New Companies Act supports honest directors

COMPANY directors who act honestly and reasonably while performing their duties under new company laws could have a valid defence if they face possible legal and criminal action, says a legal expert at Werksmans Attorneys.

Eric Levenstein, a director at Werksmans, said last week that directors who met their obligations and were able to show that they had discharged their obligations, would be able to defend themselves by showing they acted on the company’s behalf in a “reasonable” way.

“Personal liability is becoming an increasingly emotive issue for directors. They need to be aware of the circumstances in which they can be held responsible for company debts,” Mr Levenstein said.

The new Companies Act, which came into effect on May 1, penalises directors and holds them personally responsible for any losses incurred through knowingly carrying on business recklessly, or with the intent to defraud creditors and other stakeholders. It also created criminal liability for directors trading in a manner calculated to defraud creditors, Mr Levenstein said.

However, a director who meets his obligations under the new legislation would be seen as discharging his duties to the company.

George Tweedy, audit risk leader and national professional practice director at Deloitte, said the new laws also contained defence mechanisms for directors who had made bad decisions at board level.

Mr Tweedy said the new “business judgment” rule would give directors more protection from civil actions unless they were guilty of fraud or other unlawful activities.

“The Companies Act provides that a director will have satisfied his duties if he took reasonably diligent steps to become informed about the matter, does not have a personal financial interest, and has made a decision rationally in the belief that it was in the best interests of the company,” he said.

Mr Levenstein said: “Embracing honest, reasonable standards and meeting the requirements of the Companies Act would ensure that decisions made were defensible.”

via BusinessDay – New act ‘supports honest directors’.

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