Annexures
2. An overview of key legislation
Legal duties of Directors
(Adapted from an appendix to the second King report on Corporate Governance)
Central to the appointment of an individual to a board of directors are the legal duties and responsibilities that are attributed to the position. The legal duties arise from both statutory and common law. The extent of legislation applicable to companies is significant, and only a limited examination of the most pertinent provisions from the Companies Act and from the Criminal Procedure Act are dealt with here:
Companies Act (61 of 1973), as amended
| Section 50(1)(c) Company name and registration number on notices etc. |
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| Section 171 Names of directors on letterheads etc. |
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| Section 208 Number of directors |
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| Section 211 Appointment of directors (who are not the first directors appointed) |
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| Section 213 Qualification shares of directors |
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| Section 218/219 Disqualification from appointment as a director |
Persons disqualified from appointment as directors:
The High Court may make an order declaring any person disqualified from acting as a director or officer for such period as the Court may determine. |
| Section 220 Removal of directors from office |
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| Section 221 Restrictions on powers of directors to issue share capital |
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| Section 222 Restrictions on issue of shares and debentures to directors |
In addition to the restrictions in section 221, directors may not allot shares to other directors (or their nominees) or to a body corporate which acts on the instructions of a director, or at a general meeting where a director holds more than 20% of the voting rights, unless:
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| Section 223 Share option plans vis-à-vis directors |
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| Section 225 Prohibition of tax-free payments to directors |
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| Section 226 Prohibition of loans to, or security in connection with transactions by, directors and managers |
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| Section 227 Payments to directors for loss of office |
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| Section 228 Disposal of undertaking or greater part of assets of the company |
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| Section 234 Duty of director or officer to disclose interest in contracts |
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| Section 236 Written resolutions where director interested |
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| Section 238 Notice of interest included in notice of meeting |
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| Section 239 Minuting of declarations of interest |
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| Section 240 Register of interests in contracts of directors and officers |
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| Section 242 Keeping of minutes of directors' meetings (see also Sections 244 and 245) |
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| Section 251 Liability for making or concurring with the making, circulating or publication of a certificate, report or statement which is false in any material aspect. |
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| Section 271 Auditor |
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| Section 284(1) Fixed asset register |
A company must keep such accounting records as are required to fairly present the state of affairs of the company, and the business of the company, including:
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| Section 286 Annual Financial Statements |
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| Section 288-290 Group Annual Financial Statements |
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| Section 295 Disclosure of particulars of loans to or security in favour of directors |
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| Section 297 Disclosure of directors' emoluments and pensions in Annual Financial Statements |
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| Section 299 Directors' report in Annual Financial Statements |
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| Section 303 Interim financial reports |
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| Schedule 4 paragraph 37 and section 37 Disclosure of loans and security by subsidiary |
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An overview of key legislation
The following is not an exhaustive list of legislation which potentially affects the functions and responsibilities of directors of companies but is merely intended as an overview. The legislation summarised below is current as at the date of the publication of this guide.
For convience, we have grouped the legislation roughly into the following categories
Arbitration Act, 1965
This act provides for the resolution of contractual disputes by arbitration rather than by conventional legal means. Arbitration ususally offers a quicker, more cost effective solution than legal process and is often conducted under the auspices of the Arbitration Foundation of South Africa. An Arbitration clause is offen contained in commerial contracts.
Bills of Exchange Act, 1964
This Act consolidates the laws relating to bills of exchange, cheques and promissory notes. The Act defines the requirements for a bill of exchange to be valid and determines inter alia the rights of a holder in due course and the liabililty of the drawer and endorser. It also deals with the protection offered by various crossings of cheques.
Competition Act, 1998
The purpose of this Act is to promote and maintain competition in the South Africa economy to:
This Act prohibits restrictive horizontal practices and the abuse of an entity’s dominant position in the marketplace. The Competition Commission, established in terms of the act has wide-ranging powers to remedy an abuse, after investigation by the Competition Tribunal, and offences carry criminal prosecution.
