The Companies Act 71 of 2008 (“the Act”) introduces a modernised framework for director accountability in South Africa. One of its most significant features is the extent to which directors, including executive directors, can be held personally liable for their conduct while managing a company.

This article highlights the key principles and provisions relevant to director liability, without attempting to cover every possible instance.

The Duties of Directors

Before addressing liability, it is important to understand the legal duties imposed on directors. The Act partially codifies the long-standing common law fiduciary obligations. Where the Act is silent, the common law still applies; but in most cases, the Act takes precedence.

Section 76 of the Act sets the standard of conduct required from directors. In broad terms, directors must:

• Act in good faith and for a proper purpose;
• Exercise powers and perform functions in the best interests of the company; and
• Act with the care, skill, and diligence that may reasonably be expected of someone in their position.

Put simply, directors must place the company’s interests above their own and avoid conduct that is dishonest, reckless, or negligent.

Piercing the Corporate Veil

Ordinarily, a company is a separate legal entity and its directors are shielded from personal liability. However, this “corporate veil” can be lifted in certain circumstances. Both legislation and the courts (through common law) allow for directors to be held personally liable where they misuse the corporate form to commit fraud, reckless trading, or other unlawful conduct.

Provisions of the Companies Act on Director Liability

The Act contains several sections dealing specifically with when directors can face personal consequences:

• Section 20(6): Shareholders may claim damages from any person (including a director) who intentionally, fraudulently, or through gross negligence causes the company to act outside the scope of the Act.
• Section 22(1): A company is prohibited from conducting business recklessly, with gross negligence, or with intent to defraud any person. Directors who allow such conduct may be held responsible.
• Section 77: This section sets out a wide range of situations where directors can be liable, such as:
  • Acting outside their authority (s77(3)(a));
  • Acquiescing in reckless or fraudulent trading (s77(3)(b));
  • Being party to fraudulent acts or omissions (s77(3)(c));
  • Approving misleading financial statements, unauthorised share issues, unlawful distributions, or the provision of unauthorised financial assistance.

Importantly, claims brought under section 77 are subject to a three-year prescription period (s77(7)).

• Section 218(2): Anyone who contravenes the Act may be held liable to any other person for any loss or damage caused by that contravention.
• Section 81(1)(e): A shareholder may apply for the winding-up of a company where directors have engaged in fraudulent or illegal conduct, or where assets are being misapplied or mismanaged.

Old vs New Position

Under the now-repealed Companies Act 61 of 1973, section 424 allowed creditors to hold directors personally liable if they carried on business recklessly or with intent to defraud, especially during liquidation. The 2008 Act retains this principle but expands the grounds for accountability, making it clear that liability is not limited to insolvency situations.

Possible Defences for Directors

The Act also recognises that not every mistake should result in liability. Sections 76(4) and 77(9) provide potential defences:

• If a director acted honestly, in good faith, and in the best interests of the company, they may be excused from liability.
• Courts may relieve a director from liability (wholly or partially) where it appears just and equitable to do so, provided there was no wilful misconduct or breach of trust.

Conclusion

Director liability is a fact-specific enquiry. Courts retain discretion to weigh the conduct of a director against the statutory duties imposed by the Act. Broadly speaking, liability arises where directors act dishonestly, unreasonably, or in ways that prejudice the company, its shareholders, creditors, or the public.

For executives, this underscores the importance of exercising diligence, acting within the scope of authority, and always prioritising the company’s best interests. Failure to do so may strip away the protection of separate legal personality and expose directors to personal claims for damages.