Under Regulation 38 of the Companies Act 71 of 2008 (“the Act”) a new term was introduced to South African company law. The “Prescribed Officer” is often overlooked although it carries extensive legal implications. Companies are generally guided by their directors, who run the risk of personal liability in certain circumstances. Unlike directors, prescribed officers are not appointed or elected to the board.
Irrespective of their title, a person automatically becomes a prescribed officer by:
- Exercising general executive control and management over the whole, or a significant portion, of the business and activities of the company; or
- Regular participation, to a material degree, in the exercise of general executive control and management over the whole, or a significant portion, of the business and activities of the company.
Despite prescribed officers not being directors, they are subject to the same rules and responsibilities as those of directors. This means that not only are prescribed officers held substantially by the same fiduciary-type duties and responsibilities as directors, but they could be held equally liable for failure to comply with certain duties.
Duties of Prescribed Officers
Disclosure: To disclose any material information which comes to their attention.
Good Faith: To act in good faith and by using this position for the intended purpose.
Conflict of Interest: To avoid the advantage of personal gain from information obtained, even if the advantage was obtained openly, in good faith and at no expense to the company.
Personal Financial Interests: To disclose any personal financial interest in matters in which the company also has a material interest.
Care, Skill and Diligence: To act with a reasonable degree of care, skill and diligence, and to act in the best interests of the company at all times.
Prescribed officers exist by operation of law, being responsible for a material degree of management within the company, attracting the liabilities listed below in terms of Section 77 of the Act:
Liabilities by Prescribed Officers
Jointly and Severally Liable: The liability is joint and several with any other person who is or may be held liable for the same act.
General Liability: For any loss, damages or costs sustained by the company as a direct or indirect consequence of the breach of the fiduciary trust, duty of care, skill and diligence or any other provision of the Act or the Memorandum of Incorporation.
Specific Liability: For loss, damage or costs sustained by the company as a result of any of the following:
- Knowingly acting without authority;
- Fraudulent and reckless conduct;
- Authorising the publication of false or misleading financial statements or any other information;
- Being present at a meeting, or participating in the making of a decision and failing to vote against certain actions that they know to be unlawful.
It is not all doom and gloom for individuals who believe that they may be a prescribed officer, as Section 76(4) of the Act provides for the “business judgment rule” as a defense in respect of any matter arising in relation to the conduct of their duties which may have caused harm to the company. There are three requirements for a prescribed officer to be protected by this rule:
- the prescribed officer should have made an informed decision; and
- there must have been no self-dealing or, alternatively, there must have been proper disclosure of any material personal financial interest or a related person; and
- there must be a rational basis for believing that the prescribed officer was acting in the best interests of the company.
Whether or not a person is a prescribed officer in terms of the Act will be determined on a case-by-case basis regarding the functions of the person within the company and measured against the criteria as set out in Regulation 38 of the Act.
It would be beneficial for companies to properly recognise prescribed officers and determine these functions within organisations so that these affected individuals can be made aware of their duties and liabilities within the company as well as understand that certain standards of conduct are expected of them.
Prescribed officers should preferably receive training regarding the conduct required of them in order for them to capably carry out their duties, functions and obligations in a proper manner.
Written exclusively for Moore South Africa by Jacqueline Cousins from Resolve Corporate Services.