Consumer Affairs (Unfair Business Practices) Act, 1988
The Act provides for the prohibition or control of certain business practices, including any agreement, scheme, advertising or other act except where regulated by competition law. It grants wide powers of investigation to the Business Practices Committee in relation to business practices, in general and unfair business practices in particular that may affect the company.
Credit Agreements Act, 1980
The Act provides for the regulation of certain transactions in terms of which movable goods are purchased or leased on creadit or certain services are rendered on credit. The Act governs various hire-purchase agreements, instalment agreements, credit sales and leases where goods are hired or sold, where payment is payable over a period and the grantor of the credit retains the right to ownership, and prescribes and/or prohibits certain terms in credit agreements.
Currency and Exchanges Act and Regulations, 1933
This Act was promulgated in order to amend the law relating to legal tender, currency, exchanges and banking. The regulations under the Act provide the framework to control the movement of money and goods across the Republic’s borders and prohibit the purchase, sale and loan of foreign currency and gold, the export of currency, gold, securities, and the import of South African notes and restrict dealings in securities belonging to non-residents.
Close Corporations Act, 1984
Any one or more natural persons, not exceeding ten, who qualify for membership of a close corporation in terms of this Act may form a close corporation and secure its incorporation by complying with the requirements of this Act. The corporation becomes a juristic person on registration and continues, subject to the provisions of this Act, to exist as such notwithstanding changes in its membership until it is deregistered or dissolved.
Conventional Penalties Act ,1962
In cases where parties to a contract agree at the time of contracting on a fixed sum of money payable as damages by an aggrieved party to an innocent party in the event of breach of the contract, such a penalty stipulation is enforceable in terms of this Act, subject to the right of the court to reduce the penalty amount to the extent that it deems equitable. Therefore, if it appears to the court that the penalty is disproportionate to the prejudice suffered, the court may reduce the penalty to the extent it considers equitable in the circumstances.
Financial Advisory and Intermediary Services Act, 2002
This Act regulates the provision of financial advisory and intermediary services to clients. It applies to financial services providers (i.e. someone who as part of a regular business furnishes business or financial advice or renders an intermediary service). Financial services providers must be authorised and must conform to a code of conduct, maintain certain prescribed records, and meet minimum accounting and audit requirements.
Financial Institutions (Investments of Funds) Act, 1984
This Act deals with the investment, safe custody and administration by financial institutions of funds and trust property and imposes stringent duties of good faith on directors of financial institutions in their custodianship of the assets under their control.
Insolvency Act, 1936
The law dealing with the legal effects of insolvency is contained, in the case of individuals, in the Insolvency Act and in respect of juristic persons in the Companies and Close Corporations Acts respectively. The Insolvency Act defines the events and the claims procedure to be applied on insolvency, sets out the circumstances in which a debtor commits an act of insolvency and provides the procedure for sequestrating a debtor’s estate. Upon sequestration, the Act divests the insolvent of his estate and vests it with the trustee appointed in terms of the Act until the insolvent is re-invested pursuant to a composition order or until the rehabilitation of the insolvent in terms of §127.
Money laundering legislation
Money laundering is, broadly speaking, the manipulation of illegally acquired wealth in order to obscure its true nature or source. The term allegedly originated in the late 1920's when Al Capone bought laundromats with the proceeds of crime. In the mid 1990’s it was estimated that money laundering was the world’s third largest business after foreign exchange transactions and the international oil trade.
Money laundering is currently regulated by the Prevention Of Organised Crime Act, 1998 (“POCA”) and the Financial Intelligence Centre Act, 2001 (“FICA”) and certain regulations and exemptions promulgated in terms of these acts.
Prevention of Organised Crime Act, 1998
POCA is an omnibus act dealing, among other things, with money laundering, racketeering and criminal and civil forfeiture. POCA sets out the substantive money laundering offences in Sections 4,5 and 6.
Established inter alia to curb money laundering and racketeering activities, this Act also provides for confiscation and forfeiture of proceeds of unlawful activities. This Act must be together read with the Financial Intelligence Centre Act
Financial Intelligence Centre Act, 2001
FICA complements POCA and provides an administrative framework to combat money laundering. It impose onerous duties and rigorous compliance obligations on institutions that have been designated an "accountable institution" (of which there are 22 categories). These include the duty to identify clients, keep records, reporting duties including to report suspicious transactions and cash transactions above a prescribed limit and to self-regulate to ensure compliance with this Act.
