A Reflective Discussion of the Directors’ Fiduciary Duties to Creditors under the South African Company Law
Keywords:
company directors, fiduciary duty, corporate scandals, creditors, insolvencyAbstract
A company is a juristic entity possessing the legal capacity to acquire rights and obligations. However, since a company is an artificial person lacking a physical body, there are important functions that only natural persons will inevitably be required to perform on its behalf. A company usually acts through its directors or the board of directors. The interaction between company directors and other stakeholders creates various relationships between them and relevant legal subjects. In this regard, it is no longer debatable whether directors in South Africa owe fiduciary duties to the company or the shareholders as evident from section 76(3) of the Companies Act 71 of 2008 (Companies Act 2008). However, unprecedented global corporate scandals that occurred in the last two decades have triggered law reform in various jurisdictions like Australia and the United Kingdom (UK), to review directors’ duties and requiring them to become accountable to creditors. This article discusses the directors’ fiduciary duties to creditors under the South African company law in terms of both the Companies Act 2008 and the common law. The discussion of both the common law and the Companies Act 2008 is informed by the fact that the Companies Act 2008 has partially codified directors’ duties in South Africa and as such common law principles continue to apply. The article further discusses recent court jurisprudence, academic debates and the prescription of directors’ fiduciary duties to creditors in the context of insolvent companies in South African company law.
References
References
Ajibo, C.C. (2004). “A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory”. Birkbeck Law Review, 2(1), pp. 37-58.
Anderson, H. (2003). “Directors' Personal Liability to Creditors: Theory versus Tradition”. Deakin Law Review, 8(2), pp. 209-244.
Attenborough, D. (2017). “Empirical Insights into Corporate Contractarian Theory”. Legal Studies, 37(2), pp. 191-213.
Berger, A.N. & Udell, G.F. (1998). “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle”. Journal of Banking & Finance, 22(6), pp. 613-673.
Cassim, F.H.I., Cassim M.F., Cassim. R., Jooste R., Shev, J. & Yeats, J. (2012). Contemporary Company Law. 2nd ed, Cape Town: Juta & Co Ltd.
Davies, P. & Worthington, S. (2016). Gower’s Principles of Modern Company Law. 10th ed, London: Sweet and Maxwell Publishers.
Delport, P., Voster, Q., & Henochsberg, E.S., (2012). Henochsberg on the Companies Act 71 of 2008, Vol 1 Service Issue 2, Durban: LexisNexis.
Esser, I. & Delport, P. (2016). “Shareholder Protection Philosophy in Terms of the Companies Act 71 of 2008”. THRHR, 79(1), pp. 1-30.
Esser, I. & Delport, P. (2017). “The Protection of Stakeholders: The South African Social and Ethics Committee and the United Kingdom’s Enlightened Shareholder Value Approach: Part 1”. De Jure Law Journal, 50(1), pp. 98-110.
Esser, I. & Du Plessis, J.J. (2007). “The Stakeholder Debate and Directors’ Fiduciary Duties”. South African Mercantile Law Journal, 19(3), pp. 346-363.
Flannigan, R. (2005). “Reshaping the Duties of Directors: Case comment”. Canadian Bar Review, 84(2), pp. 365-376.
Garner, B.A. Jackson, T. & Newman, J. (2004). Black’s Law Dictionary. Retrieved from https://epdf.pub/queue/blacks-law-dictionary-8th-edition.html.
Hamadziripi, F. (2021). “A Critical Analysis of Zimbabwe’s Novel Solvency and Liquidity Test in the Companies and Other Business Entities Act 4 of 2019”. Interdisciplinary Journal of Economics and Business Law, 10(1), pp. 239-256.
Harner, M.M. (2016). “Navigating Financial Turbulence: Directors’ Duties in the Face of Insolvency” in Paolini, A. (ed) Research Handbooks in Corporate Law and Governance. Cheltenham: Edward Elgar Publishing.
