Creditors cannot sue company directors directly
In what BusinessLIVE calls a landmark judgment, the SCA on Wednesday said creditors cannot sue directors of a company directly.
Instead, companies themselves should be the focus of the claim, not directors in their individual capacities.
The SCA’s decision sets the precedent for how litigants must conduct their cases against companies, correcting and clarifying the litigation procedure for every court in SA.
In 2016, Siyazi Logistics and Trading, a clearing and forwarding agent, entered into an agreement with chemical company, Venator Africa. Siyazi would provide its services for Venator’s imports into SA. Siyazi would then issue disbursement accounts to Venator, which indicated the amounts Venator owed to SARS.
Venator, instead of paying SARS directly would pay those amounts to Siyazi who would then pay SARS.
Siyazi indicated in 2019 the disbursement for SARS totalled over R66m. Venator paid this to Siyazi. However, Siyazi only paid about R31m over to SARS, leaving out about R34m.
SARS being short-changed raised assessments which resulted in further penalties on top of the missing R34m. As a result, Venator says it suffered damages totalling more than R41m.
In its papers, Venator says: ‘The short payment occurred as a result of fraud and/or theft by Siyazi’s employees and/or the (directors).’
It instituted action against Siyazi’s directors, Lloyd Watts and Martin Bekker, for the R41m. According to Siyazi, the two were ‘guiding minds behind the fraud’.
Venator pointed out that Section 22(1) of the Companies Act says: 'A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.'
There had been a violation of that section, Venator claimed. Both directors opposed.
Watts argued Venator could not use Section 22(1) to come after directors of a company.
Watts said that section ‘imposes duties upon the company and not its directors’ and pointed out that ‘there is no allegation in (the court papers) that (the directors) breached a provision of Act’.
The KZN High Court (Pietermaritzburg) agreed with Watts, setting aside Venator’s claims. However, Venator took Watts’ argument – known as an ‘exception’ – on appeal to the SCA.
Venator told the SCA the Companies Act could not be read to exclude directors’ liability to companies’ creditors for fraud. It also argued the directors had breached their statutory, not director’s, duties.
Venator argued creditors could sue company directors.
The SCA however, dismissed Venator’s appeal, noting ‘the company’s legal persona cannot be ignored at the choosing of a party’ to go after the directors behind it.
Writing for a unanimous court, SCA judge Nolwazi Mabindla-Boqwana confirmed a company existing as its own entity ‘is foundational to company law’ and litigants ‘cannot simply disregard the corporate veil’.
While so-called ‘piercing’ of the veil is allowed, it is only done in rare instances. This case, the SCA ruled, was not one of them.
Mabindla-Boqwana said violations by directors are the purview of the company because directors’ ‘duties are owed to the company’.
She confirmed ‘there is no coherent reading of the Companies Act’ that allows for the kind of interpretation Venator wanted.
She therefore dismissed Venator’s appeal with costs and allowed Venator to fix its papers to continue its case back in the High Court, reports BusinessLIVE.
Article disclaimer: While we have made every effort to ensure the accuracy of this article, it is not intended to provide final legal advice as facts and situations will differ from case to case, and therefore specific legal advice should be sought with a lawyer.
