Every now and then an opportunity comes along that looks very hard to resist. If you’re a seasoned entrepreneur, this might come in the form of a company that, although in such distress that the shareholders want out, still has genuinely valuable assets or a viable business model.

Small business owners take heed of the implications of the New Companies Act. The duties and responsibilities of Directors as laid out in the Companies Act, 71 of 2008, are not just for major corporates but apply to Small Medium Enterprises (SMEs) too. In fact the Act is applicable to all companies whether listed or not which means it also affects closed corporations, non-profit companies, private or public companies as well as state owned companies.

Much has been publicised and discussed regarding the impact of the new legislation however many SMEs are still under the misconception that the Act is not applicable to them. The Act came into effect in May 2011 and all companies are expected to comply or face the penalties. The general comments we are hearing are: We're not listed on the stock exchange, or, it is my company, there are no other directors or shareholders so surely this doesn't apply to me. Unfortunately, this is not the case."

Duties under the new Act

In terms of the new Act, the codification of the duties has been broadened making it far easier for directors to have a single source of identification of their duties. Directors still have to remain aware of their responsibilities under Common Law or those duties applicable under other legislation.

The systemisation of the core duties of directors may be found mainly under Section 76; these are split into a number of categories but essentially include:

• disclosure of any conflict of interest
• using position and information for company's benefit
• disclosure of material information
• performing duties in good faith; in best interest of company; with care, skill and diligence.

There are explanations for strategy and corporate structures; board structures and corporate administration; accountability and assurance; disclosure and transparency and shareholder treatment. Although these may seem onerous, sound business is based on proper planning, compliance, implementation and review. The purpose of the new Act (Section 7) was mainly to promote compliance with the Bill of Rights as provided for in the Constitution, while encouraging entrepreneurship and enterprise efficiency.

It was aimed at promoting innovation and investment in South African markets within a global economy. The Act encourages active participation in compliance frameworks to: minimise the impact of insolvencies; protect the rights of shareholders through accountability; provide for the efficient rescue of financially distressed companies while balancing the rights and expectations of shareholders.

Compliance requirements

Implementation of a proper compliance programme requires both an in-depth knowledge of the new Act, the King III compliance report and various other Acts. For the SME this takes time and can be costly to implement without the necessary expertise. It is important to remember that the new Act applies to all companies and the SME cannot, through its Memorandum of Incorporation (MOI) or any other form of directors/employees contract, negate the liability imposed by the Act.

The implications

In terms of the new Act a Director/Officer may be held liable for any loss suffered by the company as a result of their actions or non-actions, in their capacity as Director/Officer of the company as well as in their individual capacity for any transgression of the new Act, Common Law, and the MOI. The main liabilities to be aware of are as follows;

• Breach of Fiduciary Duties (Section 77, 76 (2) or 76 (3) (a) or (b)
• Breach of Accountability (Section 213 & Section 214)
• Reckless Trading
• Prospectus Liability (Section 77 (3) (d) (ii)
• Insolvency Act (Section 424)
• Personal Liability Company

The new Act allows the company under certain conditions (Section 78) to indemnify and take out the necessary liability insurance to cover both the company and the Directors/Officers from certain liabilities. The onus will however, remain with the Director/Officer to show that they did not act contrary to the Act, the MOI and that they acted with due care and responsibility.

In Conclusion

The Act has increased the duties and responsibilities of the Director/Officer and has extensively extended the accountability of their actions or non-actions. In order for an SME company to minimise the potential liability and to comply it is imperative to apply the following;

• Implement a proper Enterprise Risk Management (EMR) programme
• Appoint a champion within the company to drive the process
• Understand the rules of the game
• Train staff and make compliance a company culture
• Incorporate compliance as a part of the employees contract of employment
• Regularly review and update the ERM process
• Identify the various potential risks and transfer risk where applicable

In a nutshell because of the provisions of the Act being so extensive, it is best for that specialist advice be sought to implement and guide the SME through the process of implementation and upkeep of such a programme.