South Africa: Claims Against Directors In Terms Of The Companies Act, 2008

Last Updated: 6 August 2012
Article by Eric Levenstein and Nastascha Van Vuuren

The principles of good leadership have become a huge money-spinner for business schools, consultants, and trainers and there is fierce competition amongst organisations to be seen as a highly ranked employer of choice. But for all the noise, company performance often remains mediocre and largely disappointing; and today, companies – and their leaders – fail faster than ever. Failure on directorship level may ultimately result in the ruin of a company with aggrieved and unpaid creditors attempting to recover damages suffered and losses incurred. Fortunately, the new Companies Act No. 71 of 2008 ("the Act") that came into effect on 1 May 2011, has a significant impact on directors' liability in corporate South Africa. The provisions of the Act set the bar for competent directors at much higher levels than we have seen in the past. This booklet provides insight into how creditors may hold errant directors of companies personally liable for the debts of their companies, in terms of the Act.


The fiduciary duties of directors are derived from our common law, which is created through the precedents set by our courts. While the Act attempts to codify many of these common law duties, it is a partial codification of the common law. In the circumstances, to the extent that the Act does not deal with a specific duty, or the consequence thereof, the common law will apply or will supplement such duty.

Section 76 addresses, to a very large extent, the standard of conduct expected from directors. Section 76(3) states that a director of a company, when acting in that capacity, must exercise the powers and perform the functions of a director -

  • in good faith and for a proper purpose;
  • in the best interests of the company; and
  • with the degree of care, skill and diligence that may reasonably be expected of a person -
    • carrying out the same functions in relation to the company as those carried out by that director; and
    • having the general knowledge, skill and experience of that director.

Section 76(4) states that, in respect of any particular matter arising in the exercise of the powers or the performance of the functions of a director, a particular company director will have satisfied the obligations set out in section 76(3), if that director has taken reasonably diligent steps to become informed about the matter. This goes to the degree of knowledge that a particular director would have as to the financial status of the company.

A director would therefore be entitled to rely on the performance and information provided by persons who have received delegated powers or authority to perform one or more of the board's functions. This includes the ability to rely on the veracity of the information provided, including financial statements and other financial data prepared by the employees of the company, accountants or any other professional person retained by the company, the board, or any committee constituted by the company.

Also included would be matters involving skills or expertise that the director could reasonably believe a particular person to have or to be within that person's professional competence. For instance, if a director receives financial information from departmental managers, he or she would be entitled to rely on the veracity of such information provided such reliance is reasonable in the circumstances and when one considers the specific expertise of that particular manager. For example, the marketing director would not have the same level of insight into a set of management accounts as would the financial director.

Furthermore, in terms of section 76(4) of the Act, a director would have satisfied the obligations of section 76(3), if the director made a decision, or supported the decision of a committee or the board, with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

However, section 77(9) states that in any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve the director, either wholly or in part, from any liability set out in this section, or on any terms the court considers just, if it appears to the court that the director has acted honestly and reasonably, or having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.


Section 22(1) of the Act states that a company must not carry on its business recklessly, with gross negligence, with intent to defraud any person, or for any fraudulent purpose. Section 77(3)(b) in turn states that any director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director -

  • having agreed to the carrying on of the company's business despite knowing that it was being conducted in a manner prohibited by section 22(1) of the Act; or
  • being party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a company creditor, employee or shareholder, or had another fraudulent purpose.

Therefore, if a company continues to incur debts, where, in the opinion of a reasonable business person standing in the shoes of the company directors, there would be no reasonable prospect of the creditors receiving payment when due, it can be inferred that the business of the company is being carried on recklessly or negligently as contemplated by section 22(1) of the Act.

Consequently a director would have a duty to pass a resolution for a company's business rescue or alternatively resolve to wind up or liquidate it as soon as he or she becomes knowingly aware that the company is either financially distressed or is trading in insolvent circumstances (both factually, in that its liabilities exceed its assets, or commercially, in that it cannot pay its debts to creditors as and when they fall due).

