THE EVER INCREASING RESPONSIBILITIES AND LIABILITIES OF DIRECTORS – BY CLAIRE TUCKER

Thursday, October 07, 2004
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Corporate governance, triple bottom line reporting, corporate social responsibility and sustainable development.  All of these terms are elements of the exponential growth in the last few years of the responsibilities and obligations placed on directors of companies. 
 
The King II Report places particular emphasis on integrated sustainability reporting and the importance of integrating Safety, Health and Environment issues into their procedures and policies and the need to deal with these matters at a board level. 
 
There has however not only been a growth in responsibility at a board level for environmental, health and safety issues but also various moves towards increasing the liability of directors, for damage caused by the company which they direct, of which they may be personally innocent, particularly in the mining and environmental sphere. 
 
As such, when the Board as a whole considers the policies and practices that the company adopts towards safety, health and the environment such decisions must always be taken with due cognisance to the increasing individual responsibilities placed on directors with respect to these matters. 
 
Recent statutory developments may even go so far as to potentially impose strict liability on directors.  Strict liability is unusual in South African law, it is generally a fundamental rule of South African law that fault (for example intention or negligence) is an essential element of every crime. Where there is no “fault” requirement for a crime liability is said to be “strict” or “absolute”, meaning that it is irrelevant whether the accused had a blameworthy state of mind when the damage in question was caused.
 
Only the Minerals Act, 2002 specifically imposes strict liability on a director for environmental damage caused by the operations of the company which they direct.  Section 38(2) of the Minerals Act provides that, notwithstanding the Companies Act, 1973 or the Close Corporations Act, 1984, the directors of a company or members of a close corporation are jointly and severally liable for any unacceptable negative impact on the environment, including damage, degradation or pollution advertently or inadvertently caused by the company or close corporation which they represent or represented.
 
This very harsh provision in the Minerals Act (which contains certain ambiguities which have yet to be tested in the Courts) does not find an echo in existing environmental legislation nor are there any proposals by the Department or Minister of Environmental Affairs and Tourism to amend any existing environmental statutes or pass new environmental legislation making directors strictly liable for environmental damage. 
 
The National Environmental Management Act, 1998 (“NEMA”) does specifically make directors liability for environmental damage but liability in terms of this statute is not strict.  Section 34(7) of NEMA, provides that any person who is or was a director (i.e. a member of the board, executive committee, or other managing body of a corporate body and, in the case of a close corporation, a member of that close corporation or in the case of a partnership, a member of that partnership) of a firm  at the time of the commission by that firm of an offence under various environmental statutes shall himself or herself be guilty of the that offence and liable on conviction to the penalty specified in the relevant law, if the offence in question resulted from the failure of the director to take all reasonable steps that were necessary under the circumstances to prevent the commission of the offence.  Proof of the offence by the firm constitutes prima facie evidence that the director is guilty under section 34(7).  Section 34(8) provides that any such director may be so convicted and sentenced in addition to the employer or firm.  Thus, to escape liability, a director would have to show that he or she took all reasonable steps under the circumstances to prevent the commission of the offence.
 
There has been a debate for some time regarding the value of holding directors liable or strictly liable for damage or loss caused by the company which they direct.  For example, there were proposals last year to amend the Banks Act, 1990 to make directors of a bank personally liable for loss suffered by depositors in the event of bank failure. Generally, these proposals do not succeed as they are seen as being punitive and not serving a real purpose.  Directors are unlikely to have sufficient resources to compensate for any losses claimed and, some form of statutory compensation fund is generally a more practical way of ensuring damage or loss caused by a company is made good.  There are also other, more immediate, ways of ensuring directors take the necessary precautions in managing the business of a company than holding them personally liable in the event that damage is caused.  As stated above, there is presently no proposal to hold directors of non-mining companies liable for environmental damage caused by the company they direct.
 However, companies can indemnifying directors for such liability without violating section 247 of the Companies Act as such an indemnity would be for any “strict” or “absolute” liability which may attach to them as a result of their directorship of the company, including any including liability for fines, penalties, personal injury, remediation and/or “clean up” costs incurred.