The Personal Liability of Directors for Corporate Fault – An Exploration

• Jurisdiction: South Africa
• Date: 25 May 2019
• Author: Kathleen van der Linde
• Citation: (2008) 20 SA Merc LJ 439
• Published date: 25 May 2019
• Pages: 439-461

The Personal Liability of Directors for Corporate

Fault – An Exploration*

KATHLEEN VAN DER LINDE**

University of South Africa

1 Introduction

The increased focus on good corporate governance has led to a renewed

interest in the duties of company directors.

1

The gradual extension of

directors’ responsibilities and the serious consequences of breach of these

duties are often alluded to in general terms.

2

However, there has not been a

systematic study of the nature and scope of directors’ personal liability for

corporate conduct.

3

In Australia, the Corporations and Markets Advisory

Committee (CAMAC) conducted an enquiry into the personal liability of

directors for corporate fault under both federal and state legislation. The

report

4

revealed a lack of coherence between the requirements and justif‌ications

for different instances of derivative liability imposed and directors. The purpose

of this article is to explore the different areas and bases of liability applicable to

company directors in South Africa.

Directors can incur personal civil liability for their role in corporate faults

and defaults under the Companies Act,

5

under specif‌ic legislation in the areas

of environmental law, tax law and social security law, and also in terms of

general delictual principles. Criminal liability can arise under the Companies

Act, where it is commonly used to encourage directors to ensure that their

companies comply with formalities, under various other statutes, and through

the application of the common-law principles of accessory criminal liability.

Before these various instances of liability are analysed, brief attention is

given to the general duties of directors. The doctrine of the piercing of the

* This article is based on my chapter entitled ‘South Africa’in: Helen Anderson (ed) Directors’

Personal Liability for Corporate Fault: A Comparative Analysis (2008) at 237, and is published with

the permission of Kluwer Law International.

** B Juris LLB Hons BA (PU) LLM LLD (Unisa). Professor,Department of Mercantile Law, College

of Law, University of South Africa. Honorary Research Fellow, Department of Business Law and

Taxation, Monash University.

1

The King Report on Corporate Governance, 1994 (‘King I’) and the King Report on Corporate

Governance for South Africa – 2002 (‘King II’) have highlighted the role and responsibilities of

directors. King III is currently being prepared, and it has been indicated that the increased

responsibilities of directors will enjoy attention.

2

See Jayne Mammatt, David Du Plessis & Geoff Everingham The Company Directors’Handbook

(2004) at v (Foreword) and vi (Preface).

3

A useful list of criminal provisions under the Companies Act appears asAppendix C in Mammatt,

Du Plessis & Everingham op cit note 2. The list indicates who can be held criminally liable in each

instance.

4

CAMAC Personal Liability for Corporate Fault Report (2006). The liability of companies and their

directors and officersalso enjoyed attention in a report of the Australian Law Reform Commission that

dealt with civil and administrative penalties (see Australian Law Reform Commission, Report 95,

Principled Regulation: Federal Civil and Administrative Penalties in Australia (2002)).

5

Act 61 of 1973.

439

(2008) 20 SA Merc LJ 439

© Juta and Company (Pty) Ltd

corporate veil and its application to directors is also considered. An overview

of the different bases of directors’personal liability concludes the introductory

part of this article.

Attention is then given to directors’ civil and criminal liability under the

Companies Act. Several specif‌ic instances of civil and criminal liability are

analysed, including liability for fraudulent or reckless trading, liability for

unlawful distributions, liability in the area of investor protection, liability in

respect of abusive loans, and various other instances of civil and criminal

liability. As the CompaniesAct contains many purely criminal offences that

can be committed by directors in respect of non-compliance by their

company, this aspect is dealt with in broad terms and with reference to

selected examples.

Common-law delictual liability of directors is discussed next. South

African law has a unique approach to this issue. This approach is illustrated

with reference to the liability of directors for pure economic loss arising from

fraudulent misrepresentation made in the course of the company’s business.

Directors’ general criminal liability is then considered. The reaction of the

Constitutional Court to a provision containing an automatic statutory

imputation of criminal liability to directors is discussed, and the important

policy considerations articulated by that Court in declaring this provision

unconstitutional are highlighted. The further development of directors’

common-law accessory criminal liability is also analysed.

Towards the end of this article, the focus is on several specif‌ic

public-interest areas in which directors’ liability can arise. These are

environmental law, tax law and social security law. Before the conclusion of

this article, brief reference is made to other public-interest legislation under

which directors could typically be held liable, although these statutes do not

expressly impose liability on a director qua director.

2Overview of the Legal Position of Directors

2.1Directors’ Duties

Directors owe their companies a duty of good faith and duties of care and

skill.

6

These duties are not codif‌ied. In keeping with international trends,

though, the importance of good corporate governance has enjoyed attention.

7

The focus of directors’ duties remains the company as a whole, translating

into the maximisation of shareholder value.

8

However, an enlightened

6

See Cilliers & Benade Corporate Law 3 ed (2000) by HS Cilliers, ML Benade, JJ Henning, JJ Du

Plessis, PADelport (managing editor), L de Koker & JT Pretorius at 139.

7

The f‌irst two King Reports have highlighted the role and responsibilities of directors. King III is

currently being prepared, and it has been indicated that the increased responsibilities of directors will

enjoy attention.

8

See Irene-marie Esser ‘The Enlightened-Shareholder-ValueApproach versus Plurism in the

Management of Companies’ (2005) 26 Obiter 719; Michele Havenga ‘The Company, the Constitution

and the Stakeholders’ (1997) 5 Juta’s Business Law 134.

(2008) 20 SA Merc LJ

440

© Juta and Company (Pty) Ltd