An accountable institution may not establish a business relationship or conclude a single transaction with a client, prospective client or business partner after 30 June 2003 unless it has taken certain prescribed steps to establish and verify the identity of the individual or entity concerned. There are different identification and verification requirements depending on whether the client, prospective client or business partner is a company (foreign or local), close corporation, partnership, trust or individual (resident or foreigner). The compliance obligations of an accountable institution include the duty to keep detailed records of its clients/business partners and the transactions entered into with them. There is also a duty on any person who is employed by a business or who is in charge of a business to report “suspicious and unusual transactions” relating to the proceeds of unlawful activities connected to the affairs of such business.
Offences under the Money Laundering legislation carry penalties of a fine up to R10 million or fifteen years imprisonment.
Patents Act, 1978
A patent, registered under the provisions of this Act, protects an invention, which could be a process or method, an article or device, a chemical compound or composition. To be patentable, the invention must have some definable technical content, and must be new, involve an inventive step and be capable of being used in trade or industry or agriculture. A patent grants the patent holder an exclusive right, usually for a period of 20 years, renewable from time to time, to exclude all third parties from infringing on the patented invention.
Pensions Funds Act, 1956
The Pension Funds Act is the key legislation concerning governance of retirement funds. It covers registration, incorporation, regulation and dissolution of pension funds. The main purpose is the protection of members of pension funds through enforcement of prudent financial management and administrative practices. As directors are often appointed by their companies as trustees of pension and provident funds, it is important to note that the fiduciary duties of directors vis-à-vis their companies apply equally to directors in their capacity as trustees in relation to the fund. Trustees can be held personally liable if they are negligent in terms of various provisions in the Act as well as the Financial Institutions (Investments of Funds) Act (dealt with above).
Preferential Procurement Policy Framework Act, 2000
A preferential procurement policy provides for, amongst other things, categories of preference in the allocation of contracts and the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination. A public company which is an organ of state must determine its preferential procurement policy and implement it within the framework prescribed by this Act.
Prescription Act, 1969
This Act provides for the acquisition of ownership or servitudes by prescription, extinction of servitudes by prescription or the extinguishing of debts. Debts generally prescribe after three years if no legal action is taken unless prescribed forms of interruption occur or a longer period is provided for (e.g. debts under most negotiable instruments such as cheques and acknowledgments of debt prescribe after six years). Prescription can be raised as a valid defence to a claim for payment brought outside the time frames determined in the Act.
Promotion of Administrative Justice Act, 2000
Administration action is any decision taken, or any failure to take a decision, by a public company or an organ of state, when exercising a power conferred upon it in terms of the Constitution or performing any other public function in terms of any legislation. It is a requirement of the Constitution that all administration action must be lawful, reasonable and procedurally fair. The Act allows a person or company affected by any administrative decision to request written reasons. This Act is of particular relevance to directors of public sector entities.
Protected Disclosures Act, 2000
This Act provides procedures in terms of which employees in both the private and public sectors may disclose information regarding unlawful or irregular conduct by their employers/ colleagues without fear of reprisal. It also creates remedies in connection with any “occupational detriment” suffered by an employee on account of having made a protected disclosure.
Public Finance Management Act, 1999
This Act applies to government departments, most major public entities, constitutional institutions, Parliament and the provincial legislatures. It's primary purpose is to instil a culture of accountability with regard to the spending of public funds. The Board of the public entity is the accounting authority for the purposes of the Act.
The Act places onerous responsibilities on the accounting authority, and on directors individually and severally, inter alia to:
The accounting authority must ensure that a public entity has and maintains effective, efficient and transparent systems of financial and risk management and internal control, robust internal audit and procurement and provisioning systems. It must also take effective and appropriate steps to
Usury Act, 1968
The Act first came into being as the Limitation and Disclosure of Finance Charges Act’ and was later amended to become the Usury Act in 1968. The broad purpose of the Act is to protect consumers against excessive interest rates in respect of money-lending transactions, credit transactions and leasing transactions, as defined. The practical effect of the Act is that it compels disclosure of and limits finance charges in respect of these transactions. Failure to disclose the finance charges applicable to the transaction has the effect that the charges are not recoverable.
