Company / Corporate / Compliance Archives

Director Delinquency Declarations: Managing Your Risk

March 2026 | Company / Corporate / Compliance

“Knowledge is power.” (Sir Francis Bacon)

Being a company director carries not only rewards but also risks that you need to manage carefully.

In particular, you are held by the Companies Act to a high standard of conduct. Breaching any of your many duties and responsibilities can have significant negative consequences. Among these is being declared a “delinquent director”. That’s no small thing…

It’s a serious long term career risk

Serious categories of misconduct expose directors to being declared delinquent and thus disqualified from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.

A wide range of less serious categories of misconduct can lead to “probation” orders, with possible consequences including disqualification for up to 5 years, supervision by a mentor, remedial education, community service, and payment of compensation.

The other side of the coin, of course, is that the delinquency risk isn’t just a warning to directors. It also gives victims of director misconduct a powerful remedy.

Let’s illustrate in the context of two recent cases.

Seven years in the wilderness (and a R78m damages bill) for a delinquent MD

Two groups of granite producing companies, one responsible for quarrying and the other for production and export, operated inter-dependently for decades. All went well until the Managing Director of the quarrying group of companies placed them into business rescue. Unsurprisingly, this had a devastating effect on both groups, with mining rights in jeopardy, credit lines and bank facilities lost, production levels affected, discussions with SARS over penalties terminated, and millions wasted both in the business rescue process and in remedying the aftermath.

The companies in the surviving group of companies sued the MD of the quarrying group with allegations that those companies should not have been placed into business rescue at all, and for various other acts of mismanagement and misconduct.

The MD’s defences to these claims found no favour with the Court, which declared him delinquent and ordered him to pay R78m in damages. He had, the Court held, unnecessarily placed companies into business rescue without engaging shareholders and despite available shareholder support and the absence of true financial distress. He had acted with gross negligence, caused substantial financial damage, breached his fiduciary duties (i.e. used his powers improperly and not in the best interests of the companies), and neglected his supervisory duties relating to quarry operations.

Another director, another disqualification

Now let’s move to a struggle between two shareholder factions for control of an investment company with energy sector interests. Exasperated, one faction went to the High Court to challenge the validity of a board resolution and share issue which affected their control of the company. There was substantial value at stake here, possibly (reading between the lines of the judgment) many millions of US dollars.

The dispute eventually found its way to the SCA (Supreme Court of Appeal), where, on application by the opposing shareholder faction, a director (and sometime Executive Chairperson) of the investment company was declared delinquent for seven years.

He had, found the Court, acted with gross negligence, wilful misconduct and breach of trust in performing his functions. Here’s one example among many: even after his removal as Chairperson, he purported to call a shareholder meeting “By order of the Chairman.” That alone, said the Court, was “a blithe disrespect for corporate governance and [a breach of] his fiduciary duty as a director.”

If you’re a director, here’s how to manage your risk

Your best defence against hostile stakeholders will always be to remain fully aware of all your many fiduciary duties, and to scrupulously comply with them. Knowledge is power!

Act early to address any financial issues that could lead to accusations of reckless trading or of causing financial harm to the company. Ensure that proper financial and operational controls and procedures are in place. At all times act strictly in the best interests of your company with transparency and good faith, proactively exercise proper oversight of all operations, and – perhaps most importantly – ask us for advice if in any doubt!

Disclaimer: The information provided herein should not be used or relied on as 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 us for specific and detailed advice.

Prescription, Procrastination, and Personal Liability for Corporate Debts

November 2025 | Company / Corporate / Compliance, Debt Recovery, Insolvency / Liquidation

“I have heard that in war, haste can be folly, but have never seen delay that was wise.” (Sun Tzu, The Art of War)

Collecting debt from a recalcitrant debtor can feel very much like going to war, particularly if you have to slog through the trenches of a series of increasingly costly court battles.

Which is where Sun Tzu’s warning against delay comes into play, because not starting collection in time could defeat your claim entirely. The reason of course is that debts – with only a few exceptions – prescribe (become unenforceable) after three years. Although that sounds like a long time, it can race by all too quickly!

Indeed, our law reports are full of cases where creditors have lost large amounts of money through procrastination, so it’s essential to start the process as soon as you think you may have a claim against someone.

