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

• Jurisdiction: South Africa
• Pages: 1-46
• Author: Bidie, S.S.
• Date: 16 August 2019
• Published date: 16 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

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(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

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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.

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