If a company is financially distressed and directors decide not to place it into business rescue, directors will be under a statutory obligation, in terms of section 129(7), to deliver a written notice to each affected person, confi rming that the company is financially distressed and is not being placed into business rescue and providing reasons for such decision. On the other hand, if a company is trading in insolvent circumstances and there is no prospect for business rescue to succeed, the directors are obligated to fi le for liquidation.

Should a director not proceed in this manner, he or she may be held personally liable in terms of section 77(3)(b) as read with section 22(1) of the Act, subject of course to the court's discretion to excuse such a director in terms of section 77(9) of the Act. In this regard, the detail of fi nancial information available to a director, together with the veracity of such information, will be taken into account when the personal liability of such director is examined in terms of section 77 of the Act. If a director is, however, in charge of operations or marketing, he or she will not be expected to be privy to the same level of fi nancial information as the financial director.


Furthermore, the Act defi nes what is meant by a person "knowing" of such prohibited conduct. "Knowing" when used with respect to a person, and in relation to a particular matter, means that the person either had actual knowledge, or such person reasonably ought to have had actual knowledge or acquired it by having investigated the matter or by having taken other measures which would reasonably be expected to have provided the person with actual knowledge of the matter.

As in all cases involving negligence, the test in South African law is essentially an objective one, in that it postulates the standard of conduct of the notionally reasonable director. It is subjective insofar as the said notional director is envisaged as conducting himself or herself with the same knowledge and access to fi nancial information as the relevant director would have had in the circumstances. In this regard the court will have regard to, inter alia, the scope of operations of the company; the role, functions and powers of the directors; the amount of the corporate debt; the extent of the company's fi nancial diffi culties; and the prospect, if any, of recovery.


Section 77(3)(b) of the Act, as read with section 22 of the Act, penalises and holds directors personally liable to the company for any loss incurred through knowingly carrying on the business of the company recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.

Any director, who allows his company (the debtor company) to receive goods on credit from a creditor, knowing full well that the company is not in a position to make payment for such goods, opens himself/herself up to a personal liability claim. Such conduct would constitute reckless behaviour on the part of the director and may also include an intent to defraud the creditor who had supplied goods to the company on credit.

If the debtor company has more than one director, the company will have to pursue claims against all of those directors that had knowledge of the financial position of the debtor company, particularly to the fact that the debtor company, at the time that the company received the goods on credit, would be unable to pay for such goods as and when payment for such goods became due and payable (albeit due to lack of liquidity or because the company's liabilities exceeded its assets). Knowledge is therefore an important element to prove and the onus will be on the company to prove such knowledge on the part of the director.

If the director indeed had such knowledge, the Act will allow the debtor company to pursue a civil claim for loss/damages against the relevant director.

Additionally, in terms of section 77(2), a director of a company may be held liable in accordance with the principles of the common law relating to the breach of a fiduciary duty and relating to delict, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of duties contemplated, inter alia, in section 76 discussed above.

It is important to note that the Act does not limit the application of section 77 only to directors as such. It applies to a director, an alternate director, a prescribed officer (as designated by the Minister), a person who is a member of a committee of a board of a company, or a member of the audit committee of a company irrespective of whether or not the person is also a member of the company's board.

Section 77(6) states that -

"The liability of a person in terms of this section is joint and several with any other person who is or may be held liable for the same act".

Section 77(6) thus allows the company to claim against more than one director and against any person who contravened the provisions of the Act.


As is evident from the above, the company itself has a claim for loss/damage caused by the director to the company itself. The Act does not specifically mention the basis upon which a creditor can pursue a claim against the director who contravened the various sections referred to above.

Section 218(2) of the Act, however, states that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

This section would accordingly allow a creditor to claim against the company as well as against a director(s) or any person who caused loss/damage to such creditor as a result of a contravention of the Act, and the abovementioned sections in particular. For instance, this section would allow a creditor to institute an action against the directors for the cost of the goods supplied on credit to the debtor company which ultimately remained unpaid, if the business of the company was carried on recklessly at the time the goods were procured by the debtor company on credit.