It’s important to note however that the “prescription” defence has its limits, as a recent Supreme Court of Appeal (SCA) decision illustrates.

Another bent bookkeeper?

A Trust sued the sole member of a close corporation (CC) on the basis of allegations (hotly denied by her) that she, her CC, and her bookkeeper husband (since deceased, apparently by suicide) had defrauded a company in a sophisticated six-year scheme. Her husband, as the bookkeeper/accountant of both the Trust and the company, had allegedly made fraudulent payments totalling R21.8m to her CC through a series of fictitious transactions.

One forensic investigation and an insolvency inquiry later…

The Trust came into the picture when it took over the company in question. It identified suspicious transactions and commissioned auditors and forensic investigators to investigate. Critically, however, it was only during the inquiry held subsequently in her deceased husband’s insolvent estate that the member admitted receiving monies from the CC, and produced the bank statements which came to underpin the claims.

After some R12m was repaid, the Trust sued the member for the balance of R9.8m on two grounds:

Personal liability under the Close Corporations Act for being party to the reckless or fraudulent conduct of the CC’s business.
Liability for damages as a co-wrongdoer alongside her husband and the CC.

Before defending the claims directly, she raised the prescription defence, saying the claims were more than three years old and thus unenforceable. The High Court agreed with her, but the Trust appealed and the SCA held that the claims had not prescribed and that the trial could continue.

Let’s see why, and what lessons we can extract from that outcome.

Why didn’t the Close Corporations Act claim prescribe?

This statutory claim for recklessness or fraud, held the Court, isn’t a “debt” for the purposes of prescription, which only begins to run when a court actually declares a member personally liable. That hasn’t happened, so prescription hasn’t yet started running.

Why didn’t the damages claim prescribe?

Turning to the damages claim, the Court confirmed that “a debt is not considered due until the creditor knows the identity of the debtor and the relevant facts behind the debt. A creditor is assumed to have such knowledge if he could have exercised reasonable care to obtain it” – only then does the three years start running.

In this case, the Court held that although the forensic report had raised suspicion against the member, the Trust only acquired enough knowledge of the facts to actually sue her after the insolvency inquiry. The Trust then avoided prescription by issuing Summons within three years of that inquiry.

The Trust can now breathe a sigh of relief and return to the main trial in the High Court to prove its claims.

The bottom line: Delay can be fatal!

If you are unfortunate enough to fall victim to a sophisticated fraud, it may not be easy to identify the culprit and establish your claim immediately. But the sooner you call in the forensic investigators and ask us to advise on your best course of action, the less likely you are to have to fight your way through the courts (as this Trust has had to do just to retain its right to continue with its claim).

What Can You do When a Director Deadlock is Killing Your Company?

July 2025 | Company / Corporate / Compliance, Insolvency / Liquidation

“Diplomats operate through deadlock, which is the way by which two sides can test each other’s determination.” (Henry Kissinger)

Running a business with a partner can work brilliantly – until it doesn’t. When co-directors or shareholders fall out and can no longer see eye to eye, the company can grind to a halt, meaning everyone loses.

If the “deadlock” is just the two sides playing diplomat by testing each other’s determination to fight to the finish, there’s a chance they’ll negotiate a settlement before the company actually fails.

But if you find yourself in a fatal stalemate, you should think of cutting your losses and putting your company out of its misery altogether. A recent High Court decision provides an excellent example of how you can do just that.

The director disputes that destroyed a profitable business

The players in this unhappy saga were the 50/50 shareholders, and co-directors, of a small business importing tents from China.

At first, their arrangement clearly worked well. But as time passed, they fell out badly over disputes relating to the terms on which their own businesses (one in Kenya, the other in South Africa) could buy tents from the importer.

Their own attempts to resolve things failed, and the seriousness of their quarrelling led to allegations of fraud and of unpaid debts, together with threats to have one director declared a delinquent director and attempts to bring a third director into play.

A buyout attempt having failed, one of the directors applied for liquidation of the company. The other director’s fierce opposition rested on him asking for everything to be put on hold while he launched alternative litigation against his opponent.

But can you liquidate a solvent company?

