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:
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:
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:
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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