Directors Liability to Creditors

Can a company’s creditors institute claims against the directors of a company if damage is suffered as a result of the company’s conduct?

This question was raised in a recent judgment by the Supreme Court of Appeal of South Africa in the case of Venator Africa (Pty) Ltd v Watts and Another (053/2023)(2024) ZASCA 60 (24 April 2024).

This appeal concerns the interpretation of section 218(2) of the Companies Act 71 of 2008 (the Act), which provides for civil liability against any person who contravenes the provisions of the Act, read with section 22(1), prohibiting reckless trading by a company. These must be viewed alongside provisions dealing with fiduciary duties of directors and the principle that companies have a separate legal persona from its directors and shareholders.

Background on the matter and summary of the plaintiff’s particulars of claim:

The plaintiff – Venator Africa (Pty) Ltd. (Appellant in the Supreme Court of Appeal) instituted action against the defendants (Respondents in the Supreme Court of Appeal) in the High Court. The defendants were the directors of a company known as Siyazi Logistics (Pty) Ltd (“Siyazi”) The said company was contracted as clearing and forwarding agent for the plaintiff.

As part of its services, Siyazi would issue disbursement accounts to the plaintiff which represented amounts due by the plaintiff to SARS. The plaintiff would pay these amounts to Siyazi, whereafter Siyazi would make payment to SARS on behalf of the applicant. During the period of 2018 and 2019, Siyazi issued disbursement accounts to the plaintiff, which the plaintiff paid in full to Siyazi. Siyazi, however, did not make payment in full to SARS, leading SARS to raise an assessment for the amount outstanding and payment of penalties and interest by the plaintiff. The plaintiff therefore suffered damages in consequence of Siyazi’s short payment.

The plaintiff is of the view that the short payment occurred as a result of fraud and/or theft by Siyazi’s employees and/or by the defendants. The plaintiff therefore relied on section 22(1) of the Companies Act which provides that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for fraudulent purpose.

The plaintiff was of the opinion that the conduct of Siyazi was reckless, grossly negligent and that the business of Siyazi was conducted with the intention to defraud the plaintiff. The plaintiff further relied on section 218(2) of the Companies Act which provides that any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

It was stated that the defendants, as directors of Siyazi, were the driving force behind the fraud, alternatively recklessness, further alternatively, negligence which led to the plaintiff suffering damages. Had it not been for the conduct of the defendants, the plaintiff would not have incurred any damages.

The Defendants’ case:

The second defendant filed an exception to the plaintiff’s particulars of claim, being that section 22(1) does not regulate what directors, such as the defendants, must do or not do, the imposes duties upon the company and not its directors.

It was further stated that Section 218(2) applies where a person breaches a provision of the Act, but there was no allegation in the particulars of claim that the defendants breached a provision of the Act.

The obligations and duties of directors are set out in section 76 of the Act and the available remedies for breaches in section 77. The plaintiff does not locate a claim in those sections. In substance, the plaintiff seems to contend for a contravention of the obligations of a director articulated in section 76(3) of the Companies Act. But any claim under that section is confined to section 77(2) (and section 218(2) cannot be invoked – where a statute expressly and specifically creates liability for a breach of a section, then a general section in the same statute cannot be invoked to establish a co-ordinate liability). Section 77(3)(b) specifically deals with the liability of directors in respect of section 22. It effectively provides that a director who is a party to the carrying on of the business of the company contrary to section 22 is liable for any loss, damages or costs sustained by the company.

As such, the particulars of claim do not aver a breach by the defendants of an obligation imposed on them by the Act in order to bring them and the alleged loss said to be caused by them within the purview of section 218(2) and does not sustain a cause of action.

In the High Court:

The court considered various cases dealing with the interpretation of section 218(2) read with section 22.

