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

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

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 s4

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

satisfies an important constitutional mandate embodied in s1(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 director 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 forthe

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 s4 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 policyguidelines for corporatelaw reform inSouth

Africa emphasised that one ofthepurposes of the CompaniesAct 71 of 2008 (2008

Act)1isto encourage accountability;its missionbeing to instil corporate

efficiency in

themannerin which the affairs of companies are carried outbythose

entrusted with

theirmanagement.2 The paper emphasised the strengtheningofcorporate

governance

standards, which must be premised on theprinciples of certainty and consistency3and

informed by the Constitution of the Republic of South Africa, 1996. 4Therefore, 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 section4(1) of the 2008Act has been crafted

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

2004 paper. The relevant introductory part of section4(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 section4(1)

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

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

must first establish the company’s solvency and liquidity5status before a decision is

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

GG32121, GN 421.

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

GG26493, (‘Guidelines for Corporate Law R eform 2004’). Thegoal is tobalance thecompeting

interests of the various economic actors. Fromaninternational community perspective,in addition

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

African corporate sphere, it is to ensure thatthere is

compatibility and harmonisation 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

abilityto

distinguish between right and wrong and can also actinaccordance 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.

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

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

5This test iscontained 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