Normally, only insolvent companies face liquidation, but the Companies Act allows courts discretion to order the winding up of a solvent company (a company able to pay its debts) in a range of circumstances. Three of those grounds for liquidation are relevant here:

There is deadlock between the directors in the management of the company and the shareholders are unable to break the deadlock, resulting in or threatening irreparable injury to the company, or
The result of the deadlock is that the business of the company cannot be carried on to the advantage of the shareholders generally, or
It is otherwise “just and equitable” for the company to be wound up.

Past the point of no return

In granting the liquidation order, the Court found that the relationship between the directors had broken down irretrievably, and the resulting deadlock had reached the point of no return. The shareholders would be unable to break the deadlock and that had resulted in irreparable injury to the company. Its business could not be conducted for the advantage of shareholders.

The Court went further, holding that in any event it was just and equitable to order winding up. The mutual trust and confidence between the shareholders had been destroyed, there had been a complete breakdown of relationship between the directors and shareholders, and the company’s “substratum” (fundamental reason for existence) had disappeared.

Prevention is better than cure

When you co-own a company, especially if it’s split 50/50, stalemate is an ever-present risk. If this happens and you can’t agree on how to buy each other out or on how to break the deadlock, you could lose the entire business.

Prevention being better than cure, good planning upfront is essential. So, if you run or plan to start a business with partners, make sure that your shareholders’ agreement and other documentation includes clear and workable mechanisms for avoiding dispute, and for breaking deadlock if it occurs.

Common solutions are:

As a way of hopefully preventing disagreements from arising, set out in writing clear boundaries as to each party’s contributions to the business, their roles in management and funding, profit sharing, obligations of good faith towards each other and to the company, and so on – every situation will call for different wording.
Clauses to allow one owner to buy the other’s shares are essential, with a clear process for determining value and resolving any disagreement over price or terms.
Provide for independent arbitration or mediation to resolve any disputes that may arise generally.

These safeguards are unfortunately no magic bullet, as witnessed by the inability of the directors/shareholders in this case to reach any form of agreement. This despite having deadlock-breaking mechanisms in their shareholders agreement, and despite their attempts at negotiation and mediation.

But safeguards are a lot better than nothing, and they will most definitely reduce the risk of you both ending up in court, paying legal fees and being grilled in witness boxes while your business dies. If that happens, everyone loses.

Bottom line? Disputes happen, but they don’t have to kill your business. Speak to us if you’d like advice on your company’s structure, and for help in drafting a shareholders’ agreement that protects you both if things turn sour.

Directors: Here’s How to Avoid Being Sued for Company Debts

January 2025 | Company / Corporate / Compliance

“To be prepared is half the victory.” (Miguel de Cervantes, author of Don Quixote)

Perhaps you’re a director losing sleep over the risk of losing everything if creditors sue you personally for your company’s debts because you’re asset-rich, and they can’t squeeze anything out of the company. Or maybe you worry about the company itself suing you for losses it suffers because of something you have or haven’t done.
There can be big money involved, as we shall see from the SCA (Supreme Court of Appeal) case below, so those are risks well worth keeping a close eye on. Preparation really is key here.

The general rule

Our law has long accepted that a company has a legal personality separate from its directors and shareholders, trading in its own name and holding its own assets and liabilities. So, the good news is that, as a general rule, directors are not personally liable for their company’s debts unless:

They sign personal sureties for those debts, or
They breach their legal duties as directors.

The not-so-good news is that those duties are many and onerous. In a nutshell, as a director, you must always perform your duties with integrity, care and diligence, without being reckless or fraudulent, without breaching your duty to act in good faith, and in the best interests of the company.

A case in point – directors sued personally for R41m

A goods importer sued the directors of a clearing and forwarding agent in their personal capacities for R41.4m. This after the agent had taken money from the importer to pay the VAT it owed, but had only paid part of that sum over to SARS. That left the importer having to pay SARS the shortfall plus interest and penalties.

On highly technical grounds (to do with the wording of various sections of the Companies Act), the importer’s claim was thrown out of court by firstly the High Court, and then by the SCA on appeal.