Information and intellectual property
Copyright Act, 1978
This Act regulates intellectual property rights (copyright) in specified works which have been reduced into a material form and in respect of works eligible for protection by virtue of the author being a citizen of South Africa or a body incorporated under the laws of South Africa. Incorporeal property rights form a valuable part of a company’s assets. The Act provides remedies for breach of copyright
Counterfeit Goods Act, 1997
This Act introduces measures to curtail the trade in counterfeit goods in order to further protect owners of trade marks, copyright and marks. The Act creates the right of the owner whose intellectual property right has been infringed to take delivery of the counterfeit goods.
Electronic Communications and Transactions Act, 2002
The advent of electronic commerce practices has created a marketplace without conventional rules, not only nationally but also globally. The ECT Act aims to provide for the development of an e-strategy for South Africa, the regulation of electronic communications and e-transactions and the promotion of access to e-commerce. The most important aspects addressed by the Act are the legal recognition of electronic messages and records for evidential purposes; the legal force of electronically concluded contracts and their time and place of conclusion; consumer protection, including the introduction of a seven day cooling off period in respect of goods and services ordered; safe harbour protection for service providers; and the introduction of statutory criminal offences relating to information systems.
Promotion of Access to Information Act, 2000
The object of this Act is to give effect to the constitutional right of access to state-held information and information held by other persons required for the exercise or protection of rights. It applies to both public and private bodies. The Act must not be seen as a means to obtain confidential information about a private company and companies are not obliged to provide access to certain information such as trade secrets, confidential financial and commercial information, information that would endanger the safety of persons or the security of property, legally privileged information, or research information that would place the researching party at a disadvantage. Unreasonable disclosures of private information about third parties may also not be made. However, these grounds for refusal may be overridden and information must be given if it would reveal evidence of a substantial contravention of, or failure to comply with, the law or imminent and serious public safety or environmental risk; and the public interest in the disclosure of the record clearly outweighs the harm contemplated in the provisions in question.
A person designated by the Company in terms of this Act is required to facilitate access to information in the manner determined by the Act. The company is also required to keep a manual in the format prescribed.
Basic Conditions of Employment Act, 1997
This Act gives effect to the right to fair labour practices as defined in the Constitution and regulates the conditions of employment of employees. The Act introduces certain core rights of employees
(in respect of, working hours and conditions, overtime, leave and termination) and prohibits the employment of children. Establishes the Employment Conditions Commission to advise the Minister of Labour (“Minister”) on any matter concerning the conditions of employment [§ 59].
Compensation for Occupational Injuries and Diseases Act, 1993
The Act contains detailed provisions in respect of the determination and calculation of compensation payable to an injured employee.
Employment Equity Act, 1998
The objectives of this Act include the elimination of employment discrimination, ensuring employment equity to redress the effects of discrimination and to achieve a representative workforce. The Act broadly contains two parts, the first (in Chapter II) dealing with the prohibition of discrimination and the second (in Chapters III, IV and V) concerns affirmative action and the ways in which it is to be implemented and enforced in practice. The Act requires affected companies to commit to develop an equity plan in terms of which they set out to achieve certain equity targets within defined timeframes and imposes certain duties on employers to effect affirmative action policies.
Employment Equity Act, 1998
The Employment Equity Act of 1998 was designed to ensure the implementation of employment equity to redress the historic effects of discrimination and to help achieve a diverse workforce broadly representative of the demographics of South Africa. The Act requires every designated employer (i.e. those that exceed a certain turnover or employ more than 50 people) to take steps to promote equal opportunity in the workplace by eliminating unfair discrimination in any employment policy or practice, and not to unfairly discriminate, directly or indirectly, against an employee, in any employment policy or practice on the grounds of race, gender, sex, pregnancy, marital status, family responsibility, ethnic or social origin, colour, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion, culture, language or birth.
