QUESTION 4

Molefe is an experienced quantity surveyor and he has extensive knowledge of the valuation of immovable property. He is approached to serve as a director of New House Properties (Pty) Ltd, a small company that deals in property speculation. Molefe agrees to serve as a director on the understanding that he will only contribute his knowledge of valuation and that he will not be involved with the day-to-day running of the company. Two years pass and Molefe has made significant contributions to the company in terms of property advice, but only when he has been asked to value a specific property. Molefe has never attended a formal board meeting during the two-year period and trusts the rest of the board with all other decisions. Molefe is informed by the managing director that it was decided at the previous evening's board meeting that they should invest in a new property development. This development is in a rural area and Molefe warns that the potential for losses is always higher in such areas. However, the managing director insists that they must act swiftly otherwise the opportunity to invest may be lost. Molefe agrees that the company should take the risk and New House Properties (Pty) Ltd invests in the property development. After six months it becomes clear that the development is a failure. The loss incurred by the company is in the region of R4 million.

4.1 Molefe approaches you for legal advice because some of the shareholders want to take legal action on behalf of the company against the directors for breach of their duty of care and skill. Advise Molefe on the provisions of the Companies Act 71 of 2008 that the shareholders would rely on to hold him liable for breach of his duty of care, skill and diligence and for repayment of the loss suffered by New House Properties (Pty) Ltd. (10 Marks)

4.2 Molefe argues that he cannot be held liable for the loss suffered by the company because when he supported the decision to invest in the new property development he had relied on information that was obtained from others. He also argues that there should be a defence available to him as he was only appointed as a non-executive director and he had supported the decision in good faith. Explain whether the arguments raised by Molefe can be used in his defence to avoid liability. (25 Marks)