EMILE MYBURGH: SCA gives directors leave to act unscrupulously

April 24 was a good day for directors, especially those who use the separate legal persona of a company to cause losses for people dealing with such companies. 

In the matter of Venator Africa v Lloyd Mason Watts and Martin Bekker, the Supreme Court of Appeal (SCA) held that creditors cannot hold directors personally liable for losses that the directors cause them. In so doing, the court swept aside more than a decade’s jurisprudence in which the high courts did hold directors personally liable for the debts of companies when they carry on business recklessly, in contravention of section 22 of the Companies Act, in other words, with gross negligence, with the intent to defraud any person or for any fraudulent purpose.

In a nutshell, Watts and Bekker were directors of Siyazi Logistics and Trading (Pty) Ltd, which conducted business as a clearing and forwarding agent. Venator did business with Siyazi. Part of Siyazi’s services included making payments to the SA Revenue Service (Sars) on behalf of its clients, after being put in funds for it by their clients.

During 2018 and 2019, Venator paid Siyazi R66,395,006.27 to pay to Sars. Siyazi paid only R31,353,697.27 to Sars, resulting in Sars pursuing Venator for the difference. Together with penalties and interest, Venator had to pay Sars R41,407,220.00 (on top of what it had already paid to Siyazi), which Venator then claimed from Watts and Becker on the basis that, in so doing, they breached section 22 of the Companies Act. It is difficult to imagine how not paying tens of millions of rand of other people’s money to Sars could be done with honest intentions.

Through a long line of cases since the 2011 promulgation of the Companies Act, jurisprudence had developed that held that, when reading together the provisions of several sections of the Companies Act that deal with the conduct required of directors, the only conclusion that one could come to was that the legislature had intended to protect the public against unscrupulous conduct by directors when they cause losses to creditors.

Section 77(3) states that a director of a company is liable for any loss, damages or costs sustained by the company as a result of the director allowing a company to run fraudulently (in breach of section 22) or if the director has been a party to an act that was calculated to defraud a creditor (among other potential victims).

This was the basis of Venator’s claim against Watts and Bekker. However, Watts and Becker argued that the Companies Act attributes liability to directors only if the company (and not creditors) suffers a loss. This was not the first time such an argument was raised against claims by creditors who suffered losses at the hands of unscrupulous directors. In all previous cases, the high court rejected that argument and held that the intention of the legislature was to protect creditors and not directors.

This reasoning by the court can be traced back to the unreported 2014 case of Blue Farm Fashion Ltd v Rapitrade 6 (Pty) Ltd, when the Western Cape High Court held that an interpretation of the Companies Act that favours holding directors personally liable in terms of section 77(3) and other sections of the Companies Act leads to a sensible and businesslike outcome.

Several other cases followed this line of reasoning, but now the SCA has put paid to that, giving unscrupulous directors ample breathing room again. The effect of this decision will be immense additional legal actions, through hoops and jumps, to eventually hold directors liable for their actions.

The judgment of the SCA has notably not been written in the style one would expect of an apex court like the SCA. The court’s reasoning is brief and fails to deal with the long list of cases that held directors personally liable under similar circumstances, other than to say they were wrongly decided (but without explaining why).

It is almost as if the SCA is unable to understand how several pieces of recent legislation altered our common law, putting the SCA at odds with the provincial divisions of the high court that do seem to grasp the changes. The only real explanation the SCA gave is that the Companies Act does not allow piercing of the corporate veil and that too many sections of the act have to be read together to come to the conclusion that the high court had come to. But that shows a fundamental misunderstanding of the new Companies Act. 

The act does not say that holding directors personally liable is piercing the corporate veil. It says that directors who cause harm to, among others, creditors can be held liable for the damages suffered. The Companies Act is acutely aware of how the legal persona of a company can be abused to the detriment of creditors, and has taken steps to address this abuse. But for the SCA it was just a bridge too far to analyse the various provisions of the Companies Act and the previous decisions, as they preferred to cling to long outdated principles of separate legal personality.

Another law that demonstrates how the legislature intended to radically alter the common law is the Consumer Protection Act (CPA). Traditionally, our courts have stuck to the unrealistic fiction that all parties to a contract have equal bargaining power. That resulted in agreements with large corporations that we tiny consumers simply had to accept, often to our detriment. The CPA has gone a long way to remedy that. The Companies Act was written with the same frame of mind as the CPA, to increase protection for people dealing with unscrupulous directors.

Part of the reason for this apparent failure to engage with how the legislature has amended the common law seems to be because the SCA and the Constitutional Court are just overwhelmed with the sheer number of cases that go their way. The number of appeal and Constitutional Court judges has not kept up with the increased number of cases that are referred to them.

This means the courts simply do not give the matters the attention that is required. This inevitably results in many litigants not being given the constitutional protections they are entitled to or, as in the Venator case, a total retrocession in jurisprudence. The little people are again left with little recourse to fend for themselves against large corporations and their expensive lawyers. This is not the progress that the legislature intended in the past 30 years.

• Myburgh is an attorney practising in Johannesburg and São Paulo.