Reliance on the relevant sections of the Companies Act indispensable!
The Companies Act 71 of 2008 (the Act) makes provision for directors to be held personally liable in certain circumstances. This was the subject matter of the recent Supreme Court of Appeal (the SCA) decision of Venator Africa (Pty) Ltd v Watts and Another.
The above matter was the subject of an appeal which arose from an exception upheld by the KwaZulu-Natal Division of the High Court, Pietermaritzburg (the High Court). Put in simplest form an exception is a process in litigation where a party takes a technical challenge to the formulation of their counterparty’s claim (i.e. citing some defect in the pleading).
The exception concerned the interpretation of s218(2) of the Act which provides for civil liability against any person who contravenes the provisions of the Act, read with s22(1), which prohibits reckless trading by a company. These sections ought to be viewed through the prism of the provisions dealing with fiduciary duties of directors (i.e. s76(3)), consequential liability (s77(2)) and the well-established principle that a company has a legal personality separate from its directors and shareholders.
In deciding the exception, the High Court had to consider whether a creditor could claim against the directors of a company and hold them personally liable in terms of s218(2) read with s22(1) of the Act. The matter went on appeal and was accordingly referred to the SCA with leave of the High Court.
Pertinent Facts
The appellant company named Venator Africa (Pty) Ltd (“Venator”) instituted action proceedings against the respondents, Lloyd Mason Watts (“Watts”) and Martin Bekker (“Bekker”). Watts and Bekker were the directors of a company known as Siyazi Logistics and Trading (Pty) Ltd (“Siyazi”) which operated a forwarding and clearing business. Siyazi and Venator had concluded a contractual relationship. In the action proceedings Bekker and Watts were cited as the first defendant and second defendant respectively. It was however Watts who was part of the appeal to the SCA as it is he who excepted to Venator’s particulars of claim.
Pleadings
In terms of the agreement concluded between Venator and Siyazi, Siyazi had to perform clearing and forwarding services on behalf of Venator. As part of the performance of those services, Siyazi would issue disbursement accounts to Venator which represented amounts due by Venator to the South African Revenue Services (“SARS”). Venator would then pay the amounts reflected on the disbursements and accounts to Siyazi who would in turn pay over the amounts received against the disbursement account to SARS.
In or during 2018 to early 2019, Siyazi delivered disbursement accounts to Venator in respect of SARS in the total amount of R66 395 006.27. Venator then paid this amount in full to Siyazi. However, Siyazi only paid a portion of this amount over to SARS in the amount of R31 353 697.27 resulting in a short-payment.
Consequently, SARS raised certain assessment issues which were as follows
- VAT due – R34 630 202.00;
- penalties – R2 143 774.00; and
- interest – R4 633 244.00.
These were the damages Venator alleged to have suffered as a result of the short payment by Siyazi. Importantly, Venator alleged that the short payment occurred as a result of fraud and/or theft perpetrated by Siyazi’s employees or the defendants.
For its claim, Venator relied on s218(2) and s22 of the Act. The following sections read as follows-
- S22(1) provides:
“A company must not carry on its business recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose”.
In this regard, Venator alleged that the conduct of Siyazi was reckless, alternatively grossly negligent, further alternatively the business of Siyazi was conducted to defraud Venator or for a fraudulent purpose.
- S218(2) 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”.
In this regard, it was alleged that Watts and Bekker were the guiding minds behind the fraud, alternatively were reckless, further alternatively, grossly negligent in controlling the activities of Siyazi. It was further alleged that the recklessness or gross negligence manifested in a failure to maintain proper records and books of account, a failure to maintain controls in the compilation of disbursement accounts, a failure to accurately reconcile accounts and report them to Venator. In the result, Venator sought to hold Watts and Bekker jointly and severally liable in terms of s218(2) read with s22(1) of the Act.
Watts took exception to Venator’s particulars of claim on the basis that (1) s22(1) of the Act did not regulate a director’s conduct, (2) further it imposed duties upon the company and not its directors. Moreover, s218(2) was applicable where a person breached a provision of the Act.
