Section 22(1) & Section 218(2) of the Companies Act
Venator Africa (Pty) Ltd vs Watts & Another (053/2023) [2024] ZASCA 60 (24 April 2024)
Reading and interpreting legal language can be daunting, especially when there are a few pieces of law that work together. It can be very confusing!
The Supreme Court of Appeal (SCA) handed down a judgment dealing with two pieces of the Companies Act, 71 of 2008 (the Act). The issue here is about understanding the extent of personal liability of directors. This is also a reminder about the principle that a company has a separate legal personality from its directors and shareholders.
The courts dealt with the interpretation of Section 218(2) of the Act, read with Section 22(1). This case was first heard in the Pietermaritzburg High Court and was heard in the SCA on appeal.
The appellant, Venator Africa (Pty) Ltd (Venator), had a contractual relationship with Siyazi Logistics and Trading (Pty) Ltd (Siyazi), the directors of which are the Respondents, Mr Watts and Mr Bekker.
Siyazi provided clearing and forwarding services to Venator. Siyazi would issue disbursement accounts to Venator reflecting payments due to SARS. Venator would then pay the amounts to Siyazi, which would then pay it over to SARS. During 2018 and 2019, Siyazi issued disbursement accounts to Venator for monies payable to SARS and Venator paid the amounts in full. Siyazi then paid SARS amounts far less than those reflected in the accounts and as a result, SARS raised assessments for short payments and Venator suffered damages of R41 million.
In the High Court, Venator alleged that the short-payment was a result of fraud and/or theft by Siyazi’s employees and/or its directors, that’s Mr Watts and Mr Bekker. It said that the conduct of Siyazi was reckless or grossly negligent or with the intention to defraud in terms of Section 22(1) of the Companies Act 2008 which provides:
“A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.”
Venator’s claim for damages was based on Section 218(2) of the Companies Act, which states:
“Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention”.
Venator said that S 22(1) had been contravened by Mr Watts and Mr Bekker and triggered the operation of S 218(2).
The High Court ruled in favour of Mr Watts and Mr Bekker. The Court said that their conduct as directors, could not be interpreted to be in contravention of any provision of the Act, including S22(1). It concluded that the Act does not intend for directors to be held liable towards creditors and so it did not have the intention to do so in S 22(1).
The SCA was asked to decide whether the interpretation applied by Venator, that the directors breached S 22(1) and where therefore liable for damages in terms of S 218(2), was reasonably possible.
The SCA found that S 218(2) is applicable when a person breaches a provision of the Act and so liability is imposed when a person contravenes the Act and causes loss to another person. It held that S 22(1) plainly imposes a duty on company (and not its directors) to refrain from carrying on its business recklessly. In this case, Venator could not clearly identify how the directors had breached any provision of the Act so that it could rely on S 218(2). The court went on to highlight that the Act provides for director’s liability specifically in S 77.
The SCA agreed with the High Court and dismissed the appeal.
This judgment places emphasis on the importance of interpretation of legislation and appropriate application of the law. The court cautioned legal practitioners not to simply read provisions into legislation. The intention of the legislators must be considered as well. Legal practitioners need to understand the spirit of the law and also follow the letter of the law.
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By: Rethabile Rapulana, Professional Assistant