Directors’ Personal Liability to Company Creditors: The Iron Veil, Daniel Le Roux, Hickley Hamman, Yousuf Munshi

In Venator Africa (Pty) Ltd v Watts and Another [2024] ZASCA 60, the Supreme Court of Appeal considered a claim by a creditor against the directors of the debtor company, based on alleged breaches by those directors of the Companies Act, 71 of 2008. The Court ruled in favour of the directors, finding that they cannot be held liable in their personal capacities except to the extent to which they had breached the duties expressly imposed on them by the Companies Act.

The judgment will be of interest to all persons who hold directorships, as well as insurers who offer Directors & Officers Liability insurance products.

Background

Mr Watts and Mr Bekker (collectively, “the Directors”) are directors of Siyazi Logistics and Trading (Pty) Ltd (“Siyazi”). Siyazi contracted with Venator Africa (Pty) Ltd (“Venator”) to perform clearing and forwarding duties for goods imported by Venator.

It is alleged that in fulfilling these duties:

Siyazi would issue disbursement accounts to Ventator, representing the amounts due by Venator to the South African Revenue Service (“SARS”).
Venator would pay the amounts reflected in the disbursement accounts to Siyazi, which would in turn pay the amounts to SARS.
In the period between 2018 and early 2019, Siyazi issued disbursement accounts in the amount of R66 395 006.27, which amount Venator duly paid to Siyazi. Siyazi, so it is alleged, did not pay this full amount to SARS.
Consequently, SARS raised assessments against Venator, amounting to R41 207 220.00. Venator alleges that the short payment to SARS occurred as a result of fraud and/or theft by Siyazi’s employees and/or the Directors.

Background

It is alleged that in fulfilling these duties:

Siyazi would issue disbursement accounts to Ventator, representing the amounts due by Venator to the South African Revenue Service (“SARS”).
Venator would pay the amounts reflected in the disbursement accounts to Siyazi, which would in turn pay the amounts to SARS.
In the period between 2018 and early 2019, Siyazi issued disbursement accounts in the amount of R66 395 006.27, which amount Venator duly paid to Siyazi. Siyazi, so it is alleged, did not pay this full amount to SARS.
Consequently, SARS raised assessments against Venator, amounting to R41 207 220.00. Venator alleges that the short payment to SARS occurred as a result of fraud and/or theft by Siyazi’s employees and/or the Directors.

The Pleadings

In pursuing its claim against the Directors, Venator mainly relied on the following provisions of the Companies Act:

Section 22(1), which provides:

"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 218(2), which provides:

“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.”

Relying on these provisions, Venator alleges that the conduct of Siyazi was reckless, grossly negligent, or that the business of Siyazi was conducted with the intention to defraud Venator.

While Mr Watts delivered a plea, Mr Bekker delivered two exceptions. In one of these (“the Relevant Exception”), Mr Bekker alleged that:

Section 22(1) imposes a duty upon the company, not its directors, and it does not regulate what directors must, or must not do.
Section 218(2) is applicable where a person breaches a provision of the Companies Act, and Venator does not allege that the Directors contravened a provision of the Companies Act.
The obligations and duties of directors are outlined in Section 76, and the remedies for the breach of these obligations and duties are outlined in Section 77.

On that basis, Mr Bekker alleged that Venator’s claim does not fall within the scope of Section 218(2), and that the claim as pleaded did not sustain a cause of action.

The High Court

Various judgments were considered by the High Court in arriving at its decision, but the High Court found that the appropriate guidance could be drawn from the following decisions:

De Bruyn v Steinhoff International Holdings N.V. and Others [2020] ZAGPJHC 145, in which it was held that Section 218(2) should not be interpreted literally. It simply 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”; and
Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others [2020] ZACSA 83 (in which Clyde & Co represented the successful parties), where it was held that the Companies Act clearly delineates where the liability of directors should lie for contraventions of any provision and who could recover the resultant loss. It held further that the “…so-called lacuna created by the legislature in not providing expressly for the liability of directors to other persons, such as creditors, for loss or damage suffered, is a clear indication that it was not its intention to do so, thereby continuing to recognise what has been referred to as a foundation of company law.”

The Hight Court therefore upheld the Relevant Exception and granted Venator leave to amend its particulars of claim accordingly. Venator took this decision on appeal to the Supreme Court of Appeal (“the SCA”).

The SCA

Venator argued that the High Court failed to conduct a discrete interpretative analysis of Section 218(1), and that a court should prefer an interpretation of the Companies Act that promotes access to justice, rather than one that denies it. It further argued that the case concerns a breach of a statutory duty, rather than a fiduciary duty, and as such, the phrase “any person who contravenes the Act”, in Section 218(2) must be read to mean the director who is behind the company.

Venator also sought to distinguish its claim from De Bruyn and Hlumisa on the basis that the plaintiffs in those cases were shareholders, whereas Venator sought compensation as a creditor.

In considering Venator’s appeal, the SCA noted that the default position in the Companies Act is to grant directors’ immunity. Section 19(2) provides 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.”

In the view of the SCA, the principle that the legal persona of a company cannot be lightly disregarded is well entrenched, quoting the following passage from Hlumisa with approval:

“...separate legal personality [of a company] is no mere technicality. It is foundational to company law. A party cannot simply disregard the ‘corporate veil’; it must be permitted by law to do so”.

Concerning Venator’s contention that its claim is premised on the breach of a statutory duty and not a fiduciary one, the SCA pointed out that interpretation of statutes is an objective unitary process where consideration must be given to the language used in light of ordinary rules of grammar and syntax, the context in which the provision appears, the apparent purpose to which it is directed, and the material known to those responsible for its production. The point of departure in such an exercise is the language used in the relevant provision.

Applying that framework, the SCA found that Section 218(2) creates a right of recovery for a breach of a provision of the Companies Act but does not itself create liability. Some other provision of the Companies Act must first be breached for liability under Section 218(2) to follow. To interpret Section 218(2) as imposing liability without regulating the concepts of fault, foreseeability and remoteness would, quoting from De Bruyn, “place a burden of liability and hence risk upon directors so great that it is hard to imagine who would accept office on those terms”.

Regarding Section 22(1), the SCA held that it plainly imposes a duty on a company, and not its directors, to refrain from certain conduct. Section 76(3), however, does impose certain duties upon directors. Such duties are owed to the company, and the company may recover the damages it sustains as a result of such duties being breached.

The SCA concluded that Venator had failed to identify the contravention of a provision of the Companies Act that would entitle it to invoke Section 218(2). It repeated the point made in De Bruyn that the legislature carefully stipulated what form of liability may result from different contraventions, and no coherent reading of the statute would recognise a general liability of all persons who contravene it in favour of all who suffer loss as a result of such contravention.

In the result, the SCA held that the High Court cannot be faulted for upholding Mr Bekker’s exception, and it dismissed Venator’s appeal with costs.

Takeaways from the SCA’s Judgment

The judgment will be well received by all those who hold office in a company, as well as insurers who offer products for any liability they may incur in that capacity.

The SCA has reaffirmed that directors owe duties to the company and that a director’s liability to the company are set out in Section 77 of the Companies Act. Directors are not liable to third parties merely because they hold the position of a director. It is only where the directors breach the duties expressly imposed on them by the Companies Act, that they may be liable for the loss sustained by the company as a result of such breach.

A copy of the judgment can be accessed here.

A copy of the judgment in De Bruyn can be found here.

A copy of the judgment in Hlumisa can be found here.