To be the director of a company comes with risks and responsibilities. The Companies Act places certain liabilities on a director. Nobody wants to be held personally liable for the debt of a company but sometimes it is inevitable. It is good for any director to know when one can be held personally liable and when not. This article will give you more information.
A director is essentially an employee of the company or a member is an employee. The director should sign an employment agreement with the company so that this employee/employer relationship can be established legally. Section 76 of the new Companies Act says what a director can and cannot to.
Duties of the director
A fiduciary duty is placed on the director: this means the director must act in the interest of the company and not him/herself and take care of the affairs of the company to the best of his abilities. Other duties will also be contained in the Memorandum of Incorporation and the employment agreement.
Personal liability of a director
If a director is delinquent and does not comply with his/her duties, she can be held personally liable for the debt of the company. Usually, a director is not liable for the debt of the company, unless:
- The director traded recklessly
- Signed surety for any of the debt of the company
Personal liability of a director after surety
When a director signs surety for the debt of the company, the director will be personally liable for the debt of the company even if the company is liquidated. The liability will be in terms of the surety and not because the person was a director of the company.
Reckless trading and personal liability
If the company was trading recklessly, a director can also be held personally liable for the debt of the company.
Reckless trading means for example that the company traded while its liabilities exceeded its assets or could not pay its debt. The new Companies Act then makes provision that directors can be held personally liable for the debt of the company even if they did not sign surety for the debt of the company. In my experience, this does not happen often, as the director must be sued in his personal capacity by the creditor who avers there was reckless trading, plus the creditor who issues the summons must prove that there was reckless trading and that is not always easy. The director can, of course, defend the matter (and should!) because the creditor has the onus to prove his/her case, so it can get tricky for the creditor.
It would have been great if directors could avoid signing surety for any of the debt of the company because that is usually the best way to get directors to be held personally liable. Unfortunately, that is sometimes unavoidable, especially when the company does business with the banks.