COMPANY LAW
REVISION STUDY PACK
JOSEPH
, 1
0784683517
Abbreviations:
MOI - Memorandum of Incorporation
MO001 - MO001/4/2016 (Module Online Company Law ‘Study Guide’) (normally
in footnotes
BR - Business rescue
Question
Fatima is the director of Indica Ltd, a company that manufactures
pharmaceutical products. One of Fatima’s functions is to manage the
company’s distribution of manufactured products to its clients. In October 2015
Fatima requested information from the company's various factories on the
demand for the company's products during the preceding year, as well as the
projected demand for its products in 2016. It was reported that the demand in
2016 would probably not exceed the demand during 2015, because a patent for
one of the company’s most profitable products would prescribe in December
2015.
As a result of this information, Fatima did not make provision for any extension
of Indica Ltd’s distribution network. In August 2015 one of Indica Ltd’s main
competitors lost all its manufacturing plants in a hurricane. Consequently, the
demand for Indica Ltd’s products rose substantially and the distribution
network could not meet this demand. Indica Ltd had to make use of outside
contractors to extend distribution, which led to lower profits.
The board of directors of Indica Ltd wants to institute action against Fatima for breach
of her duty of care and skill.
Advise the board of directors on the company’s chances of success, keeping in mind
the common law, relevant case law and the provisions of the Companies Act 71 of
2008. In your answer you must also include a discussion of the business judgement
“The expert in anything was once beginner”
, 2
rule.
A director’s duty of care and skill has its origin in the common law. In Fisheries
Development Corporation of SA Ltd v Jorgensen [1980 (4) SA 156 (W)] the concepts
of care and skill were examined. The court held as follows:
i. The required degree of care and skill to a large degree depends on the nature
of the company’s business and the specific duties assigned to the director. A
distinction must be drawn between executive and nonexecutive directors in the
sense that a nonexecutive director is not expected to give continuous attention
to the affairs of the company.
ii. It is not expected of a director to have special expertise or experience. What is
expected is that the director exercises the degree of skill and care one could
reasonable expect from a person with his or her knowledge and experience.
Directors are not liable for mere errors of judgment.
iii. A director may rely on other officials and management unless there are
reasons for questioning the judgment of such officials or management. A
director must however still give due regard and exercise his or her own
judgment in doing so.
Remedies against a breach of the duty of care and skill may be based on contract if a
contract was concluded between the company and the director. Alternatively, a
delictual claim for damages exists. In order to claim for delict, obviously all the
requirements must be proven.
Section 76 of the Companies Act of 2008 has partially codified the duty of care and
skill and provides that the director must exercise that degree of care, skill and
diligence that may reasonable be expected of a person carrying out the same
functions in relation to the company as those carried out by the director.
An objective test is applied to determine what a reasonable director would have done
in the same situation. An objective test applied contains subjective elements in that
the general knowledge, skill and experience of that particular director in question are
taken into consideration. Therefore, the Act adopts a dual test.
In terms of the new Act, a statutory business judgment rule section 76(4) of the
Companies Act 71 of 2008 is also accepted.
If a director
had taken reasonably diligent steps to become informed about the matter
“The expert in anything was once beginner”
, 3
had no personal financial interest in the matter
had a rational basis for believing that the decision was in the best interest of
the company
then his/her actions will be excused.
Application of the above principles to the facts
For determining whether Indica Ltd would succeed in instituting an action against
Fatima the required degree of skill required from Fatima, a subjective as well as an
objective test must ensue. Firstly, one would have to determine Fatima’s subjective
expertise and experience and secondly, whether under the circumstances one could
reasonably say that she exercised the care that one would expect from a person with
her experience. A further aspect for consideration is whether she made a decision in
good faith, with care and on an informed basis. From the facts it is clear that Fatima
obtained the necessary information before making any business decisions and that
she acted with the required degree of care in making the decision and that she had
no personal interest. For a company to be successful in its action against Fatima it
has to prove that she failed to obtain the necessary information before taking a
business decision, that she acted with the required degree of care and skill and that
she had a personal interest.
In applying the objective test one would come to a conclusion that a reasonable
director in Fatima’s position would have acted the way she acted. Clearly the nature
of the business and the task laid upon her requires expertise. But, she had not
breached her duty of care and skill since she requested information from various
factories on the supply and demand before taking a business decision. Thus, her
decision is an informed one and since she has no personal interest in the matter
Fatima will not be personally liable
Question
Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed
to appoint a new marketing agent to advertise its products in Gauteng, Lesego
persuaded the board to appoint ‘The Best CC’ by convincing them that The Best
CC would be ideal for this task. However, Lesego did not disclose the fact that
his brother had a substantial member’s interest in The Best CC. The Best CC
was appointed, but a few months later it became clear that One Stop Groceries
(Pty) had suffered substantial losses in Gauteng because its products were not
being advertised effectively, since The Best CC had no experience in this type
of work. A number of shareholders in One Stop Groceries (Pty) ltd now want to
hold the company’s directors liable for breach of their duty to act in the best
interest of the company and their duty to care, skill and diligence by appointing
an inexperienced close corporation as their marketing agent.