The importer now has an opportunity to amend its papers and to have another go at the directors personally, so this saga may not be over quite yet. But what’s important on a practical level is that the judgments in this case have established clearly that:

The “separate personality” of a company is still recognised, and directors cannot be automatically held liable for the company’s debts. Grounds for personal liability must be proved.
An attack can come from anywhere – creditors, employees, other stakeholders, and even the company itself can hold directors liable for company losses arising from any breach of their fiduciary duties towards it.
A creditor must show which specific section or sections of the Act the director breached. It was the importer’s inability to identify such a section in its papers that led to its case falling at the first hurdle. But as we saw above, it now has a third crack at the whip and the warning to directors remains – comply with the Act’s many requirements, or face litigation.
Taking another tack, a creditor could use the “abuse of separate personality” angle to sue a director. That would involve proving that the director abused the company’s separate personality sufficiently for a court to hold that it is not a separate “juristic person” for the purpose of a particular claim. In other words, the director would be regarded as the debtor for that debt.

Be prepared, and protect yourself from liability

Staying on the right side of the law isn’t complicated, but you do need to know what’s required of you. Here are some tips:

Understand your duties: Familiarise yourself with your fiduciary duties to the company on the one hand and its and your legal obligations to other stakeholders on the other.
Maintain proper records and books of account: Ensure financial records are always up-to-date and accurate. Ignorance of your company’s financial health is not a defence.
Monitor compliance and financial controls: Check that financial controls are in place and adhered to, make sure that SARS returns and payments are made on time, and generally stay on top of your financial game.
Don’t ignore warning signs: If your company is struggling financially, ask us for advice early. Avoid delaying tough decisions.
Open communication: Transparency with all stakeholders can save you from accusations of deceit and fraud.

If you’re ever unsure about your legal obligations or find yourself in a sticky situation, we’re here to help you understand your duties, assess risks, and protect yourself personally while you focus on growing your company and its profitability.

Now Creditors Can Apply for Directors to be Declared Delinquent – Why is That Important?

January 2024 | Company / Corporate / Compliance, Debt Recovery

“He who is quick to borrow is slow to pay” (Old proverb)

A recent High Court decision means that, for the first time, creditors of debtor companies are specifically cleared to apply for the company’s directors to be declared “delinquent” in certain circumstances. And that has significant implications for both directors and creditors.

For directors – major long-term career risks

Company directors need to manage a whole range of duties, responsibilities and risks, including being declared “delinquent” in terms of the Companies Act. For more serious categories of misconduct a director risks disqualification from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.

A wide range of less serious categories of misconduct can lead to “probation” orders, with possible disqualification for up to 5 years, supervision by a mentor, remedial education, community service and payment of compensation.

The fact that creditors can now make delinquency applications adds a new level of director risk, the reality being that of all the stakeholders out for blood after a corporate failure, unpaid creditors may well be the fiercest. Your best defence against any personal attack is to always be aware of, and to scrupulously comply with, all your many fiduciary duties.

For creditors – a new door opens

As a creditor on the other hand, your chances of recovering a company debt from a director personally will depend on a range of factors – whether you hold personal suretyships, whether you can prove personal liability for breach of statutory duties and so on (this is a complex topic – specific legal advice is essential).

Now another door has opened to you, and although as we shall see below you will have to convince the court that you are acting in the public interest, it will certainly make directors think twice about defrauding you or exposing you (and creditors and the public generally) to loss through corporate misconduct.

The case in question stems from the creditors of a company in liquidation failing to recover their debt from it, and consequently taking action against the directors in their personal capacities for over R370m.
They also asked the High Court to declare the directors delinquent, and one of the directors objected on the basis that creditors have no power to bring such an application. Indeed, the Companies Act gives this right only to a specific list of stakeholders – namely a shareholder, director, company director, secretary or prescribed officer, registered trade union, employee representative, Takeover Regulation Panel, some organs of state and the CIPC (Companies and Intellectual Property Commission).
The Court however agreed with the creditors that they could apply under another provision of the Companies Act which allows anyone to apply “acting in the public interest, with leave of the court”. On the facts of this particular matter, the creditors were cleared to proceed under that provision.
In reaching this decision, the Court took account of the (as yet unproven) serious allegations levelled against the directors – extreme breaches of fiduciary duty over a long period of time and involving substantial amounts of money, “a full panoply of misdemeanours” including gross abuse of position and gross negligence, the large number of directorships held by the directors, the (indirect) involvement of public entities – the list goes on.
Importantly, the Court rejected the director’s argument that “the danger of giving the creditor such standing was that it could use the threat of a delinquency declaration to squeeze the proverbial few extra bob out of the directors.” Every case, said the Court, must be decided on its own facts, and the fact that creditors are suing directors personally does not automatically mean that they are acting cynically and opportunistically.
But clearly, to succeed you will have to prove that you are acting in the public interest and not just in your own interest as a creditor. It will help to be able to argue, as the creditors in this case did, that “the general public and creditors deserve and require to be protected in their dealings, engagements and transactions with the companies and close corporations of which the defendants are respectively directors and/or members; and … the relief will protect the public from the defendants repeating or replicating their delinquent conduct in other entities.”

