1.2.1 Purpose and focus of the article

It is important to point out that this is a study of delegation and reliance that focusses on South African law with international perspectives.10 The purpose of this article is to analyse the law pertaining to directors' reliance on others for their own performance – in the context of their role in the strategic management of the company.11 The Companies Act 2008 of South Africa recognises this leadership or oversight/supervisory management role of the board. Section 66 of the Act provides that the business and affairs of the company shall be managed by the board of directors, and confirms that the board has the authority to exercise all the powers and to perform all the functions of the company.12 This section further provides that the limitations to the powers of the board in this regard are to be specifically determined by the provisions of the Act or they are to be specifically provided in the company's constitutive document – the memorandum of incorporation (the MOI).13

The Companies Act 2008 now includes statutory provisions on delegation and reliance. This article aims to analyse the relevant provisions in section 76(4)(b) and (5) to establish the quality of the standards introduced into South African law vis-à-vis the irreducible minimum standards of care, skill and diligence. The central research question which this article intends to answer is whether South Africa has established globally competitive legal standards of directors' delegation and reliance on the performance of others in line with company law reform objectives prior to 2008.14 The sub-inquiries

8 The duty of care, skill and diligence is now reflected in s 76(3)(c) of the Act. 9 See part 1.2.3 below. 10 Reference is made to the English law influence on the development of legal

principles pertaining to reliance and delegation as potential defences to liability

claims for breaching standards of conduct such as the duty of care, skill and

diligence, for example. For the statutory reliance and delegation defences in South

Africa, comparisons are made with Australian law. 11 For an elucidation of the strategic management role of the company board, see Part

2 of IoDSA King IV Report on Corporate Governance (hereafter King IV Report) 21. 12 Section 66(1) of the Companies Act 2008. 13 Section 66(1) of the Companies Act 2008. 13 Section 66(1) of the Companies Act 2008. 14 Issues of providing for the protection of directors against liability through the

defences of delegation and reliance are comprehended in part 4.4.2 in a document

entitled South African Company Law for the 2Ist Century Guidelines for Corporate

Law Reform (Gen N 1183 in GG 26493 of 23 June 2004).

or co-research questions which this article intends to interrogate are as follows:

The article begins by laying the foundations for South African company law's English and common law heritage with respect to reliance and delegation. In particular I note the sequence of developments regarding the standards of care, skill and diligence and the concomitant development of standards of reliance and delegation in English law which were assimilated into South African law with the passage of time. The international trends in the 1990s regarding the evolution of legal standards of care, reliance and delegation (in the UK and in Australia) receive brief attention in the introductory parts of the article. I further briefly consider the signs of the further tightening-up of standards in the UK evidenced by the 2018 consultation article seeking public opinion on whether company directors are becoming over-reliant on professional advice. It is suggested that these developments in the UK are influenced by the principles that have been developed in Australian case law through rigorous enforcement of the statutory standards of care, reliance and delegation in that jurisdiction (Australia). The article briefly examines the current practices in a best practice jurisdiction, Australia, and considers what lessons South Africa could learn from this jurisdiction. This is then followed by an analysis of section 76(4)(b) and (5) of the Companies Act 2008. The article concludes with findings and possible recommendations.

1.2.2 The common law

It is trite that South African company law has a rich English law heritage, and even the now repealed Companies Act 61 of 1973 was said to have been "based on the framework and general principles of the English law".15 Like the old company law statute, the principles governing reliance and delegation too were influenced by English common law. Margo J in Fisheries Development Corporations of SA Ltd v Jorgensen16 adapted into South African common law the English law principles on delegation and reliance. He ruled that in the absence of suspicion, directors are entitled to trust in and rely on the information supplied by relevant company officers.17 Margo J added that a director's reliance on the defences of delegation and reliance ought to be reasonable18 – in other words, they should meet the requirement of rationality if such defences are to avail the directors. The learned judge relied on Re City Equitable Fire Insurance Co Ltd19 in formulating these principles for South African law.

Concerns were expressed over the English common law standards which had influenced South African case law before the 1990s, especially the position as espoused by Margo J in Fisheries Development Corporations of SA Ltd v Jorgensen. The standards of reliance and delegation, just like the related standards of care, were described as having been lax and far too lenient to be appropriate in a modern world.20 The seemingly lax attitude of the courts towards the enforcement of the duty of care during the early 1900s led some commentators to argue that the common law of the day operated to give directors a remarkable freedom to run companies incompetently.21 While on the surface the standards espoused by Margo J appeared competent, on closer examination the requirement that there be an "absence of grounds for suspicion"22 was criticised for paying little

15 As was said by the then Minister of Trade and Industry, Mandisi Mpahlwa, in a foreword to the Department of Trade and Industry policy document, South African Company Law for the 2Ist Century Guidelines for Corporate Law Reform (Gen N 1183 in GG 26493 of 23 June 2004).

16 Fisheries Development Corporations of SA Ltd v Jorgensen; Fisheries Development Corporations of SA Ltd v AWJ Investments (Pty) Ltd 1980 4 SA 156 (W) (hereafter Fisheries Development Corporation).

17 See generally Fisheries Development Corporation paras 160-166. 18 Fisheries Development Corporation paras 160-166. 19 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (CA). 20 See Cassidy 2009 Stell LR 394. 21 Finch 1992 MLR 179. Also see Mupangavanhu Directors' Standards of Care 65. 22 A test adapted from Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (CA)

decided in 1925.

attention to the competence and trustworthiness of the person receiving the delegation.23 Even more importantly, the standards were criticised for lacking safeguards in the monitoring of the delegation by the fiduciary.24 The standards developed by the courts of Chancery in England in the early 1900s might have been suitable for those times. It has been said25 that company boards of the time apparently consisted of part-time, non-executive directors who were considered mere figureheads,26 or even well-meaning amateurs.27 However, directors' standards of conduct had surely evolved by the 1990s, and there was a shift towards more objective standards expected of directors. By the 1990s directors fulfilled critical corporate governance and strategic decision-making roles in companies.

