Author: Michael Jackson Partner Cox Yeats
Murray Munro, the CFO of Tongaat Hulett, appealed a fine handed down by the JSE on the basis that he was not responsible for misrepresentations contained in Tongaat Hulett’s financial statements. The Financial Services Tribunal found that he was strictly liable. Directors are not usually strictly liable for errors in financial statements.
Our Companies Act codified the common law on the obligations of directors and the preparation of financial statements. Our common law and the Companies Act does not impose strict liability on directors. They are only liable if they fail to exercise reasonable skill and care.
The standard of director conduct required is contained in Section 76 of the Companies Act. A director is obliged to exercise his or her powers in good faith, for a proper purpose, in the best interests of the company and with the degree of care, skill and diligence that may reasonably be expected of a person having the knowledge, skill and experience of that director.
In performing his or her obligations, the director is entitled to rely on employees of the company whom the director reasonably believes to be reliable and competent. The director may also rely on legal counsel, accountants or other professionals retained by the company.
In the Brazilian Rubber case, the English Courts described the duty of skill to be “… a director’s duty has been laid down as requiring him to act with such care as is reasonably to be expected from him, having regard to his knowledge and experience. He is, I think, not bound to bring any special qualification to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance; while if he is acquainted with the rubber business, he must give the company the advantage of his knowledge when transacting the company business”.
The general rule has been that directors must make reasonable effort to understand the company affairs and exercise his or her own judgement based on personal knowledge and experience and the information and advice provided by company officials and professional experts.
Section 29(2) of the Companies Act states that any financial statements prepared by a company must not be false or misleading in any material respect. It follows that the Companies Act and common law requires a director to act with reasonable skill in preparing financial statements. The director, in doing so, is entitled to rely on expert advice provided by, for example, the company’s auditors.
These principles were considered by the Financial Services Tribunal in a recent judgment handed down on 31 July 2024. The Tribunal was chaired by Judge Dennis Davis and considered an appeal by Murray Munro, the chief financial officer and director of Tongaat Hulett. The JSE had found that Munro had been involved in the material mis-statements of the financial statements of Tongaat Hulett, between 2011 and 2018, and that he should receive a penalty of R6 million, a public censure and be disqualified from holding the office of a director of a listed company for 10 years.
Munro appealed the decision of the Johannesburg Stock Exchange contending that the information which the Stock Exchange had relied upon (three property transactions) had not been placed before Munro and there was no evidence to the effect that Munro was aware of the mis-statements. Munro further contended that he was entitled to rely on experts to ensure that the financial statements were properly prepared. In particular, he was entitled to rely on the auditor’s interpretation.
The issue arose as to whether Munro was strictly liable for the mis-statements or whether he could rely upon the principles contained in the Companies Act.
The Tribunal found that the JSE was entitled to rely on the provisions of the Listing Requirements which imposed a different legal test to the Companies Act.
The Tribunal referred to an earlier decision against Markus Jooste which stated:
“Jooste was the chief executive officer of Steinhoff throughout the period in question. Directors of issuers fulfil a critical role in ensuring that listed companies comply with the Listing Requirements. Issuers of securities listed on the JSE are only able to comply with the Listing Requirements if their directors take appropriate action (or refrain from taking unlawful actions) to ensure that such issuers comply in all respect with its provisions and to ensure that the financial information of listed companies are, in all aspects, accurate and correct and that it represents a fair and accurate exposition of the company’s financial information”.
Every director of a listed company is required to complete a declaration which reads:
“I agree to be bound by and comply with the JSE Listings Requirements, as amended from time to time, and, in my capacity as a director, I undertake and agree to discharge my duties in ensuring such compliance whilst I am a director. The delegation of any of my duties to any sub-committee or anyone else will not absolve me of my duties and responsibilities in terms of the Listing Requirements”.
The Listing Requirements oblige listed companies to prepare financial information in accordance with IFRS.
The PWC Investigation into Tongaat Hulett had identified that there had been an overstatement in Tongaat Hulett’s annual financial statements affecting assets, income and liabilities in excess of R10 billion.
This fact and that Munro was a central figure in the manner in which the financial records of Tongaat were prepared and reflected, was, in the Tribunal’s view, sufficient evidence to conclude that Munro had breached the Listing Requirements and that the fine of R6 million should be upheld.
The Tribunal differentiated between a penal statute (such as the Companies Act) which requires fault and a regulatory one (such as the JSE Listing Requirements) which imposed strict liability.
Steinhoff and Tongaat are not usual examples. However, this ruling is a reminder for directors to be careful of the consequences of their actions. Directors can be held strictly liable for a breach of the duty of skill and cannot rely on advice given by company officials and professional experts.
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