Havenga, M. (1995). “Competing with the Company- When does a Director Breach His or Her Fiduciary Obligation?” South African Mercantile Law Journal, 7(3), pp. 435-441.
Havenga, M. (1997). “Directors’ Fiduciary Duties under our Future Company-Law Regime”. South African Mercantile Law Journal, 9(3), pp. 310-324.
Havenga, M. (2004). “Directors in Competition with their Companies”. South African Mercantile Law Journal, 16(2), pp. 275-286.
Janger, E.J. (2018). “The Market for Corporate Control in the Zone of Insolvency: Symposium Introduction”. Brooklyn Journal of Corporate, Financial & Commercial Law 13(1), pp. 1-4.
Keay, A. (2003). “Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors”. Modern Law Review, 66(5), pp. 665-699.
Keay, A. (2007). “Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach”. Sydney Law Review, 29(4) pp. 577-612.
Keay, A. (2001). “The Director’s Duty to take into Account the Interests of Company Creditors: When is it Triggered?” Melbourne University Law Review, 25(2), pp. 315-339.
Kolitz, D.L. (2015). A Concepts-Based Introduction to Financial Accounting. 6th ed, Cape Town: Juta & Co Ltd.
Lin, L. (1993). “Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors’ Duty to Creditors”. Vanderbilt Law Review, 46(6), pp. 1485-1524.
Macey, J. & Salovaara, J. (2019). “Bankruptcy as Bailout: Coal Company Insolvency and the Erosion of Federal Law”. Stanford Law Review, 71(4), pp. 879-962.
Mckenzie-Skene, D.W. (2007). “The Directors’ Duty to the Creditors of a Financially Distressed Company: A Perspective from across the Pond”. Journal of Business and Technology Law, 1(2), pp. 499-528.
Meintjes, L. (2011). Introduction to South African Law: Fresh Perspectives. 2nd ed, Cape Town: Heinemann/Pearson Education.
Miller, H.R. (1993). “Corporate Governance in Chapter 11: The Fiduciary Relationship between Directors and Stockholders of Solvent and Insolvent Corporations”. Seton Hall Law Review, 23(4), pp. 1467-1515.
Nettle, G. (2018). “The Changing Position and Duties of Company Directors”. Melbourne University Law Review, 41(3), pp. 1402-1433.
Nwafor, A.O. (2013). “Corporate Criminal Responsibility: A Comparative Analysis”. Journal of African Law, 57(1), pp. 81-107.
Nwafor, A.O. (2013). “Fraudulent Trading and the Protection of Company Creditors: The Current Trend in Company Legislation and Judicial Attitude”. Common Law World Review, 42(4), pp. 297-323.
Quartey, P. Turkson, E. Abor, J.Y. & Iddrisu, A.M. (2017). “Financing the Growth of SMEs in Africa: What are the Constraints to SME Financing within ECOWAS?” Review of Development Finance, 7(1), pp. 18-28.
Rwigema, H. & Venter, R. (2004). Advanced Entrepreneurship. Cape Town: Oxford University Press Southern Africa.
Van der Linde, K. (2009). “The Solvency and Liquidity Approach in the Companies Act 2008”. Journal of South African Law, 2009(2), pp. 224-240.
Winkler, A. (2004). Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History. Law and Contemporary Problems, 67(4), pp. 109-133.
Wishart, D.A. (1991). “Models and Theories of Directors’ Duties to Creditors”. New Zealand Universities Law Review, 14, pp. 323-336.
Zanardo, A. (2018). “Fiduciary Duties of Directors of Insolvent Corporations: A Comparative Perspective”. Chicago-Kent Law Review, 93(3), pp. 867-894.
Zwieten, K. (2018). “Director Liability in Insolvency and its Vicinity”. Oxford Journal of Legal Studies, 38(2), pp. 382-409.
Case law
Bayer v Frost [1991] 4 SA 559 (A).
BCE Inc v 1976 Debenture holders [2008] 69 (SCC) 584.