International trends in the 1990s leaned more towards the tightening-up of standards of reliance and delegation. For example, in Australia Clarke JA, in Daniels v Anderson,28 rejected Romer J's "absence of grounds for suspicion"29 test as being outdated and unsuited to modern commercial realities and requirements. Where directors have delegated authority to company officers, they are required in Australian common law to supervise the performance of such delegated authority.30 In the USA during the same period it was held in Federal Deposit Insurance Corporation v Stanley31 that a director's duty to exercise care in overseeing the affairs of the company cannot be met solely by relying on other persons. In the UK directors' standards of care had already begun to tighten up just before the 1990s. Two very important developments which took place in 1986 in the UK should be partly credited for this. The first was the passing of the Company Directors Disqualification Act 1986, in terms of which a court could rule on the disqualification of a director for incompetence, that is, if the court adjudged that the director's conduct made him/her unfit for office and to be involved in management.32 The second and very important development was the passing of an important provision in the Insolvency Act 1986: section 214(4).33 That section imposes both an objective element which all directors must meet and a subjective element which sets the standard of the relevant director who possesses the relevant skill34 in circumstances when the company trades in the zone of insolvency.35 Dual objective and subjective standards of the duty of care, skill and diligence thus became part of English law through interpretation and application by the English courts.

Hoffman J made a huge contribution in applying improved standards of care in the UK in the two decisions he made in the early 1990s, that is in Norman v Theodore Goddard36 and in Re D'Jan of London Ltd.37 In those two judgments Hoffman J ruled that the directors' duty of care at common law was consistent with the tortious duty of care at common law, which was accurately encapsulated in section 214 of the Insolvency Act 1986.38 While section 214(4) was framed to apply to wrongful trading, it should be clarified, as Hoffman J made sure to emphasise in Norman v Theodore Goddard, that the correct position is that the standard of care owed by a director is the same, whether or not a company is trading in the zone of insolvency.39 The dual standards of care, skill and diligence which became part of the English common law through the interpretation and application of section 214(4) of the Insolvency Act by the courts, were then transposed into the Companies Act 2006.40 Section 174 of that statute imposes on English or UK directors an irreducible objective minimum standard of conduct, which minimum standard may be raised if the director possesses any special knowledge, skill and experience.41 While standards of care were improved during the 1990s in the UK, as outlined above, to the best of my knowledge there is no evidence to indicate that the standards of reliance and delegation in the UK improved to the same level during the same period until the time of the Companies Act 2006, and beyond the level introduced into law by Romer J in Re City Equitable Fire Insurance Co Ltd.

It is important to note that consistent with the improving standards of care in some best practice international jurisdictions like Australia, the UK and

the USA, South African courts began to tighten-up standards pertaining to reliance and delegation. In 1990 Conradie J, in Barlows Manufacturing Co Ltd v RN Barrie (Pty) Ltd, 42 considered it a fundamental principle of South African company law that a director may delegate some or even all of his powers to others. However, Conradie J ruled that a director may not delegate his duty or abdicate his/her ultimate responsibility towards the company.43 The implication of this common law principle is that directors remain fiduciaries even after delegating authority to sub-committees of the company board or to some servants of the company.44 This ruling, it can be noted, was a departure from the 1980 ruling by Margo J in Fisheries Development Corporation of SA Ltd v Jorgensen, which did no more than affirm the much criticised subjective standards in the "absence of grounds for suspicion" test formulated by Romer J in Re City Equitable Fire Insurance Co Ltd.45 So it can be safely stated that the position in Barlows Manufacturing Co Ltd v RN Barrie (Pty) Ltd was the position obtaining in South African common law at the time of the passing of subsections 76(4)(b) and (5) of the Companies Act 2008, and should remain the current position.

1.2.3 Recent international developments on reliance on professional advice

What we have learnt from the global acute respiratory disease popularly known by the acronym COVID-19 is that we must never ignore developments in one part of the world because they will sooner or later have an impact throughout the world. For this reason, and also with the knowledge that English company law developments have often influenced South African law, developments in the UK are important to follow especially for South African jurisprudence. In the UK it is reckoned that many companies, particularly larger and more complex ones, will often seek professional advice, for example on financial, legal or competition matters, so that directors have access to the expertise needed to help them make important decisions for the company. The legal position that obtains in the UK is that the Companies Act 2006 imposes on directors the duty to exercise independent judgment46 when making corporate decisions. That principle does not prevent directors seeking and acting on advice from others, but the board cannot treat such advice as if it were an instruction.47 In addition, as Popplewell J remarked in Madoff Securities International Ltd v Raven,48 in the same way that the duty of care does not prevent directors from delegating their functions to non-board employees, so the duty to exercise independent judgment does not prohibit such delegation.49

While the use of professional advice by company directors is recognised in the UK, concerns began to be raised as recently as 2018 on the suspected over-reliance of directors on professional advice.50 This led the government to commission a consultation article to seek input into the matter. The consultation sought public opinion on: "whether, when commissioning and using professional advice, company directors did so with an adequate awareness of their legal duties under the Companies Act 2006, specifically the duties in sections 172-177 which include the requirement to exercise independent judgement."51 The English public expressed confidence that the directors understand their duties generally, and also reckoned that it is important for directors to seek professional advice without being hindered, and for advisers to give frank and honest advice. Respondents noted, however, that problems can occur when directors shop around for the advice or the opinion they want, or when advisers fail to exercise robust independence and flex their advice in the direction the client wants.52

The recent developments in the UK, touched on above, are a continuation of an international trend towards reviewing upwards the standards of reliance and delegation, as is evident in recent Australian case law. For example, in Australia company directors have failed on a number of occasions to rely on delegation and their reliance on others as a defence against claims for breaching the statutory duty of care.53 Whereas directors are permitted by the law to delegate to others and/or to rely on information and advice from others for their own performance such as their decision-making, the law requires the reliance and delegation to be reasonable.54 Australian courts have recently not only confirmed that reliance and

48 Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm). 49 Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) [191]. Also see Davies, Worthington and Hare Principles of Modern Company Law 289.

