Finding Juridical Dispositions Germane to the Interpretative Context to be Attributed to ‘Reasonably’ under Section 4 of the Companies Act 71 of 2008

• Date: 01 October 2020
• Author: Simphiwe S. Bidie
• Published date: 01 October 2020
• Pages: 1-30
• DOI: 10.25159/2522-6800/6466

Article

Southern African Public Law

https://doi.org/10.25159/2522-6800/6466

https://upjournals.co.za/index.php/SAPL

ISSN 2522-6800 (Online), 2219-6412 (Print)

Volume 35 | Number 1 | 2020 | #6466 | 30 pages

© Unisa Press 2020

Finding Juridical Dispositions Germane to the

Interpretative Context to be Attributed to

‘Reasonably’ under Section 4 of the Companies Act

71 of 2008

Simphiwe S Bidie

Lecturer, Nelson R Mandela School of Law

University of Fort Hare

sbidie@ufh.ac.za

Abstract

This article takes the view that the inclusion of the term ‘reasonably’ under s 4

of the Companies Act 71 of 2008 has profound foundational importance. It

satisfies an important constitutional mandate embodied in s 1(c) of the

Constitution, 1996: that the principle of legality be observed in all decision-

making. Because of this requirement, the actions of a company d irector are

required to be scrutinised in the light of the Constitution. This may mean that

the courts must determine decisions made by directors having regard for the

country’s overall constitutional and economic objectives. Therefore, the

inclusion of the term seems to be a validation, because the Constitutional Court

has held in many cases that the principle of legality is fundamental to the South

African constitutional legal order, as required by section 1(c) of the

Constitution, 1996. Practically, as vanguards of the constitutional principles, the

courts would be expected to infuse the principle of legality into their

interpretative duties in order to instil in the company-law sphere an environment

that will foster compliance with the Bill of Rights and ensure predictability and

certainty. This article pertains specially to circumstances where a board of

directors has erred in law by misdirecting itself or by falling short when

considering and/or interpreting ‘reasonable circumstances’. This is particularly

necessary since the legal meaning the Act contemplates by including the term

‘reasonably’ in s 4 requires urgent examination before directors proceed to

distribute company money or property.

Keywords: reasonableness; distribution; solvency; liquidity test

Bidie

2

Introduction

The 2004 paper that provided policy guidelines for corporate law reform in So uth

Africa emphasised that one of the purposes of the Companies Act 71 of 2008 (2008

Act)1 is to encourage accountability; its mission being to instil corporate

efficiency in

the manner in which the affairs of companies are carried out by those

entrusted with

their management.2 The paper emphasised the strengthening of corporate

governance

standards, which must be premised on the principles of certainty and consistency3 and

informed by the Constitution of the Republic of South Africa, 1996. 4 Therefore, ultimately,

these

principles would be expected to inform the interpretation of the current regulatory

framework, and in fact must do so.

The manner in which the wording of section 4(1) of the 2008 Act has been crafted

appears to show that the intention was to incorporate the objective pronounced in the

2004 paper. The relevant introductory part of section 4(1) that informs the subject of the

discussion here provides that

for any purpose of the Act, a company satisfies the solvency and liquidity test at a

particular time if, considering all reasonably foreseeable financial circumstances of the

company at that time …

In this excerpt, the Act incorporates two concepts: ‘reasonable’ and ‘foreseeable’. This

article concentrates exclusively on ‘reasonable’, that is, the reasonableness of a

particular decision. On a proper construction, the wording of this part of section 4(1)

has the effect that whenever a board of directors of a company contemplates exercising

its powers and/or performing its duties for any purpose permitted by the Act, the board

must first establish the company’s solvency and liquidity5 status before a decision is

1 The Act was assented to by the President on 9 April 2009. It came into operation on 1 May 2011,

GG 32121, GN 421.

2 South African Company Law for the 21st Century: Guidelines for Corporate Law Reform, GN 1183

GG 26493, (‘Guidelines for Corporate Law R eform 2004’). The goal is to balance the competing

interests of the various economic actors. From an international community perspective, in addition

to promoting good corporate governance and instilling predictability and confidence in the South

African corporate sphere, it is to ensure that there is

compatibility and harmonisa tion with best

practice in other jurisdictions: Guidelines for Corporate Law Reform 2004 at 8‒9. From a delictual

perspective, a person is perceived to be a ccountable if that person has the necessary mental

ability to

distinguish between right and wrong and can also act in accordance with such appreciation: see

Johann Neethling, Johannes M Potgieter and Petrus J Visser, Law of Delict (LexisNexis 2006) 110;

Weber v Santam Versekeringsmaatskappy Bpk

1983 (1) SA 381 (A) 389, 403 and 410.

3 Guidelines for Corporate Law Reform 2004 (n 2) 6 and 11.

4 See the Bill of Rights ss 7–39 of the Constitution of the Republic of South Africa, 1996.

5 This test is contained in s 4(1)(a) and (b) of the 2008 Act. On balance, this obligation is economically

significant as failure to observe it could have far-reaching consequences for the country: the liquidation

and/or sequestration of companies due to ill-informed decisions made by company directors; the