Indemnification and Director's Insurance

Section 78: Indemnification and director's insurance

• Indemnify means compensation for loss or harm.
• A company can indemnify a director against liability in certain situations and take out insurance to cover losses related to some actions by a director.
• A company may not indemnify a director for liability arising from failure to:
  • Act in good faith and for proper purpose.
  • Act in the best interest of the company.
  • Act with care, skill, and diligence.
• A company may not pay any fine imposed on a director who is convicted for an offence in terms of national legislation.
• The above does not apply to a private company if:
  • The director is the only director and owns 100% of the shares in that company.
  • Two or more related individuals are the only shareholders and there are no directors, other than one or more of the related individuals.
• Any rule, resolution passed or provision in the MOI is void if it seeks to relieve the director of duties and liabilities per section 75, 76 or 77.
• Any rule, resolution passed or provision in the MOI is void if it negates, limits or restricts any legal consequences arising from an act or omission that amounts to willful misconduct or willful breach of trust
• A company can seek to protect itself or its directors through indemnity and insurance, the company can never remove a director's duty in terms of sections 75, 76, 77 or duties to act with due diligence.
• Such duties are non-negotiable for any director.
• The company may, if allowed by MOI, advance expenses to a director to defend litigation in any proceedings arising from the director's service to the company.
• A company can carry legal costs incurred by a director who has to defend his actions (that he performed as a director of the company) in a court of law.
• A company may not indemnify a director against a fine incurred by the director for the following:
  • Acting on behalf of the company knowing he/she did not have the authority to do so.
  • Agreed to run a business recklessly, with gross negligence, with intent to defraud any person or to trading under insolvent circumstances.
  • Was party to an act or omission intended to defraud a creditor, employee or shareholder.
  • Committed wilful misconduct/breach of trust.
• If authorised by the MOI the company may also purchase insurance to protect:
  • A director against any liability or expenses that the company is permitted to indemnify; or
  • A company against any expenses or liabilities of the director that it advanced or indemnified.
• A company is allowed to claim restitution from a director for money paid to him directly or indirectly in a manner that's inconsistent with this section.

Section 90: Appointment of Auditor

• Public and state-owned companies must appoint an auditor at the Annual General Meeting (AGM).
• If a Private company is required by the Act or regulation to appoint an auditor it must also appoint the auditor at the AGM.
• AGM stands for a yearly meeting of the members or shareholders of a company, or other organization, especially for holding elections and reporting on the year's events.
• The auditor must be an individual or a firm of auditors.
• The auditor must be registered with IRBA.
• The auditor must not be any of the following persons:
  • A director or prescribed officer of the company
  • An employee or consultant of the company involved in maintaining/preparing financial records of the company for more than 1 year
  • A company secretary of the company;
  • Anyone who habitually & regularly performs finance and/or secretarial work for the company
  • A person in any of the 4 categories above in the 5 preceding financial years of appointment.
  • A person related to the person who during the past 5 years fell into one of the 5 categories above.
• The audit committee must satisfy itself regarding auditor's independence by:
  • Ensuring that the auditor does not receive any remuneration from the company except fees for audit and approved non-audit services
  • Considering whether independence has been jeopardised by any previous appointment as an auditor or the extent of non-audit services
  • Considering whether the auditor complies with 'rules and regulations' of IRBA
• A person disqualified from being a director is also disqualified from being an auditor.
• Whether the company appoints an individual or a firm of auditors the above requirements must be met.
• A retiring auditor may be deemed to be re-appointed if no resolution is passed at the AGM, unless the auditor is:
  • No longer qualified for appointment
  • Does not accept re-appointment
  • Needs to be rotated ito S 92
  • Audit committee rejects re- appointment or company intends to change the audit and files a notice
• If an AGM does not appoint/ re- appoint the auditor the directors must fill the vacancy within 40 business days. The function of the external auditor is not allowed to be vacant for more than 40 business days.

Section 93: Auditor's rights

• The auditor has right of access at all times to:
  • All accounting records, books and documents of the company
  • Information and explanations from directors and officers as he / she deems necessary to perform his / her duties as the auditor
• The auditor of a holding company, who is not the auditor of the holding company's subsidiary (ies) has right of access at all times to:
  • All current and former financial statements of the subsidiary (ies)
  • Information and explanations from directors and officers (of the holding and subsidiary(ies) as he / she deems necessary to perform his / her duties as the auditor
  • All accounting records, books and documents of the company
• A subsidiary company is a company that belongs to another company, which is usually referred to as the holding company.
• The parent holds a controlling interest in the subsidiary company, meaning it has or controls more than half of its stock
• The auditor also has right to:
  • Attend any shareholders' meetings
  • Be heard at any shareholders' meeting
  • Receive all notices and other communication sent to shareholders' regarding the meeting.
• An auditor can apply to court to enforce the rights above.

Section 214: False statements

• It is an offence to:
  • Make false statements or be a party to the falsification of accounting records
  • Intentionally provide false or misleading information where the Act requires one to provide it
  • Intentionally omit information with the aim to defraud a creditor, employee or credit holder of a business

Section 216: Penalties

• Any person convicted of an offence in terms of this Act, is liable
  • (a) in the case of a contravention of section 213(1) or 214(1), to a fine or to imprisonment for a period not exceeding 10 years, or to both a fine and imprisonment; or
  • (b) in any other case, to a fine or to imprisonment for a period not exceeding 12 months, or to both a fine and imprisonment

Section 218: Civil actions

• Any person who contravenes any provision of this Act is liable to any other person for the loss or damage suffered
• The provisions of this Act do not affect the right to any remedy that a person may otherwise have
• Nothing in this Act renders void an agreement, resolution or provision an agreement, resolution, MOI or rules of a company that is prohibited, void, voidable or maybe declared unlawful in terms of this Act, unless the court declares it void