50 While Worthington and Agnew Sealy and Worthington's Company Law 378 generally hold the view that the duty to exercise independent judgement is not breached if directors merely take advice, over-reliance on advice has begun to be questioned by others in the UK. See Kean 2018 https://www.willistowerswatson.com/enGB/Insights/2018/08/can-you-rely-too-much-on-professional-advice-as-a-director.

51 See the UK government's consultation article Insolvency and Corporate Governance: Government Response (UK Department for Business, Energy and Industrial Strategy 2018 https://www.bl.uk/collection-items/beisc-insolvency-andcorporate-governance-government-response-2018).

52 UK Department for Business, Energy and Industrial Strategy 2018 https://www.bl.uk/collection-items/beisc-insolvency-and-corporate-governancegovernment-response-2018 24.

53 The Australian statutory duty is found in s 180 of the Corporations Act 50 of 2001 (hereafter Corporations Act 2001). 54 See generally s 189 read together with s 190 of the Corporations Act 2001.

delegation must be reasonable, but that directors of companies must independently assess the professional advice that they receive from advisers and/or experts.55 This is in keeping with the ruling by Australian courts that directors as fiduciaries given the mandate to run the affairs of corporations have strict monitoring and oversight duties.56

2.2.1 Reliance on information from employees and professional/specialist advice

The Corporations Act 2001 allows directors to rely on information or advice provided by others.69 In ASIC v Macdonald the court acknowledged that directors are entitled to rely on others for performance where there is no cause for suspicion or circumstances demanding detailed attention.70 It is important to note the kind of reliance on information and advice that is permitted by statutory law in Australia and the categories of persons that directors can rely on. The four clear categories of persons that Australian directors can rely on for information or specialist advice and the circumstances in which reliance is permitted are as follows:

64 See s 7(e) of the Companies Act 2008.

65 Just one example of the influence of jurisprudence from Australian law is to be seen

in the area of derivative actions where a South African court imported a good faith

criterion developed in Swansson v Pratt [2002] NSWSC 583 (3 July 2002). 66 Probably as is the case elsewhere; in South Africa for example, as will be

demonstrated later. 67 The duty in s 180(1) of the Corporations Act 2001 provides that: "A director or other

officer of a corporation must exercise their powers and discharge their duties with

the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer." 68 Besides providing the bases for directors' defence against liability claims for breach

of the duty of care and diligence. 69 See s189 of the Corporations Act 2001. 70 ASIC v Macdonald 251. Also see Vines v Australian Securities and Investments

Commission (2007) 62 ACSR 1, 149.

The Corporations Act sets legal standards which a director's reliance on information and professional advice must comply with. The first requirement is that the reliance on information and professional advice must be done in good faith.75 In other words, there should not be any other motive for relying on the information or advice other than to enable a director to discharge his/her obligations as a director of a company. In an era where the risks of the liability of directors have increased, some directors may be tempted to use reliance on information and professional advice as a way of either avoiding taking decisions or as a way of justifying taking risky decisions which their own judgment would have prevented them from taking but for the advice. Reliance on professional advice is susceptible to abuse because directors can shop around for the professional advice or the opinion they want, or the advisers may fail to exercise robust independence and flex their advice in the direction the client wants.76 In some instances, directors may not disclose the full facts to their professional advisors and may thus receive incorrect advice, which could be the advice they would be hoping to get. This is contrary to the requirement to act in good faith.77

In a couple of cases where directors were less than candid in disclosing facts to professional advisers, they were adjudged to have acted in bad faith and their defence premised on their reliance on professional advice was

71 See s 189(a)(i) of the Corporations Act 2001. 72 See s 189(a)(ii) of the Corporations Act 2001. 73 See s 189(a)(iii) of the Corporations Act 2001. 74 See s 189(a)(iv) of the Corporations Act 2001. 75 See s 189(b)(i) of the Corporations Act 2001. 76 These are the exact fears and sentiments expressed in the public opinion during the

public response to the recent consultation conducted by the UK government. The government sought to establish whether the use of professional advice by directors of companies was done in a manner that enabled the directors to be conscious of their statutory duties, and in a manner that enabled them to still exercise independent judgment. See UK Department for Business, Energy and Industrial Strategy 2018 https://www.bl.uk/collection-items/beisc-insolvency-and-corporate-governancegovernment-response-2018 24.

