Quasi-punitive measures as a deterrent to abuse in corporate insolvency

Abstract

The board of directors effectively assumes the role of the captain(s) of a ship, the ship in this case being a company. What to do then when the actions of a director or the board of directors have the effect of causing severe damage to the ship, causing it to lose its capacity to be seaworthy or, even worse, to sink? This question is what this study seeks to answer. This study investigates the general duties owed by directors to a company and what these duties entail in the context of the period leading up to and until the insolvency of a company. An investigation is conducted to determine whether any recourse exists for affected persons who may seek to penalise the director(s) of a company for causing the insolvency of a company. If such penalties exist, a further analysis is embarked upon to determine whether such penalties are sufficiently severe, and therefore adequate, for the purposes of discouraging similar conduct by the directors of other companies. This study entails a short but focused analysis of South African company and commercial insolvency law, followed by a similarly short and focused analysis of United Kingdom company and commercial company law. The United Kingdom is chosen because of the empowering provisions of South African company law, which enables such comparisons, and the fact that the influence of English Law upon South African Law is undeniable. The study concludes that the United Kingdom corporate insolvency law specifically caters for the disqualification of a director due to the conduct of such a director causing the insolvency of a company. Further, the United Kingdom framework caters for the vindication of creditors’ interests through providing creditors with locus standi to apply to have a director disqualified. South African corporate insolvency law does permit the declaration of a director as delinquent, with a consequence of such a declaration being the disqualification of such a director. However, there are no explicit provisions catering for the disqualification of a director for the contribution to or causing of a company’s insolvency, nor are there provisions explicitly providing creditors with locus standi to apply to have such directors declared delinquent and subsequently disqualified.