Venator Africa (Pty) Ltd v Watts and Another (053_2023) [2024] ZASCA 60 (24 April 2024)

Groundbreaking judgment regarding the personal liability of directors to creditors. The Companies Act does not expressly provide for director liability to third parties (creditors) for loss or damage suffered.

Author

Ross Shepstone
April 26, 2024

The case involves an appeal by Venator Africa (Pty) Ltd (the plaintiff) against the decision of the KwaZulu-Natal Division of the High Court, Pietermaritzburg, which upheld an exception by Lloyd Mason Watts, one of the directors of Siyazi Logistics and Trading (Pty) Ltd (Siyazi), to the plaintiff's particulars of claim. The plaintiff contracted with Siyazi for clearing and forwarding services, and subsequently paid Siyazi a total of R66,395,006.27 in disbursement accounts for payments to the South African Revenue Services (SARS). However, Siyazi only paid R31,353,697.27 to SARS, resulting in a shortfall of R34,612,576.19.

The plaintiff alleged that this short payment occurred due to fraud, theft, or reckless and negligent conduct by Siyazi's employees or directors, in contravention of Section 22(1) of the Companies Act, which prohibits a company from carrying on its business recklessly or with gross negligence. The plaintiff sought to hold the directors of Siyazi, including Watts, jointly and severally liable for the loss under Section 218(2) of the Companies Act. Watts filed an exception, arguing that Section 22(1) imposes duties on the company and not its directors, and that the plaintiff failed to aver a breach of any obligation imposed on the directors by the Act.

"The statutory scheme of liability under the Companies Act does not attach a singular consequence for a contravention of the Act. Rather, the Companies Act attaches a regime of liability for particular contraventions. I have already observed that this is so in respect of the contravention of s 76 and s 22. This is a systemic feature of the Companies Act. A breach of duty may exact compliance by the Commission (s22(3)); a breach may be an offence (s32(5)); and a breach may give rise to liability to make good a loss as a consequence of the breach (s77). Certain breaches are visited with more than one permissible consequence. Thus, s 22 permits the Commission to issue a compliance notice. In addition, a director may be held liable to the company for reckless trading (s22(1) read with s 77(3)(b))."

Mabindla-Boqana JA

The High Court upheld the exception, finding that Section 22(1) does not impose obligations on directors and that the Act does not expressly provide for director liability to third parties for loss or damage suffered. The plaintiff appealed this decision, arguing that the High Court erred in its interpretation of Section 218(2) and that the directors' statutory duty under Section 22(1) was breached.

The Supreme Court of Appeal provided a detailed interpretation of the relevant provisions of the Companies Act and concluded that Section 22(1) imposes duties on the company and not its directors. The court also highlighted the separate legal personality of a company and the default immunity of directors from liabilities of the company. The court upheld the High Court's decision, dismissing the plaintiff's appeal and confirming the order granting leave to amend the particulars of claim.

The court found that Section 22(1) of the Companies Act imposes duties on the company and not its directors, and that the Act does not expressly provide for director liability to third parties for loss or damage suffered. The court emphasised the separate legal personality of a company and the default immunity of directors from company liabilities.

The case law relied on by the court in its reasoning process includes the following:
1. Rabinowitz v Van Graan and Others [2013] ZAGPJHC 151; 2013 (5) SA 315 (GSJ): The court in this case held that a director who is guilty of an offense under the Companies Act must be considered to have "contravened" a provision of the Act, and that a third party can hold a director personally liable for acquiescing in or knowing about conduct that falls within the ambit of Section 22(1) of the Act.
2. Chemfit Fine Chemicals (Pty) Ltd v Maake 2017 JDR 1473 (LP) and Maake and Others v Chemfit Finechemical (Pty) Ltd [2018] ZALMPPHC 71: These cases followed the reasoning in Rabinowitz and held that a director can be held liable by a third party for breach of Section 22(1) of the Act.
3. Blue Farm Fashion Limited v Rapitrade 6 (Pty) Ltd and Others [2016] JOL 35613 (WCC) and Meatworld Factory CC v ET Trading House (Pty) Ltd (2019 JDR 1351 (GJ): These cases also followed the reasoning in Rabinowitz and held that directors can be held liable for breach of Section 22(1) of the Act.
4. De Bruyn v Steinhoff International Holdings N.V. and Others [2020] ZAGPJHC 145; 2022 (1) SA 442 (GJ): The court in this case held that Section 218(2) of the Act should not be interpreted literally, and that the provision recognises that liability for loss or damage may arise from contraventions of the Act, but the specific requirements of liability are to be found in the substantive provisions of the Act.
5. Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others [2020] ZASCA 83; [2020] 3 All SA 650 (SCA); 2020 (5) SA 419 (SCA): This Court held that the Act makes clear where liability should lie for conduct by directors in contravention of certain sections of the Act and who could recover the resultant loss, preserving certain common law principles.
6. Gihwala and Others v Grancy Property Ltd and Others [2016] ZASCA 35; [2016] 2 All SA 649 (SCA); 2017 (2) SA 337 (SCA): This Court held that Section 77(3) of the Act creates a statutory claim in favour of the company against a director for breach of fiduciary duties, and it is not a provision that can be invoked to secure payment to a creditor or shareholder.