companies bill widens liability of directors  
14 July 2008

The Companies Bill, which was recently retabled in Parliament, will introduce a new law in the form of a codified regime of directors’ duties, including “a fiduciary duty and a duty of reasonable care”.

The bill, part of the government’s corporate law-reform project, is aimed at improving regulatory oversight and redress for shareholders. Directors will be expected to act in good faith, in the best interests of the company and with a degree of care, skill and diligence that may reasonably be expected of a person in that position.  “Although these obligations have always been expected of directors, for the first time these levels of responsibility have been legislated by the government,” said Werksmans Attorneys director Eric Levenstein last week.  “Director participation at board level will now become far more meaningful than in the past,” he said.

“Board packages will have to be carefully scrutinised by directors and there will be an expectation that directors understand the relevant provisions of the bill when considering how they behave while they are members of the board,” he said. “No longer will mere attendance at a board meeting with minimum participation be sufficient or accepted by those seeking redress against directors for loss.”

The provisions of the bill prohibit directors from carrying on business recklessly with gross negligence or with intent to defraud any person, for any fraudulent purposes, or from trading under insolvent circumstances. A new body, known as the Companies and Intellectual Property Commission, will examine this conduct when a complaint is lodged with it in regard to any director’s conduct.

Also, the bill introduces a “solvency and liquidity” test. A duty is imposed on directors to consider if it is reasonable to go on trading in financial circumstances when company liabilities exceed assets, fairly valued.  Time will tell as to whether or not directors will continue to be keen to be appointed to boards, Levenstein said.   Mervyn King, chairman of the King committee on corporate governance, said last week the legislators might have good intentions, but the new legislation might not have good results. He said no law could stop dishonesty. “Further, it is even more difficult to legislate intellectual honesty.”

King cited the US Sarbanes-Oxley Act as one of the most controversial laws to reach a statute book. Its original aim was modest: to improve the accountability of managers to shareholders, and to calm the raging crisis of confidence in US capitalism caused by the scandals at Enron and WorldCom.  However, he said, the law’s methods were anything but modest, and the costs of implementing key provisions exceeded the benefits.  Deneys Reitz managing partner Michael Hart said the notion of good faith would have to be tested in court.  The bill is expected to be passed into law early next year.

Sanchia Temkin,  www.businessday.co.za