General duties and liability
By accepting an appointment to become a member of a board of directors, a director – whether expressly requested or not – undertakes to exercise due care and act in the best interests of the company. The directors have two main areas to focus on:
- The directors must regularly assess the company’s financial position and ensure that the accounting and management of funds are adequately and effectively monitored.
- The directors must organise the company in such a way that it has sufficient staff resources at all levels.
A director is liable for any loss the company incurs as a result of his intentional or negligent acts during the performance of his duties.This applies not only to a director actively ignoring the best interests of the company but also a director who is passive or does not take sufficient action. Furthermore, a director is liable for the damage caused to a shareholder or a third party if the loss incurred is as a consequence of a violation of:
a. the Companies Act;
b. the applicable annual reports legislation; or
c. the articles of association of the company.
One of the principal matters that is dealt with at the AGM is whether the directors may be discharged from liability. Claims regarding loss to the company may be brought where the majority of shareholders, or a minority consisting of the owners of not less than one-tenth of the shares in the company, have voted against a resolution discharging the directors from liability. Furthermore, if a company enters into insolvent liquidation, the ‘estate’ in liquidation may bring proceedings against a director notwithstanding that discharge from liability may have been granted previously by the shareholders.
Directors duties are not listed exhaustively in the Companies Act as these naturally vary depending on the size and nature of the company. However, the directors’ obligations concerning the liquidation of the company are specified.
Duties in insolvency
Where there is reason to believe that the shareholders’ equity is less than one-half of the registered share capital or if it has been shown during execution of a distraint order that the company lacks attachable assets, the board of directors is obliged to prepare immediately a balance sheet of the company for liquidation purposes.
Directors must issue a notice of a general meeting if the balance sheet shows that shareholders’ equity is less than one-half of the registered share capital. If a second balance sheet, prepared within a set time limit, shows that the shareholders’ equity still does not exceed one-half of the registered share capital, the board of directors has a duty to petition the court for a liquidation order.
Should the board of directors fail to prepare the balance sheet (to convene the initial general meeting) or to petition the court for an liquidation order within set time limits, the directors can be jointly and severally liable for the obligations incurred by the company during the period of such failure to act, unless a director can prove that he or she was not negligent