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Issue Date: November 2002 (es)

Personal responsibilities of directors

November 2002
Francis Cronjé of Buys Incorporated

Online ‘sellers’ must realise that they are getting closer to their clients and thereby placing more focus on how their company is governed. At a recent seminar on corporate governance, Adv Heath, CEO of Heath Specialist Consultants said that the board of directors of companies involved in rendering services and selling products through e-commerce should practice good corporate governance by setting an example to their staff by acting ethically and with integrity and thereby best serve the interests of their customers and clients. This, according to him, promotes trust on the part of the consumer, which is vital for the growth of e-commerce.

He went further to say that the integrity of an online supplier is of the utmost importance. Indications are in other countries that investors are prepared to pay a premium for shares in companies which practice good corporate governance. The same would apply to the customers and clients of such a company. It would therefore seem that the practicing of good corporate governance, including risk policies, etc, adds value to shares.
But its importance is not just lying in the added value, it also prevents mistakes which are caused by a lack of legally related knowledge that might result in directors being held personally responsible and accountable for reckless behaviour, a term so easily misinterpreted.
Responsibilities and liabilities
In terms of the King II report it is the board's responsibility to assess the company's risk. Risk management has almost become synonymous with corporate governance and should directors fail to fulfil their duties, they may be held accountable in terms of section 424 of the Companies Act No 61 of 1973.
This section specifically deals with the liabilities of directors and concludes that when it appears, whether it be in a winding-up, judicial management or otherwise, that any business of a company (this perforce will include e-commerce activities) was or is being carried on recklessly, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
Consumer protection
A good example in e-commerce would be, for instance, where the e-commerce division or e-commerce company does not comply with the provisions as set out in the Electronic Communications and Transactions Act (ECT Act) and more specifically those provisions dealing with consumer protection.
Let us say for example the company did not utilise a payment system that was sufficiently secure with reference to accepted technological standards at the time consumers transacted with them. Murphy presses for time, applies its law and suddenly the company receives a flood of claims caused by disgruntled consumers who incurred damages due to a faulty payment system. The claims amount to thousands and threaten to sink the company.
The responsible director explains to the board that there is no reason to panic due to the fact that in the e-commerce web site's terms and conditions, the company disclaimed all its liabilities and he personally saw to the drafting of these legal notices. If any of the directors were familiar with the ECT Act, they would have had good reason to panic. Reason is that section 43(6) of the ECT Act clearly states that a company or supplier is liable for any damage suffered by a consumer due to a failure by the company or supplier to provide a sufficiently secure payment system.
Ouch
The responsible director could therefore personally be held accountable in terms of section 424 of the Companies Act. Would the director be able to argue that he was not knowingly aware of the ECT Act's provisions and therefore did not act recklessly?
No, he will not
Some would argue that it is almost imperative that directors of e-commerce divisions or directors of e-commerce companies should, apart from becoming acquainted with corporate legislation, also familiarise themselves with the ECT Act. Fact of the matter is, it is imperative.
The ECT Act, like the Constitution, has a horizontal effect and finds impact on hundreds of other acts, making life difficult for those who are not aware of its application.
Conclusion
What then precisely would be the responsibilities of directors that are involved with e-commerce? The answer is that the same responsibilities that would apply in a brick and mortar business would also apply to them, namely:
* Adherence to and implementation of good governance practices;

* Protection of company assets, reputation, staff and shareholders' interests;

* Avoidance of mismanagement and reckless practices;

* Development and implementation of a strong code of ethics with corresponding penalties for those who transgress; and

* Attainment of transparency in the company.
But the differences being that they should also take additional care when structuring the legal notices of their e-commerce websites, not only to prevent non-compliance with the ECT Act, but also to prevent personal accountability.
Francis Cronjé: Buys Incorporated
Francis Cronjé: Buys Incorporated
Francis Cronjé, Buys Incorporated, 021 4617387, t: 021 461 7387, f: 021 462 7117, francis@buys.co.za, www.buys.co.za


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