“To be prepared is half the victory.” (Miguel de Cervantes, author of Don Quixote)
Perhaps you’re a director losing sleep over the risk of losing everything if creditors sue you personally for your company’s debts because you’re asset-rich, and they can’t squeeze anything out of the company. Or maybe you worry about the company itself suing you for losses it suffers because of something you have or haven’t done.
There can be big money involved, as we shall see from the SCA (Supreme Court of Appeal) case below, so those are risks well worth keeping a close eye on. Preparation really is key here.
The general rule
Our law has long accepted that a company has a legal personality separate from its directors and shareholders, trading in its own name and holding its own assets and liabilities. So, the good news is that, as a general rule, directors are not personally liable for their company’s debts unless:
- They sign personal sureties for those debts, or
- They breach their legal duties as directors.
The not-so-good news is that those duties are many and onerous. In a nutshell, as a director, you must always perform your duties with integrity, care and diligence, without being reckless or fraudulent, without breaching your duty to act in good faith, and in the best interests of the company.
A case in point – directors sued personally for R41m
A goods importer sued the directors of a clearing and forwarding agent in their personal capacities for R41.4m. This after the agent had taken money from the importer to pay the VAT it owed, but had only paid part of that sum over to SARS. That left the importer having to pay SARS the shortfall plus interest and penalties.
On highly technical grounds (to do with the wording of various sections of the Companies Act), the importer’s claim was thrown out of court by firstly the High Court, and then by the SCA on appeal.
The importer now has an opportunity to amend its papers and to have another go at the directors personally, so this saga may not be over quite yet. But what’s important on a practical level is that the judgments in this case have established clearly that:
- The “separate personality” of a company is still recognised, and directors cannot be automatically held liable for the company’s debts. Grounds for personal liability must be proved.
- An attack can come from anywhere – creditors, employees, other stakeholders, and even the company itself can hold directors liable for company losses arising from any breach of their fiduciary duties towards it.
- A creditor must show which specific section or sections of the Act the director breached. It was the importer’s inability to identify such a section in its papers that led to its case falling at the first hurdle. But as we saw above, it now has a third crack at the whip and the warning to directors remains – comply with the Act’s many requirements, or face litigation.
- Taking another tack, a creditor could use the “abuse of separate personality” angle to sue a director. That would involve proving that the director abused the company’s separate personality sufficiently for a court to hold that it is not a separate “juristic person” for the purpose of a particular claim. In other words, the director would be regarded as the debtor for that debt.
Be prepared, and protect yourself from liability
Staying on the right side of the law isn’t complicated, but you do need to know what’s required of you. Here are some tips:
- Understand your duties: Familiarise yourself with your fiduciary duties to the company on the one hand and its and your legal obligations to other stakeholders on the other.
- Maintain proper records and books of account: Ensure financial records are always up-to-date and accurate. Ignorance of your company’s financial health is not a defence.
- Monitor compliance and financial controls: Check that financial controls are in place and adhered to, make sure that SARS returns and payments are made on time, and generally stay on top of your financial game.
- Don’t ignore warning signs: If your company is struggling financially, ask us for advice early. Avoid delaying tough decisions.
- Open communication: Transparency with all stakeholders can save you from accusations of deceit and fraud.
If you’re ever unsure about your legal obligations or find yourself in a sticky situation, we’re here to help you understand your duties, assess risks, and protect yourself personally while you focus on growing your company and its profitability.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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