4. LIABILITY FOR CARTEL CONDUCT
4.3 Directors’ Responsibilities, Duties and Liabilities
4.3.2 The Companies Act 71 of 2008
It must be noted that the Companies Act partially codifies the common law, and incorporates in its provisions some of the common law principles282. However, this is only a partial codification and thus the Companies Act must always be considered in conjunction with the common law. The common law provides a fiduciary duty on directors. It is accepted that a director, in his capacity as a director, owes a fiduciary duty to his company. This means that directors, when acting as individuals and as a board, must act in good faith and for the benefit and in the best interests of the company as a whole. In this regard the company is the beneficiary of the duty.283
The Companies Act partially codifies both the fiduciary duties and the duty of care and skill.284 Section 76 of the Companies Act makes provision for the codification of the fiduciary duties of directors; as well as the standards of conduct required to be performed and exercised by directors; whilst section 77 explains the basis and the extent of liability imposed on directors for breach of these duties. In the common law, wrongs were decided on a case by case basis whereas under the Act there is a clear list of wrongs that can constitute liability.285 It is important to note that the Companies Act does not exclude the common law, but applies in addition to it. In the event of a conflict between a statutory provision and the common law provisions, the statute will apply.286
Section 66(1) of the Companies Act codifies the powers of the board and states that:
‘The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions
281 Ibid.
282 Ibid.
283 Ibid.
284 Ibid.
285 Ibid.
286 Ibid.
64 of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.’ 287
Essentially, shareholders rights are restricted to appointing directors to run the company for them. In turn directors have an obligation to assure themselves that they do not expose the company to the risks of unlawful and anti-competitive conduct in terms of section 76 the Companies Act. Shareholders consequently run the risk of directors acting fraudulently and involving the company in cartel activity. However if shareholders do not like the manner in which their company is being run, they have the right to remove the defaulting director.
It is important to note that the Companies Act which, while providing for the personal civil liability of directors (in terms of section 77 and section 22(1) of the Companies Act) and criminal liability for fraud (in terms of section 214 of the Companies Act), remains silent on whether directors involved in cartel offences should face criminal prosecution.
‘Section 77, as read with section 22 of the Act, penalises and holds directors personally liable for any loss incurred through knowingly carrying on the business of the company recklessly or with the intent to defraud creditors and other stakeholders.’ Section 214 creates criminal liability for those directors trading a company in a manner which is calculated to defraud a creditor.’288
‘Section 22(1) states that a company must not:
(a) carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.’289
‘Section 77 (3) states that any director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having:
(a) acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1);
(b) been a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose’.290
287 71 of 2008.
288 Levenstein, E ‘The personal liability of directors: company law’ (2011) 11 (5) Without Prejudice 21-23.
289 71 of 2008.
290 71 of 2008.
65 According to the Companies Act, the word ‘knowing’ is defined ‘as a person either having actual knowledge, a person who has investigated the matter to an extent that would have provided the person with actual knowledge; or a person who has taken other measures which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter.’291 It is imperative to note that the definition of ‘knowing’ in the Companies Act is similar to the definition of ‘knowingly acquiesced’ in section 73A of the Competition Amendment Act. Thus, only directors who are shown to have had a legitimate interest in the prosperity of the company and whose decisions have been made in the best interests of the company, whilst carrying on the business of the company, would have a valid defence against such claims.292 Enquiries conducted as to the affairs of a company will always involve an evidential investigation into whether a director has carried out the business of the company in accordance with sound legal business practices and has fulfilled his or her fiduciary duties.293 The law provides directors with a defence to any action instituted in terms of section 77, in appropriate and objective circumstances, where a director can show that he or she has complied with what can be reasonably expected of a reasonable director placed in the same situation or faced with similar circumstances as that director.294
Section 76(3) of the Companies Act provides that ’a director acting in his capacity as a director, must exercise the powers and perform the functions of a director in good faith and for proper purpose; and act in the best interests of the company with the necessary degree of care, skill and diligence that is reasonably expected.’295 Further, the Companies Act provides that directors ‘may only use their position, or any information which they become aware of whilst holding that position, to the advantage of the company. They are therefore prohibited from any personal gain or to knowingly causing harm to the company.’296 It therefore follows that a person who accepts their appointment as a director, agrees in principle, to act in accordance with certain standards listed in section 76 of the Companies Act which encourages directors, whilst acting in their capacity as directors, to be responsible and accountable for their actions.
291 Levenstein (note 288 above) 22.
292 Ibid.
293 Ibid.
294 Ibid.
295 Section 76(3) of the Competition Act 71 of 2008.
296 Levenstein (note 288 above) 23.
66 It is also important to note that the Companies Act applies to all directors as it draws no distinction between executive, non-executive and independent non-executive directors.
Section 76(2)(ii) specifically provides that ‘directors must not use the position of director, or any information obtained while acting in the capacity of a director, to knowingly cause harm to the company.’297 Thus the Companies Act does not contain provisions which is directly applicable that specifically provides for the imposition of personal criminal and civil liability on directors for corporate crimes such as tender collusion which is an anti-competitive practice.
It is often said that prevention is better than a cure. Directors should be encouraged to create a risk management framework which assesses the prevailing laws and regulations affecting the company. An assessment of the company’s compliance with competition laws is an important risk management strategy which is often overlooked.298 Directors should use this as a means to assess the internal regulations and procedures established by the company to mitigate the risks of anti-competitive behaviour. Furthermore, directors should develop internal policies, which include internal penalties, and compliance programmes, which prohibit anti- competitive behaviour within the company.
Following a director’s conviction under section 73A of the Competition Amendment Act, section 78 of the Companies Act (still to become effective) provides that a company will be prohibited from directly or indirectly paying any fine imposed on a ‘director of the company, or of a related company, who has been convicted of an offence in terms of any national legislation.’299
In future, fines personally incurred by directors as a result of anti-competitive behaviour, in contrast with fines levied against the company, ‘will result in increased personal risk of liability for the directors in their personal capacity, without the prospect of assistance from
297 Levenstein (note 288 above) 23.
298 PricewaterhouseCoopers ‘Anti - competitive practices: Corporate Governance Network - position paper 2’
available at http://c.ymcdn.com/sites/www.iodsa.co.za/resource/collection/05E93ACB-10BE-4507-9601- 307A66F34BD8/CGN_Position_Paper_2_Anti-competitive_practices.pdf, accessed on 3 October 2014.
299 Ibid.
67 the company.’300 Companies may only assist in paying directors’ legal costs if the prosecution is abandoned, or the director is acquitted.301
Section 162 of the Companies Act states that a director may be declared ‘delinquent’ if such director grossly abuses the position of his office ‘intentionally; or, by gross negligence, inflicts harm upon the company or a subsidiary of the company contrary to section 76; or acts in a manner that amounts to gross negligence, willful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company or as contemplated in section 77 of the Act.’302