The Fiduciary Duty of Directors in South Africa: The case of Da Silva

"While the fiduciary concept imposes liability upon directors for mismanagement, it also protects them as long as they act in a reasonable manner within the scope of their authority"� (Ronald A. Anderson & Walter A.Kumpf, Business Law, 1976.p.710).

It is obvious that everyone entitled with rights, and ultimately means he has duties towards others. The Right to commerce, for instance, entails to an individual means that it has the duty to respect others rights to commerce. 

In the same way directors have the fiduciary duty to their company; if they act in good faith and they are innocent this clause of the law will shield them from any alleged breach of their duties.

The New Company Act 71 of 2008 has set out new concepts of directorship in the company. It is actually to adapt with the current international trend. The Act is promulgated, among other things, to set up efficient, responsible, ethical management in the companies of South Africa. The risk based management is the major part of the Act. It also imposes strictest duties on directors. Due to this fact, many directors have reluctant to take the position of directorship as they fair the consequence of breach of fiduciary duty. For instance, the competition Amendment Act imposes R.500, 000 and 10 years of imprisonment for directors who are compete with their company as result of breach of their duty. The Amendment Act is one of the back up of the New Company Act. But, the law is always in the side of the innocent personalities, including the directors therefore, their duty can serve as a defense to be at liberty of any liability, if they can proof their innocence position.

Who is a director?
A company is a juridical or artificial legal entity that it cannot activate by itself rather through appointed officials. We referred them as directors. Directors are the agents of the company. In most companies the director can be the share holder, but they are also as directors have a liability towards their wrong doings as they act on behalf of the company as directors. This means they will be liable for damage incur even if they are the owners of the company.

A director can be defined as any person occupying the position of director or alternate director of a company, by whatever name he may be designated.  When directors act collectively towards the aim of the company they are called board of directors.

There are executive and non-executive director's distinctions, who are jointly manage the day to day activities of the company, all of them are accountable and act on behalf of the company, or they are simply the agent of the company. A director is appointed by the share holders of a company based on certain criteria's ability, experience, ethical matters and the like are considered to do so. 

Rights and Duties of Directors

A director is the agent of the company, so that s/he need to act based on the guidelines that established by the company. S/he should respect the memorandum, service agreement when s/he acts on behalf of the company. A director is expected to act effectively as an agent of his/her company.  In addition, a director needs to act in loyal manner to his/her company. In other words, a director has a duty to pursue and protect his company's interests. Directors have rights and duties while they run on behalf of their company.

A. Rights of Directors

A director cannot be the surf of the share holders, she has rights like:

• The right to remuneration,
• The right to claim the reimbursement for expenses she incurred from her pocket,
• The right to discharge her responsibility independently and free of influence from the share holders of the company,
• The right to take part in the meeting of board of director's ,
• The right to support by independent expert advice if necessary.

In addition to the below mentioned rights, the share holder and co directors should be respect the bill of rights of directors as enshrined in the 1996 constitution of South Africa. Because directors themselves are human beings.

B. Duties of Directors

The law imposes duties towards agents, trustees and it also imposes the same strict duties towards directors. The law presumes that the nature of director's business is not far away from driving the company, which is mainly with the latter's philosophy; the business of the company will be at risk of maladministration. The two extreme points considered, here, are the interest of the company or the benefit of the share holders and the controlling of management of the directors.   The duties imposed on directors are generally fiduciary duties. 

B.1. Duty to act in good faith

Directors expected to act honestly to their company. Regarding, the test of good faith there are controversial doctrines.  But, the subjective test has got prominence in the business procedures of companies that stated directors need to act based on their conscience as they believe the best interest of the company. It gives a place to professional independence to directors. However, if directors failed to act in the best interest of the company, it is considered as they breach their duties and responsibilities towards the company. Honesty, integrity and interdependence with other company stake holders and professional independence must go together regarding the duty of good faith. 

B.2.Duty to use for the proper purpose

It is inevitable that once the share holders of a company appoint a director, he will entitle with powers to run the day to day activities of the company. This power given must be allocated to proper purpose; this is the other duty of a director.  A director have not any power to use his legitimate power to company for an improper purposes, such as to decide unfairly for the benefit of certain share holder rather that deciding fairly for the common good of the company, allocating underserved resources in improper way, which will result in wastage of the company's resource and so forth. He can not take the advantage of the power to benefit his family, relatives, and friends.   

Even if a company becomes profitable, but the director used his power for improper purpose, it is considered as he breaches his duty. Because the first thing that should be seen is whether the director acts in the best interest of the company. The principle of the duty to act for the interest of the company is the corner stone of all other fiduciary duties of a director.  