77 As required by s 189(b)(i) of the Corporations Act 2001.

rejected by the courts. For example, in Australian Securities and Investments Commission v Adler78 proceedings were brought against two directors for breach of care and diligence under section 180 of the Corporations Act 2001. The two directors failed to disclose several important facts to the solicitors, including the fact that the purchases had been made prior to any trust structure’s being set up. For this reason the directors argued unsuccessfully that they had relied on the solicitors' advice that the scheme was lawful – in other words the court rejected their reliance defence.79 Another case of bad faith on the part of directors is to be seen in

80

the Australian Securities and Investments Commission v Hobbs. In proceedings brought in terms of section 180 of the Corporations Act for breach of the duty of care, the directors raised the defence that they had relied on solicitors' advice that registration was not required for wholly offshore investment schemes. It then turned out that the directors had failed to give the actual scope of activities to the solicitors, implying that the directors had acted in bad faith in that they had concealed certain material facts to the solicitors before receiving legal advice. The Australian Securities and Investment Commission (ASIC) was able to rebut the presumption in the directors' favour that their reliance on professional advice was reasonable, and the court rejected their reliance defence.81

The good faith requirement also implies that the reliance must be on a rational basis (reasonable) and must be made in the best interests of the company. Australian courts have demonstrated their strict adherence to the requirement that reliance ought to be reasonable and have rejected directors' reliance defence where the reliance was unreasonable. In the famous ASIC v Healey case82 the court reasoned that while directors are entitled in terms of section 189 to rely on the advice of specialist professionals,83 reliance cannot be said to be reasonable when a director is or ought to be aware of circumstances which would cause a reasonable person to question what the director was being told – even by professional advisors. The court adjudged the errors of classification found in the reports to have been "obvious" because the errors concerned a basic classification of liabilities.84 Middleton J held that each of the directors had breached the

78 Australian Securities and Investments Commission v Adler (2002) 168 FLR 253

(hereafter ASIC v Adler). 79 ASIC v Adler 307. 80 Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276

committees, senior management, inter alia. Also see Wan 2015 CLWR 78. The errors in the report were not just a question of mere technical oversight. There were fundamental errors in the reports. The 2007 annual reports of Centro Properties Group (CNP) and Centro Retail Group (CER) failed to disclose significant matters.

statutory duty of care and diligence towards the Centro entities by failing to have apparent errors in the financial report and financial statements corrected.85

The Corporations Act, it appears, proceeds from the presumption that the director's reliance on information and/or professional advice was in good faith and on a reasonable basis unless the contrary is proven.86 Thus, if the reasonableness of the director's reliance on the information or advice arises in proceedings brought to determine whether a director has performed a statutory duty or any equivalent duty in law, the person alleging a breach of duty must rebut the presumption that the reliance was reasonable.87

The second requirement is that the director must exercise independent assessment/judgment of the information received or professional/expert advice/opinion received, using the director's knowledge of the company and taking into account the complexity of the company's structure and operations.88 A director is therefore not allowed to simply accept information given to him by officers of the company. To begin with, a director must believe on reasonable grounds that the company employee whose information/advice the director relies on say for decision-making is an employee who is, objectively speaking, reliable and competent, not only in general terms, but is one that merits confidence placed upon him/her with respect to the specific matters concerned.89 In addition, a director must not simply accept information given by an employee or professional/specialist without independently assessing the information in the light of the director's knowledge of the company and other relevant circumstances of the company in his knowledge. The bottom line is that any reliance on information and advice must be reasonable. Lack of reasonableness in the reliance renders the director open to liability for breach of duty as alleged. Directors cannot substitute reliance upon the advice of management in place of their own attention and examination of a strategic matter that falls within the board's responsibility.90 In ASIC v Macdonald Gzell J rejected the directors' defence premised on reliance on experts. It was Gzell J's strong view that once management referred the draft Australian Stock Exchange

In the case of CNP, the report failed to disclose some $1.5 billion of short-term

liabilities by classifying them as non-current liabilities, and failed to disclose

guarantees of short-term liabilities of an associated company of about US$1.75

billion that had been given after the balance date. In the case of CER, the 2007

annual reports failed to disclose some $500 million of short-term liabilities that had

been classified as non-current. ASIC v Healey [No 1] [9]-[10]. 85 ASIC v Healey [No 1] [9]-[10]. 86 See s 189(c) of the Corporations Act 2001. 87 See s 189(c) of the Corporations Act 2001. See how Middleton J applied this

provision in ASIC v Healey [No 1] [130]-[134]. 88 See s 189(b)(ii) of the Corporations Act 2001. 89 See s 189(a)(i) of the Corporations Act 2001. 90 ASIC v Macdonald 248-249.

(ASX) statement to the board members for approval, it was the duty of each director to independently assess the information at his/her disposal, and none of them was entitled to abdicate responsibility by delegating his/her duty to a fellow director.91 The matter of approving a statement referred to the directors, per Gzell J, was the sole strategic responsibility of the board, and not a matter of reliance upon the management or outside experts.92

2.2.2 Delegation

In terms of section 198D of the Corporations Act 200193 a director (a member of the company board) may, unless a company's constitution provides otherwise, delegate any of his/her powers to the following categories of persons:

When a director delegates some of his powers to any of the persons identified in section 198D(1)(a) or the categories provided in the paragraph above, the exercise of the power by the delegatee is as effective as if the director who delegated had performed.94 Impliedly, the "performer" or delegatee replaces the delegator and the delegator performs through the delegatee. The delegator logically assumes responsibility for the actions of the delegatee and remains accountable for the exercise of delegated authority. The common law principle in Australia in this regard is that the board of directors is required by law to supervise those who have received delegated powers, and it is expected to continually appraise the effectiveness of the checks and balances put in place by companies to enable it to fulfil its monitoring role.95

The Corporations Act 2001 seems to suggest that the responsibility of the delegating director for the performance of the delegatee depends on who the delegatee is. Section 190(2) provides that the directors are not liable if they believed, on reasonable grounds, that the delegatee would perform in conformity with the duties imposed on directors by law,96 or where the directors believed in good faith, on reasonable grounds, having made relevant inquiries and established that the delegatee was reliable and competent in relation to the power delegated.97 The statutory text (in section 90(2)(a)) appears ambiguous when read in the light of recent decisions in Australia against directors of listed companies. For example, the reading of the text raises questions regarding whether there are powers and functions which are non-delegable. Nowhere in the relevant provisions pertaining to delegation98 and reliance99 or financial reporting requirements100 does the Corporations Act shed light on this question and clearly provide that the Act imposes non-delegable duties.

