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CML3001W CORPORATION LAW 2010

TOPIC OUTLINE

LIABILITY OF DIRECTORS & OFFICERS

1. INTRODUCTION

2. COMMON LAW LIABILITY

← There are 3 main forms of CL liability


o Firstly there is the possibility of liability for a breach of the duty to
exercise reasonable care and skill
 The general rule is that this duty is to the company only and
therefore the only one who can bring the cause of action against
the director
 The only exception is a derivative action where a shareholder may
bring the cause on behalf of co
 This is a delictual claim and therefore a claim for damages
o Second,

2.1 Liability for breach of the duty to exercise reasonable care and skill

2.2 Liability for breach of fiduciary duty

- These are generally owned only to the company and therefore only they are
allowed to sue unless derivative
- The remedies for a duty are sui generis
- Firstly the there is a claim for any profits/benefits
- Or a claim for damages
- If the breach involved the director entering into a transaction with a 3rd party
that transaction will be voidable at the instance of the company provided that
the 3rd party was aware of the breach or reasonably ought to have been aware

2.3 Veil piercing

- This would result in liability for 3rd parties


- It is no longer just a common law remedy but it also has some statutory
authority now

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3. STATUTORY LIABILITY FOR FRAUDULENT OR RECKLESS TRADING

3.1 S 424 of the Companies Act 61/1973

(a) The provisions of s 424(1):

'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 member 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 or other liabilities of the company as the Court may direct.'

3.2 Requirements for s 424 liability

- Normally applications are brought when the company has incurred a large amount of
debts and has been declared insolvent
- It is in this situation where the creditors go after the directors

(a) Locus standi


a. They must show that they have locus standi- judicial manager, any creditor,
any member or a contributory

(b) Existing debts or liabilities


a. Must prove the above
b. The applicant does not need to show that any of the debts were actually
owed to him or her

(c) 'Any business of the company'


a. Must show that any business of the company was being carried on
fraudulently or recklessly

Ex parte Lebowa Development Corp Ltd 1989 (3) SA 71 (T)


- You must show an ongoing pattern of fraudulent or reckless trading or a single act-
this is ‘any business of the company’

(d) Recklessness, intent to defraud or fraudulent purpose

Fisheries Development Corp oration of SA Ltd v Jorgensen 1980 (4) SA 156


(W) 163
- In this context recklessness means ‘ a serious departure from the standard of care
what would be observed by a reasonable business person in conducting the

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company’s businesss in similar circumstances’- it would include dolus eventualis and
gross negligence
- An example would be where the business is incurring debts continuously and a
reasonable person would have realised that this was AFFECTING the company
- The test for intent to defraud is entirely subjective- would require a form of dolus either
directus or indirectus
- There is not much case law on what a ‘ fraudulent prupose is’

Ex parte Lebowa Development Corp Ltd 1989 (3) SA 71 (T)

Re Gerald Cooper Chemicals Ltd 1978 Ch 262


- A fraudulent purpose is a pattern or form of conduct from which one can induce fraud-
it is a objective test
- Note the applicant does not have to prove that the respondent was the one who acted
recklessly etc
- But what YOU MUST show is that they were knowingly a party to this fraudulent,
reckless conduct
(e) "Knowingly a party'

Howard v Herrigel 1991 (2) SA 660 (A)


- You must show that the respondent had subjective personal knowledge of the facts
that gave rise to and concluded reckless conduct
- You do NOT have to show that they had LEGAL knowledge of the consequences of
the facts
- What does it mean to be a party??
o Different views as to what being a party is
o Some cases such as Howard say that there must be some kind of active
involvement in the fraudulent or reckless trading
o In Philotex 1998 (2) SA 138 (SCA)
 Court said no you can be held to be a party even if you simply know its
going on and you do nothing to prevent it (ie acquiescence)

-

3.3 Extent of liability under s 424

Howard v Herrigel 1991 (2) SA 660 (A)


- The court has a wide disctreion to decide on the extent of their liability- it can be all or
any of the company’s debts
- It is not necessary to show any causual connection btw the fraudulent and reckless
trading and the amount they can be held liable for
- It is not limited to the amount that there debt
- All that 424 means is that the director can be held liable along with the company for
their debts
- It is of a jointly and severable nature
-

3.4 Ss 22(1) & 77(3)(b) of the Companies Act 71/2008


- These provisions go a bit further than 73 Act as they include gross negligence and
tade under insolvent circumstances(this is a new reference whatever it might mean)