In the New Company Act, the duty of good faith and proper use is seen together in a provision under s.76 (3)(a). In fact, the Act is considered as a new paradigm in the

B.3. Duty of Care and Skill

A director as an agent of the company can expected to take the property of the company as his own, as a hard working shepherd keeps care for his cattle's. On the other hand, a director is appointed to serve his company by his trained skill. Hence, he has the duty to a greater degree of skill as expected from a reasonable person in the same experience and knowledge. For instance, a director can not got excuse from the share holders due to his ignorance of the King III code, because the code has got extensive media coverage and as a director he has to expected to know about the at least the basic principles of the code.      

B.4. Duty to act in the best interest of the company            

The duties apply to each director separately, while the powers apply to the board jointly. Also, the duties are owed to the company itself, and not to any other entity.This do not mean that directors can never stand in a fiduciary relationship to the individual shareholders; they may well have such a duty in certain circumstances.

The director has to expect to avoid the conflict of his rights and duties with that of the rights and duties which is imposed upon him by the company. He has to disclose when such cases happen immediately to the board of directors. A director even has the duty to avoid conflict of interest after he resigns. The question is how it will be arise? Avoidance of Conflict of interest means that to use the overall potential of the company to the best interest of the company, therefore, a director who hired or set up his own business cannot use the information he gain while working in original company to the use of the new company. It is a civil breach and sometimes extend to criminal wrong.  

B.5. Duty to not use corporate property and opportunity

Directors are the agents of a company; they can not use the property, opportunity and information of the company to their own benefit. But, they can if they got permission to dos so. If a director got any profit due to using the company's opportunity, he has to make disgorge. The principle is that directors must run for the best interest of the company and they must not got any profit-benefit by using the property and property of the company.  Besides, a director expected to disclose any corporate opportunity or information to the board, because the opportunity should be laid down to the best interest of the company. However, in rare cases, if the board fails to take the corporate opportunity, which is disclosed by the director, the latter can take it for his own interest. Because he has done what expected from him, i.e. disclosing the information to the board of directors. 

B.6. Duty not to Compete with the company

Directors cannot compete with their company. While they operate in a company they can not open up a competing company of their own. This will considered as a play at the expense of their original company.  They have a duty not to serve as the director of a competing company, because conflict of interest will inevitably arise. Simply, they can not be an agent for two competing company at the same time. If conflict of interest arises, they can resign from their positions and can choice whatever they like.

Legal Remedies for Breach of Director's Duty

The legal remedy in this regard is different from one legal system to another one. The most notable remedies available for breach of director's duty can be the following:

-  A director can not benefit from his wrong doing, the company law principle-the no profit rule will apply that a director can not benefit from the profits he acquired while he act in breach of his fiduciary duties.  So that, the company has the right to claim any profit or corporate opportunity, which acquired by the delinquent director,

-  A company who suffered from the director's breach of duty can have the option to claim compensation for the damage incurred.

The New Company law has set out such remedies under 77(2)(a)(b), which also reveals the compensation for the damages and the tort law principles of compensation will be applied in such cases. On the other hand, s. 77(2) (a) (b) and 75(5), shows the principle of no profit rule that a company can claim a profit from the director who acquired the profit due to breach of his fiduciary duty.

THE SUPREME COURT OF APPEAL

  Case no: 304/2007

Appellants: 1. Da Silva                                 V   C.H. Chemicals (PTY) LTD "“Respondent

                 2. Resinex Plastics (PTY) LTD

                 3. Resinex Southern Africa (PTY) LTD

The respondent claims damages for the alleged breaches of the first appellants as managing director of the former. The claim includes:

-         The exploitation of two business opportunities for his benefit,

-         The Seeking his own interest, instead of the company's interest with the second and third appellants.

Regarding the second and third appellants the respondent claim damages because they entered into unlawful competition with the former. The court started to assess the case:

       Directors have a fiduciary duty to exercise their powers in good faith   

       and in the best interest of the company. They may not make a secret

       Profit or otherwise place themselves in apposition where their fiduciary

       duties conflict with their personal interests.  

The new Company Law Act-2008 is also reveals under s. 76(3) (b) "Duty to act in the best interests of the company". As indicated earlier, a director should not promote its own interest at the expense of his company. As an agent of the company, he should protect the advantage of the company, instead of taking the advantage of his position to his personal interest.

