Fiduciary duty of good faith
In terms of the common law, a director’s fiduciary duty means that a director acts in good faith and in the best interests of the company. This includes:
without limitation avoiding conflicts of interest, not exceeding the company’s powers and accounting for secret profits. Because it is not the intention of the legislator to unreasonably overrule law practices that has been built up over a number of years, these common law provisions will continue to apply as long as they do not conflict with the new Act.
In addition to the common law duties the new Act now codifies director’s duties in sections 75 and 76 of the Act. Section 75 describes conflicts of interest and compels directors to disclose the nature and extent of the conflict of interest.
In terms of the new Act, directors also have a duty to act in the best interests of the company. This means that he/she shall not use their position or information to, for example, gain advantage for anyone other than the company and/or cause harm to the company.
These ‘’fiduciary duties’’ impose the following duties on a director:
Duty of care and skill
- A duty not to exceed his powers
- A duty the exercise his powers for a proper purpose
- A duty to maintain an unfettered discretion
- A duty not to compete with the company
- A duty to avoid a conflict between a director’s interests and the interests of the company
In terms of Section 76 of the Act a director’s duty of care and skill towards the company has been expanded and now demands a higher standard than its common law equivalent.
In terms of the new Act this now entails that he/she acts with care, skill and diligence that may reasonably expected from someone:
- Fulfilling his/her functions and
- Having his/her knowledge, skill and experience
A director will act in the best interests of the company and with the necessary care and skill if he/she (business judgement):
- Has no personal/financial interest, or
- Did not reasonably know that any related person had an interest, or
- Disclosed a conflict of interest, and
- Made a decision or supported a decision of the board believing that he/she was acting in the best interests of the company. This would only hold true if they relied on the advice or opinion of an employee, member of the board or a committee or a professional consultant:
- who is believed to be reliable, competent to provide information or merited confidence or
- where it falls within the professional’s field of expertise.
Although, the director’s liabilities as set out in the old Act will still apply, the new Act has added to this and stated that directors will also be liable for:
- any losses and damages resulting from a breach of a director’s fiduciary duties
- unauthorised trading on behalf of a company or taking part in reckless trading,
- being party to acts/omissions which defraud creditors, employees or, shareholders as well as other fraudulent acts
- signing/approving false or misleading financial statements or prospectus
- failing to vote against certain prohibited acts.
The company will also in future not be allowed to indemnify directors from damages and losses suffered from:
- a breach of fiduciary duties
- a breach of duties of care and skill
- a breach of trust
- wilful misconduct
- conflicts of interest.
In terms of the new Act, the legal standing for people who have suffered damages or losses as a result of a director’s conduct has been extended to any interested or affected party including shareholders, employees, trade unions and creditors. In addition, a director may be held accountable for his/her actions when he/she was:
- Present at a meeting or
- Participated and
- Knew provisions of the Act were not complied with. In this context and in terms of the Act, “to know” in terms of section 1 of the Act means “that the person either had actual knowledge of the matter; or was in a position in which the person should have —
(i) had actual knowledge;
(ii) investigated the matter to an extent that would have provided the person with actual knowledge; or
(iii) taken other measures which, would reasonably be expected to have provided the person with the necessary knowledge.”
This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
- Failed to vote against a prohibited act involving e.g. issue of shares or the approval of false financial statements.