Personal liability of company directors towards company creditors under the Companies Act 71 of 2008 : much ado about nothing?

Abstract

The legal fiction known as separate legal personality is the foundation of company law and attracts natural persons to incorporate companies, appoint a board of directors and raise capital. In terms of s 66 of the Companies Act, 71 of 2008 (“the 2008 Act”), directors can now be regarded as the heart of a company and represent the body through which the company takes all actions within the economic sphere. As a default position, directors owe fiduciary duties and a duty of care and skill to the company itself and not its creditors. However, on its face, this default position is placed under threat by s 218(2) of the 2008 Act. This section potentially constitutes a general remedy for any interested person, including company creditors, to hold liable any person, including company directors, for any loss or damage suffered as a result of a contravention of any provision in the 2008 Act. The potential threat posed by s 218(2) becomes heightened if one considers the prohibition on reckless trading as codified in s 22(1) of the 2008 Act. This statutory prohibition against reckless trading, considered in light of a stringent solvency and liquidity test prescribed by s 4 of the 2008 Act, places a microscope on the conduct of a debtor company vis-à-vis its creditors. The question then arises, whether or not s 218(2) read with s 22(1), and any other interrelated provisions of the 2008 Act, represent a novel and effective remedy for creditors to pursue company directors personally as a result of reckless trading? Or is s 218(2) rather, in the words of the renowned playwright Shakespeare, much ado about nothing? In order to interpret the potential operation of s 218(2), it is important to consider existing remedies available to creditors for the purpose of holding directors personally liable under South African common law and in terms of s 424 of the Companies Act, 61 of 1973 (“the 1973 Act”). This study primarily focuses on s 218(2) and its interplay with s 22(1) and other interrelated provisions of the 2008 Act and whether it creates a legal remedy for creditors to hold company directors personally liable for the reckless trading of a debtor company. It is concluded that whilst s 218(2) is a novel general remedy, the ability of creditors to enforce s 218(2) for the purpose of holding directors personally liable is hamstrung by interpretive difficulties and adverse policy considerations. In the circumstances, the existing and recognised remedies available to creditors, appear to be better calibrated for the purpose of holding directors personally liable for the reckless trading of a debtor company.