Chapter 12 The duties and the liability of Directors

Question 1

What does the duty to act in the best interests of the company entail?

Answer 1

The collective interests of present and future shareholders.

Question 2

What are the fiduciary duties of a director?

Answer 2

To act in:
1. Good faith and for a proper purpose
2. The best interests of the company

Question 3

What does the duty of good faith entail?

Answer 3

1. Duty to exercise an independent judgment
2. Duty to act within the limits or authority.

Question 4

What kind of test is the test for good faith?

Answer 4

Subjective.

Question 5

What does the duty to exercise powers for a proper purpose entail?

Answer 5

Directors must exercise their powers for the objective purpose for which the power was given to them and not for a collateral or ulterior purpose.

Question 6

What kind of test is the for proper purpose?

Answer 6

Objective.

Question 7

What is the test for proper purpose?

Answer 7

Whether this purpose falls within the scope of the purpose for which the power was conferred on the directors.

Question 8

What case sets out the four-step test for proper purpose?

Answer 8

Extrasure Travel Insurances Ltd v Scattergood.

Question 9

What is the four-step test for proper purpose?

Answer 9

Court must:
1. Identify the particular power that is being challenged
2. Identify the proper purpose for which the power was given to the directors
3. Identify the substantial purpose for which the power was in fact exercised
4. Decide whether the purpose was proper.

Question 10

What does the duty to avoid a conflict of interest entail?

Answer 10

1. A duty to avoid a conflict of personal interests (no conflict rule)
2. A duty not to make a profit from the fiduciary’s position as a director (no profit rule)

Question 11

What does the no-profit rule hold?

Answer 11

Directors may not retain any profit made by them in their capacity as directors while performing their duties as directors.

Question 12

What is the corporate opportunity rule?

Answer 12

A rule that prohibits a director from usurping any contract, information or other opportunity that properly belongs to the company and that came to them as director of the company.

Question 13

What is a corporate opportunity?

Answer 13

A corporate asset belongs to the company- extends to confidential corporate information which directors have used to make a profit for themselves.

Question 14

Can the duty to avoid a conflict of interest be evaded by simply resigning?

Answer 14

No.

Question 15

Is the duty of care, skill and diligence a fiduciary duty?

Answer 15

No, it is based on delictual liability for negligence.

Question 16

Which section deals with the business judgment?

Answer 16

Section 76(4).

Question 17

What is the business judgment rule?

Answer 17

A judicial doctrine that protects the directors and officers of a company from liability for losses incurred in corporate transactions, as long as they act in good faith, with the reasonable skill and diligence, and in the best interests of the corporation.

Question 18

What happens if the requirements of the business judgment rule are satisfied?

Answer 18

Directors cannot be held liable for a poor decision or a bad judgment made by them.

Question 19

What are the three requirements for a director to be protected by the business judgment rule contained in section 76(4)(a)?

Answer 19

1. Made an informed decision
2. No self-dealing or there must have been a proper disclosure of any material personal financial interest of the director or a related person
3. There must be a rational basis for believing that the director was acting in the best interests of the company.

Question 20

Which section deals with the relief by the court of directors?

Answer 20

Section 77(9)

Question 21

What are the two grounds for relief, whether under section 77(9) or 77(10)?

Answer 21

1. The director must have acted honestly and reasonably
2. The circumstances must be such that they ought fairly to be excused from liability under section 77 for their negligence, breach of duty or other default that does not amount to wilful misconduct or wilful breach of trust

Question 22

What is ratification?

Answer 22

A condonation by the company of a specific breach of fiduciary duty that takes place after the occurrence of that breach.

Question 23

Which section prohibits reckless trading?

Answer 23

Section 22.