While the position in the Corporations Act may not be crystal clear, Australian courts have ruled that there are certain responsibilities of the board which are non-delegable and have restricted the directors' ability to delegate these functions or to rely on professional advisors or experts.101 As already established above, in ASIC v Macdonald the court rejected the defence of delegation raised by the directors and ruled that it was the duty of each director to independently assess the information at his/her disposal, and none of them was entitled to abdicate responsibility by delegating his/her duty to a fellow director.102 The directors in ASIC v Macdonald had approved the publishing of a defective, false, misleading or deceiving draft ASX announcement to the effect that the James Hardie Industries Limited (JHIL) had sufficient funds to meet all legitimate asbestos compensation claims, when they knew or ought to have known that this was not true. In ASIC v Healey the directors could not rely on the defences of delegation and reliance on professional advisors because their breach of duty involved a failure to have apparent errors in the financial report and financial statements corrected.103 From recent Australian case law it appears therefore that it is considered that the preparation, approval, publication of financial statements and public disclosures to the securities markets are non-delegable duties or responsibilities of directors.104 Because directors

97 See s 190(2)(b)(i)-(iii) of the Corporations Act 2001. 98 See ss 190 and 198D of the Corporations Act 2001. 99 Section 189 of the Corporations Act 2001. 100 See Part 2M.3 of the Corporations Act 2001, from ss 292-344. 101 See Wan 2015 CLWR 84. 102 ASIC v Macdonald 251. 103 ASIC v Healey [No 1] [9]-[10]. 104 In ASIC v Macdonald 251 for e.g. Gzell J ruled that directors cannot substitute

reliance upon the advice of management in place of their own attention to and examination of a strategic matter that falls within the board's responsibility. It was Gzell J's strong view that once management referred the draft ASX statement to the board members for approval, none of the directors was entitled to abdicate responsibility by delegating his or her duty to a fellow director. Thus, Gzell J rejected the directors’ defence premised on reliance on others like experts and company officers. In ASIC v Healey [No 1] [9]-[10] and [175] Middleton J held that each of the directors had breached the statutory duty of care and diligence towards the Centro entities by failing to have apparent errors in the financial report and financial

have to apply themselves105 to the task of scrutinising and approving financial statements and public disclosures, the law imposes on them a positive duty to have the basic financial literacy to read and understand financial statements.106 In addition, directors must discharge their monitoring role to the company,107 which "duty" includes a responsibility to become familiar with fundamentals of the company's business, coupled with a continuing obligation to ensure that they are informed about the company's activities.108

3.1.1 Irreducible minimum standards of care?

It can be argued that section 76(3)(c) of the Companies Act 2008 is comparable to and was modelled along the lines of the UK statutory duty of care, skill and diligence found in section 174 of the Companies Act 2006.116 In terms of section 76(3)(c) a director is expected to exercise a duty of care, skill and diligence that is to be expected of a director in a similar position, who also possesses similar general knowledge, skill and experience.117 The best way to interpret section 76(3)(c)(i)-(ii) is to break the subsection into

110 See ss 189, 190 and 198D of the Corporations Act 2001. 111 The Australian statutory duty of care is found in s 180 of the Corporations Act 2001. 112 See s 174 of the Companies Act 2006. 113 See s 173 of the Companies Act 2006. 114 See s 76(3)(c) of South Africa's Companies Act 2008. 115 The duty to exercise an independent judgment is not part of the statement of

directors' duties found in s 76(3) of the Companies Act 2008. 116 The duty in s 76(3) reads like the similar duty under s 174 of the Companies Act

2006. For more elucidation of this point and a comparison of the two positions, see

Mupangavanhu Directors' Standards of Care 70-78.

117 Section 76(3)(c) of the Companies Act 2008 specifically provides that the director should operate/function: "with a degree of care, skill and diligence that may reasonably be expected of a person—(i) carrying out the same functions in relation to the company as those carried out by that director; and (ii) having the general knowledge, skill and experience of that director."

what leading English company law writers Davies, Worthington and Hare call limbs, with respect to the comparable English statutory duty.118 Thus section 76(3)(c)(i) can be referred to as Limb 1, while section 76(3)(c)(ii) can be referred to as Limb 2. So, Limb 1 sets a standard which all directors must meet. That is the implication of the phrase –"carrying out the same functions in relation to the company as those carried out by that director".

The standard in Limb 1, unlike the common law standard inherited from the subjective standards applied by the courts of Chancery in England in the nineteenth century, is not dependent on the capabilities of the particular director.119 Arguably, this is the minimum irreducible objective standard of care which all company directors are reasonably expected to meet in terms of subsection 76(3)(c)(i) of the Companies Act 2008. Limb 2 adds a subjective standard which can operate to allow reference to be made to the particular characteristics of the director whose conduct may be under scrutiny. These characteristics could relate to the skill, experience, and knowledge of the particular director. The subjective elements do not operate to lower the minimum objective standard, but could in fact operate to enhance the minimum irreducible objective standards in Limb 1 by requiring a director to utilise such skill, knowledge and experience as he has, for the benefit of the company.120 One of the inquiries or research questions asked at the beginning of this article121 which this article has just attempted to answer, is whether section 76(3)(c) of the Companies Act 2008 imposes irreducible minimum standards of care. In the light of the above brief analysis of the subsection, it has been established therefore that the reliance and delegation legal standards found in section 76(4)(b) and (5) relate to an irreducible minimum standard of care, skill and diligence found in the Act.

