The Companies Second Amendment Act 17 of 2024, which came into effect in December 2024, has introduced significant changes to sections 77 and 162 of the Companies Act, 2008. These amendments have far-reaching implications for directors of South African companies, especially concerning their personal liability and the duration of legal exposure after they leave office. One of the most pressing consequences is the increased need for extended run-off insurance.
Key Amendments: Sections 77 and 162
1.Section 77 – Liability of Directors and Prescribed Officers
The amendment extends the prescription period for initiating legal proceedings to recover losses, damages, or costs from directors. Previously, claims could not be brought more than three years after the act or omission that gave rise to the liability took place. The amendment now allows for a longer window during which directors can be held personally liable.
The Act now says the Prescription Act does not apply to these claims, and although it says claims can not be brought more than three years after the act or omission that gave rise to the liability took place, it also gives the court the power to extend that period on good cause shown. In addition, the court can extend that period even if the act or omission which gave rise to the claim occurred before these amendments took effect.
2.Section 162 – Application to Declare Director Delinquent or under Probation
The time period within which an application can be brought to declare a director delinquent or under probation has also been extended. This means that even after a director has resigned or retired, they may still face legal action for misconduct or breach of fiduciary duties for a much longer period.
Before the amendment, the claim had to be brought while the person was a director or within 24months of them ceasing to a director. Now, this period has been extended to 60 months, and may also be further extended by a court on good cause shown. As with the amendment to section 77, the court can extend the period even if the act or omission which gave rise to the claim occurred before these amendments took effect.
Implications for Directors and Officers (D&O) Insurance
These legislative changes significantly prolong the period of potential liability for directors. As a result, the standard D&O insurance policies—which typically provide run-off cover for 3 to 6 years after a director leaves office—may no longer be sufficient.
Why Longer Run-Off Insurance is Now Essential
- Extended Legal Exposure: Directors can now be sued or declared delinquent years after their term ends.
- Personal Financial Risk: Without adequate run-off cover, former directors may have to personally fund legal defence and settlements.
- Corporate Governance Best Practice: Companies that offer extended run-off insurance demonstrate a commitment to protecting their leadership, which can help attract and retain qualified directors.
Recommendations for Companies and Boards
- Review Existing D&O Policies: Ensure that the policy includes adequate run-off cover that aligns with the new legal timeframes.
- Negotiate Extended Run-Off Periods: Consider policies that offer 7 to 10 years of post-tenure coverage.
- Educate Directors: Make sure current and prospective directors are aware of the increased risks and the protections in place.
- Update Governance Policies: Reflect the new legal landscape in board charters and risk management frameworks.
The Companies Second Amendment Act 2024 has reshaped the risk landscape for directors in South Africa. With the extension of time bars under sections 77 and 162, longer run-off insurance is no longer optional—it’s essential. Companies and directors must act proactively to ensure that they are adequately protected against the evolving legal environment.