The new Companies Act helps to settle the question of when companies are allowed to indemnify and insure their directors when they misbehave and lose money for shareholders.
Until now, there has been uncertainty as to the extent to which companies could indemnify directors against breaches of their duties. If directors were guilty of misconduct, a company is permitted to take out insurance policies to indemnify itself against liability which is ultimately paid for by shareholders. In certain circumstances, costs can also be advanced to directors to enable them to defend the case.
The new act is far more explicit about circumstances under which companies may indemnify their directors for breach of duty and thus enhances the role of insurers in covering the losses of directors and company officers.
" This act will allow companies to indemnify directors against liability and take out appropriate cover. But it excludes indemnities and cover for directors' liability when it involves the director knowingly performing wrongful acts, wilful misconduct or breaching of trust," says Deneys Reitz associate Thato Seroto.
Thato Seroto
He says directors who were traditionally only responsible to the company and the shareholders and not necessarily to the public may now have liability to any other person who suffers loss or damage as a result of them contravening their duties.
The new act also codifies minimum standards of conduct for directors, including outlining how they should not use their position to gain personal advantage, pass on any information that is material to the firm unless it is publicly available, and act in good faith and in the best interests of the company. If the company has adopted the King Code III, a director's liability will be further extended.
Seroto says though this statutory clarification makes it easier for a director to judge actions against responsibilities, it has important consequences. "Any person who contravenes any provision of the new act is now liable to any other person for any loss suffered by that person as a result of those actions."
Directors are liable under the common law for breaches of fiduciary duty and negligence. For example, a director who acts without authority is liable for the losses sustained by the firm. "The new Act helps provide directors with clear guidance as to their duties. Until now, they have had to glean common law duties of a director from textbooks and case law."
He says the new act will make it easier for insurers to provide cover to directors. "Where there is uncertainty, insurers tend to be reluctant to provide cover or if they do provide it, it could be expensive."
Though the provisions in the new act are good news for shareholders, in the absence of adequate insurance cover, this may serve as a disincentive for directors to join boards as it increases the potential number of claimants significantly.
"The new system will penalise directors guilty of misconduct where it hurts most - in their pockets," says Seroto.
