So you have either opened your company or joined a new one and have proudly added that title of DIRECTOR to your business card… but being a director of a company is not just having a fancy title. Did you know that the directors of a company must adhere to provisions of the Companies Act? Did you know that a director can face liability for reckless trading? What about good corporate governance?
Being a board member/ director comes with duties and responsibilities that you need to be aware of and ensure that you adhere to. Even as a sole director of a small start-up. Do not underestimate your obligations to the company itself and its shareholders as your appointment is not just a formality. Your general duty to the company is to be responsible for the management thereof and a director must exercise the powers and perform the functions of director in good faith and for proper purpose, that must be in the best interest of the company and with a degree of care, skill and diligence that may reasonably be expected of someone in that position.
The various rules, legislation and corporate governance principles can seem daunting, so let’s cover a few basics (please note that this is not a comprehensive list) …
What is a director?
This may seem obvious, but let’s look at the legal definition…
As per the Companies Act 2008, a director is defined as a member of a board of a company, or an alternate director of a company, and includes any person occupying the position of director or alternate director, by whatever name designated.
Who qualifies as a director?
With a few specific exceptions, anyone can be appointed as a director of a company.
Section 69 of the Act in essence provides that any person is ineligible for appointment as director, if that person is a juristic person, an unemancipated minor (or is under a similar legal disability), or does not satisfy the qualifications as per the company’s Memorandum of Incorporation.
Also, a person is disqualified from being a director, if the person:
- has been prohibited to be a director by the court
- has been declared by the court to be delinquent in terms of this Act or the Close Corporations Act • is an unrehabilitated insolvent
- is prohibited in terms of any public regulation to be a director of the company
- has been removed from an office of trust, on the grounds of misconduct involving dishonesty, or
- has been convicted and imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury or an offence under the Companies Act, the Insolvency Act, the Close Corporations Act, the Competition Act, the Financial Intelligence Centre Act, the Securities Services Act, or the Prevention and Combating of Corruption Activities Act.
Registering as a director
The first item, and often initially overlooked by small entities on a new appointment to an existing board, is to actually update the company details on CIPC to include yourself as a director (either an executive or non-executive… we will cover the difference later). Unless the memorandum of incorporation specifically states that the shareholders’ approval is required for board appointments, the existing board of directors has the ability to appoint a new director. This is generally performed in a director’s meeting which should have the appropriate minutes as evidence of the decision to appoint the new director.
It must also be noted that the Companies Act requires every company (regardless of size) to keep a record of its directors. This record should be in written form.
The register of director’s of a company must be open to inspection by any person who holds a beneficial interest in any securities (profit company) or who is a member of a non-profit company, as well as any member of the public.
The records should comprise:
- Full name
- Identity number or date of birth
- Nationality and passport number
- Date of most recent appointment as director
- Name and registration number of every other company of which the person is a director (including foreign companies)
These records should be kept for a period of seven years after the person ceases to serve as a director.
Even if you are the sole director of the company, you must maintain the appropriate records. Always seek advise from a professional accountant when determining what records should be maintained for your company.
Quick Facts- Duties and responsibilities of a director
Please note that this is not an extensive list and is for explanatory purposes only
The Companies Act No 71 of 2008 details clearly the duties and responsibilities of the board of directors of a company. The King IV Report on Corporate Governance for South Africa 2016 provides principles for good corporate governance and ethical leadership. Unlike the Companies Act, the King IV Report application is voluntary. (Note that some of the principles have been legislated and if conflict occurs, the law prevails).
- Fiduciary duties:
- To act bona fide in the interest of the company
- To exercise powers for their proper purpose
- To exercise independent judgement in decision making
- Not to use corporate property information or opportunities for personal profit
- Duty to perform duties in good faith, in the best interests of the company and with due care, skill and diligence
- Duty to comply with the Companies Act No 71 of 2008
- Duty to comply with the company’s Memorandum of Incorporation (MOI) (Section 13) A memorandum of incorporation is the document that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company and other matters.
- Duty to manage the business affairs of the company (Section 66(1))
- Duty to carry on the business without trading recklessly or under insolvent conditions (Section 22)
- Duty to comply with the Solvency and Liquidity Test (Section 4)
- What is it? As a director, you have the duty to monitor the company’s financial position and ensure that the company meets this test. It is an accounting exercise and the Act states how to perform the calculation.
- Solvency – Relates to the net worth or net asset value of the company. Total assets – Total liabilities
- Liquidity- Is used to describe how easily the assets can be converted to cash. Current assets- current liabilities
- In order to remain compliant, you as a director, must constantly monitor whether a transaction that the company proposes to enter into will require that the test be satisfied.
- Duty to facilitate shareholder’s meetings (Section 61)
- If you are the sole director and sole shareholder, you will not need to facilitate a meeting however there will be a formality of items you need to attend to at a shareholder and director level which will require resolutions.
- Duty to facilitate director’s meetings (Section 73)
- If you are the sole director and sole shareholder, you will not need to facilitate a meeting however there will be a formality of items you need to attend to at a shareholder and director level which will require resolutions
- Duty to operate in the best interest of the shareholders (Section 20 (6), (7) and 76(3))
- Duty to keep company records (Section 24)
- Duty to keep accounting records (Section 28)
- Duty to prepare financial/ annual financial statements (Section 29 and 30)
- Duty to prepare a director’s report (Section 30(3))
- Duty to disclose director’s remuneration information (Section 30)
- Duty to disclose director’s financial interests (Section 75)
- Duty to file an annual return (Section 33)
Keep a look out on our blog for our downloadable comprehensive director’s guide.