‘Knowledge’ as a mechanism to hold directors personally liable for adverse distributive decisions under the Companies Act 71 of 2008

JurisdictionSouth Africa
Pages1-46
AuthorBidie, S.S.
Citation(2018) 4(1) JCCL&P 1
Date16 August 2019
Published date16 August 2019
1
‘KNOWLEDGE’ AS A MECHANISM
TO HOLD DIRECTORS PERSONALLY
LIABLE FOR ADVERSE DISTRIBUTIVE
DECISIONS UNDER THE COMPANIES
ACT 71 OF 2008*
SIMPHIWE S BIDIE
Lecturer, Nelson R Mandela School of Law, University of Fort Hare
ABSTRACT
It has been almost a decade since the Companies Act 71 of 2008
became operational. However, the veracity of some of its provisions
remains untested. As such, its purpose with regard to those
provisions remains unravelled. In this regard, ss 46(6) and 77(3)(e)
(vi) are a case in point. The intention in this paper is to analyse
these provisions. In engaging with these provisions the aim of the
2008 Act seems to be to encourage directors to make decisions which
contribute to social stability and enhance economic development. To
achieve its purpose, the 2008 Act has entrusted boards of directors
with the responsibility to make proper decisions informed by that
which the Act seeks to achieve. The wording of the Act suggests
that directors are expected to assist to achieve the purpose of the
Act by undertaking this duty voluntarily without necessarily being
compelled by legislative provisions. However, if looked at through
the lens of the many corporate failures to date, this task is proving
to be idealistic. It is even more so where corporate failure is caused
by directors’ deliberate conduct. Because of the important role which
courts occupy within our legal system, they naturally become the
vanguard to drive the interpretative objective envisaged by the Act.
It is this interpretative objective which forms the basis of this paper
to critically engage with the above provisions which are among many
aimed at instilling accountability in directors.
* This is a revised version of a paper which I first presented at the Third
International Mercantile Law Conference, at the University of the Free State,
Bloemfontein, South Africa 4–6 November 2015. The paper is extracted from my
LLD thesis, The Protection of Company Capital in Contemporary Company Law: South
Africa and Selected Commonwealth Jurisdictions. I wish to acknowledge and thank
Prof PC Osode for his assistance, excellent editing and guidance in my studies.
Responsibility for any error/s or omission/s is exclusively mine.
LLB, LLM, LLD (UFH).
(2018) 4(1) JCCL&P 1
© Juta and Company (Pty) Ltd
2
(2018) 4 (1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE
I INTRODUCTION
The provisions of the Companies Act 71 of 2008 (hereinafter ‘the
2008 Act’) impose various obligations on company directors. The
Act has set the bar high,1 presumably with the intention of effecting
a notable impact on how directors comply with their obligations,
considering how corporate governance has failed across the globe.
One part of law in which the 2008 Act has made a formidable
expansion is in the parameters and/or extent to which directors must
capacitate themselves with knowledge of the matter before taking
decisions on it. As a result, what comes out clearly in the 2008 Act is
that presence and/or absence of that ‘knowledge’ shall be one of the
yardsticks by which courts shall determine whether or not directors
have complied with their obligations.
Of particular importance for purposes of this paper is the level
of knowledge expected as a result of those obligations concerned
with the distribution of company money and/or property.2 Where
1 This seems to be in line with the intended purpose of the Act as was first espoused
by the South African government in its 2004 paper ‘South African company law
for the 21st century: Guidelines for corporate law reform’, GN 1183 in GG 26493
of 23 June 2004, available at http://www�info�gov�za/gazette/notices/2004/26493�pdf,
accessed on 1 February 2012) (hereinafter ‘Guidelines for Corporate Reform’).
