Attacking Directors (Or Officers) Of Companies In Business Rescue

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...