Bell Group Ltd (in liq) v Westpac Banking Corporation No 3 [2012] 767 (WASCA).
Blue Farm Fashion Limited v Rapitrade 6 (Pty) Ltd [2016] ZAWCHC 35.
Booysen and others v Kohrs and others (59732/2016) [2016] ZAGPPHC 871.
Brady v Brady [1988] 20 BCLC.
BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112.
Canadian Aero Service Ltd v O'Malley [1976] 10 OR 239.
Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch).
Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC.
Financial Mail (Pty) Ltd (1990) v Sage Holdings Ltd [1993] 2 All SA 109 (AD) 116.
GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch).
Horsley v Weight Ltd [1982] 3 All ER 1045.
In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] 122 ALR 531 550.
Kinsela v Russell Kinsela (Pty) Ltd [1986] 4 NSWLR 722.
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 All ER 404.
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 (HL) 713.
Mouritzen v Greystone Enterprises (Pty) Ltd & Another 2012 (5) SA 74 (KZD).
Nicholson v Permakrafi (NZ) Ltd (in liq) [1985] 3 ACLC.
North American Catholic Educational Programming Foundation, Inc. v Gheewalla 930 A.2d 92 (Del. 2007).
Phillips v Fieldstone Africa (Pty) Ltd [2004] 3 SA 465 (SCA).
R v Kritzinger 1971 2 SA 57 (A) 59.
Rabinowitz v Van Graan [2013] 5 SA 315 (GSJ).
Salomon v Salomon [1897] AC 22 (HL).
Sanlam Capital Markets (Pty) Ltd v Mettle Manco (Pty) Ltd [2014] 3 All 454 (GJ).
Standard Bank of South Africa Ltd v R-Bay Logistics CC 2013.
Swansson v Pratt [2002] NSWSC 583 (3 July 2002).
Volvo (Southern Africa) Pty Ltd v Yssel [2009] 6 SA 531 (SCA).
Walker v Wimborne [1976] 137 CLR 1.
West Mercia Safetywear v Dodd [1988] 4 BCC 30.
Westpac Banking Corporation v The Bell Group Ltd (In liq.) No 3 [2012] 157 (WASCA).
Winkworth v Edward Baron Development Co [1986] 1 WLR 1512.
Legislation
Companies Act 71 of 2008.
Companies Act 2006 c 46.
Corporations Act 2001 (Cth).
Ajibo, C.C. (2004). “A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory”. Birkbeck Law Review, 2(1), pp. 37-58.
Anderson, H. (2003). “Directors' Personal Liability to Creditors: Theory versus Tradition”. Deakin Law Review, 8(2), pp. 209-244.
Attenborough, D. (2017). “Empirical Insights into Corporate Contractarian Theory”. Legal Studies, 37(2), pp. 191-213.
Berger, A.N. & Udell, G.F. (1998). “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle”. Journal of Banking & Finance, 22(6), pp. 613-673.
Cassim, F.H.I., Cassim M.F., Cassim. R., Jooste R., Shev, J. & Yeats, J. (2012). Contemporary Company Law. 2nd ed, Cape Town: Juta & Co Ltd.
Davies, P. & Worthington, S. (2016). Gower’s Principles of Modern Company Law. 10th ed, London: Sweet and Maxwell Publishers.
Delport, P., Voster, Q., & Henochsberg, E.S., (2012). Henochsberg on the Companies Act 71 of 2008, Vol 1 Service Issue 2, Durban: LexisNexis.
Esser, I. & Delport, P. (2016). “Shareholder Protection Philosophy in Terms of the Companies Act 71 of 2008”. THRHR, 79(1), pp. 1-30.
Esser, I. & Delport, P. (2017). “The Protection of Stakeholders: The South African Social and Ethics Committee and the United Kingdom’s Enlightened Shareholder Value Approach: Part 1”. De Jure Law Journal, 50(1), pp. 98-110.
