Recent legislative changes and increased public awareness have demanded a closer scrutiny of the duties and responsibilities of directors. Judges are also checking the actions of directors. In a recent Court case, it was held that directors of a liquidated company were personally liable for company debts to unsecured creditors. In addition, the Serious Fraud Office has been set up to maintain higher legal and ethical standards for businessmen.
PERSONAL LIABILITY
A director can be held personally liable for company debts if he or she:
- Fails to
ensure that the company keeps adequate accounting records.
- Is party to company
debt and at the time the debt was incurred and did not honestly believe
on reasonable grounds that the company would be able to pay the debt
when it fell due, as well as its other debts.
- Knowingly
carries on company business in a reckless manner.
- Intends to defraud the company’s creditors.
Directors are increasingly being called to answer for the level of company debts accumulated when trading while insolvent.
DIRECTORS’ DUTIES
A director is responsible for the management, supervision and control of the company’s business affairs. Furthermore, at common law there is a duty to:
(a) Act in good faith.
(b) Exercise care, skill, diligence.
And a director must:
(c) Act honestly.
(d) Exercise reasonable care and diligence.
(e) Not misuse information or position.
Directors are not permitted to use confidential information going through their position to derive financial gain.
INSIDER TRADING
A company officer who has had access to confidential, price sensitive information must not deal in securities of that company, or any other company about which they obtained such information due to the connection with the first company.
Under the Securities Amendment Act civil proceedings can be brought against an insider to recover profits made or losses avoided. The Court can also impose a pecuniary penalty on the insider.
FEES AND LOANS
Directors fees must be stated in the company’s annual financial statements. Likewise, loans to directors must also be mentioned in those statements.
REDUCING LIABILITY
There are a number of ways to minimise directors’ risks, eg:
- Sound management
practice and procedure.
- Protection against
creditors by transferring assets to a spouse or trust.
- Insurance against legal liability for loss caused by breaches of duty and wrongful acts.
CONCLUSION
It is vitally important that directors are fully aware of their duties and obligations and that they act honestly and with reasonable care and diligence.
The foregoing
information is of a general nature and should be used as a guide only.
If any matter
is of concern, do not hesitate to contact our offices.
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