This article begins by giving a simple illustration of the concepts of semi-privatisation and privatisation. It then discusses common law duties and fiduciary duties of directors under the Companies Act 71 of 2008 (the Act). Finally, it cites the case of Kukama v. Lobelo and Others (GSJ) (unreported case no 38587/2011, 12-4-2012) (Tshabalala J) in terms of the far-reaching ramifications for directors with regard to deterring them from engaging in illicit outflow of capital activities.

In discussing illicit outflow of capital activities, with specific focus on South Africa, the spotlight falls upon directors. This article is relevant to legal practitioners working on a set of facts which raises questions over a director's delinquency. It further encourages legal practitioners to apply the provisions of the Act cited herein. Lastly, legal practitioners are recommended to study the Kukama case when assessing a director's delinquently and expand on the judgment of this precedent-setting case when preparing/drafting papers. In light of the sixth Thabo Mbeki Africa day, it is crucial to highlight a recent study by Global Financial Integrity (GFI) entitled "Illicit Financial Flows from Africa: Hidden Resource for Development" (, which estimated total illicit outflows from the African continent across the span of 39 years at around US$1.8 trillion. Further, the top five countries with the highest outflow measured were: Nigeria (US$89.5 billion), Egypt (US$70.5 billion), Algeria (US$25.7 billion), Morocco (US$25 billion) and South Africa (US$24.9 billion).

Furthermore, the African Union High Level Panel on Illicit Financial Flows from Africa, headed by the former South African President, Thabo Mbeki, recently issued a report stating that Africa loses around US$60 billion annually due to illicit financial outflows. The report also established that most illicit financial outflows are facilitated through trade mispricing.

As well as trade mispricing, illicit outflow comprises bulk cash movements and smuggling, among others, all of which are designed to move money out of Africa with the object of avoiding taxes.

The debate surrounding the issue of semi-privatisation and privatisation provides for interesting legal analysis in light of the illicit outflow of capital by directors under the Act.


An interesting and relevant example of semi-privatisation can be found in South Africa with regard to Eskom, the "main" electricity provider of South Africa. Semi-privatisation is best illustrated in terms of a public-private partnership (PPP).

A PPP is defined as "a contractual arrangement between a public sector institution and a private party in which the private party performs an institutional function or uses state assets and assumes substantial financial, technical and operational risk in the design, financing, building and or operation of the project, in return for a benefit" (Ivan Grobbelaar: The privatisation of the electricity industry in South Africa (unpublished LLM thesis, University of Pretoria, October 2010) 72).

A PPP is beneficial for governments such as that of South Africa as it limits risks and prevents the illicit outflow of capital, as witnessed in cases of full privatisation, because the state is privy to the operations conducted under a PPP.


Privatisation is the transfer of assets to the private sector rather than a transfer merely of activities (OECD Privatisation in the 21st Century: Summary of Recent Experiences Privatisation is not a wrongful proposition if appropriate checks and balances are put in place. These checks and balances consist of carefully drafted legislation in company and tax law respectively.

Common law and statutory fiduciary duties on directors

The common law in South Africa places fiduciary duties on directors. Some of these duties are to:

  • act in the best interests of a company; 
  • prevent a conflict of interest;
  • act within the limitations of power; and
  • exercise powers for the purpose for which they were conferred and maintain an unfettered discretion.

In the South African context the Act makes provision for directors' statutory duties. Section 76 of the Act lists the statutory fiduciary duties of directors. A few sub-sections of this provision are s.76(2)(a), which creates a statutory duty on a director to avoid a conflict of interest, and s.76(3)(a), which places on directors a duty to act in good faith and for a proper purpose.

In light of the above provisions, directors will refrain from running companies fraudulently because they will be aware that if they breach their statutory fiduciary obligations they may face civil or even criminal liability.

Directors' liability for breaching fiduciary duties

If directors breach their statutory duties they will be held liable under s.77 of the Act. A provision to be considered also is s.218(2), which reads: "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". This sub-section makes provision for civil liability if someone suffers any loss or damage and is wide enough to enable action to be taken against a director or anyone else who acts inappropriately by taking part in illicit outflow of capital schemes.

In addition, consideration is to be given to corporate governance in the form of the King III Report. One of the key principles of the report is "social transformation and redress", which would "give rise to greater opportunities, efficiencies, and benefits, for both the company and society" (Corporate Governance King III Report, accessed 31-8-2014). If the King III Report is applied then multinational corporations will have a duty to contribute positively to society.

Case law

The Kukama case is a precedent-setting case in which the first order of delinquency against a director was made in terms of s.162 of the Act. It is not necessary to discuss the facts of the case but rather some provisions of the Act as highlighted in the case.

Section 162(5)(c)(i) of the Act reads: "A court must make an order declaring a person to be a delinquent director if the person ... (c) while a director ... (i) grossly abused the position of director". My view is that a director grossly abuses his position by participating in illicit outflow of capital activities.

A finding of delinquency against a director has far-reaching effects. This is because, under s.69(8)(a) of the Act, a director can be disqualified if he or she is found delinquent under s.162. The time period in which a director will be disqualified for grossly abusing his or her position under s.162(6)(b)(i) is to be decided by a court. This is achieved by factoring in conditions limiting the application of the declaration to one or more particular categories of companies and under s.162(6)(b)(ii), a period of seven years from the date of a court order, or such longer period as determined by the court at the time of making the declaration, subject to sub-sections 11 and 12 in terms of the Act.

It is common knowledge that multinational corporations operate in South Africa and that parastatals such as Eskom may soon be semi-privatised. Further, many private entities carry out business in South Africa and the provisions in the Act reflect that we have done what is necessary insofar as deterring directors from carrying out illicit outflow of capital activities.


Regardless of whether directors act in a semi-privatised or privatised entity they will face civil or even criminal liability if found guilty of participating in illicit outflow of capital activities. Directors in South Africa must take heed of their statutory fiduciary duties under the Act and be mindful not to be pronounced delinquent as in the Kukama matter.

The far-reaching effect of the Kukama case is that, apart from disqualification, a director may face a more severe sentence at a court's discretion. The only problem that may be encountered in enforcing the provisions of the Act and the common law is in situations where the companies involved in illicit financial outflows are not domiciled in South Africa, as South African company law will not be applicable to such companies. However, it is quite common for the mispricing that leads to illicit financial outflows to be facilitated by a South African subsidiary of a multinational company, which means that the South African company law will be applicable to such a subsidiary, as the company is neither an external nor a foreign company in that context.

Finally, the African countries that suffer most of the illicit financial outflows should consider adopting similar company law rules to the ones applicable in South Africa and should, in particular, consider extending "standing rules" to empower those acting in "the public interest" with right of action in company law in order to protect the interests of the companies concerned.

This article was first published in De Rebus in 2015 (Aug) DR 48.

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