Third parties may be able in certain circumstances to pursue a director of a company in person for monies due and payable to them. This will for instance be the case where a director, while knowing that a company is insolvent, proceeded with operations which led to the company not being able to service all its obligations towards third parties. This will also be the case where a director operates in one company, migrates the “healthy” business to a new company, and leaves the creditors with an empty shell to sue.
Section 22 of the Companies Act 71 of 2008 states that a company must not recklessly carry on with business activities with gross negligence, the intent to defraud any person, or with gross negligence.
Section 77 of the Companies Act states that a director of a company will be liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director(s) who proceeded to carry on the business well knowing that it was conducted in a manner prohibited by section 22, or that the director(s) were parties to an act or omission by the company, despite knowing that the act or omission was to defraud a company creditor, employee or shareholder, or had another fraudulent purpose.
Directors who fail to take action when the company is trading in insolvent circumstances can in terms of section 214 of the Companies Act be criminally convicted as well. They can also in terms of section 218 be held civilly liable for damages of third parties.
Section 162 of the Companies Act provides a special remedy to victims of unlawful acts by directors. According to this section directors can be declared delinquent if a director grossly abuses his or her position as director, or by gross negligence causes harm to the company or any third parties relating to the company.
This article is a general information sheet and should not be used or relied on as legal or other 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 your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)