Watts argued further that (1) there was no allegation in Venator’s particulars of claim that the defendants had breached a provision of the Act, (2) and that the obligations and duties of directors as set out in s76 of the Act and the available remedies for breaches were set out in s77. Importantly, Watts alleged in his plea that Venator did not place reliance for its claim in those sections.
In essence, Watts argued that where a statute such as the Act specifically makes provision for obligations of directors as articulated in s76(3) of the Act, a section of general applications such as s218(2) could not be invoked to establish a co-ordinate liability. It was further argued that s77(3)(b) specifically deals with liabilities of directors with regards to s22 in that it provides that a director who is party to the carrying on of business of a company contrary to s22 is liable for any loss, damages or costs sustained by the company.
Decision in the High Court
Venator for its claim placed considerable reliance on the decision of Rabinowitz v Van Graan and Others (“Rabinowitz”) and related judgments. In Rabinowitz, the court held as follows:
“A person who is guilty of an offence in terms of the Act, must . . . be found to have “contravened” a provision of the Act. If, therefore, a director is guilty of the offence created by section 214, such director must therefore be found to have contravened a provision of the Act for the purposes of s218(2)”.
Notably, the High Court disagreed with the Rabinowitz decision and the cases that followed it. The court in its reasoning observed the following:
“One can sense the frustration some judges might feel when it is clear that a director was up to no good and a creditor ended up suffering damages or a huge financial loss. The fact however remains that the Companies Act does not make express provision for such liability. It could never have been the intention of the legislator to provide for liability in a manner that would involve a convoluted manner of interpreting various sections, and then to arrive at a conclusion that is still open to doubt, based on how certain sections are interpreted”.
In its interpretative exercise, the court embraced the approach adopted in De Bruyn v Steinhoff International Holdings N.V. and Others (Steinhoff) which held that-
“Section 218(2) should not be interpreted in a literal way. Rather, the provision recognizes that liability for loss or damage may arise from contraventions of the Companies Act. And so the statute 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”.
The High Court also referred to the judgment of the SCA in Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others (“Hlumisa”) where, with reference to s77(2)(b) and 77(3)(b) of the Act, the Court held-
“These provisions of the Companies Act make it clear that the legislature decided where liability should lie for conduct by directors in contravention of certain sections of the Act and who could recover the resultant loss. It is also clear that the legislature was astute to preserve certain common law principles. It makes for a harmonious blend”.
The High Court upheld Watts’ exception to Venator’s particulars of claim.
The SCA decision
In the SCA, Venator highlighted that in its view the High Court had not conducted a discreet interpretive analysis of s218 and had rather opined on the correctness of the judgments the High Court had identified and appeared to have adopted a rather prominent focus on s22 rather than s218(2).
In Venator’s view, it was highly unlikely that the purpose of the Act was intended to exclude liability for fraudulent or reckless trading by directors (to the creditors of the company), and as such its claim was permitted by common law. Venator argued further that had it been the intention of the legislature to exclude such a claim, the language of the Act would be clear as such. Prior to its interpretive exercise, the SCA deemed it prudent to highlight the separate legal status a company enjoys as a juristic person as foreshadowed in s19(2) of the Act. As a result of its importance, it is quoted below:
“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 this regard the court restated that the separate legal personality of a company is foundational to our common law. The court further emphasised that the abovementioned illegal principal to wit that a company’s legal persona cannot be ignored at the choosing of a party. To illustrate this, the SCA referred to the Hlumisa judgment which stated that the separate personality of a company is “no mere technicality. It is foundational to company law”.
In the SCA’s view, Venator’s case was premised on a statutory duty. The SCA further stated that the interpretation of statutes “is an objective unitary process where consideration must be given to the language used in the 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 inevitable point of departure is the language used in the provision under consideration”.
