Introduction

On 24 November 2023, the Gauteng Division of the High Court handed down an important judgment in the matter of Vantage Mezzanine Fund II Partnership and Another v Hopeson and Others (2022/045978) [2023] ZAGPJHC. 

The judgment relates to an application launched by the plaintiffs to amend their particulars of claim to meet an exception raised by the third defendant. 

The Court had to determine whether a creditor of a company, who seeks to have a director of that company declared delinquent, can do so on the basis that they are acting in the public interest with the leave of the court, as contemplated by section 157(1)(d) of the Companies Act, 2008 (Act), which provides for the extended standing to apply for remedies in terms of the Act. 

Pertinent facts

The plaintiffs (Vantage) are creditors who provided a loan to a company called Somnipoint (Pty) Ltd (Somnipoint) for the purchase of a building known as ABSA Towers situated in Pretoria. The three defendants were all directors of Somnipoint as well as various related entities. 

Vantage registered a mortgage bond over the building as security and obtained a cession of the rental payments from Somnipoint. The tenant in the building was the Unemployment Insurance Fund (UIF), a government entity. Somnipoint failed to satisfy the terms of the loan and Vantage obtained judgment and successfully applied for Somnipoint to be wound up. A section 417 enquiry followed in which all three defendants testified.  

Vantage then proceeded to institute action for the recovery of the loan amounts and to have the three defendants declared delinquent. 

Vantage contended that the defendants had in the course of their duties as directors committed acts which amounted to gross abuse of their position as directors, gross negligence and being party to acts or omissions to defraud Vantage as Somnipoint’s creditor.

The exception raised by the third defendant alleged that the plaintiffs, as creditors, lacked the necessary legal standing to apply for delinquency relief as provided for in terms of section 162(2) of the Act because the section only affords such right expressly to the following stakeholders of a company: a shareholder, director, company secretary, prescribed officer, registered trade union or employee representative.  Notably, a creditor of the company is not one of the stakeholders expressly mentioned in the list. 

In seeking such relief, Vantage placed reliance upon section 157(1)(d) of the Act which caters for the extended standing to apply for remedies.

Section 157(1)(d) of the Act provides that when, in terms of the Act, an application can be made or a matter can be brought before court, the right to make the application or bring the matter may be exercised by a person acting in the public interest, with leave of the court. 

The amendment application

Vantage claimed to act in the public interest by virtue of, inter alia:

• The egregious nature of the defendants’ breach of their fiduciary duties.
• The large sums of money involved.
• The interest of the general public in the management of companies that conduct business with organs of state, in this case the UIF. 
• The crucial role that Vantage and funders play in providing investment in the country.
• The fact that the defendants were directors and/or members of a large number of other companies and close corporations. 
• The protection that the general public and creditors require when dealing and transacting with the entities of which the defendants are either directors and/or members. 

The third defendant raised various grounds of objection to the plaintiffs’ proposed amendment. 

Notably, the defendant contended that a creditor does not have legal standing under section 157(1)(d) of the Act, and that Vantage’s cause of action was in its own interest and not in the public interest.

In this regard: 

• The defendant argued that the danger of giving a creditor such standing was that it could use the threat of a delinquency application to squeeze the proverbial few extra bob out of the directors and hence is not genuine but opportunistic. 
• The court acknowledged that there may be validity to arguments around genuineness in some cases. But it does not follow that this will apply in every case where a creditor seeks leave under section 157(1)(d) of the Act. There may be no other party willing to vindicate the public interest. Nor does it automatically follow that because a creditor is also suing the directors at the same time for damages, as well as seeking a delinquency declaration, that they must be acting cynically and opportunistically. 
• This will depend upon the facts of each case. In this case, Vantage had advanced arguments for why it is acting in the public interest. These can be tested if challenged, but they are not a basis for finding that a creditor can never be a genuine applicant to vindicate the public interest.  
• Interestingly, the defendant also argued that company directors do not owe duties to creditors based upon the traditional company law approach. 
• The court however took cognisance of the economic approach, having regard to the changing nature of a company’s interests depending upon its commercial circumstances. 
• In this respect, the economic approach would favour treating the position of a creditor of an insolvent company or near insolvent company as being different to that of a company which is financially stable. 
• The court cited the recent United Kingdom Supreme Court judgment in BTI 2014 LLC v Sequana SA and others and the fact that the treatment of the company’s interests as equivalent to the shareholder’s interests can therefore be regarded as justifiable whilst the company is financially stable, since it results in the directors being under a duty to manage the company in the interests of those who primarily bear the commercial risks which the directors undertake. But that ceases to be true when the company is insolvent or nearing insolvency. To treat the company’s interests as equivalent to the shareholder’s interests in that situation encourages the taking of commercial risks which are borne primarily not by the shareholders but by the creditors, who will recover less in winding up if the company’s assets have been diminished or if it has taken on additional liabilities. 
• The court held that this economic approach is consonant with the purpose of the Act, which refers in its headnote to one of its aims being to provide appropriate legal redress for investors and third parties with respect to companies. In addition, one of the purposes of the Act is to encourage transparency and high standards of corporate governance as appropriate, given the significant role of enterprises within the social and economic life of the nation. 
• The court found that the reading of the policy approach in the Act suggests two things: that investors and third parties are to be provided with greater remedies in relation to companies; and that high standards of corporate governance are expected. 

Accordingly, the court found that any reading of section 157(1)(d) of the Act read with section 162 which seeks to categorically deny a creditor these rights seems contrary to the spirit of the Act. The court acknowledged that it is not suggesting that a creditor always has this right, only that per se, as a category of person, it cannot be denied this right without the further enquiry as to whether it acts in the public interest and that is an enquiry dependent on the facts in each case. 

The court also found that, in terms of whether Vantage was acting in its own interest as opposed to the public interest, is a matter of fact. This is not though an appropriate argument to raise in opposing an application for amendment by way of an exception. Rather, it can form part of a special plea. 

Conclusion 

The third defendant’s exception was accordingly dismissed and Vantage was granted leave to amend its particulars of claim. 

This is an important judgment recognising the rights of a creditor to seek an order declaring a director of a company delinquent on the basis that the creditor is acting in the public interest, with leave of the court.

It also develops our law, beyond the traditional approach, regarding the duties owed by directors to creditors in circumstances of insolvency or near insolvency. 

Whilst this was a judgment granted in respect of an application for amendment, and Vantage will of course still have to establish the factual basis for the relief sought at a trial hearing in the matter, we expect to see an increase in legal proceedings by creditors against directors on the basis of this judgment.

Legal notice: The contents of this article should not be construed as formal legal advice from Clyde & Co. Readers are advised to consult legal professionals for guidance on the Act and the implications thereof.