Esser, I. & Du Plessis, J.J. (2007). “The Stakeholder Debate and Directors’ Fiduciary Duties”. South African Mercantile Law Journal, 19(3), pp. 346-363.
Flannigan, R. (2005). “Reshaping the Duties of Directors: Case comment”. Canadian Bar Review, 84(2), pp. 365-376.
Garner, B.A. Jackson, T. & Newman, J. (2004). Black’s Law Dictionary. Retrieved from https://epdf.pub/queue/blacks-law-dictionary-8th-edition.html.
Hamadziripi, F. (2021). “A Critical Analysis of Zimbabwe’s Novel Solvency and Liquidity Test in the Companies and Other Business Entities Act 4 of 2019”. Interdisciplinary Journal of Economics and Business Law, 10(1), pp. 239-256.
Harner, M.M. (2016). “Navigating Financial Turbulence: Directors’ Duties in the Face of Insolvency” in Paolini, A. (ed) Research Handbooks in Corporate Law and Governance. Cheltenham: Edward Elgar Publishing.
Havenga, M. (1995). “Competing with the Company- When does a Director Breach His or Her Fiduciary Obligation?” South African Mercantile Law Journal, 7(3), pp. 435-441.
Havenga, M. (1997). “Directors’ Fiduciary Duties under our Future Company-Law Regime”. South African Mercantile Law Journal, 9(3), pp. 310-324.
Havenga, M. (2004). “Directors in Competition with their Companies”. South African Mercantile Law Journal, 16(2), pp. 275-286.
Janger, E.J. (2018). “The Market for Corporate Control in the Zone of Insolvency: Symposium Introduction”. Brooklyn Journal of Corporate, Financial & Commercial Law 13(1), pp. 1-4.
Keay, A. (2003). “Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors”. Modern Law Review, 66(5), pp. 665-699.
Keay, A. (2007). “Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach”. Sydney Law Review, 29(4) pp. 577-612.
Keay, A. (2001). “The Director’s Duty to take into Account the Interests of Company Creditors: When is it Triggered?” Melbourne University Law Review, 25(2), pp. 315-339.
Kolitz, D.L. (2015). A Concepts-Based Introduction to Financial Accounting. 6th ed, Cape Town: Juta & Co Ltd.
Lin, L. (1993). “Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors’ Duty to Creditors”. Vanderbilt Law Review, 46(6), pp. 1485-1524.
Macey, J. & Salovaara, J. (2019). “Bankruptcy as Bailout: Coal Company Insolvency and the Erosion of Federal Law”. Stanford Law Review, 71(4), pp. 879-962.
Mckenzie-Skene, D.W. (2007). “The Directors’ Duty to the Creditors of a Financially Distressed Company: A Perspective from across the Pond”. Journal of Business and Technology Law, 1(2), pp. 499-528.
Meintjes, L. (2011). Introduction to South African Law: Fresh Perspectives. 2nd ed, Cape Town: Heinemann/Pearson Education.
Miller, H.R. (1993). “Corporate Governance in Chapter 11: The Fiduciary Relationship between Directors and Stockholders of Solvent and Insolvent Corporations”. Seton Hall Law Review, 23(4), pp. 1467-1515.
Nettle, G. (2018). “The Changing Position and Duties of Company Directors”. Melbourne University Law Review, 41(3), pp. 1402-1433.
Nwafor, A.O. (2013). “Corporate Criminal Responsibility: A Comparative Analysis”. Journal of African Law, 57(1), pp. 81-107.
Nwafor, A.O. (2013). “Fraudulent Trading and the Protection of Company Creditors: The Current Trend in Company Legislation and Judicial Attitude”. Common Law World Review, 42(4), pp. 297-323.
Quartey, P. Turkson, E. Abor, J.Y. & Iddrisu, A.M. (2017). “Financing the Growth of SMEs in Africa: What are the Constraints to SME Financing within ECOWAS?” Review of Development Finance, 7(1), pp. 18-28.
