Supreme Court of Appeal provides clarity on claims against directors for s22(1) reckless trading

In its recent judgment of Venator Africa (Pty) Ltd v Watts and Another, the Supreme Court of Appeal (SCA) confirmed that section 218(2) of the Companies Act, 2008 does not give rise to a specific cause of action against a director of a company in circumstances where that company is accused of carrying on its business in contravention of section 22(1) of the Companies Act. This is a development which is of significant interest to companies, directors and indeed insurers who provide Directors & Officers cover.

In this case, the SCA was called to decide whether to uphold an exception taken by the directors of a company to a claim which was brought against them in terms of section 218(2) of the Companies Act, read with section 22(1) of the Companies Act.

Section 218(2) of the Companies Act establishes a general, catch-all remedy, stating that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered as a result of the contravention. Section 22(1) of the Companies Act prohibits a company from carrying on its business recklessly, with gross negligence, for any fraudulent purpose or with intent to defraud any person.

The claim against the directors alleged that they were liable to the plaintiff on the basis that they (in various alternatives) had acted recklessly, or shown gross negligence or conducted business with the intention to defraud the plaintiff. The conduct was alleged to be in breach of section 22(1) and resulted in a loss suffered by the plaintiff, which was claimed from the directors in terms of section 218(2).

The directors raised an exception a​gainst the claim made against them, arguing that it did not disclose a cause of action. This exception was granted by the High Court, and the decision was taken on appeal to the SCA.

The SCA upheld the exception, and found that on a proper interpretation, a company, and not its directors, is responsible for the obligations outlined in section 22(1). As a result, the plaintiff was therefore unable to identify a provision of the Act which had been contravened by the directors – a prerequisite for bringing a claim in terms of section 218(2).

In doing this, the court has clarified the application of the Gauteng (Johannesburg) High Court case of Rabinowitz v Van Graan and Others 2013 (5) SA 315 (GSJ) which held, among addressing other issues, that 'a third party can hold a director personally liable in terms of the Act for acquiescing in or knowing about conduct that falls within the ambit of s 22(1) thereof.'

The Judge in the Venator Africa case expressed the view that the Rabinowitz case was wrongly decided.


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