After claiming that a R41m debt owed to the Revenue Service (Sars) was as a result of a clearing company directors’ “reckless” or “negligent” conduct, a chemical company has been allowed to “amend” its court papers so the matter can continue.
In a landmark judgment on Wednesday, the Supreme Court of Appeal (SCA) said creditors could not sue directors of a company directly. Instead, companies themselves should be the focus of the claim, not directors in their individual capacities.
The SCA’s decision sets the precedent for how litigants must conduct their cases against companies, correcting and clarifying the litigation procedure for every court in SA.
In 2016, Siyazi Logistics and Trading, a clearing and forwarding agent, entered into an agreement with chemical company, Venator Africa. Siyazi would provide its services for Venator’s imports into SA. Siyazi would then issue disbursement accounts to Venator, which indicated the amounts Venator owed to the SA Revenue Service (Sars). Venator, instead of paying Sars directly would pay those amounts to Siyazi who would then pay Sars.
Siyazi indicated in 2019 the disbursement for Sars totalled over R66m. Venator paid this to Siyazi.
However, Siyazi only paid about R31m over to Sars, leaving out about R34m. Sars, being short changed raised assessments which resulted in further penalties on top of the missing R34m.
As a result, Venator says it suffered damages totalling more than R41m.
In its papers, Venator says: “The short payment occurred as a result of fraud and/or theft by Siyazi’s employees and/or the [directors].” It accused Siyazi of conduct that was “reckless, alternatively grossly negligent” or done with a fraudulent intention.
It instituted action against Siyazi’s directors, Lloyd Mason Watts and Martin Bekker, for the R41m. According to Siyazi, the two were “guiding minds behind the fraud”. Venator pointed out that section 22(1) of the Companies Act says: “A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.” There had been a violation of that section, Venstor claimed.
Both directors opposed.
Watts argued Venator could not use section 22(1) to come after directors of a company. Watts said that section “imposes duties upon the company and not its directors” and pointed out that “there is no allegation in [the court papers] that [the directors] breached a provision of Act”.
The Pietermaritzburg high court agreed with Watts, setting aside Venator’s claims. However, the court allowed Venator time to amend its papers. However, Venator took Watts’ argument — known as an “exception” — on appeal to the SCA.
Venator told the SCA the Companies Act could not be read to exclude directors’ liability to companies’ creditors for fraud. It also argued the directors had breached their statutory, not director’s, duties. Venator argued creditors could sue company directors.
The SCA however, dismissed Venator’s appeal Wednesday, noting “the company’s legal persona cannot be ignored at the choosing of a party” to go after the directors behind it.
Writing for a unanimous court, SCA judge Nolwazi Mabindla-Boqwana confirmed a company existing as its own entity “is foundational to company law” and litigants “cannot simply disregard the corporate veil”. While so-called “piercing” of the veil is allowed, it is only done in rare instances.
This case, the SCA ruled, was not one of them.
Pointing to section 22(1) of the Act, the SCA said: “This section plainly imposes a duty on the company, and not its directors, to refrain from carrying on its business recklessly, among other things. To construe s22(1) as being capable of infringement by the directors is to read into the section a prohibition that is not there.”
Mabindla-Boqwana said violations by directors are the purview of the company because directors’ “duties are owed to the company”.
Venator “has been unable to identify a provision that has been contravened”.
Instead, she confirmed “there is no coherent reading of the Companies Act” that allows for the kind of interpretation Venator wanted. In other words, where there are alleged violations of directors, creditors and shareholders cannot claim from the directors in their personal capacity.
Instead, the proper party for Venator to target would be the company itself.
She therefore dismissed Venator’s appeal with costs and allowed Venator to fix its papers to continue its case back in the High Court.
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