Disclaimer: The information provided herein should not be used or relied on as 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 professional adviser for specific and detailed advice.

Why You Need a Shareholders’ Agreement, and How to Structure It

March 2023 | Company / Corporate / Compliance

Whether you are forming a new company or buying shares in an existing one, a formal shareholders’ agreement, tailored to suit your particular situation and needs, is essential.

What is a shareholders’ agreement?

It’s a contract between shareholders outlining the rights, responsibilities, and obligations of each shareholder, it provides a framework for the governance of the company, and it ensures a clear understanding between the shareholders about its management, operation and control. It’s not a legal requirement, but not having one is a recipe for uncertainty and dispute.

Which brings us to…

Why you need one

Here are some of the reasons why it’s a “must-have” and not a “nice-to-have” –

The Memorandum of Incorporation (MOI) is not enough: Every company must have a memorandum of incorporation (MOI) setting out amongst other things the “rights, duties and responsibilities of shareholders, directors and others within and in relation to a company” but you should always complement its provisions to suit your particular needs and circumstances. Be careful here, the MOI will override any conflicting provisions in your shareholder’s agreement.
Dispute avoidance and management: By setting out the agreed shareholder relationships and responsibilities, a shareholders’ agreement will greatly reduce the risk of bitter, disruptive and expensive disputes arising. Where disagreements do arise, reference to the agreement should help diffuse them before they become a major issue. Agree processes for dispute resolution.
Avoidance of deadlock: Deadlocks can occur when shareholders are unable to reach a decision on important matters such as the direction of the company or the appointment of new directors. Deadlocks will inevitably hurt the company and could even result in failure and liquidation. A formal shareholders’ agreement reduces the risk of deadlocks by providing a clear set of rules for decision-making and resolving disputes.
Clarity of roles and responsibilities: Your agreement should define the roles and responsibilities of each shareholder, which can be especially important in companies where the shareholders are also involved in the day-to-day management of the company. This will help to ensure that each shareholder is clear about their obligations and the consequences of not complying with them, and it will help to prevent misunderstandings that may arise from overlapping responsibilities.
Flexibility: Make sure that your agreement is tailored to the specific needs of the company and shareholders. This allows it to be flexible enough to accommodate changes in the company’s structure and operations, while still providing the necessary protection and clarity to shareholders.
Protection of minority shareholders: Sometimes, majority shareholders have different goals and objectives than the minority shareholders. A formal shareholders’ agreement can provide protection to the minority shareholders by ensuring that the company operates in a fair and equitable manner. In doing so it reduces the risk of dispute by setting out the voting rights and decision-making powers of each shareholder.

What should be in it?

As we said above, your agreement should be tailored to your particular needs, so professional advice is essential to ensure that your agreement is legally binding and protects the interests of all parties involved. You will likely to be advised to address at the very least the following aspects –

How loan accounts, profit sharing, payment of dividends, salary and fringe benefit structures and the like will work
Who will manage the company and its business activities, and how
Decision-making processes, with reference to meeting requirements and voting
Roles and responsibilities, powers to make executive decisions and to bind the company
Confidentiality requirements, conflict of interest rules, restraints of trade and the like
Conflict resolution procedures
Valuation and sale of shares, rights of first refusal etc
The list goes on – every company and every set of circumstances will be different, so brainstorm other issues to be included with your fellow shareholders, other stakeholders, and your legal advisors.

Keep everything as short, simple and practical as possible!

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