3.1.2 Irreducible standard to exercise an independent judgment?

As highlighted in the paragraphs above, South Africa may not have a statutory duty to exercise independent judgment as the UK has,122 but this duty is recognised in South African common law. South African common law acknowledges that directors are required to exercise an independent judgment and to make decisions according to the best interests of the

118 This is how the authors refer to the similar formulation of s 174 of the Companies

Act 2006. See Davies, Worthington and Hare Principles of Modern Company Law

294. 119 Mupangavanhu Directors' Standards of Care 71. Also see Davies Principles of

Modern Company Law 435. 120 Mupangavanhu Directors' Standards of Care 71. 121 See the list of research questions to be answered in this article as outlined in part

3.3.1 Who and what may directors rely on for their performance in terms of the Act?

Just like Australia's Corporations Act, the Companies Act 2008 provides answers to the question: who and what may South African directors rely on for their performance. The Act allows directors to rely on the following:

(a) Any persons to whom the board may reasonably delegate formally or informally by course of conduct the authority or duty to perform one or more of the board's functions.155 It is not clear who is included or excluded in the ambit of "any persons". Could "any person" be restricted to only company insiders such as company officers, or does this refer to outsiders such as specialists? This is not entirely clear as section 76 does not contain any definitions which are helpful in this regard. The Act also curiously provides that directors may delegate a "duty",156 and this appears to contradict sharply the common law

149 See part 2 above. 150 See s 5(1) of the Companies Act 2008. The purposes of the Act are listed in s 7. 151 See Explanatory Memorandum to the Companies Bill [B61-2007] 3; Gen N 166 in

GG 29630 of 12 February 2007 (Notice of Intention to Introduce the Draft Companies

Bill, 2007 into Parliament). Also see s 7(e) of the Companies Act 2008. 152 See the Explanatory Memorandum to the Companies Bill [B61-2007] 3. 153 See s 7(b)(iii) of the Companies Act 2008. 154 See the Explanatory Memorandum to the Companies Bill [B61-2007] 3. 155 See s 76(4)(b)(i)(bb) of the Companies Act 2008. 156 Subsection 76(4)(b)(i)(bb) of the Companies Act 2008 makes an awkward reference

to a "duty" which the board may presumably delegate. The drafters could perhaps make the technical argument that the duty referred to is the delegated authority to perform some of the functions of the board. However, a counter argument could therefore be: why include the word "duty" in the same sentence where the terms "powers" and "authority" are used, if the intention was to use the word "duty" as a

position as laid down in the Barlows Manufacturing Co Ltd case. As already reflected in part 1.2.2 above, Conradie J in that case considered it a fundamental principle of South African company law that a director may delegate some or even all of his powers to others, but may not delegate his duty or abdicate his/her ultimate responsibility towards the company;157

3.3.2 What are the legal standards for directors' delegation and reliance on others for performance?

Subsection 76(4)(b) and (5) provides some legal requirements or standards that the directors' reliance on the performance of others must meet, but it can be seen that there are some gaps or questionable formulations of standards, as will be noted below.

a) Directors can only delegate powers or authority to perform functions that are "delegable under applicable law". The first requirement that can be noted in section 76(4)(b) is that when the board of directors delegates some of its functions formally or informally by course of conduct, the delegated authority or powers should be what is "delegable under applicable law".161 This is, in a nutshell the extent to which directors can delegate to others. The verbal formula "delegable under applicable law" is a catchy phrase, but in context

synonym of either of the latter words? Quite clearly the inclusion of the word "duty"

could be seen as being a little clumsy.

157 Barlows Manufacturing Co Ltd 611.

158 See s 76(5)(a) of the Act. There must not be any red flags that warn a director of the incompetence of the person to whom a task is delegated. See Cassim et al Law of Business Structures 373.

159 See s 76(5)(b) of the Act.

160 See s 76(5)(c) of the Act.

161 See s 76(4)(i)(bb) of the Act.

what does it mean? Admittedly the requirement that directors can only delegate powers and authority to perform functions that are "delegable under applicable law" has the potential to be interpreted in such a way as to result in the development of important relevant case law principles when courts get the opportunity to do so. Unfortunately for now, the phrase "delegable under applicable law" raises some questions for which answers must be found. In section 76(1) or even section 1, which provisions provide limited definition of key terms, the Act does not yet provide guidance as to the meaning of what is "delegable under applicable law".162 If there are functions or powers or authority of the board of directors that are "delegable",163 this implies that there should be authority, powers and functions of the board that are non-delegable. Which functions are those? This is one of the issues to be interrogated by this article. The Companies Act 2008 has not provided a hint on what authority, power or functions of the board are delegable and those which are not to be delegated. As noted above, this was potentially a challenge with the statutory standards of delegation in Australia too.164 Luckily for Australia, the courts intervened and through case law were able to formulate standards pertaining to what is non-delegable in terms of the duty of care and diligence.165 For a jurisdiction like South Africa, where the statutory provisions on reliance on others for the directors' performance have not yet been tested, when the occasion to apply and interpret the provisions arrives the courts can utilise section 5(2) of the Companies Act 2008 to borrow from Australian company law to determine the functions, powers or authority of the board which are non-delegable. Courts in Australia were able to rule that functions such as the preparation, approval, publication of financial statements and public disclosures to the securities markets

162 It is not difficult, however, to decipher that the term “applicable law” is a reference to any provision of the Act and corresponding common law principles relevant to reliance on information and the delegation of powers and authority of the board. This includes common law principles and standards of care, skill and diligence in s 76(3)(c) of the Act.

163 If authority, powers and functions are said to be "delegable", this means that the directors are permitted by the law to delegate to categories of persons identified under applicable law.