SECTION 424 OF THE COMPANIES ACT 61 OF 1973 ("the 1973 Act")

As set out above, the standards of conduct, and liability of directors under the Act are dealt with principally in sections 76 and 77. However, nowhere in those sections or anywhere else in the Act are there provisions identical to sections 423 and 424 of the 1973 Act, which gave creditors rights as against directors of debtor companies.

Schedule 5 of the Act delineates the transitional arrangements. That is, those provisions of the 1973 Act which continue to apply despite the repeal of the 1973 Act.

Item 9 of Schedule 5 of the Act provides that despite the repeal of the 1973 Act, Chapter 14 of the 1973 Act continues to apply with respect to the winding-up and liquidation of companies under the Act.

In light of item 9(1) of Schedule 5, it would therefore appear that sections 423 and 424 of the 1973 Act (which are part of Chapter 14) will continue to be used by aggrieved creditors (whose claims arose either before or after 1 May 2011) against directors of companies in circumstances where such companies have been wound up or liquidated, and when such conduct has caused losses to creditors. Whether or not the reference to "winding-up and liquidation" in item 9 is limited to purely procedural aspects of this process, and thus not to matters related therewith, is something that will need to be deliberated on by our courts.

That being said, as a result of item 11(1) of Schedule 5, if the debtor company has not been wound up, the rights enjoyed by aggrieved creditor, in respect of claims that arose prior to the effective date of the Act, in terms of section 424 of the 1973 Act will, in all likelihood, remain valid subject to section 218(2) of the Act, if the provisions of section 22 (which provides that a company must not carry on its business recklessly, with gross negligence, with the intent to defraud creditors or for any fraudulent purpose) and section 77(3) of the Act were contravened.

Section 424 of the 1973 Act reads as follows -

"When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or creditor or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts of other liabilities of the company as the Court may direct."

Whilst section 424(1) does not specifically refer to directors, it is clear that directors who acted in the manner referred to in section 424(1) are targets for aggrieved creditors in terms of that subsection. Moreover, section 424 of the 1973 Act can be applied in conjunction with section 423 of the 1973 Act, which gives creditors a right against directors of companies whose conduct had caused loss to creditors. Section 423 reads as follows -

"(1) Where in the course of the winding-up or judicial management of a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present director or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of any breach of faith or trust in relation to the company the Court may, on the application of the Master or of the liquidator or of any creditor or creditor or contributory of the company, enquire into the conduct of the promoter, director or officer concerned and may order him at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retention, breach of faith or trust as the Court thinks just."

There were a significant number of important decisions of our High Courts in regard to section 424 of the 1973 Act. Amongst these were -

  • Gordon N O and Rennie N O v Standard Merchant Bank Limited and others 1984 (2) SA 519 C
  • Ex Parte Lebowa Development Corporation Limited 1989 (3) SA 71T;
  • Howard v Herrigel and Another NNO 1991 (2) SA 660 (A); and
  • Philotex (Pty) Limited and Others v Snyman and Others; Braitex (Proprietary) Limited and Others v Snyman and Others 1998 (2) SA 138 (SCA).

These decisions discussed and interpreted various provisions of section 424 of the 1973 Act. What was, however, clear under section 424 of the 1973 Act (and section 423 of that Act) and the decisions pertaining to those sections, was that a creditor of a company who has sustained losses enjoyed rights to claim compensation for such losses directly against a director of a company who had participated in, or was responsible for, the company conducting its business recklessly or fraudulently and which had resulted in a loss to the creditor.

It must also be said that, sections 22, 77(3) and 218(2) may be relied upon to impute personal liability on directors if the claims of creditors of solvent debtor companies arose after the effective date of the Act.


Section 214 of the Act provides for criminal liability if an act of fraud has been perpetrated by any person in relation to a company, its creditors or employees.

Additionally, in terms of section 34 of the Prevention and Combating of Corrupt Activities Act 12 of 2004 ("POCA"), any person who holds a position of authority and who knows or ought reasonably to have known or (reasonably) suspected that any other person has committed fraud involving an amount of r100,000 or more must report such knowledge or suspicion or cause such knowledge or suspicion to be reported to any police offi cial. A failure to do so is a criminal offence.