In interpreting s218(2), the SCA stated that the s218(2) does not in and of itself create liability. Rather what it does is impose liability in the event of a contravention of some other provision of the Act. For this view the court made reference to the decision of Steinhoff where the following was stated-
“The statute 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”.
“Such an interpretation answers another difficulty that the literal interpretation of s218(2) does not. As Hlumisa observed, can 218(2) be understood to impose liability without the regulating concepts of fault, foreseeability and remoteness; and an undifferentiated conception of permissible plaintiffs. Such an understanding would require an interpretation of s218(2) that gives rise to wholesale liability at the instance of all persons who sustained loss or damage as a result of the contravention. That is to place a burden of liability and hence risk upon directors so great that it is hard to imagine who would accept office on these terms. And if that is what the legislature intended it would be expected to have made the imposition of so great a burden clear. The better interpretation is that the legislature intended that the specific requirements of any liability are to be found in the substantive provisions of the Companies Act. Section 218(2) has a different function. It determines the question posed in Steenkamp: contraventions do permit a right of action. Whether there is a right of action, who enjoys the right, and on what basis of all matters regulated by the substantive provision of the Companies Act”.
Insofar as Venator’s reliance on s22(1) was concerned, the SCA’s view was that this section plainly imposes a duty on the company and not its directors, to inter alia refrain from carrying on business recklessly. In the premise, to interpret s22(1) as capable of infringement by the directors was to read into that section a prohibition that is not there. The court opined that s22(2) and s22(3) were also directed at the company and not directors.
The court then importantly alluded to the relevant sections which deal with the directors’ liability to wit s77(3)(b).
Moreover, the court referred to the decision of Gihwala and Others v Grancy Property Ltd and others where the court stated that s77(3):
“creates a statutory claim in favour of the company against a director, imposing liability on the director for any loss or damages or costs incurred by the company in certain circumstances, including whether the director acquiesces in the company engaging in reckless trading. It is not a provision that can be invoked to secure payment to a creditor or shareholder in respect of their claim against the company or a director”.
The court further referred to s77(2)(a) which provides a remedy against a director of a company to be held liable for breaches of fiduciary duties which result in any loss or damage to the company. It is the company who can then sue for damages against the director in question. It was no coincidence that this provision is availed to the company.
Referring the decision of Hlumisa, the SCA opined that the aforesaid provisions (i.e. those dealing with liability of directors) make it clear that the legislature decided where liability should lie for conduct of directors in contravention of certain sections of the Act and more importantly who could recover the resultant loss. More importantly, what the legislature did was to preserve common law principles which would make for a harmonious blend of these sections. The Act abounded with provisions for recovery of loss occasioned from misconduct on the part of directors. This must have been deliberate, the SCA expressed.
It is on the above basis that the SCA ruled in favour of Watts and pointed out that Venator had been unable to identify a provision that was contravened by the directors so as to invoke s218(2) of the Act. In its reasoning, the Act pointed out the systemic feature of the Companies Act insofar as it provides several remedies for certain breaches by directors of companies.
The statutory scheme of liability under the Companies Act thus did not attach a singular consequence for a contravention of the Act. By way of example, s22 permits the Commission to issue a compliance notice, in addition a director may be held liable to the company for reckless trading under s22(1) as read with s77(3)(b).
Lastly the SCA in its reasoning stated the following:
“There is no coherent reading of the Companies Act that would subordinate this specification of differentiated liability for the recognition under s218(2) of general liability of all persons who contravene the Companies Act in favour of all who suffer loss as a result thereof”.
The SCA accordingly upheld the exception and rules against Venator.
Conclusion
What appears clear from the above decision is that there could be no reading of s218 of the Act which could culminate in the attraction of general liability for all persons who contravene the Act in favour of all those who suffer as a result including but not limited to creditors of a company. For such liability, the Companies Act made provision for aggrieved creditors to seek recourse using inter alia s77(6) and 77.
What the above case does highlight is the importance of utilising the relevant and pertinent sections of the Act when seeking to invoke director liability in terms of the Act. This bearing in mind the contextual matrix of the matter in question of course.