that directors must make tough decisions, and they won’t be held liable for mistakes made honestly and in good faith. However, decisions must be based on adequate information and rational business reasoning.
Statute of Limitations
If a company wants to take legal action against a director for negligence, they must do so within three years from the date the wrongdoing occurred.
How to Protect Yourself and Your Business
- Stay Engaged – Attend board meetings, review company documents, and be active in decision-making.
- Document Decisions – Keep records of why certain choices were made, showing they were based on reasonable judgment.
- Seek Legal & Financial Advice – Before making major decisions, consult experts to ensure compliance.
- Understand Your Authority – Make sure all decisions fall within your legal power as a director.
- Obtain Director’s Liability Insurance – Protect yourself from personal financial exposure in case of legal claims.
As a business leader, being informed and proactive about your responsibilities under the Companies Act can help you avoid unnecessary risks and ensure long-term success. If you have any questions about director liability or need professional advice, don’t hesitate to reach out.
If you have any queries, please contact our offices for assistance.
011 476 1112
info@wvdw.co.za
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