Where does director liability end?

The actions of a company director are often seen as the actions of the company, leading to the perception that where a company has potentially caused harm or damage at the direction of its directors, the directors are automatically liable for such loss or damage. Our Supreme Court of Appeal recently had occasion to consider this position and when directors can be held liable.

In the matter of Venator Africa (Pty) Ltd v Watts and Another (053/20230) [2024] ZASCA 60 (24 April 2024), the Supreme Court of Appeal re-affirmed the principle that a company has a separate juristic personality from its directors/shareholders and that an aggrieved party cannot seek to circumvent the common law principle of piercing the corporate veil by seeking to enforce the provisions of section 218(2) of the Companies Act 71 of 2008 (“Act”) against directors of a company. Section 218(2) of the Act provides for civil liability against any person who contravenes the provisions of the Act.

Venator Africa (Pty) Ltd (“Venator Africa”), the appellant, alleged that it had suffered damages as a result of the actions of the directors of Siyazi Logistics and Trading (Pty) Ltd (“Siyazi”), in that Siyazi had failed to make full payment to the South African Revenue Services on its behalf for VAT, even though this amount had been paid to Siyazi by Venator Africa. SARS raised an assessment on Venator Africa for the unpaid amount plus penalties and interest for R41 407 220.00. Venator Africa then instituted action against the directors of Siyazi in their personal capacities under section 218(2) read with section 22(1) of the Act (which prohibits reckless trading by a company) for the amounts claimed by SARS. The directors of Siyazi raised a successful exception in the High Court which became the subject of the appeal in the Supreme Court of Appeal. 

The argument of the directors of Siyazi was that section 22(1) of the Act does not create any obligations for a company’s director(s), but imposes obligations on the company itself and contended that the liability of directors is in terms of section 77 of the Act, but that the appellant had not established their claim using that section.

The Court found that section 218(2) of the Act does not create liability for directors per se but imposes liability if there is a substantive contravention of another section of the Act. It found that the parameters of liability (the right, the party vested with that right and who may exercise the right) would still need to be determined in the context of the specific section of the Act which is alleged to have been transgressed. The Court held that interpreting section 218(2) to find a case for the liability of directors would be so wide as to cause uncertainty and dissuade potential directors from taking up such positions.

The Court then considered whether a contravention of section 22(1) of the Act could form the basis for the liability of directors when read with section 218(2) of the Act. The Court here also found that such an interpretation could not be sustained. It confirmed that section 22(1) of the Act imposes obligations on a company and not its directors. The legislature had clearly made provision for the liability of directors for specific transgressions of the Act in sections 76 and 77, and that if it was the legislature’s intention for section 218(2) of the Act to create liability for directors of a company, then the legislature would have made that clear in the text of the statute. The court dismissed the appeal but allowed Venator Africa to bring an amended action within 10 days of the order.

From this case, it is clear that our courts still view the independence of a company and directors as a foundational aspect of our company law. It also confirms that section 218(2) cannot be used as a “catch-all” provision to try and hold directors accountable and thereby circumvent the separate juristic personality of a company.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s)

June 26, 2024
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