Accordingly, if a creditor (or fellow director) suspects that the business of a company is being carried on with the intent to defraud any person or for any fraudulent purpose, then such creditor (or fellow director) is under a statutory obligation to report his/her suspicions to the police. As a result, the directors of debtor companies may not only be held personally liable towards to the company and its creditors for losses incurred, but may also be charged criminally.

In order to advance a criminal investigation, it may be advisable to assist the police by deposing to a detailed affi davit, in support of a complaint for the purpose of a criminal investigation. Such affi davit will assist the police in their investigations, and may be the foundation for the successful prosecution of a criminal offence, in circumstances where proof must be established "beyond reasonable doubt".


In terms of section 162 of Act, the Companies and Intellectual Property Commission ("the Commission") or the Panel set up by the Act, may apply to a court for an order declaring a director delinquent (or under probation) if such a director continues to grossly abuse his/her position, or acted in a manner which constituted a contravention of section 77(3)(b) of the Act. Such contravention would occur as a result of a director acquiescing in the carrying on of a company's business despite knowing it was being conducted in a manner prohibited by section 22(1).

Further, a director may be declared to be a delinquent, if he/she has been a party to an act or omission by a company despite knowing that the act or omission was calculated to defraud a creditor of the company or had another fraudulent purpose.

A director may also be declared a delinquent, in terms of section 162(7)(b)(ii) of the Act, if during the time that he/she was a director of more than two companies, and such companies failed to pay all of its creditors in full or meet all of its obligations (except in terms of a Business rescue Plan resulting from a resolution of the board in terms of section 129 or a compromise of creditors in terms of section 155). Therefore if a director consistently allowed his/her companies to be placed into liquidation resulting in creditors not being paid in full, an application may be made to court via the Commission or the Panel to declare such person to be delinquent.

Where a declaration of delinquency occurs, the director concerned may be ordered to pay compensation to any person adversely affected by that person's conduct as a director, even if such a victim does not otherwise have a legal basis to claim compensation or in the case of an order of probation (similar to a suspended sentence) be forced to be supervised by a mentor in any future participation as a director while the order remains in force or be limited to serve as a director of a private company or of a company of which that person is a sole shareholder.


Creditors are often faced with the unfortunate consequence of having supplied goods and/or services to a debtor company on credit and where such debtor company refuses or is unable to pay for such goods.

What would happen in the ordinary course is that creditors either issue summons for recovery of the debt due or such amounts are written off. This of course is costly and may contribute to deficiencies in the company's bottom line.

Creditors should, in the light of the issues considered in this booklet, consider the following options -

  • if a creditor believes that a director has failed in any of the statutory obligations (and has evidence of this) set out in the Act, such creditor could institute an action/summons for any loss/damage caused to such creditor in terms of section 218(2) of the Act;
  • in the event that a creditor does not have any or sufficient evidence to make out a cause of action against a director in terms of section 218(2) of the Act, such creditor should apply to the High Court to wind up the debtor company on the basis that the debtor company is commercially insolvent in that it is unable to pay its debts;
  • thereafter the creditor should convene an insolvency enquiry in terms of section 417 of the 1973 Act (still applicable) and proceed to interrogate the directors of the debtor company in respect of the trade, dealings and affairs of the debtor company. During such enquiry, the creditor would seek to establish knowledge on the part of the director/s and any other person in respect of the commercial insolvency position of the debtor company whilst trading with suppliers and creditors. The objective would be to obtain evidence of this factual position so that creditors are able to pursue personal liability claims (in terms of sections 423 and 424 of the 1973 Act) against such persons;
  • the creditor would thereafter have to proceed to issue a summons against such persons in the High Court for recovery of the amounts due to such creditor and as a result of such damage/loss caused to the creditor by such persons.

Creditors should always be aware of their reporting obligations under POCA and the consequences of failing to report fraud to the relevant authorities.

In conclusion, creditors can take comfort in the fact that they remain able, under the Act, to pursue delinquent directors of debtor companies civilly for losses incurred, and also to bring criminal charges against them in the appropriate circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.