Chris Nduna
Attorney, Notary and Conveyancer
The Legislative Foundation
Sections 76 and 77 of the Companies Act set out the standards of conduct expected from directors and the circumstances under which they may be held accountable. Whether you serve on the board of a small family business, a growing SME, or a large corporate organisation, understanding these obligations is essential.
Section 76 — Standards of directors' conduct: good faith, proper purpose and the best interests of the company.
Section 77 — Liability of directors and prescribed officers for breaches of duty, reckless or fraudulent trading, and misuse of company assets.
Fiduciary Duties: The Core Obligations
At the heart of the legislation is the principle that directors occupy a position of trust. These fiduciary duties form the foundation and cornerstone of good corporate governance, requiring directors to place the interests of the company above their own.
Good Faith
Directors must act honestly and in good faith in all decisions and dealings on behalf of the company.
Proper Purpose
Powers granted to directors must be exercised for the purpose for which they were given — not for personal gain or ulterior motives.
Best Interests of the Company
Directors must always prioritise the company's interests above their own and disclose any personal financial interests in matters before the board.
Care, Skill and Diligence
Directors must exercise the degree of care, skill and diligence that can reasonably be expected from someone in their position.
The Duty to Play an Active Role
The Companies Act expects directors to take an active role in the management and oversight of the business. This means:
What active participation requires
- Understanding the company's financial position
- Becoming informed about board matters
- Considering consequences before approving decisions
- Applying independent judgment
- Not relying solely on fellow board members or advisers
- Maintaining accurate records of decisions
The Business Judgment Rule
Recognising that business decisions often involve uncertainty, the Act provides some protection through what is known as the business judgment rule. The law does not expect directors to be infallible — rather, it expects them to act responsibly and honestly.
took reasonable steps to become informed about the matter · had no personal financial interest in the decision · genuinely believed the decision was in the best interests of the company.
When Directors Face Personal Liability
Section 77 of the Companies Act allows claims to be brought against directors in a range of circumstances. Importantly, liability does not end when a director resigns — former directors can still be held accountable for conduct that occurred during their tenure.
Reckless or Fraudulent Trading
Knowingly permitting the company to trade recklessly or fraudulently can result in personal liability for losses suffered.
Breach of Fiduciary Duty
Acting in bad faith or misusing company assets, information or opportunities for personal gain exposes directors to legal action.
Unlawful Distributions
Approving dividends or distributions when the company does not meet the required solvency and liquidity tests can trigger personal liability.
Undisclosed Conflicts of Interest
Failing to disclose a conflict of interest and participating in decisions that result in personal benefit can expose a director to financial consequences.
Good Governance in Practice
Good governance is about more than simply complying with legislation. Directors should ensure that a culture of compliance and ethical conduct exists throughout the organisation.
Final Thoughts
Being appointed as a director is both an opportunity and a significant responsibility. The Companies Act expects directors to exercise independent judgment, act with integrity and always prioritise the interests of the company. Failure to do so can have serious consequences, including personal financial liability.
Obtaining legal advice early can help identify risks, strengthen governance practices and prevent costly disputes in the future.
Hammond Pole Attorneys · Serious About Service