By Brandon Cole (4 June 2024)
In a recent judgment by the Supreme Court of Appeal of South Africa (“SCA”) on 24 April 2024, the case of Venator Africa (Pty) Ltd v Watts and Another[1] (“Venator Africa) has clarified and redefined earlier interpretations of section 218(2) of the Companies Act 71 of 2008 (“the Act”).
Section 218(2) reads 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.” This section has been the cause for much debate, partly due to its ambiguity. It is a foundational principle of Company Law that the company is a separate juristic person to its shareholders and directors and that the establishment of a separate juristic person creates limited liability for directors. Given these foundational principles, the question arises whether it is possible that section 218(2) provides a statutory mechanism to circumvent these well-established principles, and if it does, to what extent and under what circumstances. This question was well ventilated in the earlier High Court Judgment of De Bruyn v Steinhoff International Holdings N.V. and Others[2] which has now been reaffirmed by the SCA.
Case Overview:
Venator Africa initiated legal action against the directors of Siyazi Logistics and Trading (Pty) Ltd, claiming that they were personally liable for the company’s reckless trading and subsequent financial losses, the claim was based on the premiss that the directors had contravened section 22(1) and as result section 218(2) was applicable to hold them liable for the contravention. The second respondent brought an exception to the particulars of claim, arguing that sections 22(1) and 218(2) of the Act do not impose personal liability on directors for a company’s reckless business conduct.
The High Court’s Position:
The High Court was tasked with interpreting whether Section 218(2) of the Companies Act, which imposes liability on “any person” who contravenes the Act, can be used to hold directors personally liable for reckless trading by the company as prohibited under Section 22(1).
The High Court concluded that Section 22(1) imposes a duty on the company itself, not on its directors. This section prohibits a company from carrying on its business recklessly, with gross negligence, or with intent to defraud any person. The court determined that Section 22(1) does not directly regulate the conduct of directors. Instead, it applies to the company as a separate legal entity. Consequently, the court found that there was no direct statutory obligation imposed on directors under Section 22(1) that could trigger personal liability under Section 218(2).
The judgment highlighted that for directors to be personally liable, there must be a specific provision within the Companies Act that imposes such a duty on them. Since Section 22(1) does not do so, it cannot be used as a basis for personal liability under Section 218(2). The High Court referred to the decision in De Bruyn v Steinhoff, in which it was held that Section 218(2) should not be interpreted in isolation but in conjunction with other substantive provisions of the Companies Act that specifically define and limit the liability of directors.
The court emphasized that the Companies Act has a detailed scheme for director liability under sections like Section 76 and Section 77, which outline directors’ fiduciary duties and the consequences of breaching those duties. The High Court expressed disagreement with the judgment in Rabinowitz v Van Graan and Others[3], which suggested that directors could be held personally liable under Section 218(2) if they were found to be knowingly involved in the company’s contravention of Section 22(1). The High Court found this interpretation to be convoluted and not supported by the legislative scheme of the Companies Act.
It noted that while it is frustrating when directors’ misconduct results in significant financial loss to creditors, the Act does not provide for such liability in a straightforward manner. The court stressed the need for clarity and precision in legislative language to impose such significant liability. The High Court reiterated the foundational principle of company law that a company has a separate legal personality from its directors and shareholders. This principle is crucial for the functioning of company law and cannot be disregarded unless explicitly permitted by law.
The court highlighted that the Act preserves common law principles and carefully specifies the circumstances under which directors may be held liable. These provisions ensure a harmonious blend of statutory and common law principles, maintaining the balance between corporate governance and protection of stakeholders.
The High Court upheld the exception raised by the defendants and granted the plaintiff leave to amend its particulars of the claim.
Supreme Court of Appeal’s Analysis:
The SCA provided a detailed analysis of the legal framework and principles governing director liability under the Act.
The SCA reaffirmed that Section 218(2) of the Companies Act allows for civil claims against any person who contravenes the Act. However, this general provision must be interpreted in the context of the specific provisions it references. Section 22(1) prohibits a company from carrying on business recklessly, with gross negligence, or with intent to defraud any person, but this duty is explicitly imposed on the company, not on individual directors. The court emphasized that statutory interpretation requires understanding the Act as a whole. The Act differentiates between the duties of the company and the duties of its directors, and this distinction is crucial for determining liability.
The SCA pointed out that Section 218(2) does not automatically create new liabilities for directors. Instead, it recognizes the possibility of liability arising from contraventions of the Act, but the specific grounds for such liability must be found in other sections of the Act. The court held that while Section 218(2) can be invoked to claim damages, the claim must be grounded in a substantive provision that directly imposes a duty on the person (in this case the directors) and specifies the consequences of breaching that duty.
The SCA rejected the argument that Section 218(2) could be broadly interpreted to impose liability on directors for any contravention of the Act by the company. Such an interpretation would undermine the separate legal personality of the company and the principle of limited liability for directors, which are fundamental aspects of company law. The court emphasized that imposing broad liability on directors without clear statutory authority would create uncertainty and potentially discourage individuals from serving as directors.
The SCA emphasized that a company is the proper plaintiff to seek redress for wrongs done to it, thereby reaffirming the long established Foss v Harbottle[4] proper plaintiff principle. Any recovery by the company would indirectly benefit its shareholders and creditors. The court held that allowing creditors to claim directly against directors under Section 218(2) for the company’s contraventions would effectively bypass the company’s separate legal personality
The SCA dismissed the appeal, upholding the High Court’s decision to grant the exception raised by the defendants. The court found that Venator Africa failed to establish a statutory basis for holding the directors personally liable under the claimed sections.
The SCA analysis in this case highlights the importance of adhering to established legal principles and statutory interpretation when determining director liability. The judgment underscores that while directors have fiduciary duties and can be held liable for breaches under specific provisions of the Companies Act, general provisions like Section 218(2) must be read in conjunction with those specific sections that clearly define the scope and nature of such liabilities. This approach ensures that the fundamental principles of company law, such as the separate legal personality of the company and limited liability for directors, are respected and upheld.
Implications for Business and Legal Practice:
This judgment is a critical reminder of the importance of understanding the specific statutory frameworks governing director liability. For directors, it reaffirms the protection of limited liability under the Companies Act, provided they do not engage in fraudulent or reckless activities explicitly prohibited by law.
For creditors and other third parties, this case underscores the necessity of clearly establishing statutory or common law grounds when seeking to hold directors personally liable. It also highlights the role of careful statutory interpretation and the need for precise pleadings in litigation involving complex aspects of company law.
By upholding the distinct separation between the company’s obligations and the personal liabilities of its directors, the judgment ensures that directors are shielded from unwarranted personal liability, thus maintaining the foundational principles of corporate governance.
The case not only informs current legal practice but also guides strategic decision-making for companies and their boards. Understanding the nuances of such judgments can significantly impact the advice provided to clients and the management of corporate risk.
Conclusion:
While Venator Africa reaffirms the foundational aspects of Company Law. The effect of the court’s interpretation is that the section cannot be read in isolation but must be interpreted with other sections clearly describing the scope and intent of liabilities. The question arises why did the legislature include this provision and in its current form as interpreted by the courts does it have a purpose at all.
Footnotes:
[1] (053/2023) [2024] ZASCA 60
[2] (29290/2018) [2020] ZAGPJHC 145; 2022 (1) SA 442 (GJ) (26 June 2020)
[3] (2012/26217) [2013] ZAGPJHC 151; 2013 (5) SA 315 (GSJ) (26 April 2013)
[4] (1843) 2 Hare 461; 67 ER 189
