Although the Companies Act, 2009 is only likely to be in force no sooner than the second half of 2010, there is no reason why directors and officers and their insurers should not start taking steps to deal with the additional risks and opportunities that will be introduced.

Section 76 of the Companies Act, 2009 describes the standards of conduct required by directors and prescribed officers. It is not clear who will be designated as prescribed officers but the chances are it will be senior executives such as CEOs and CFOs who are not otherwise directors.

The Act has partially codified the common law duties of a director making awareness of those duties more accessible. The fiduciary duty is never in doubt and a director must exercise powers and functions in good faith. A director’s powers must also be exercised for a proper purpose and in the best interests of the company which precludes the director from abusing these powers or acting unlawfully. Directors may not use information obtained while acting as a director to gain personal advantage or advantage for some other person other than the company or its subsidiaries. The disclosure duty is extended by requiring a board member to communicate at the earliest practical opportunity any information coming to the director’s attention which is material to the company (unless the information is generally available or known to the other directors). Most of these obligations are to be found in the common law in similar terms.

The liability of directors and prescribed officers to the company is fully spelt out in section 77. Directors and officers are liable for loss, damages or costs sustained by the company as a direct or indirect consequence of breaching his or her obligations. There is also provision later in the Act (section 218(2)) for liability to third parties who suffer loss or damage by reason of a contravention of any provision of the Act by any person including a director or prescribed officer. Class actions are provided for.

Directors will be assisted in three important respects. Firstly, the degree of care, skill and diligence required of a director is partly subjective as it takes into account the general knowledge, skill and experience of the director concerned although there is an objective element as well and directors cannot sink below the general level of skill required to run the company in question. Secondly, what is in the United States known as the business judgment rule, is found in section 76(4). A director, who takes reasonably diligent steps to be informed about a matter where personal interests do not secretly conflict, will be relieved of liability if the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company. Thirdly, a director can rely on other competent people to whom the board has reasonably delegated authority to perform delegable board functions and can rely on information and financial data prepared by internal or external experts including board committees.

Directors and officers can start now by identifying viable and competent experts within the company whose opinions they can rely upon. Directors should gather a team of external legal advisers, accountants or other professional persons, who are competent and merit confidence, from whom to take professional or expert advice.

Fortunately the scope of permissible director’s and officer’s insurance cover has been clarified considerably. Section 78 permits a company to indemnify directors against liability which does not arise from knowingly exceeding their authority, fraudulent activities, wilful misconduct or wilful breach of trust or any fines arising from a conviction under national legislation. Subject to these limitations and any limitations contained in the Memorandum of Incorporation, the directors may be indemnified in terms of a directors and officers policy. The policy can also indemnify the director against the costs of litigation successfully defended and extend advances for the costs of pending litigation (refundable if the action is lost).

By the time the new Companies Act comes into force, directors should be fully informed as to the scope of their rights and duties under the new Act, be trained how to take a rational non-actionable decisions, should be advised by the right internal and external experts and committees so that gaps in their own knowledge can be filled, should be unequivocally aware of the limitations of any indemnity so they know what conduct will leave them unprotected, and must ensure that their directors and officers insurance cover fully and adequately covers them for potential losses.

Company secretaries have more onerous duties including the obligation to guide directors as to their duties and to make directors aware of any law affecting the company. Company secretaries will need all the insurance they can get.

What is wrongful and negligent on the part of a director or officer is a matter of public policy. There is no reason why public policy should not, in the meantime, be guided by what is in the new Act. Directors and officers may as well behave now exactly as if the new Act were in force. Public policy will also be influenced by what is in the King Report on Corporate Governance and knowledge of the corporate and other risks facing their companies will be part of the specific context in which directors operate.

The message to directors is: Take your responsibilities seriously but get what protection you can.