Dealing with corporate defaulters: Curbing the unfettered exercise of criminal law

• Jurisdiction: South Africa
• Published date: 15 August 2019
• Date: 15 August 2019
• Pages: 411-432
• Citation: 2010 Acta Juridica 411
• Author: Dennis M Davis

Dealing with corporate defaulters: Curbing

the unfettered exercise of criminal law

DENNIS M DAVIS*

The 1973 Companies Act used the criminal law extensively to enforce

numerous provisions of the Act. This process of criminalisation proved

ineffective and many provisions of the Act were honoured in the breach rather

than the compliance. The drafters of the 2008 Act, following comparative

precedent, sought to decriminalise the enforcement mechanisms contained in

the Act by introducing a complaint procedure to be investigated by a newly

created Companies Commission or the TakeoverPanel, as well as introducing

compliance notices. This paper examines the international trend to remove

criminal sanctions from company law and to introduce alternative means of

enforcement. It then proceeds to evaluate the new measures contained in the

2008 Act.

I INTRODUCTION

A primary goal of new company law will be to ensure that through a

proper system of corporate governance, disclosure and exposure to

market forces, wrongdoing will be discouraged and punished. Tradition-

ally, company laws have left the enforcement of their provisions to

shareholders, the liquidator in winding-up, and the Director of Public

Prosecutions. Experience has shown that these methods of enforcement

are inherently defective.

1

Professor Baxt, who was a representative to the Australian Law Reform

Commission, said the following while arguing in favour of decriminalisa-

tion of company law:

If I were rewriting the Companies Act I would decriminalize a lot of it. I think

that there are far too many criminal penalties in areas where there should not

be. I query why you want criminal penalties in some of the situations where

there are not major problems ie: failure to f‌ile accounts etc.

He says:

Certainly you can penalize them monetarily but keep the criminal element

out of it.

2

* BCom, LLB (UCT), MPhil (Cambridge). Honorary Professor in Commercial Law at the

University of Cape Town, Judge of the Western Cape High Court and Judge President of the

CompetitionAppeal Court in South Africa.

1

The Department of Tradeand Industry, South Africa South African Company Law Reform for

the 21st Century: Guidelines for Corporate Law Reform (May 2004) at 45.

2

The Parliament of the Commonwealth ofAustralia Company Directors’ Duties: Report by the

Senate Standing Committee on Legal and Constitutional Affairs (November 1989) ch 13 at 189.

411

2010 Acta Juridica 411

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In its 2004 policy paper, the Department of Trade and Industries

proposed, as an important issue for review, that an examination be

instituted concerning the appropriate balance to be struck between civil,

criminal and administrative sanctions. The reason for this recommenda-

tion was that the Companies Act 61 of 1973 was replete with provisions

which imposed criminal penalties, whereas alternative remedies such as

civil or administrative penalties were too easily eschewed within the

legislative scheme.

The policy paper recognised that the decriminalisation of company law

could not take place simply by way of a straight replacement of criminal

law with the imposition of personal liability on directors. Such enforce-

ment, while potentially effective, would impose excessive burdens upon

shareholders and liquidators who would then be faced with the ultimate

burden of enforcement. For this reason, the policy document went on to

state:

While the continued role of criminal and civil courts in company law

enforcement is not questioned, there is also a need for a body with the power

to issue administrative orders and impose f‌ines to ensure the quick resolution

of some commercial matters, especially those relating to mergers and take-

overs. Thus, a combination of criminal, civil and administrative remedies

should be introduced. In addition, measures to disqualify persistent violators

from access to public markets and to promote dispute resolution will be

considered.

3

The policy document therefore squarely faced the question of the costs

and benef‌its of employing criminal as opposed to non-criminal measures

of enforcement. Even if the benef‌its of employment of criminal law

exceeded the costs, it was contended that various civil and administrative

regulatory measures could prove to be either more effective or less costly

than the employment of criminal sanctions. In the f‌irst place, non-

criminal measures may not be subject to the strict procedural require-

ments which are applied to criminal statutes, now buttressed further by a

vast body of related constitutional jurisprudence. Secondly, the traditional

criminal law requirements of proof of a culpable mental state, the mens rea,

often constitutes an insurmountable evidential burden for the prosecuting

agency whereas the imposition of strict liability may itself be the subject of

constitutional challenge. Furthermore, non-criminal procedures may be

better adapted to controlling and regulating violations of a continuing

nature. Thus, an interdict procedure which employs a pattern of proof of

misconduct to formulate a rule which is tailored specif‌ically to the

possibility of future conduct together with the censure triggered by

3

Op cit (n 1) 46.

412 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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