(a) The provisions of s 22(1):

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'A company must not –

(a) carry on its business recklessly, with gross negligence, with intent to
defraud any person or for any fraudulent purpose; or
(b) trade under insolvent circumstances.'
(b) The provisions of s 77(3)(b)- this is the liability bit
- It is a general liability section- covers breach off s 77 general duties
And it covers liability for specific wrongs
- And it deals with liable for breaching s 22(1)
- If any person either acquiesced in or was knwolingly a party to a breach of s 22(1) is
laible for any loss, damage or costs sustained by the company as a direct or indirect
consequence
- IN some respects these are wider than s 424 and in other respects narrower
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4. OTHER FORMS OF STATUTORY LIABILITY UINDER THE COMPANIES ACT


71/2008

4.1 Liability under s 77

(a) Application of s 77

- Same as s 76

(b) Liability for breach of statutory fiduciary duty

- S 77(2)(a)- is main section that imposes statutory duties


- CL duties in statutory duties- duty to disclose
- Breach of the duty not to misuse company information and to communicate
information to the company- it is a duty defeined in s76(2)
- Breach of duty to act in GF and a proper purpose
- The duty to act in the best interests of the company
- A breach would give rise to the same remedies that arise from a breach of CL duties
- It would give rise to the company and only the company being allowed to bring a case
unless there is exceptional circumstances where shareholder can bring
-

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(c) Liability for breach of the statutory duty to exercise reasonable care,
skill and diligence

- Section 77(2)(b) relevant- it says that the follwoign breaches will give rise to delictual
liability in terms of the common law principles of delict
o Failure to exercise reasonable care, skill and diligence as set out in s 76(3)
o Breach of any other provision of the 2008 Act- this is a general delictual
provision
o Breach of any provision in the Company’s MOI
- The liability will take the form of damages
- The general rule is that this laibiliuty will be in favour of the company itself unless
there is derivative action
- It also imposes liability for specific offences and requirements
- The SS’s that are relevant are 3 and 4
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(d) Liability for specific wrongs under s 77(3)

(e) Nature and extent of liability under s 77

- There are just 2 subsections in this regard


- SS 5- if the wrong in question involved the wrong and unauthorised issue of shares
then a director who is laible can go to court to have that issue set aside and relief that
director of liability for that wrong
- SS6- whenever you have more than one person liable for the same thing then liability
is joint and severable
- It always operates in the favour of 3rd parties cos it means they have many defendants
and they can choose who to sue
-

4.2 Liability for breach of confidence (s213)

- It makes it an offence for anyone to disclose personal information that they have
obtained in the proceedings of the company

4.3 Liability for false statements, reckless conduct and non-


compliance (s 214 & proposed amendment)
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4.4 Liability for hindering the administration of the Act (s215)

4.5 Penalties (ss216 & 217)


4.6 Civil liability (s218(2))
- Any person who contravenes any provision of the act is personally liable to any
other person who suffered damages
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5. RELIEF FROM LIABILITY

5.1 Ratification by the company


Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168

- It is a well established principle of our law that a company can ratify the breach of duty
- Ratification means to release the director from liability for a particular breach- it is a
decision by the ocompany to bring any end to the company’s rights against that
director for that brach
- It DOES NOT mean the same as VALIDATION
- A director who breaches a duty commits a legal wrong- nothing company can do to
turn it into a right- only thing they can do is remove liability for it
- It can only be given for a specific particular breach of duty – a company cannot give a
blanket release for a breach of duty
- The power to ratify usually rests with the GM where shareholders decide to sue or
ratify
- Only exception would be where the CO’s constitution gives the directors authority to
ratify and this has to be done by the independent, non breaching directors of the
board
-
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5.2 Prior consent and relief by the company

- This must follow on from proper disclosure


- It is only valid if it is given to a specific matter- ie blanket consent cannot be given
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5.3 Exemptions and indemnities

- Not possible to give a general, upfront indemnities to directors- it rendered void

(a) S 247 of the Companies Act 61/1973:

(1) Subject to the provisions of subsection (2), any provision, whether contained in the
articles of a company or in any contract with a company, and whether expressed or
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implied, which purports to exempt any director or officer or the auditor of the company
from any liability which by law would otherwise attach to him in respect of any negligence,
default, breach of duty or breach of trust of which he may be guilty in relation to the
company or to indemnify him against any such liability, shall be void: Provided that this
subsection shall not be applicable to insurance taken out and kept by the company as
indemnification against any liability of any director or officer towards the company in
respect of any negligence, default, breach of duty or breach of trust.