2 Distribution is defined in s 1(a) of the 2008 Act, as amended by s 1(1)(i)(ii) of
the Companies Amendment Act 3 of 2011, as the direct or indirect ‘transfer
by a company of money or other property of the company, other than its own
shares, to or for the benefit of one or more holders of any of the shares, or to the
holder of a beneficial interest in any such shares, of that company or of another
company within the same group of companies’. It can also be in the form of
incurrence of a debt or other obligation by a company for the benefit of one or
more holders of any of the shares of that company or of another company within
the same group of companies. It can also be in the form of forgiveness or waiver
by a company of a debt or other obligation owed to the company by one or more
holders of any of the shares of that company or of another company within
the same group of companies. See s 1(b) and (c) of the 2008 Act substituted by
s 1(1)(i)(iii) of the Companies Amendment Act 3 of 2011. See also definition of
distribution in s 2(1) of the New Zealand Companies Act, 1993. Any distribution
must meet the solvency and liquidity test set out in s 4. Section 4 states that: ‘[F]
or any purpose of this 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 the assets of the company, as fairly valued, equal
or exceed the liabilities of the company, as fairly valued, and it appears that
the company will be able to pay its debts as they become due in the ordinary
course of business for a period of, 12 months after the date on which the test
is considered, or in the case of a distribution contemplated in para (a) of the
definition of “distribution” in s 1, 12 months following that distribution.’ Section
46 provides for the procedure by which distribution must be carried out. The
section states that a company must not make any proposed distribution unless:
(a) the distribution was pursuant to an existing legal obligation of the company;
or a court order; or the distribution, by resolution, was authorised by the board;
(b) it reasonably appears that the company will satisfy the solvency and liquidity
test immediately after completing the proposed distribution; (c) the board of the
© Juta and Company (Pty) Ltd
3
‘KNOWLEDGE’ AS A MECHANISM TO HOLD DIRECTORS PERSONALLY
LIABLE FOR ADVERSE DISTRIBUTIVE DECISIONS
a director contravenes any of the obligations set out in distribution
provisions ss 46(6) and 77(3)(e)(vi) of the 2008 Act are constituent.
These sections are similar in wording. Both impose personal liability
on a director where the company suffers any loss, damage or incurs
costs as a result of ill-considered distributive decisions made by
directors. On this note s 77(3) sets out a long list of scenarios against
which the actions of directors may be assessed/measured. In all the
provisions under the section the words ‘despite knowing’ occur.
Therefore, the intended purpose of this paper is to present a critical
analysis of these potent words as one of the elements enshrined
in both sections. The aim is to provide clarity on the appropriate
standard/level of knowledge the 2008 Act requires when directors
exercise their powers and/or perform their duties. By clarifying the
standard/level of knowledge expected, it is hoped that parameters
within which director liability will occur where knowledge of the
director in the circumstances fails to meet that expected standard/
level shall be elucidated.
This paper is structured as follows. Part 2, in addition to the
introductory part, gives a summarised overview of the duties
expected of a director. Part 3 critically explores in depth the concept
of knowledge as means to lawful decision-making expected of a
director. Part 4 sets out a reflective recapitulation of the discussion.
Part 5 concludes.
II DIRECTORS’ DUTIES AS A SOURCE OF LIABILITY: A
SUMMARY
Historically directors were not required to have any particular
qualification or skill in order to perform their duties and as such their
knowledge could be judged by a lesser standard.3 In recent times most
jurisdictions around the globe have codified directors’ common-
law duties. South Africa, and other commonwealth nations, are no
exception to the evolution. As a result, high standards are set for
directors to meet the increasing range of obligations placed on them
amidst commercial and legal expectations of their actions.4 Under the
2008 Act s 76(3) contains these duties. Under the Canada Business
Corporations Act 1985 (hereinafter ‘the CBCA’) and the Australian
company, by resolution, has acknowledged that it has applied the solvency and
liquidity test, as set out in s 4, and reasonably concluded that the company will
satisfy the test immediately after completing the proposed distribution.
3 Howard v Herrigel & another NNO 1991 (2) SA 660 (A).
4 Jeffrey Lucy AM ‘Directors’ responsibilities: The reality vs the myths’ 17
August 2006, available at https://download�asic�gov�au/media/1336808/Directors_
responsibilities_August2006�pdf, accessed on 18 September 2018 at 1.
© Juta and Company (Pty) Ltd

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