Rwigema, H. & Venter, R. (2004). Advanced Entrepreneurship. Cape Town: Oxford University Press Southern Africa.
Van der Linde, K. (2009). “The Solvency and Liquidity Approach in the Companies Act 2008”. Journal of South African Law, 2009(2), pp. 224-240.
Winkler, A. (2004). Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History. Law and Contemporary Problems, 67(4), pp. 109-133.
Wishart, D.A. (1991). “Models and Theories of Directors’ Duties to Creditors”. New Zealand Universities Law Review, 14, pp. 323-336.
Zanardo, A. (2018). “Fiduciary Duties of Directors of Insolvent Corporations: A Comparative Perspective”. Chicago-Kent Law Review, 93(3), pp. 867-894.
Zwieten, K. (2018). “Director Liability in Insolvency and its Vicinity”. Oxford Journal of Legal Studies, 38(2), pp. 382-409.
Case law
Bayer v Frost [1991] 4 SA 559 (A).
BCE Inc v 1976 Debenture holders [2008] 69 (SCC) 584.
Bell Group Ltd (in liq) v Westpac Banking Corporation No 3 [2012] 767 (WASCA).
Blue Farm Fashion Limited v Rapitrade 6 (Pty) Ltd [2016] ZAWCHC 35.
Booysen and others v Kohrs and others (59732/2016) [2016] ZAGPPHC 871.
Brady v Brady [1988] 20 BCLC.
BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112.
Canadian Aero Service Ltd v O'Malley [1976] 10 OR 239.
Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch).
Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC.
Financial Mail (Pty) Ltd (1990) v Sage Holdings Ltd [1993] 2 All SA 109 (AD) 116.
GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch).
Horsley v Weight Ltd [1982] 3 All ER 1045.
In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler [1994] 122 ALR 531 550.
Kinsela v Russell Kinsela (Pty) Ltd [1986] 4 NSWLR 722.
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 All ER 404.
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 (HL) 713.
Mouritzen v Greystone Enterprises (Pty) Ltd & Another 2012 (5) SA 74 (KZD).
Nicholson v Permakrafi (NZ) Ltd (in liq) [1985] 3 ACLC.
North American Catholic Educational Programming Foundation, Inc. v Gheewalla 930 A.2d 92 (Del. 2007).
Phillips v Fieldstone Africa (Pty) Ltd [2004] 3 SA 465 (SCA).
R v Kritzinger 1971 2 SA 57 (A) 59.
Rabinowitz v Van Graan [2013] 5 SA 315 (GSJ).
Salomon v Salomon [1897] AC 22 (HL).
Sanlam Capital Markets (Pty) Ltd v Mettle Manco (Pty) Ltd [2014] 3 All 454 (GJ).
Standard Bank of South Africa Ltd v R-Bay Logistics CC 2013.
Swansson v Pratt [2002] NSWSC 583 (3 July 2002).
Volvo (Southern Africa) Pty Ltd v Yssel [2009] 6 SA 531 (SCA).
Walker v Wimborne [1976] 137 CLR 1.
West Mercia Safetywear v Dodd [1988] 4 BCC 30.
Westpac Banking Corporation v The Bell Group Ltd (In liq.) No 3 [2012] 157 (WASCA).
Winkworth v Edward Baron Development Co [1986] 1 WLR 1512.
Legislation
Companies Act 71 of 2008.
Companies Act 2006 c 46.
Corporations Act 2001 (Cth).
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Published
2022-03-14
How to Cite
Chitimira, H., & Hamadziripi, F. . (2022). A Reflective Discussion of the Directors’ Fiduciary Duties to Creditors under the South African Company Law: Array. Acta Universitatis Danubius. Juridica, 18(1). Retrieved from https://dj.univ-danubius.ro/index.php/AUDJ/article/view/1579
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Copyright (c) 2022 Howard Chitimira, Friedrich Hamadziripi
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