A recent judgment by the Supreme Court of Appeal (SCA) clarifying the conditions under which directors can be held personally liable for a company’s actions has significant implications for companies and directors, as well as insurers that provide Directors & Officers cover.
This is the view of Ben Rule, a senior associate at Webber Wentzel who specialises in insurance coverage and litigation.
In its commentary, the Chartered Institute of Business Accountants (CIBA) said the judgment confirms that directors are generally not liable to the company’s creditors unless there is an abuse of the corporate structure, which could lead to piercing the corporate veil and attaching liability to the directors.
The judgment not only reinforces the autonomy of the corporate entity, but also clarifies the conditions under which directorial liability can be invoked. It preserves the foundational legal principles of company law, while ensuring that directors are appropriately accountable under clearly defined statutory breaches, the CIBA said.
Background to the case
The appellant, Venator Africa (Pty) Ltd, a manufacturer of chemical products, concluded an agreement with Siyazi Logistics and Trading (Pty) Ltd to handle clearing and forwarding duties. Siyazi was responsible for issuing disbursement accounts to Venator, indicating the amounts owed to the South African Revenue Service (SARS). Venator would pay Siyazi, which was required to pay SARS.
In 2018 and early 2019, Siyazi indicated the SARS disbursement was more than R66 million. Venator paid the amount to Siyazi, but Siyazi paid only R31m to SARS.
SARS, being short-changed, raised assessments that resulted in penalties on top of the missing R34m. As a result, Venator said it suffered damages totalling more than R41m.
Venator sued the directors of Siyazi for breaches of sections 22(1) and 218(2) of the Companies Act, alleging they were “the guiding minds behind the fraud”, or had been “reckless” or “grossly negligent” in controlling the activities of Siyazi.
Section 22(1) provides that “a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose”.
Section 218(2) stipulates that “any person who contravenes any provisions of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention”.
The directors opposed the action.
One of the directors filed an exception to Venator’s particulars of claim, alleging that section 22(1) imposes duties on the company, not the directors.
He also argued that section 218(2) applies only where a person breaches a provision of the Companies Act, and Venator’s particulars of claim did not allege that the directors breached the Act.
The High Court in Pietermaritzburg agreed and set aside Venator’s claims. The court granted Venator time to file amended particulars of claim.
Venator’s submission
Before the SCA, Venator argued that the High Court had not conducted “a discrete interpretative analysis” of section 218(2). Instead, it opined on the correctness of the judgments it identified and appeared to have adopted a prominent focus on section 22 rather than section 218(2).
Venator contended it was not the intention of the Act to exclude liability for fraudulent or reckless trading by directors to creditors of the company. It claimed such liability was permitted by common law and would require clear language in the Act to preclude it.
Counsel argued that the court should prefer an interpretation that promotes access to justice rather than one that denies any remedy.
It was also argued that the court was not dealing with a breach of fiduciary duty owed to the company, but with a breach of a statutory duty. Regarding a creditor’s claim, the phrase “any person who contravenes the Act” in section 218(2) must be interpreted to mean the director behind the company that contravenes section 22(1).
Directors are not generally liable
The SCA, quoting approvingly from its decision in Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (2020), said the separate personality of a company is “no mere technicality” but is “foundational to company law”.
Section 20(9) of the Companies Act allows the court to declare a company not to be a juristic person in certain circumstances, particularly when there is an unconscionable abuse of the juristic personality of the company as a separate entity.
But section 20(9) does not dismantle the principle that directors are generally not liable to creditors. Instead, it expands the grounds upon which the court can invoke legal exceptions to this principle.
Section 218(2) creates a right to recovery if there has been a breach of a provision of the Act. This liability, however, does not stand alone; it depends on a breach of specific provisions of the Act.
The SCA’s interpretation clarifies that directors are not automatically liable for company actions unless those actions contravene specific statutory duties.
Venator asserted that the contravention of section 22(1) had triggered the operation of section 218(2).
But the SCA held that section 22(1) plainly imposes a duty on the company, not its directors, to refrain from carrying on its business recklessly, among other things.
“To construe section 22(1) as being capable of infringement by the directors is to read into the section a prohibition that is not there,” Judge Nolwazi Mabindla-Boqwana wrote in the unanimous decision.
Claim is against the company
The judgment referred to the duties of directors towards the company as contained in sections 76 and 77 of the Companies Act.
Section 76(3) imposes a duty on directors to act in good faith and in the best interests of the company. It codifies the common law fiduciary duties of directors, requiring them to avoid conflicts of interest, act with the care an ordinarily prudent person would take, and act within their powers.
Sections 77(2) and 77(3)(b) detail the liability of directors for losses or damages sustained by the company because of a director’s actions.
Section 77(3)(b) expressly deals with directors’ liability. It states a director is liable for any loss, damages, or costs sustained by the company as a direct or indirect consequence of the director having acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1).
The SCA quoted from its decision in Gihwala and Others v Grancy Property Ltd and Others (2016), where the court held that section 77(3) “creates a statutory claim in favour of the company against a director, imposing liability on the latter for any loss, damages or costs incurred by the company in certain circumstances, including whether the director acquiesces in the company engaging in reckless trading. It is not a provision that can be invoked to secure payment to a creditor or shareholder in respect of their claim against the company or a director.” (SCA’s emphasis.)
The SCA said the High Court, in Rabinowitz v Van Graan and Others (2013), decided incorrectly when it held that “a third party can hold a director personally liable in terms of the Act for acquiescing in or knowing about conduct that falls within the ambit of section 22(1) thereof”.
The implication of the SCA’s position is that someone who wants to institute litigation based on a breach of section 22(1) and/or section 218(2) must institute action against the offending company rather than its directors.
The court said the Act “abounds” with provisions for the recovery of loss resulting from misconduct on the part of directors. However, there must be a clear link between the contravention and the loss allegedly suffered.
It found that Venator had been unable to identify a provision that was contravened by the directors to invoke section 218(2).
The SCA dismissed Venator’s appeal with costs but allowed Venator to amend its particulars of claim to continue its case in the High Court.
