Director liability in South Africa and how to guard against these risks

January 20, 2023

Director liability in South Africa refers to the legal responsibility that directors of companies have for the actions and decisions of the companies they lead. Under South African law, directors can be held liable for a variety of legal wrongs, including fraud, breach of contract, and negligence.

Fiduciary Duty

One of the main ways that directors can be held liable in South Africa is through the principle of “fiduciary duty.” This principle holds that directors have a legal duty to act in the best interests of the company and its shareholders. If a director breaches this duty by, for example, taking advantage of the company for personal gain, they can be held liable for any resulting losses.

Reckless Trading

The Companies Act also penalises and holds directors personally liable to the company for any loss incurred through knowingly carrying on the business of the company recklessly, with gross negligence, with intent to defraud any person of for any fraudulent purpose.

Contravening the Companies Act

A director may also be held liable to any other person for any loss or damage suffered by that person as a result of the contravening of any provision of the Companies Act by the director.

Indemnification Clauses

There are several ways that directors can protect themselves against these types of liability. One way is through the use of indemnification clauses in their contracts with the company. These clauses provide that the company will pay for any legal costs or damages that the director may incur as a result of their actions as a director.

Insurance

Another way to protect against liability is by obtaining director and officer insurance. This type of insurance covers the legal costs and damages that a director may incur as a result of being sued in their capacity as a director.

Preventative Steps

In addition, directors should also make sure that they are fully informed about the company’s activities and that they are only taking decisions that are in the best interests of the company. This means that they should attend all board meetings and actively participate in the decision-making process. Directors should also be aware of the company’s financial position and not trade recklessly, and should ensure that the company is complying with all relevant laws and regulations.

Directors can also protect themselves against liability by remaining vigilant and taking steps to address potential legal issues before they become problematic. This includes monitoring the company’s financial position, reviewing its compliance with relevant laws and regulations, and taking steps to address any problems that are identified. By taking proactive steps to manage the risks of director liability, directors can help to protect themselves and the companies they lead fro