19 June 2019 by and Corporate & Commercial Alert

In the Line of Duty: Duties of “Divisional Directors” under the Companies Act

“A divisional director can incur personal liability for a failure to comply with their duties under the Companies Act.” That should be a sentence that catches the attention of divisional directors and companies across South Africa’s commercial space.

The appointment of divisional directors is becoming more and more frequent in the South African business sphere as expanding companies seek to exercise greater control over their operations. Divisional directors are appointed by a company to manage a particular division or department. Generally, these divisional directors are not appointed to the board of the company and if this is the case then they do not fall under the ambit of a “Director” in terms of the Companies Act, No 71 of 2008 (Companies Act). The Companies Act also does not specifically mention “divisional directors” within the Act and does not attribute any duties to divisional directors specifically.

If a divisional director does not fall under the definition of a “Director” and doesn’t have the duties of a “Director” then “what is the issue?” you may ask.

The issue is that a divisional director of a company (when not elected to the board of directors) will still potentially fall under the definition of a “prescribed officer” under the Companies Act.

A “prescribed officer” under the Companies Act (and in particular regulation 38) is defined as:

“Despite not being a director of a particular company, a person is a ‘prescribed officer’ of the company for all purposes of the Act (being the Companies Act) if that person;

exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or

regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.”

Again, in general, a divisional director will exercise a great deal of general executive control and management over a significant portion (a division) of the business of a company and therefore falls under the definition of a “prescribed officer”. Note that this could apply to a number of senior managers (not only divisional directors) of a company.

So what does this mean for divisional directors?

Divisional directors would be subject to s76 and s77 of the Companies Act, being the duties and liabilities of directors (including any common law duties). A (very) brief summary of these duties are:

1.    To not use the position of prescribed officer, or any information obtained while acting in the capacity of a prescribed officer, to gain an advantage for anyone other than the company or a wholly-owned subsidiary of the company or to knowingly cause harm to the company or a subsidiary of the company and to communicate to the board any information that comes to the prescribed officer’s attention.

2.    To exercise the powers and perform the functions of a prescribed officer in (a) good faith and for a proper purpose, (b) in the best interests of the company, and (c) with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions.

3.    A prescribed officer must exercise independent discretion.

4.    A prescribed officer must not exceed the powers provided to him/her.

These are far reaching provisions and it is important to note that personal liability can be imputed on these prescribed officers for a failure to comply with their respective duties.

Daunting.

Companies can however mitigate the risks faced by: (i) identifying prescribed officers and informing them of this designation as well as the duties and liabilities that are attributed to them, (ii) taking out insurance that covers the actions of any identified prescribed officers of the company, and (iii) running frequent training programs for directors and prescribed officers to ensure they are aware of their duties.

CDH conducts various training sessions on director’s duties and many other aspects of the Companies Act. Kindly contact us for further information on the next training session or a training session tailored to your business.

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