164 See part 2.2.2 above for examples.

165 Case law in Australia has been able to delineate between functions or aspects of the directors' duty of care that are delegable and those that are non-delegable. To this effect the preparation, approval, publication of financial statements and public disclosures to the securities markets are non-delegable duties or responsibilities of directors. See part 2.2.2 where relevant cases, namely ASIC v Macdonald 251 and ASIC v Healey [No 1] [9]-[10] and [175] are referred to.

are non-delegable duties or responsibilities of directors.166 I see no reason why South African courts should not follow a similar approach given the numerous challenges experienced recently with respect to directors' approval of misleading financial statements. In any case, as already noted, section 5(2) of the Companies Act 2008 allows courts to refer to foreign company law principles to supplement any deficiencies in law when applying and interpreting provisions of the Act. Subsection 76(4)(b)(i)(bb) implies that there should be non-delegable responsibilities of the board. This agrees with the argument presented in this article that the Companies Act 2008 envisages a minimum irreducible standard of care in section 76(3)(c), which is related to reliance and delegation standards.167

b) If a director is to rely on the performance of any company employee, the director should reasonably believe that the employee is reliable and competent in the functions performed or the information supplied. This requirement that an employee relied upon should merit confidence is comparable to requirements under the equivalent provision of Australia's Corporations Act 2001.168 The belief that the employee is competent and reliable must not be unreasonable. A reasonable person's test is to be applied, which implies that a director cannot negligently rely on the performance of an employee or information supplied by an employee. The director must first investigate and be satisfied on reasonable grounds that the employee is one whose performance or whose information provided can be relied upon for the director's own performance. If for example a director knows that an employee is incompetent or dishonest, that director's reliance on such an employee would be unreasonable and would probably expose the director to liability for any wrongdoing or incompetent performance of the delegate.169 In Australian law, for example, a director will be held responsible for the performance of delegated authority unless he can show that he made proper inquiries regarding the competence and dependability of the employee.170 Thus an unreasonable reliance on an employee's performance can be seen to be a breach of the duty of care.171 A

166 See part 2.2.2 above. 167 See part 3.1.1 above. 168 See s 189(a)(i) of the Corporations Act 2001 discussed in part 2.2.1 above. 169 See Cassim et al Law of Business Structures 373. Also see Davis and Geach

Companies and Other Business Structures 163.

170 See s 190(2)(b)(iii) of the Corporations Act 2001.

171 In terms of applicable law; that is in terms of s 76(3)(c) of the Companies Act 2008 and any relevant or equivalent common law principles.

director could be held responsible for an irrational reliance on information supplied by or performance rendered by an incompetent and unreliable employee. The Companies Act 2008,172 unlike Australia's Corporations Act,173 omits to emphasise the requirement that the reliance on information must be done in good faith. Despite this unfortunate omission, it may be possible for a court, depending on the facts of each case, to find that lack of rationality in the conduct of the director in relying on performance of an employee who does not merit confidence is indicative of bad faith.

c) Directors can use professional advice provided they believe on reasonable grounds that the expertise or opinion from a specialist professional is within that person's professional or expert competence. Section 76(5) places a responsibility on the director seeking to use professional advice to ensure that the matters for which the director seeks specialist advice are within that professional's competence and that the professional merits confidence.174 The Australian Corporations Act 2001, as stated previously, makes good faith a very important requirement for the use of professional advice, and links good faith to the requirement of the reasonableness of the director's belief that the professional advisor merits confidence. In fact, the Corporations Act presumes that the director's reliance on professional advice was in good faith and on a reasonable basis unless the contrary is proven.175 Good faith, which is provided for in section 76(3)(a), is not as emphasised in relevant provisions on reliance and delegation under the Companies Act 2008176 as is done for example under Australia's Corporations Act.177 Good faith is an important standard/requirement for the reason that the use of professional advice is susceptible to abuse, as directors can seek for it with wrong motives. For example, directors can seek a professional opinion for the purposes of supporting a decision which might not necessarily be in the best interests of the company. The good faith requirement is also vital for the reason that, as has been seen in other jurisdictions, directors could act in bad faith by

172 See s 76(5)(a) of the Act.

173 Section 189(b)(i) of the Corporations Act 2001 specifically requires that reliance on information must be done in good faith.

174 See s 76(5)(b)(i)-(ii) of the Companies Act 2008. Also see Cassim et al Law of Business Structures 373; Davis and Geach Companies and Other Business Structures 163.

175 See s 189(c) of the Corporations Act 2001. 176 There is no good faith requirement in either s 76(4)(b) or (5) of the Act. 177 See s 189(b)(i) of the Corporations Act 2001.

failing to disclose material facts to professional advisors such as solicitors/lawyers, accountants or auditors, for ulterior motives.178 Even in the absence of the emphasis on good faith, though, a contextual approach to interpretation could consider all the standards of conduct contained in section 76(3) of the Companies Act 2008.

The important requirement that the director must exercise independent assessment/judgment of the information and professional/expert advice/opinion received is also missing from the Companies Act 2008 or alternatively put it is muted in comparison with Australian law, where this aspect is clearly specified. In the absence of a specific reference to this important requirement in section 76(4) and (5), the King IV Code could be useful as an aid to the interpretation of the provisions of the Companies Act 2008, as already suggested.179 When interpreting and applying standards on delegation and reliance courts of law or a relevant adjudicating panel could rely on King IV as an aid in interpreting what the thinking should be in the corporate governance approach in South Africa.180 The thinking, as clearly recommended in King IV,181 is that a board of directors should put in place a system. I suppose the arrangements or system referred to would be a combination of minimum standards and procedures which promote independent judgment in the decision-making processes of sub-committees of the board. Even though principles 8 and 10 apply mostly to "delegation", I have no doubt that the principle of the independent judgment and independent decision-making of a committee or of directors applies to both delegation and reliance contexts.

d) A director can rely on the performance of a committee of the board of directors, provided that the director is not a member of that committee. By implication, a director may not rely on the performance of a committee which he/she is a part of because that would be tantamount to relying on his/her own performance.

