South Africa: Attacking Directors (Or Officers) Of Companies In Business Rescue

Last Updated: 29 November 2013
Article by Ravie Govinder and Alex Eliott

Business rescue provisions clearly state that a company in business rescue enjoys freedom against prosecution of claims against it.

These provisions are silent when it comes to instituting civil recovery actions against directors who have conducted the business fraudulently, recklessly or both.

Could a creditor of a company in business rescue hold the directors (or even its officers) liable for fraudulent and/or reckless trading?

Currently it is possible for a creditor to bring a civil claim against directors for the fraudulent and reckless carrying on of the business, but only when a company is liquidated, through the mechanism of section 424 of the 1973 Companies Act. However the winding-up provisions in the 1973 Act do not, by definition, apply to a company in business rescue.

The 2008 Companies Act, on the other hand, does not provide a workable mechanism by which a creditor of a company in business rescue can sue a director personally for reckless or fraudulent trading.

There are a host of statutory duties imposed on directors by section 76 of the 2008 Companies Act. However, a breach of these duties only gives rise to a claim, in terms of section 77(3), against the director, by or on behalf of the company,for losses sustained by the company. It does not afford any right of recovery to creditors of the company.

Section 218(2) of the Act provides that any person who contravenes any provision of the Act is liable to any other person for any damages suffered by the aggrieved party in consequence of the contravention. This seemingly wide provision unfortunately narrows the scope for establishing personal liability.

  • First, most of the obligations that are imposed by the Act are imposed not on individuals but on the company itself. For example, the prohibition in section 22(1) on reckless or fraudulent trading is clearly a peremptory requirement imposed on the company – without any mention of its directors or officers.
  • Second, there must be a "contravention" of the Act, which requires proof that the company breached a peremptory requirement of the Act (not just a directory requirement). There are very few peremptory requirements in the Act.
  • Third, it will in most cases be extremely difficult for the creditor to prove that the cause of its loss was the particular contravention complained of.

From both these Acts the legislative framework does not provide a workable situation for holding directors personally liable for the debts of the company in business rescue. Another point is that when a creditor accepts a business plan and such plan through implementation discharges the whole or part of the debt as approved, a creditor will lose the right to enforce the relevant debt or part of it (in this instance also against directors).

However, company law is not based solely on legislation but on common law principles also. This was clearly emphasised in the matter of Ex Parte Lebowa Development Corporation Ltd [1989] 4 All SA 492 (T). In this matter the court was asked in terms of section 311 of the Companies Act 61 of 1973, by the applicant (a creditor and also the major shareholder of Discreto (Pty) Ltd, under judicial management), for an order authorising the calling of meetings of the creditors of Discreto to consider and decide upon a proposal of a compromise or arrangement between Discreto and its creditors that had been put forward by the applicant.

Judge Stegmann in his judgment, after a close analysis and questioning of the applicant's proposal, dismissed the application by concluding it was clear that the applicant had no intention to provide the insolvent company with capital that could be realised to pay future creditors in full. As such the court could not knowingly expose creditors to further risk by this insolvent company and refused the application. Before reaching his decision, however, the learned judge commented that a line of enquiry into the possibility of fraud and recklessness must be pursued because enough was already apparent to him to suggest a prospect of establishing personal liability on the part of the directors or other officers of Discreto for at least some of Discreto's debts.

Stegmann J went on to draw comparisons between English law and South African law with regard to common law principles of fraud and recklessness. The conclusion reached by him was that the two jurisdictions shared similar common law principles when determining fraud and/or recklessness (gross negligence).

He pointed out that anyone (specifically referring to directors and other company officers) who injures another by fraud ( dolus)or negligence ( culpa) is of course personally liable to the victim in terms of the common law remedies respectively deriving from the actio doliand the actio legis Aquiliaefor patrimonial loss resulting from the fraud or negligence.

To give substance to these principles the judge made example of the following three cases, two of which were English and one South African:

English cases

  • In R v Sinclair and Others [1968] 3 All ER 241 (CA),a director of a company who dishonestly (ie knowing that he is not entitled to do so) exposed the company's funds to a risk to which he was not entitled to expose them (the potential prejudice), and who honestly believed that the funds would be repaid, nevertheless had the intention to defraud and committed a fraud on the company by so doing.
  • Similarly in R v Grantham [1984] 3 All ER 166 (CA),a director who dishonestly exposed his company's creditor to the risk that the company might not pay him, or might not pay him in full, on due date or soon after, had an intention to defraud the creditor, even if he honestly believed that the creditor would ultimately be paid.

Stegmann J analyses these two English cases and stated that to obtain credit for a company without disclosing a known risk that the terms of payment may not be honoured is fraud, even if the representor may not have intended to cause a loss and may honestly have believed that the debt would probably be paid, provides no sufficient excuse.

South African case

  • The judge then emphasised that these English cases were fully in accord with the principles of our law as reflected in, for example, Orkin Bros Ltd v Bell and Others 1921 TPD 92. The facts of that case were such that the fraud could be found to have been committed on the basis that the defendants obtained goods on credit for a company, while knowing that there was no likelihood that the company would be able to pay, since it had no means of payment. As indicated, however, it is not necessary to go so far as to prove that the representor knew that there was no likelihood of payment. It is sufficient to prove that the representor was aware of a risk that the company might not be able to pay in full on due date, even if the representor honestly believed it more likely that the company would be able to pay.

In conclusion and to answer the question posed at the start, whether a creditor of a company in business rescue could hold the directors (or even its officers) liable for fraudulent and/or reckless trading: A creditor could do so under common law as was clearly pointed out above in Ex Parte Lebowa Development Corporation Ltd. However, creditors should be cognisant that if they approve a business plan that discharges the whole debt or a part thereof and such plan is implemented, then they would lose the right to proceed against the directors or officers of the company altogether under the common law. The loss of this right to enforcement, however, can be overcome in the plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions