The art of law - the new Companies Act provides that a director can incur personal liability to shareholders and others
The structure of the new Companies Act 2008 as regards the personal liability of directors
The decision of the South Gauteng High Court in Rabinowitz v van Graan 2013 (5) SA 315 (GSJ), in which judgment was given on 26 April 2013, is the first reported decision in which a High Court has set out to make sense of the complex jigsaw puzzle of the Companies Act 71 of 2008 in regard to the various grounds on which the directors of a company can incur personal liability toward other parties, such as shareholders and outsiders, as distinct from incurring liability toward the company.
In this particular case, the plaintiff was seeking to amend her particulars of claim so as to set out a cause of action against the directors of the company in question, in their personal capacity.
At the heart of the litigation were the provisions of section 22 and section 77(3)(b) of the new Companies Act 71 of 2008. Section 22(1) states that -
'A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose'
and section 77(3) says that -
'A director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect result of the director having -
(b) 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)'.
Also significant are the provisions of section 218(2) which provide 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.'
The court pointed out (at paragraph [7.2]) of the judgment) that section 77(3)(b) is explicit that the liability of the director is a liability toward the company for any loss that it has sustained as a result of conduct by the director. In other words, this provision creates a liability on the part of the director for a loss sustained by the company itself.
Thus, (see the judgment at para [7.3]) a shareholder or outsider has no claim against the director in terms of this provision for any loss suffered by that person.
Moreover, as the court pointed out (see para [7.3]), the provisions of section 22(1), quoted above, are a prohibition on the company's acting in a particular manner; hence, the conduct of a particular director does not constitute a breach of section 22(1).
From this it follows that loss caused by the conduct of a director falling with the scope of s 22(1) is not recoverable in terms of section 218(2) since such conduct does not constitute a contravention of 'any provision of this Act' as contemplated in section 218(2). Moreover (see para ), a person seeking to hold a director personally liable would have to prove a causal connection between the act complained of and the damages suffered.
Acquiescence or knowing participation by a director in prohibited conduct
However, section 77(3)(b), quoted above, provides that a director is liable for any loss or damage sustained by the company as result of the director's acquiescing in the carrying on of the company's business, despite knowing that the company was carrying on business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose. Again, this does not create a liability on the part of the director toward anyone other than the company itself.
However, section 214 makes it an offence for a person - clearly including a director - to be 'knowingly a party to an act or omission by a company' that is calculated to defraud a creditor or employee of the company or a shareholder, or any act with another fraudulent purpose.
Loss caused by a director whose conduct has contravened the Companies Act
The court accepted the proposition (see para ) that conduct by a director that constitutes an offence under the Act is conduct that has 'contravened' the Act, and that such a director can thus incur personal liability in terms of section 218(2), quoted above.
The court also (see para ) accepted the argument 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 s 22(1) thereof.'
In the present matter, the court said (see para ) that the particulars of claim were clear that the defendants in question were being held liable by the plaintiff -
'on the basis that they were knowingly parties to the conduct in respect of the company in respect whereof they were directors at all relevant times'.
This decision introduces useful clarity on the manner in which the new Companies Act distinguishes between directors' liability to the company for loss occasioned by breaches of the Act, and their liability in damages to other persons who have suffered a loss.