According the New company Act, a director who purports his benefit against his duty to act in the best interest of the company, he will not relive from liability.  According to, the New Company Act, Section 76(2) (a): "Duty to avoid conflicts of interest", the appellant or the director is expected to avoid conflicts between his personal and the company's interest.  When such conflict arises the director has the duty to inform or disclose the company's share holder about the fact. If the director fails to do that, it is considers as breach of duties.   If, there is conflict of interest, between the director's personal interest and the company's interest. It can be the point of determination of corporate opportunity.   

Again, s. 76(3) (a) demonstrated "Good faith and for a proper purpose". A director expected to act in a heartfelt and trusted manner towards his company. He should use his position honestly to upgrade his company. He also expected to acts as a reasonable person which act in utmost good faith. In other words, he should avoid any bad faith to his company. Keep the faith is the rule of the game. He should also keep his position for appropriate tasks that will enrich his company and be a potential contestant with other competitive companies.

It is obvious that directors appointed with certain responsibilities, so as to hit the target of the company. They perform to acquire opportunity for their company (e.g. broadening the market access of the company). Such opportunity belongs to the company. However, if a director who acts on behalf of the company but for his own interest, the company can use the doctrine of restitution. This doctrine entails that the director expected to bring back the opportunity he takes for his personal benefit. The respondent claims restitution because it believes the first appellant (the director) takes the opportunity of the former to his benefit. The respondent declared the director (Da Silva) as delinquent director, so that it request to restitution of the profit gain [by Da Silva] in breach of his fiduciary duties. Furthermore, the respondent has the right to claim damage, which the company lost. The damage can be stretch top non material aspect of the company. For instance, the company may lose the confidence of his customer and they may hesitate on the effectiveness of administration of the company. In such cases, the damage needs to be good by the delinquent director.

Yet, the court ruled that in order to declare that the director benefit from the opportunity of the company, it should be corporate opportunity:

     Corporate opportunity can be the task the company was actively pursuing at present

     Prospectively or related to the operations of the company within the scope of its

     business. (Excerpts from the appellant court judgment part) 

But, if the director recognizes the opportunity, having resigns and has not knowledge before resignation. He has the freedom to benefit from the opportunity.  Because

         The expertise and the experience acquired by a director during

         his period of employment with the company and in general even

         the personal relationships established by him during that belongs

         to him and not the company. (Excerpts from the appellant court judgment part)          

In addition to this, under sec.22 of the Bill of rights-in the 1996 RSA Constitution, everyone has the right to trade and commerce or their professions and as a human being the right of directors should be respected.

The director who breaches his fiduciary duty or who is entered in competition with has the liability towards his company, this will applied whether he uses the benefit of the business before or after he leave the company.  This notion is clearly demonstrated under, s.77 (2) (a) and (b): "Liability of directors and prescribed officers". 

"Section 77, entitled "˜Liability of directors and prescribed officers' provides for several circumstances in which directors may be held personally liable under common law.  Such liability relates to:

-Breach of a fiduciary duty for any loss,

-damages or costs sustained by the company as a consequence of any breach by the director or a duty contemplated in provisions of s75; or

- In accordance with the principles of the common law relating to tort for any loss damages or costs sustained by the company as a consequence of any breach by that director."� (Excerpts from the New Company Act 2008)

However, the law allows an innocent director to establish his own business and fairly compete with his former company. He can also hire in the company, which compete with his former company. In addition, he can also request his former clients to join the new company. The law purports such notion to keep the rights and interests of the innocent director and to regulate or create competitive environment in the business arena.

In deportation to this , a director cannot set up his business and hired in competing company, if there is a contract, not to doing so, with the former company, even though he is resign from the company. 

In the case, the respondent got the claim on two "˜business' opportunities, which it believes the appellant director and his collaborators benefited.

1. The Resinex Opportunity

In this claim, the court directly assesses the contract entered between the director (Da Silva) and the second appellant (Resinex Plastics [Pty] Ltd). The main argument was in the contract. The court set aside the decision, as the contract entered between the mentioned parties is contract of employment and it is not to form joint business relationship. Further, the court stated that:      

         The planning of [Da Silva's] future and the preparatory steps taken to

         enable him to  obtain alternative employment and earn a living even if

         taken during his month of notice cannot be regarded  as public policy and

          therefore unlawful. It can therefore, not be branded as unfair competition. (Excerpts   from the same case)

The contract only entitles Da Silva to be the director of the second appellant. So there is no corporate opportunity which is or will benefit the respondent or the C H Chemicals (PTY) Ltd.

In this regard, the New Company Act 71 2008 under s .77(2) (a) and (b), can be interpreted as directors are liable only when they are in breach o