Legal Remedies For Reckless Trading: To Sue The Company Or Its Directors?

E
ENS

Contributor

ENS is an independent law firm with over 200 years of experience. The firm has over 600 practitioners in 14 offices on the continent, in Ghana, Mauritius, Namibia, Rwanda, South Africa, Tanzania and Uganda.
In the case of Venator Africa (Pty) Ltd v Watts and Another, the Supreme Court of Appeal ("the SCA") ruled that a plaintiff must sue a company for certain breaches of the Companies Act 61 of 2008 ("the Act").
South Africa Corporate/Commercial Law
To print this article, all you need is to be registered or login on Mondaq.com.

In the case of Venator Africa (Pty) Ltd v Watts and Another, the Supreme Court of Appeal ("the SCA") ruled that a plaintiff must sue a company for certain breaches of the Companies Act 61 of 2008 ("the Act") rather than its directors. Therefore, where there has been reckless trading, as is prohibited by section 22(1) of the Act, and if a violation of section 218(2) of the Act has occurred, it is the infringing company that must be sued and not its directors personally.

Background

The aggrieved party, Venator Africa (Pty) Ltd ("Venator"), concluded an agreement with Siyazi Logistics and Trading (Pty) Ltd ("Siyazi") to handle clearing and forwarding duties. Siyazi was responsible for issuing disbursement accounts to Venator, reflecting amounts owed to SARS. Venator would pay Siyazi who in turn was required to pay SARS. However, Siyazi allegedly underpaid SARS significantly. As a result, SARS raised assessments and Venator suffered damages of over R41 million.

Subsequently, Venator sued the directors of Siyazi for breaches of sections 22(1) and 218(2) of the Act, alleging that Siyazi's directors were the masterminds behind this fraudulent and reckless trading.

Section 22(1) of the Act provides 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 218(2) of the Act stipulates that "any person who contravenes any provisions of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention".

Prior judicial interpretation of sections 22(1) and 218(2) of the Act imposed liability on directors for fraudulent or reckless trading. The case of Rabinowitz v Van Graan and Others ("Rabinowitz") made this clear and subsequent precedents followed this interpretation.

The SCA's findings

The SCA highlighted the fact that a company is a juristic entity whereby its directors are not held personally liable with the exception of a director breaching fiduciary duties with sections 19(2), 76 and 77 of the Act making this clear.

In consideration of this factor, the SCA drew on its prior precedent, Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others, and emphasised the point that the legal identity and thus separate personality of a company to its directors cannot be ignored.

Section 218(2) of the Act creates a right of action. However, the court explained that this provision does not determine what the right consists of and against whom the right may be exercised. To determine this, reference must be made to the substantive provisions of the Act.

Given that the substantive provision of the Act in question, section 22(1), specifically denotes that it is a "company" that bears the duty of not engaging in reckless trading and fraud rather than its directors, the SCA held that it is incorrect to sue a director personally where the Act specifies that a company should be held liable. The SCA held that to interpret section 22(1) in any other way would result in exposing directors to liability where the legislature specifically intended to exclude directors from being held liable.

Conclusion

The reasoning in the Rabinowitz judgment was not adopted by the SCA. Instead, the SCA explicitly held that Rabinowitz was decided incorrectly. As such, a litigant who wishes to institute litigation on the basis of a breach of section 22(1) and/or section 218(2) of the Act must institute action against the offending company rather than its directors.

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.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More