Occupational Health and Safety Act, 1993
This Act provides for the health and safety of persons at work and for the health and safety of persons in connection with the use of plant and machinery, and the protection of persons other than persons at work against hazards to health and safety arising out of or in connection with the activities of persons at work. Employers are required to provide a working environment that is safe and without risk to the health of their employees. Manufacturers have additional duties regarding articles and substances for use at work. Victimisation of employees who report unsafe conditions is expressly prohibited by the legislation.
Promotion of Equality and Prevention of Unfair Discrimination Act, 2000
This Act sets out measures to facilitate the eradication of unfair discrimination and procedures in the workplace. It applies to persons to whom the Employment Equity Act does not apply and its applicability is limited to the extent of the inapplicability of the Employment Equity Act. The schedule provides an illustrative list of unfair practices in certain sectors.
Labour Relations Act, 1995
The Act aims to give effect to and regulate the fundamental rights to fair labour practices conferred by the Constitution. It sets out a framework and processes by which labour disputes of various types are to be resolved and affords extensive organisational rights to trade unions. In general, the Act prescribes a two-stage process consisting of conciliation (i.e. an attempt to resolve the dispute, with independent facilitation) followed by adjudication (i.e. of either arbitration or adjudication by the Labour Court) in the event of the dispute remaining unresolved. The Act defines which disputes must be dealt with by way of arbitration and which fall within the jurisdiction of the Labour Court.
Skills Development Act, 1998 and Skills Development Levies Act, 1999
The Skills Development Act aims to develop the skills of the country’s workforce by increasing levels of investment in education and training in the labour market. It is closely related to the Skills Development Levies Act which provides the mechanism by which levies are collected and disbursed.
Unemployment Insurance Act, 2001
The Act establishes the Unemployment Insurance Fund for the purposes of providing benefits to formerly employed persons who are unemployed due to retrenchment, sickness, maternity or any of the other reasons set out in the Act. This Act must be read together with the Unemployment Contribution Act, 2002 which provides the mechanism by which moneys are collected and paid into the Fund. Both employers and employees contribute in a defined percentage to the Fund. Employees who become unemployed and who have contributed to the Fund are entitled to benefits.
Atmospheric Pollution Prevention Act, 1965
This Act aims to regulate the emission of noxious or offensive gases, atmospheric pollution by smoke, air pollution by fumes emitted by vehicles, and dust control. Given the provisions of the Constitution with regard to environmental quality, the provisions of this Act are likely to become increasingly more important and onerous for directors of companies who engage in activities which generate atmospheric pollution.
Atmospheric Pollution Prevention Act, 1985
This Act aims to regulate the emission of noxious or offensive gases, atmospheric pollution by smoke, air pollution by fumes emitted by vehicles, and dust control.
Environment Conservation Act, 1989
This Act must be read together with Regulations 1182 and 1183 and the National Environment Management Act. Together these pieces of legislation provide a framework for controlling activities that may have a detrimental effect on the environment. The National Environmental Management Act, dealt with below, repeals certain of the provisions of the ECA.
National Environmental Management Act, 1998
Arguably the most significant of all the environmental legislation, this Act provides for co-operative environmental governance by establishing principles and institutions for co-ordinated decision-making on matters affecting the environment. The owner or person in control of land or premises on/in which any activity occurs or has occurred which is likely to cause significant pollution or degradation to the environment, may be held liable for clean-up costs. In terms of § 34, any person who is or was a director of a company found guilty of pollution or environmental degradation at the time of commission of the offence may be held personally liable for any transgressions if the offence in question resulted from the failure of that director to take all reasonable steps that were necessary under the circumstances to prevent the commission of the offence. Liability is strict and proof that the company committed the offence is prima facie evidence that the director is guilty. This is an extension of the “polluter pays” principle which is firmly entrenched in the United States and Europe and which has been applied in a some recent cases by South African courts.
Statutes imposing personal liability
Criminal Procedure Act, 56 of 1977,
In terms of § 332(5) where a company commits an offence, every person who is or was a director at the time of the commission of the offence will be deemed liable unless he can prove that he did not take part in the commission of the offence and could not have prevented it. A director may be cited, as representative of the company and may be dealt with as if he personally committed the offence in question. Any evidence that would be admissible against the company shall be admissible against the director. Conviction renders the director liable to a fine which is payable by the company and may be recovered by attachment and sale of its property.
