Directors’ Duties and Personal Liability: When Can Directors Be Held Personally Liable?

A company is recognised in law as a separate juristic person. In simple terms, this means that it exists independently from the people who own and manage it. A company can own property, enter into contracts, incur debts, sue and be sued in its own name.

One of the consequences of a company's separate legal personality is that, as a general rule, its rights, obligations, and liabilities are its own, and not those of its directors.

In terms of section 1 of the Companies Act 71 of 2008 ("the Companies Act"), a director includes a member of the board of a company, an alternate director, and any person occupying the position of director, regardless of the title they use.

Simply put, directors are responsible for managing and overseeing the affairs of the company. They make strategic decisions, supervise the company's business and are responsible for ensuring that it is managed in accordance with the law and in the company's best interests.

Company liability and the principle of limited liability

Because a company is a separate juristic person, it is generally responsible for meeting its own contractual and legal obligations. For example, where a company enters into a lease agreement, loan agreement, or supply contract, the company is ordinarily the party responsible for performing its obligations. If it fails to do so, the other party's claim will usually lie against the company rather than its directors.

This is a consequence of the principle of limited liability. As a general rule, directors are not personally liable for the debts of a company merely because they manage it. This protection is one of the reasons many businesses choose to trade through companies rather than in their personal capacities.

However, this protection is not absolute. The Companies Act, the common law, and, in some instances, other legislation recognise circumstances in which directors may be held personally liable for their conduct.

What duties do directors owe?

Directors' duties arise from both the common law and the Companies Act. Broadly speaking, directors are required to:

• act in good faith and for a proper purpose; 

• act in the best interests of the company; 

• exercise the degree of care, skill, and diligence that may reasonably be expected of a person carrying out the same functions; 

• disclose personal financial interests where required by law; 

• avoid conflicts between their personal interests and those of the company; and 

• avoid permitting the company to conduct its business recklessly, with gross negligence, with intent to defraud any person, or for a fraudulent purpose. 

Depending on the nature of the company's business, directors must also ensure that the company complies with applicable legislation, including tax, employment, and industry-specific regulatory requirements.

Importantly, directors are not expected to guarantee that every business decision will be successful. Business inevitably involves commercial risk. The law does not impose personal liability simply because a company suffers financial loss or ultimately fails. Rather, the question is whether the director acted honestly, in good faith, and with the level of care, skill, and diligence required by law.

When can directors be held personally liable?

Although a company is generally responsible for its own obligations, directors should not assume that they are immune from personal liability.

Depending on the circumstances, directors may incur personal liability where they, amongst other things:

• breach their fiduciary duties or their statutory duties under the Companies Act; 

• fail to exercise the required degree of care, skill, and diligence; 

• authorise unlawful or prohibited distributions; 

• acquiesce in, or knowingly participate in, conduct that contravenes the Companies Act; 

• permit or participate in reckless or fraudulent trading or other conduct prohibited by section 22 of the Companies Act; or 

• are otherwise held personally liable under section 77 of the Companies Act or another applicable law. 

Whether personal liability arises will always depend on the particular statutory or common-law basis relied upon and the specific facts of the matter.

The Companies Act also recognises that, in exceptional circumstances, a court may disregard a company's separate legal personality. Where there has been an unconscionable abuse of the company's juristic personality, a court may declare that the company is to be regarded as not being a juristic person in respect of a particular right, obligation or liability. This remedy, commonly referred to as "piercing the corporate veil", is reserved for exceptional cases and is distinct from the ordinary statutory grounds upon which directors may incur personal liability.

Practical guidance for directors

Directors should ensure that company affairs are properly managed, that appropriate financial and corporate records are maintained, that conflicts of interest are appropriately disclosed and managed, and that the company is never used to facilitate unlawful, reckless, or fraudulent conduct.

Understanding the scope of a director's duties, and obtaining legal advice when difficult decisions arise, can significantly reduce the risk of personal liability.

In our next article, we explore the doctrine of piercing the corporate veil in more detail and examine the circumstances in which a court may disregard a company's separate legal personality.

At Le Roux Vivier Attorneys, we advise directors, companies, creditors and other stakeholders on directors' duties, corporate governance, commercial disputes, debt recovery and matters involving personal liability under the Companies Act.

Ezekiel Dikio

LLB

Associate at Le Roux Vivier Attorneys

Disclaimer: The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the firm. This content is provided for general information only and does not constitute legal advice. While every effort is made to ensure accuracy, the law may change and its application depends on the specific facts of each matter. Readers should seek professional legal advice before acting on any information contained herein. The firm and the author(s) accept no liability for any loss or damage arising from reliance on this content.