178 See part 2.2.1 above, which considers two cases where directors failed to disclose material facts to solicitors when seeking professional advice and the courts in both cases refused to accept the directors' defence of reliance against liability claims for breaching their duty of care obligations. See ASIC v Hobbs [2473]-[2475]; ASIC v Adler 307.

179 See part 3.2 above.

180 See principles 8 and 10 of the King IV Report, which lists recommended practices to support each of the principles.

181 See principle 8 of the King IV Report 54.

3.3.3 Summary of the comparison between the Australian and South African approaches

It has already been noted, for comparative purposes, that there are both slight differences and some similarities between the approach of the Australian Corporations Act to reliance/delegation and South Africa's statutory approach.

With regard to similarities, it is clear that most of the categories of the persons on whom Australian directors can rely for information or advice and to whom they can delegate are similar to the categories of persons that directors can rely on for their own performance in terms of the Companies Act 2008. For example, in terms of both the Australian and South African statutes directors are permitted to rely on or delegate some of their powers and authority to these categories of persons: a company employee, a committee of directors, "any other person",182 and a professional expert or specialist advisor. In the Corporations Act 2001, another category that is included but that is not to be found in the Companies Act 2008 is that of a "single director".183 Another similarity between the two statutes pertains to some requirements for reliance on information and delegation. For example, in terms of reliance on the performance of or on information provided by employees, both statutes require that the director should believe on reasonable grounds that the employee relied upon is competent, reliable and should merit confidence.184 With respect to reliance on professional advice, both statutes agree that the director should consult the professional in relation to matters that the director believes on reasonable grounds to be within the person's professional or expert competence.185

There are important differences in the way Australia's Corporations Act 2001 emphasises the requirements/standards for reliance and delegation that could provide important lessons for improving standards under the South African Companies Act. One of the differences includes, as already noted, that the Corporations Act (Australia) emphasises and presents reliance on information from employees and professional or specialist advice as separate from directors' delegation of their powers to designated persons.186 Presenting reliance and delegation separately allows the

182 Interestingly, in neither piece of legislation, that is, neither in the Corporations Act

2001 nor in the Companies Act 2008, is the term "any other person" defined. 183 See s 198D(1)(d) of the Corporations Act 2001. 184 See parts 2.2.1 and 3.3.2 above. 185 See parts 2.2.1 and 3.3.2 above. 186 See parts 2.2.1 and 2.2.2 above. Reliance, including categories of persons directors

can rely on and the requirements or standards for reliance are in terms of s 189 of

the Corporations Act 2001. Delegation, including the categories of persons directors

can delegate to are found in s 198D, while the requirements or standards for

delegation are to be found in s 190 of the Corporations Act 2001.

Corporations Act to emphasise the important principles/standards relating to directors' reliance on employees and professional/specialist advice.187 It also allows the Corporations Act to emphasise the standards of delegation separately.

Amain difference, as already noted in this article, is that whereas the Australian Corporations Act emphasises the requirement that the reliance on information and professional advice must be done in good faith,188 the Companies Act 2008 is mute on this requirement. Specifying such a requirement in statute189 has allowed Australian courts to develop valuable case law principles which could prove to be instructive to the interpretation of South Africa's reliance provisions under the Companies Act 2008.190

Another important and related standard emphasised by the Corporations Act 2001 but missing from the Companies Act 2008 is the requirement that the director must exercise independent assessment/judgment of the information received or professional/expert advice/opinion received, using the director's own knowledge of the company and taking into account the complexity of the company's structure and operations.191 It is important to note that as established in part 3.1.1 above, the Companies Act 2008 provides for a director's minimum irreducible duty of care, which is related to the director's reliance on the performance of others in terms of section 76(4)-(5). It has already been established in this article that Australian and English law are clear that directors must not utilise professional advice without exercising an independent judgment with respect to the advice given.192 These jurisdictions recognise the importance of the director's duty to exercise an independent judgment, and as already pointed out, English law even decided to strengthen this common law duty by codifying it in statute.193 Though the Companies Act 2008 has not yet codified this common law duty, South African common law acknowledges that directors are required to exercise an independent judgment and to make decisions according to the best interests of the company.194 In addition to this, South African common law relevant to reliance and delegation emphasises that a director may delegate some or even all of his/her powers to others, but may not delegate his/her duty or abdicate his/her ultimate responsibility towards the company.195 It is in line with these principles to argue that even if a

187 See ss 189(b) and 190 of the Corporations Act 2001 for important principles

pertaining to reliance and delegation respectively. 188 See part 2.2.1 above. 189 See s 189(b)(i) of the Corporations Act 2001. 190 See such principles considered in 2.2.1 above. 191 See s 189(b)(ii) of the Corporations Act 2001. 192 See part 3.1.2 above. 193 See s 173 of the UK's Companies Act 2006. 194 Fisheries Development Corporations 163D-F. 195 See Barlows Manufacturing Co Ltd 611.

director seeks the advice of a professional advisor or receives information from employees, it remains his/her ultimate responsibility to make a decision that advances the best interests of the company. The law for this reason should assist directors by emphasising principles which ensure that directors do not become so dependent on any advice to the extent that they stop applying their minds adequately in the misguided hope that specialists will make decisions for them to simply rubberstamp.