The income tax system casts an onus on directors to perform certain functions on behalf of the South African Revenue Service ("SARS"). Duties of directors' can be summarised as follows:
Income Tax Act, 1962
Directors have certain defined duties in terms of the Income Tax legislation. These are usually delegated to management.
Directors are responsible for ensuring that income tax return of the company is prepared and submitted to SARS annually. In practice, directors usually appoint auditors to prepare and audit the Annual Financial Statements of the company in accordance with the requirements of the Companies Act. The directors however remain responsible for the correctness of such documents notwithstanding the “delegation” of their responsibility in this regard to the company’s auditors.
Notwithstanding any delegation to management, directors also remain responsible to ensure the registration of employees for income tax purposes, to deduct employees' tax from remuneration paid to such employees and pay it over to SARS on behalf of the employee. Directors must also ensure that employees or former employees are furnished with employees' tax certificates (Form IRP5) in respect of employees' tax withheld in any period during the relevant year of assessment.
Value-Added Tax Act, 1991
Value Added Tax (currently 14%)is levied on four broad categories of taxable events, being:
Stamp Duties Act, 1968
This Act imposes a general obligation to pay stamp duty inter alia on certain bills of exchanges, promissory notes, instalment credit agreements, leases, marketable securities, insurance policies, suretyships etc. Of particular relevance is § 12 of the Act which provides that an instrument which is not stamped as required by the Act cannot be used as evidence in any court of law (except in respect of criminal proceedings or where the State is relying on the instrument to claim stamp duty).
Insider Trading Act, 1998
Insider traders use information to which they become privy by virtue of a privileged position in the company to deal for their own account in the securities of the company, or they profit or avoid a loss through such dealing by another person. The basis on which a person is able to profit from such trades is his knowledge of “inside information” (i.e. information that is not readily available to members of the general public) which, if it were made public, would be likely to have a material effect on the price or value of the securities being traded.
Directors may incur personal liability in terms of the Insider Trading Act if they are found guilty of insider trading. Apart from the criminal penalty of R2 million and/or 10 years imprisonment, the Financial Services Board can bring a civil action against an insider trader to pay to the FSB the amount by which the individual profited or the loss which he avoided as a result of such dealing and penalties.
Directors who wish to deal in the securities of their companies should therefore ensure that such transactions are carried out at a time when all information likely to affect share prices materially is generally available to the investing public.
Banks Act, 1990
This Act applies to listed companies that conduct the business of a bank, barring a few exclusions. The definition of the business of a bank centres around the concept of a deposit and you should carefully consider whether your company’s actions fall within the ambit of the Act.
The powers of the Registrar of Banks to determine who the directors and auditors of a bank should be have been greatly increased by the 2003 Amendment.
A formal definition of corporate governance has been introduced. The Act provides that the board of directors and executive officers of a bank must establish and maintain an adequate system of corporate governance which must be consistent with the nature, complexity and risks inherent in the activities and the business of the bank concerned. Every director, CEO and executive director of a bank owes a fiduciary duty and a duty of care and skill to the bank and a duty towards the bank to:
The amendment, in contrast to the earlier provisions of the Banks Act, which refer to a “fiduciary relationship” only, codifies the generally accepted common law principles of a fiduciary duty and a duty of care and skill owned to the company. The amendment makes it clear that the company, as opposed to the shareholders, is the beneficiary of the statutory fiduciary duty and duty of care and skill.
Recent developments in the Companies Act have made it possible for companies to pay dividends from the share capital of that company. As the capital requirements of a bank forms an essential part of its prudential requirements banks are now prohibited from paying dividends from their share capital subject to the prior written approval of the Registrar of Banks.
In addition to the prescribed Audit and Remuneration Committee, banks are now required to have a Risk Committee and a Directors Affairs Committee, charged with governance issues.
Constitution of the Republic of South Africa, 1996
The constitution underpins all legislation in South Africa and prevails any other legislation in the event of a conflict.
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