Delinquent directors and the recourse available to aggrieved creditors

There is a general misconception that the creditors of debtor companies have no direct remedies against the director/s of such companies. This of course leads to the associated question as to how and under what circumstances any recourse is indeed available. 

In terms of the South African Companies Act (No. 71 of 2008) (“the Act”), a company is prohibited from carrying on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.[1] The basis for director liability, as the duly authorised representative/s of a company perpetrating these practices, is rooted in so-called fiduciary duties and expected standards of director conduct. To this end, the Act states that a director of a company, when acting in that capacity must exercise the powers and perform the functions of a director[2]:

(a)        In good faith and for a proper purpose;

(b)        in the best interests of the company; and 

(c)        with the [reasonably expected] degree of care, skill and diligence.

In the event that a director/s falls foul of these standards, and a creditor of the relevant debtor company suffers loss or damage as a direct result of such misconduct, and notwithstanding the remedies available to that creditor against the company itself, section 218(2) of the Act encompasses potential recourse against the directors themselves:

Any person [for example a Director] who contravenes any provision of this Act is liable to any other person [for example a Creditor] for any loss or damage suffered by that person as a result of that contravention.

On this basis, it is feasible for a creditor who has suffered any loss or damage due to the negligent and/or reckless trading of a debtor company to institute action directly against the director/s of that company, provided however that such loss is reasonably attributable the dereliction of fiduciary duties or any other breach of the Act. 

We trust that you found this article informative, please email info@hjw.co.za for any assistance regarding commercial litigation. 

This article is provided for informational purposes only and should not be substituted for legal advice on any specific matter. Any opinions expressed herein are subject to the law as at the time of writing and will change in accordance with any change in the law. We recommend that you contact HJW Attorneys at info@hjw.co.za directly for advice applicable to your specific matter.

[1] See section 22(1) of the Companies Act 71 of 2008 (“the Act”).

[2] See section 76(3) of the Act.