02 March 2021 01:31:41 PM

Guidance on Prescribed Officers

- 2016-11-22 02:38:53 PM

What are prescribed officers and why are they relevant?

Although directors are commonly known to be the leaders of companies who make the decisions and run the risk of personal liability in certain circumstances, the Companies Act, 71 of 2008 (“the Act”) creates a second, lesser known and often overlooked category of leadership known as “prescribed officers”.

Unlike directors, prescribed officers are not elected. A person can become a prescribed officer based on their functions or tasks within a company. In simplified terms, anyone who regularly participates to a material degree in the management or control of a company’s business or activities, irrespective of their title, is a prescribed officer. This is a wide definition and as such it is sometimes difficult to ascertain exactly who within the organisation qualifies as a prescribed officer.

Despite the difficulty in identifying prescribed officers, it is essential for a company’s board to thoroughly investigate the matter. Individuals who believe that they may qualify as prescribed officers should report their concerns to the Company’s Board. The importance of this process rests in the fact that prescribed officers, despite note being directors of the Company, share certain liabilities with directors (which can be insured against) and are compelled by law to abide by certain standards of conduct.

What does it take to become a prescribed officer and can it be avoided?

Prescribed officers exist by operation of law. Persons who are responsible for a material degree of management in a company are automatically prescribed officers. The Company’s Board has no power to declare that someone is or is not a prescribed officer. As such, a communication from the Board that someone is not a prescribed officer of the Company does not exempt that person from the associated liability if they fall within the definition. Individuals should be mindful of their responsibilities and err on the side of caution where uncertainty exists. The only way of avoiding becoming a prescribed officer is by avoiding jobs entailing an extensive management role.

A prescribed officer’s contract of employment or any other agreement entered into between the Company and the individual may not exclude his or her duties in terms of the law and may not exempt any liability imposed for breach of those duties. Any such provision is void and unenforceable.

Who is allowed to be a prescribed officer?

Any person who performs the functions of a prescribed officer is seen to be “occupying the position of a prescribed officer”. The Act provides that certain persons may not occupy the position of a prescribed officer if they are disqualified from doing so. If an individual occupies the position of prescribed officer and later becomes disqualified, it may result in their dismissal or demotion; the Act prohibits the Company from knowingly permitting an ineligible or disqualified person from occupying the position of prescribed officer. Furthermore, an individual who continues to occupy the position of prescribed officer by continuing to perform their functions runs the risk of being declared a “delinquent director” by a court, precluding them from taking up office as director or prescribed officer in another company for an extended duration.

The following persons may not occupy the position of a prescribed officer:

1.     Unemancipated minors;

2.     Persons without capacity to act;

3.     Juristic  persons;

4.     Persons who do not satisfy specific criteria set out in the Company’s MOI;

5.     Persons who have been declared as delinquent directors;

6.     Persons who are unrehabilitated insolvents;

7.     Persons who are prohibited in terms of any public regulation from being a director of a company;

8.     Persons who have been removed from an office of trust on the grounds of misconduct involving dishonesty; and

9.     Persons who have been convicted and imprisoned for certain criminal offences.

 

What does it mean to be a prescribed officer?

The fact that someone is a prescribed officer doesn’t change their job description, but it does mean that he or she must conduct themselves a certain way and augments their interaction with the Company in the following ways:

  • Being a prescribed officer enables an individual to participate as a member of the company’s social and ethics committee (a committee of the Board of directors).
  • A prescribed officer may not serve as the Company’s auditor.
  • The Company may not issue or re-acquire shares from a prescribed officer without prior shareholder approval.
  • The Company is required to publish a prescribed officer’s salary, bonuses, performance-related payments, expense allowances and contributions to pension schemes in its Annual Financial Statements (if the Company is required to be audited).

The company’s MOI and any rules of the company are binding on prescribed officers in the exercise of their respective functions within the company; as such, prescribed officers should familiarise themselves with the company’s constitutive documents.
 
Prescribed officers are required by law to accord with certain duties towards the company. These duties include:

  • Not using their position to gain an advantage for themselves or someone else;
  • To knowingly harm the company or a subsidiary;
  • To immediately communicate to the Board any material information relevant to the Company;
  • To always act in good faith and for a proper purpose, in the best interests of the Company and with care and skill expected of a person performing the same functions; and
  • Prescribed officers or related persons who acquire a personal financial interest in an agreement or other matter in which the company has a financial interest must disclose it to the Board immediately.
  • Prescribed officers who serve on the Company’s Social & Ethics Committee that have a personal financial in respect of a matter to be considered at a meeting of the Committee must disclose this before the meeting starts and recuse themselves from such a meeting.

Prescribed officers are liable for breach of any of their duties, including fiduciary duties towards the company or for breaching a provision of the Company’s Act or the Company’s MOI. Furthermore, prescribed officers are liable for any loss or damage caused by them by acting in the Company’s name without authority to do so.
The Company may indemnify and insure prescribed officers against liability arising from a breach of their duties, except where the breach amounts to recklessness, fraud or wilful misconduct.

What effect does a holding/subsidiary relationship have on prescribed officers in a group?

Prescribed officers are not determined in a group context, but rather per individual company. The focus is not on employment or directorship status in a specific company, but what functions an individual performs for a company. As such, the CEO of a holding company who is not a director in a subsidiary may be a prescribed officer of that subsidiary if he performs the functions of a prescribed officer for the subsidiary. In addition, the CEO of a major subsidiary will not automatically qualify as a prescribed officer of a holding company, unless he performs management functions for the holding company itself (the business of a subsidiary is not the business of the holding company).
 
In determining prescribed officers for group companies, the question is what the individual does for a company, not the group.

Article by Nicholas Lewis

Acorim

 
 

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