Directors fiduciary duties explained

Directors could be subject to criminal sanctions like fines, jail time, and even disqualification from serving as a director in future, if they have failed to perform their duties.

However, these duties and related potential liabilities should not prevent directors from taking the necessary bold decisions that are often required to drive growth and success. Business is ultimately all about taking risk in order to gain reward. Equally, it is accepted that directors can take decisions that turn out to be wrong or result in financial loss to the business.

What is commonly known as the Business Judgment Rule essentially outlines how directors can defend their decisions if they are able to demonstrate that they satisfied the obligations of acting in the best interests of the company and with the required care of skill, in that they took reasonably diligent steps to be informed about the matter and access the correct information, had a rational basis to believe that their decision was in the best interests of the company at the time, and that they had no personal financial interest in the matter.

The Companies Act extends the duties of directors and increases the accountability of directors to the shareholders of the company.

Section 76 of the Act addresses the standard of conduct expected from directors and extends it beyond the common law duty of directors by compelling them to act honestly, in good faith and in a manner they reasonably believe to be in the best interests of, and for the benefit of, their companies.

Liability of directors and prescribed officers

In this section, “director” includes an alternate director, and a prescribed officer or a person who is a member of a committee of a board of a company, or of the audit committee of a company, irrespective of whether or not the person is also a member of the company’s board.

A 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 a duty contemplated in section 75 and 76 of the Companies Act.

The liability will be in accordance with the principles of the 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 contemplated in section 76;
  • any provision of this Act not otherwise mentioned in this section; or
  • any provision of the company’s Memorandum of Incorporation.

A director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having:

  • acted in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;
  • acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1);
  • been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose;
  • signed, consented to, or authorised, the publication of any financial statements that were false or misleading in a material respect; or a prospectus, or a written statement contemplated in section 101,
  • been present at a meeting, or participated in the making of a decision in terms of section 74, and failed to vote against the issuing of any unauthorised shares, despite knowing that those shares had not been authorised in accordance with section 36; the issuing of any authorised securities, despite knowing that the issue of those securities was inconsistent with section 41; the granting of options to any person contemplated in section 42(4), despite knowing that any shares for which the options could be exercised; or into which any securities could be converted had not been authorised in terms of section 36;
  • the provision of financial assistance to any person contemplated in section 44 for the acquisition of securities of the company, despite knowing that the provision of financial assistance was inconsistent with section 44 or the company’s Memorandum of Incorporation.

If the board of a company has made a decision in a manner that contravened the Companies Act:

  • the company, or any director who has been or may be held liable, may apply to a court for an order setting aside the decision of the board; and
  • the court may make an order setting aside the decision in whole or in part, absolutely or conditionally; and any further order that is just and equitable in the circumstances, including an order to rectify the decision, reverse any transaction, or restore any consideration paid or benefit received by any person in terms of the decision of the board;

Court case example (Directors fiduciary duties)

Appellants: Da Silva V C.H. Chemicals (PTY) LTD

The respondent claims damages for the alleged breaches of the first appellants as managing director of the former. The claim includes:

  • The exploitation of two business opportunities for his benefit.
  • The seeking of his own interest, instead of the company's interest with the second and third appellants.

The court started to assess the case and noted that directors have a fiduciary duty to exercise their powers in good faith and in the best interest of the company. They may not make a secret profit or otherwise place themselves in apposition where their fiduciary duties conflict with their personal interests.

The new Company Law Act of 2008 also reveals under section 76 the "Duty to act in the best interests of the company". As indicated earlier, a director should not promote his own interest at the expense of his company. As an agent of the company, he should protect the advantage of the company, instead of taking the advantage of his position to his personal interest.

According to the Companies Act, a director who purports his benefit against his duty to act in the best interest of the company, will not be exempt from liability. When a conflict of interest arises, the director has the duty to inform or disclose to the company's shareholders of this fact. If the director fails to do that, it is considered as a breach of duties. If there is a conflict of interest between the director's personal interest and the company's interest, it can be the point of determination of corporate opportunity.

Section 76(3) demonstrates "Good faith and for a proper purpose". A director is expected to act in a heartfelt and trusted manner towards his company. He should use his position honestly to upgrade his company. He is also expected to act as a reasonable person who acts in utmost good faith. In other words, he should avoid any bad faith towards his company. Keeping the faith is the rule of the game. He should also keep his position for appropriate tasks that will enrich his company.

It is obvious that directors are appointed with certain responsibilities, so as to meet the objectives of the company. They perform to acquire opportunity for their company (e.g. broadening the market access of the company). Such opportunities belong to the company. However, if a director fails to act on behalf of the company but for his own interest, the company can use the doctrine of restitution. This doctrine entails that the director is expected to return the opportunity he took for his own personal benefit. In this case, the respondent claimed restitution because the company believed that the first appellant (the director) took the opportunity of the former to his benefit. The respondent declared the director (Da Silva) as a delinquent director, requiring restitution of the profit gained [by Da Silva] in breach of his fiduciary duties. Furthermore, the respondent had the right to claim damage, which the company lost. It is important to note that damages may be extended to non-material aspects for the company. For instance, the company may lose the confidence of its customers and doubt the effectiveness of administration of the company.

The court ruled that in order to declare that the director benefited from the opportunity of the company, there should be a corporate opportunity. A corporate opportunity can be the task the company was actively pursuing at present, prospectively or related to the operations of the company within the scope of its business.

"Section 77, entitled "Liability of directors and prescribed officers” provides for several circumstances in which directors may be held personally liable under common law. Such liability relates 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 or a duty contemplated in provisions of section 75; or
  • in accordance with the principles of the common law relating to tort for any loss damages or costs sustained by the company as a consequence of any breach by that director.


However, the law allows an innocent director to establish his own business and fairly compete with his former company. He can also hire in the company, which competes with his former company. In addition, he can also request his former clients to join the new company. The law purports such notion to preserve the rights and interests of the innocent director and to regulate or create competitive environment in the business arena.

In deportation to this , a director cannot set up his business, if there is a contract, not to do so, with the former company, even though he resigns from the company.



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