Can A Director Be Held Personally Liable To The Creditors Of A Company?

There are a few instances in which a director can become liable for the debts of a company. The first being in an instance where the director binds himself/herself in his/her personal capacity as surety for a debt. The other instances are stipulated in the Companies Act No. 71 of 2008 (“the Act”) which came into effect on 1 May 2011.

In terms of the Act, when can a director be held liable?

Section 76 (3) of the Act prescribes standards of conduct for directors. It states that “a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director in good faith and for a proper purpose; in the best interests of the company; and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company and having the knowledge and skill of that director.

The problem arises whenever the above duties are breached. Section 218(2) of the Act, is the empowering provision that allows a director to be held liable for any breach of the provision of the act. It states that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

Section 77 of the Act elaborates on the instances in which a director can be personally liable. It begins to state that a director of a company may be held liable where they have breached their fiduciary duty and caused any loss or damage to the company due to such breach. A director can further be liable for loss or costs sustained by the company as a direct or indirect consequence of the director having acted in the name of the company without having the required authority, by resolution, to do so. The same is true where a director has been a party to an act or omission by the company which was with the intention to defraud a creditor, employee, or shareholder of the company.

Can I be held personally liable if I traded negligently in terms of the Companies Act?

Section 22 of the Act goes further and introduces the concept of reckless and negligent trading the consequence of which is also personal liability of the director. This provision is arguably the most pertinent instance for which a director can be held liable especially during these tough economic times where companies are struggling to keep their doors open. It specifically states that a director can be held liable if it is established to have traded with the intent to defraud, traded negligently, or traded knowing that their company is in an insolvent state and would not be able to perform by supplying goods or delivering on services due to its insolvency.

What will be regarded as reckless trading in terms of the Companies Act?

The test to prove reckless trading is an objective one where it is considered whether in the opinion of a reasonable businessperson, standing in the shoes of the company’s directors, there would be no reasonable prospect of the creditors receiving payment.

Should you require assistance in avoiding personal liability or should you require assistance in bringing or defending a claim for personal liability against a director, contact our commercial lawyers in Johannesburg