The plaintiff’s claim was based on the court’s decision in Rabinowitz v Van Graan and Others where it was held that a person who is guilty of an offence in terms of the Act, must . . . be found to have “contravened” a provision of the Act. If, therefore, a director is guilty of the offence created by section 214, such director must therefore be found to have contravened a provision of the Act for the purposes of section 218(2). Here, the court doubted that it was the legislature’s intention to preclude a director from knowingly being a party in section 22 of the Act. It took this view bearing in mind s 66(1) of the Act which brought the company affairs under the direction of the board.

The High Court disagreed with the view taken in the Rabinowitz case, stating that it is frustrating when it is clear that some directors are up to no good, but that the Act does not make provision for such express liability where a creditor suffers damage.

The High Court rather followed the approach adopted in De Bruyn v Steinhoff International Holdings N.V. and Others (Steinhoff) which held that:

‘Section 218(2) should not be interpreted in a literal way. Rather, the provision recognizes that liability for loss or damage may arise from contraventions of the Companies Act. And so the statute confers a right of action. But what that right consists of, who enjoys the right, and against whom the right may be exercised are all issues to be resolved by reference to the substantive provisions of the Companies Act.’

The high court also referred to the judgment of this Court in Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (Hlumisa) where, with reference to sections 77(2)(b) and 77(3)(b) of the Act, the Court held:

‘These provisions of the Companies Act make it clear that the legislature decided where liability should lie for conduct by directors in contravention of certain sections of the Act and who could recover the resultant loss.’

In conclusion, the Court stated that ‘. . .the so-called lacuna created by the legislature in not providing expressly for the liability of directors to other persons, is a clear indication that it was not its intention to do so.

The second defendant’s exception was upheld and the particulars of claim were set aside. The plaintiff was granted leave to file amended particulars of claim.

On appeal:

The applicants disagreed with the High Court’s interpretation of case law and section 218(2). They further argue that it could not have been the legislature’s intention to exclude liability for fraudulent or reckless trading by directors. As this claim was permitted in Common Law, it is submitted that clear language would be needed to exclude liability.

The plaintiff further contended that the reliance of the court on the Hlumisa and Steinhof cases were incorrect, as those matters dealt with claims of shareholders and not with claims by creditors.

It is important to remember that a company is a juristic person incorporated in terms of the Act. Section 19(2) states that ‘A person is not, solely by reason of being an incorporator, shareholder or director of a company, liable for any liabilities or obligations of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.’
Section 218 (2) says: ‘Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.’

This section creates a right to recovery if there has been a breach of a provision of the Act, but does not itself create liability. It imposes liability in the event of a contravention of some other provision of the Act.

The plaintiff relies on section 22(1) as the provision that it asserts has been contravened and triggers the operation of section 218(2). Section 22(1) stipulates:

‘A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.’
This section plainly imposes a duty on the company, and 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.

Sections 22(2) and 22(3) create remedies for the Commission when reckless trading is suspected. These provisions as well, are directed at the company. The section that deals expressly with directors’ liability is section 77(3)(b), which was dealt with in the Gihwala and Others v Grancy Property Ltd and Others. It was held that:

‘That section . . . does not involve a declaration by the court, but 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.’

Section 76(3) imposes duties on directors to act in good faith and in the best interests of the company etc. These duties are owed to the company and not to others. As such, directors may be held liable for losses suffered by the company.

These provisions make it clear that the legislature decided where liability should lie for conduct by directors in contravention of certain sections of the Act and who could recover the resultant loss. Further, the Act abounds with provisions for recovery of loss resulting from misconduct on the part of directors. There must clearly be a link between the contravention and the loss allegedly suffered. The plaintiff has been unable to identify a provision that has been contravened by the directors in order to invoke section 218(2).

It was decided that the high court cannot be faulted for upholding the first exception. The appeal must, accordingly, fail.

In the result, the following order was made:
1. The appeal is dismissed with costs including the costs of two counsel, where so employed.
2. The order of the high court is confirmed save for paragraph 3 of the order which is substituted as follows:

3. The plaintiff is granted leave, if so advised, to file amended particulars of claim within 10 days of the date of this order.’