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The art of law - a director may be liable in damages to his company; this is distinct from being declared delinquent.

Did the Pretoria High Court err in its understanding of a director's liability for damages?

The decision of the Pretoria High Court in CES Africa (Pty) Ltd v Burger [2014] ZAGPPHC 146 (2 April 2014 is intriguing and puzzling.

It is the first reported decision in which a cause of action is apparently based, inter alia, on a breach of the duties imposed on directors by the new Companies Act 71 of 2008.

A claim for damages which the defendant claimed was bad in law

In this case, a company, CES Africa (Pty) Ltd ("CES"), was suing one of its directors who was also a director of a second company, Cost Engineering Mozambique Lda ("CEM"), for failing in his duty to generate invoices for professional services rendered by CES to CES during 2013.

It was alleged that the director in question had thereby "abused his position as director to gain an advantage for CEM and/or himself" and had "knowingly caused harm" to CEM, thereby causing CES to suffer damages.

The plaintiff company's cause of action, as summarised in the judgment is an odd - and arguably confused and incorrect -potpourri of different provisions of the Act.

Abuse by a director of his position

The expression abused his position in relation to the conduct of a director comes from section 162(5)(c) of the Companies Act 71 of 2008 in terms of which the consequence of such conduct is that a court may declare the director in question to be delinquent, but there is no remedy in damages for such conduct.

What the plaintiff ought to have alleged was that the director had failed to act in the best interests of the company in terms of his common law duty and in terms of the similar now-codified duty as set out in section 76(3)(b) of the Companies Act 2008. The remedy for such a breach of duty is that the company is entitled, both at common law and in terms of the Act (see section 77(2)(a)) to institute an action for damages against the director to recover its financial loss.

If the contention in this particular case was that the director had been negligent in failing to generate the relevant invoices (and the judgment makes no mention of negligence) then the remedy would have been an action by the company against the director, in terms of the common law and in terms of section 77(2)(b) of the Act. It is also possible for an action for damages to be brought by the company against the director in terms of section 218(2).

It is also conceivable that an action for damages might lie against the director in terms of common law principles and in terms of section 76(2)(a) for using information that he obtained as a director to gain an advantage for himself or for CEM. Again, the judgment makes no explicit mention of this particular duty and liability.

Moreover, where a director's abuse of position has resulted in his gaining a financial benefit - which would require a specific averment to this effect in the particulars of claim - the company's usual remedy is one for disgorgement of the profit improperly made, as distinct from damages for loss suffered, as was being claimed in this case; see for example, Symington v Pretoria-Oos Privaat Hospitaal Bedryfs (Pty) Ltd 2005 (5) SA 550 (SCA).

So the first oddity about the plaintiff's cause of action is that even at face value the allegations made about the conduct of the defendant director, were not a legal basis for a claim for damages; and the oddity about the judgment is that it fails to identify this flaw in the plaintiff's particulars of claim.

Had the company suffered damages at all?

The further oddity about the judgment is the way it deals with the defendant's argument that, even on the face of the plaintiff company's claim, it had suffered no damages, for no allegation was made in the plaintiff's particulars of claim that the amount due to the plaintiff company by CEM could not be recovered by the plaintiff.

In particular, no allegation was made that the claim had prescribed or that CEM was insolvent.

That being the case, if the plaintiff were to succeed in securing a judgment against the director for damages, there would be the potential for a double recovery - damages from the defendant director and payment of the debt by CEM. And if the plaintiff failed to prove its debt against CEM, then it would have suffered no financial loss that was causally linked to the director's conduct and the judgment for damages against the director would have been ill-founded.

All of these arguments the judgment dismissed as being "without substance" and it was held that the plaintiff's cause of action, as pleaded, was not excipiable.

A critical overview

The plaintiff's cause of action in this case and the judgment, with respect, seem to have been based on several fundamental misconceptions.

The first relates to the structure and internal logic of the new Companies Act in relation to remedies.

The Act conceives of an action by the company against a director for damages for breach of duty, and also the granting of an order that a director is delinquent.

Damages are a remedy whose objective is to enable the company to recoup a financial loss caused to it by the director. An order of delinquency, by contrast, is not premised on a director's having caused his company financial loss, but on misconduct by a director that renders him - by reason of a lack of integrity or competence - to be not a fit and proper person to hold such a position.

It is not a prerequisite for an order of delinquency that a director has caused the company loss - indeed, the delinquency may have lined the company's pockets with profits made in an unethical way.


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