08 Jul PERSONAL LIABILITY OF DIRECTOR OF DEBTS OF A PRIVATE COMPANY
! ! DIRECTORS BEWARE ! !
PERSONAL LIABILITY OF DIRECTOR OF DEBTS OF A PRIVATE COMPANY
It is important for persons that are currently Directors of a Private Company or contemplating taking up a position of Directorship, to establish the circumstances in which such a Director would be liable for the debt of the Company.
THE FOLLOWING GROUNDS HAVE BEEN IDENTIFIED
In the normal course of business, the Company would require credit facilities with either suppliers or financial institutions or both. It is standard operation procedure for a supplier or financial institution to require the Director to sign surety for the Companies due performance of all its obligations.
This immediately leaves the Director in a quandary. A decision will have to be made to establish a clear guideline for a Director, when he/she would sign such surety. On signature of such surety, the Director would be personally liable for the due performance of the obligations (payments) of the debt on behalf of the Company.
This is a matter to be carefully considered and should not be blindly or recklessly entered into. In South African Law, the Courts’ attitude in respect of sureties, are very strict. In any event, by signing surety for the Company, the Director accepts personal liability and it could result in the Directors’ personal assets being attached in execution for the debt of the Company.
In the event that the Director should decide to sign surety, it is advisable that the Director places clear limits on the amount for which he/she accepts. This can be done by limiting the amount of the suretyship or alternatively, limit the time of the suretyship, eg. for a period of 6 or 12 months, thereafter to be renewed in writing.
Sureties, form a very large and important part of the Directors’ liabilities and therefore it should be strictly controlled
FRAUDULENT, RECKLESS AND INSOLVENT TRADING
All Directors have a fiduciary duty in respect of the Company. All prudent and consensus Directors should also not that personal liability may also follow in cases mentioned namely, fraudulent, reckless and insolvent trading. The Director should note the following:
The Director would become personally liable to the 3rd party and or the Company if he/she should breach his/her fiduciary duty by engaging in behaviour transactions that are calculated to defraud a creditor, employee or shareholder;
The Director would also be personally liable if he/she should fail to exercise due care and skill in the execution of his/her duties. The loss suffered by the Company, would be recoverable from the Director.
The Director would also attract personal liability in circumstances where the Director allows or consents to trading in insolvent circumstances. If the Company’s liabilities exceed assets or alternatively increases where the Director realizes or ought to have realized that it would be impossible for the Company or unlikely that the Company would be able to repay the newly acquired or existing debts or trade creditors.
The Director incurs personal liability if he knowingly signs, consents or authorize the publication of financial statements that are false or misleading.
Section 77 of the Company Act of 2008, also enumerates various other circumstances, in which Directors would be personally liable for the debt of the Company
In conclusion, the Company, although it is a separate legal entity, it has to function via Directors and any party that wishes to act as a Director, needs to be aware of the duties that is being placed on the Director to avoid the personal liability in consequence of the provisions of Section 77 of the Companies Act 2008.
It is recommended that all parties that contemplate in acting as a Director or is already acting as such, obtains professional advice to avoid unforeseen and unwanted consequences.