(2) The provisions of subsection (1) shall not be construed as prohibiting a company
from indemnifying any director, officer or auditor in respect of any liability incurred by
him in defending any proceedings, whether civil or criminal, in which judgment is given
in his favour or in which he is acquitted or in respect of any such proceedings
which are abandoned or in connection with any application under section 248 in which
relief is granted to him by the Court.'

- To give a blanket idemnitity would undermine the general fiduciary duties

(b) S 78 of the Companies Act 71/2008

- It is a similar provision but it also applies to auditors and prescribed officers


- It basically says that it is void for company to give a general release from the following
kinds of liability
o For breach of the s 75 duty to disclose personal interests
o For breach of s 76- fiduciary duties- reasonable care etc
o For breach of s 77- statutory liability
o For wilful mistake or wilful breach of trust
- Section says that if any director commits a stat offence the company is prohbitied
from paying the fine for them
- These types of statutory liability have given rise to THE INSURANCE DEBATE
-

(c) The 'insurance debate'

- Heated debate about Director and Ofiicer insurance


-

(i) 3 Types of insurance relevant to debate


a. Insurance that directors personally take out and personally pay for in
order to protect themselves against the possibility that they might
breach a duty and be personally liable
b. Insurance taken out by the company to cover it for any loss it suffers
if any of the directors breach any duty and cause the company loss
i. This has been criticised that it breaches s78- NO it is not that
the company is covering the director- the company goes to
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insurance and then insurance goes against director- therefore
director still liable
c. It is an insurance where the company takes out the insurance on
behalf of the director and the company pays for it
i. Problem- at least indirectly the company by paying for the
directors insurance they are indirectly protecting him
- This debate lead to an amemdment of s 248

(ii) The proviso to s 247(1) of the Companies Act 61/1973


a. Provided that this subsection shall not be applicable to insure taken
out and kept by the company as indemnification against any liability
of any director or officer towards the company in respect of any
negligence, default, breach of duty or breach of trust
b. This proviso does not clarify the position
c.

(iii) Section 247(2) of the Companies Act 61/1973

(iii) S 78 of the Companies Act 71/2008 (and its proposed amendment)


a. It is a section they might be chaningn
i. Subject to a company’s of MOI the company can purchase the
following kinds of insurance
1. Insurance to protect a director against any liability apart
from liability for a breach of s75 (disclose); s76 (fiduary
duties); or for wilful misconduct or wilful breach of trust
2. Insurance to protect the company against any legal
expsenses that it is entitled to
3. Insurance to protect the company against any liability it
is allowed to idemnifiy the director against
b. You could argue that type 3 is a bit too generous- it may undermine
any incentive of the director to be good.
c. The DTI said that if you don’t have these types of insurance then you
will discourage people from being directors- too much personal
liability

5.4 Relief by the court

- Directors can ask the court to relieve them of liability for the a breach

(a) S 248 of the Companies Act 61/1973

- Requirements
- He or she must have acted honestly
- Must have acted reasonably in the circumstances and
- It must be fair
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Barlows Manufacturing Co Ltd v RN


- Directors had appointed a manager to run the company’s business and the Con said
that they could appoint manager and delegate its powers to the manager
- The directors delegated ALL of their powers to the managers and stepped back
- They lost all control over the manager- things went wrong
- Question was whether they could be held responsible for the loss by the company
o Argued it was breach of care and skill and fiduciary duties
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- Directors argued in defence that they were not laible and they said you must look at
s247 of 1973 which does not prevent them from delegating their powers
- They argued that even if they had done something wrong then the court should give
them relief in terms of 248
- Court said about s 248
o Exact ambit is unclear- section says you cannot give general imnitiy for general
breach but it must also be interpreted as saying that company’s cannot allow
directors to relieve themselves of all their duties
o S248- court said that it only allows court to excuse directors from loability to the
company itself- does not excuse them from liability to a 3rd party or criminal
liability
o
Barrie (Pty) Ltd 1990 (4) SA 608 (C)

(b) Ss 77(9) & (10) of the Companies Act 71/2008

- These sections allow the court to relieve them if they acted honestly and reaosnbly
- SS 10 now also says that if the director thinks that he is about to be sued then he can
go to the court for a order that excuses him from liability even if the claim has not
come about yet
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