“The expert in anything was once beginner”
REVISION STUDY PACK
JOSEPH
, 1
0784683517
Abbreviations:
MOI - Memorandum of Incorporation
MO001 - MO001/4/2016 (Module Online Company Law ‘Study Guide’) (normally
in footnotes
BR - Business rescue
Question
Fatima is the director of Indica Ltd, a company that manufactures
pharmaceutical products. One of Fatima’s functions is to manage the
company’s distribution of manufactured products to its clients. In October 2015
Fatima requested information from the company's various factories on the
demand for the company's products during the preceding year, as well as the
projected demand for its products in 2016. It was reported that the demand in
2016 would probably not exceed the demand during 2015, because a patent for
one of the company’s most profitable products would prescribe in December
2015.
As a result of this information, Fatima did not make provision for any extension
of Indica Ltd’s distribution network. In August 2015 one of Indica Ltd’s main
competitors lost all its manufacturing plants in a hurricane. Consequently, the
demand for Indica Ltd’s products rose substantially and the distribution
network could not meet this demand. Indica Ltd had to make use of outside
contractors to extend distribution, which led to lower profits.
The board of directors of Indica Ltd wants to institute action against Fatima for breach
of her duty of care and skill.
Advise the board of directors on the company’s chances of success, keeping in mind
the common law, relevant case law and the provisions of the Companies Act 71 of
2008. In your answer you must also include a discussion of the business judgement
“The expert in anything was once beginner”
, 2
rule.
A director’s duty of care and skill has its origin in the common law. In Fisheries
Development Corporation of SA Ltd v Jorgensen [1980 (4) SA 156 (W)] the concepts
of care and skill were examined. The court held as follows:
i. The required degree of care and skill to a large degree depends on the nature
of the company’s business and the specific duties assigned to the director. A
distinction must be drawn between executive and nonexecutive directors in the
sense that a nonexecutive director is not expected to give continuous attention
to the affairs of the company.
ii. It is not expected of a director to have special expertise or experience. What is
expected is that the director exercises the degree of skill and care one could
reasonable expect from a person with his or her knowledge and experience.
Directors are not liable for mere errors of judgment.
iii. A director may rely on other officials and management unless there are
reasons for questioning the judgment of such officials or management. A
director must however still give due regard and exercise his or her own
judgment in doing so.
Remedies against a breach of the duty of care and skill may be based on contract if a
contract was concluded between the company and the director. Alternatively, a
delictual claim for damages exists. In order to claim for delict, obviously all the
requirements must be proven.
Section 76 of the Companies Act of 2008 has partially codified the duty of care and
skill and provides that the director must exercise that degree of care, skill and
diligence that may reasonable be expected of a person carrying out the same
functions in relation to the company as those carried out by the director.
An objective test is applied to determine what a reasonable director would have done
in the same situation. An objective test applied contains subjective elements in that
the general knowledge, skill and experience of that particular director in question are
taken into consideration. Therefore, the Act adopts a dual test.
In terms of the new Act, a statutory business judgment rule section 76(4) of the
Companies Act 71 of 2008 is also accepted.
If a director
had taken reasonably diligent steps to become informed about the matter
“The expert in anything was once beginner”
, 3
had no personal financial interest in the matter
had a rational basis for believing that the decision was in the best interest of
the company
then his/her actions will be excused.
Application of the above principles to the facts
For determining whether Indica Ltd would succeed in instituting an action against
Fatima the required degree of skill required from Fatima, a subjective as well as an
objective test must ensue. Firstly, one would have to determine Fatima’s subjective
expertise and experience and secondly, whether under the circumstances one could
reasonably say that she exercised the care that one would expect from a person with
her experience. A further aspect for consideration is whether she made a decision in
good faith, with care and on an informed basis. From the facts it is clear that Fatima
obtained the necessary information before making any business decisions and that
she acted with the required degree of care in making the decision and that she had
no personal interest. For a company to be successful in its action against Fatima it
has to prove that she failed to obtain the necessary information before taking a
business decision, that she acted with the required degree of care and skill and that
she had a personal interest.
In applying the objective test one would come to a conclusion that a reasonable
director in Fatima’s position would have acted the way she acted. Clearly the nature
of the business and the task laid upon her requires expertise. But, she had not
breached her duty of care and skill since she requested information from various
factories on the supply and demand before taking a business decision. Thus, her
decision is an informed one and since she has no personal interest in the matter
Fatima will not be personally liable
Question
Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed
to appoint a new marketing agent to advertise its products in Gauteng, Lesego
persuaded the board to appoint ‘The Best CC’ by convincing them that The Best
CC would be ideal for this task. However, Lesego did not disclose the fact that
his brother had a substantial member’s interest in The Best CC. The Best CC
was appointed, but a few months later it became clear that One Stop Groceries
(Pty) had suffered substantial losses in Gauteng because its products were not
being advertised effectively, since The Best CC had no experience in this type
of work. A number of shareholders in One Stop Groceries (Pty) ltd now want to
hold the company’s directors liable for breach of their duty to act in the best
interest of the company and their duty to care, skill and diligence by appointing
an inexperienced close corporation as their marketing agent.
“The expert in anything was once beginner”
