This article considers the circumstances when a company is time-barred from suing a director under the Companies Act 71 of 2008 (Companies Act) to recover losses incurred by the company as a result of that director breaching their fiduciary duties, and the envisaged amendments to the Companies Act in this regard.

Recovering losses from directors

Section 77 of the of the Companies Act provides that a director may be held personally liable for any loss, damage or costs sustained by the company as a direct or indirect result of, amongst other things, a breach of a fiduciary duty, or any other duty contemplated in the Companies Act or the company’s memorandum of incorporation.

Such liability may arise in circumstances where, for example, a company suffered a loss as a result of its directors acting negligently, in an unauthorised manner, or where the directors were party to conduct which was calculated to defraud a creditor.

However, section 77(7) provides that proceedings to recover any loss suffered by a company for which a director may be held liable may not commence more than three years after the act or omission that gave rise to that liability. As a company would be barred from suing a director to recover such losses outside of this three-year period, it becomes important to consider when the period begins to run.

This is especially so given that breaches of duty by directors – take misstatements in financial reports as an example – often involve complex sets of facts, sophisticated modus operandi and perhaps even the concealment of facts, such that the realisation that loss has been suffered may only surface many years after the act or omission. 

As a general rule, prescription in South African law only runs from when the claimant knew or ought reasonably to have known of the material facts underlying the cause of action.

The courts’ approach

The time-bar in section 77(7) has recently been interpreted in Nebavest 1 (Pty) Ltd t/a Minster Consulting v Central Plaza Investments 202 (Pty) Ltd and Others (4212/2017) [2023] ZAWCHC 69 to create an absolute bar against the commencement of a claim outside the stipulated three-year period. In its judgment, the court remarked that the Companies Act prohibits the commencement of such proceedings outside of the stipulated period, irrespective of factors such as reasonable lack of knowledge by the company. 

This is a rather startling interpretation in the context of the South African approach to prescription and on the basis of equity – albeit undoubtedly supported by the plain text of the provision. Plaintiff companies would be very eager to find a way to argue away or distinguish this finding on some plausible basis, especially in cases where the company only becomes aware of such an act or omission after the three years have passed.

It could be argued that the time-bar issue in Nebavest was dealt with in a relatively obiter manner given that it was a derivative action case and the court found numerous other, more important, reasons why it was not in the best interests of the company that the (poorly) pleaded case be pursued in the company’s name. Another argument might be that section 77(7) pertains only to “purely statutory” causes of action in section 77(3) and not to common law claims, which should exist separately. These arguments are clearly not without considerable difficulty and the problematic Nebavest position seems likely to hold sway.

As an aside, it should be kept in mind that fraudulent concealment by the director of the breach would arguably bring in the common law “fraud unravels all” doctrine to hold a fraudulent director liable despite section 77(7) of the Companies Act.

Amendments to give courts discretion

Rogue directors, put that champagne back on ice.

Although research suggests that the three-year period conforms with international best practice, the proposed amendments to the Companies Act under the Companies Second Amendment Bill, 2023, amongst other things, seek to bestow upon courts a discretion to allow a section 77 claim against a director to be brought outside of the stipulated three-year period upon good cause shown.

The proposed amendments further envisage that the courts will be empowered to apply the provisions of this discretion for conduct which arose before the amendments come into law (i.e. there will be retrospectivity in this regard).

If the proposed amendments to section 77(7) are passed, courts, in determining whether to extend the time-bar, would presumably be able to consider whether the breach by the director was “latent” or supposedly “well-hidden”’ and could only reasonably have been discovered much later (perhaps when the company was under new management). It may even be that the facts surrounding such breach were so complex that it was inherently overlooked until much later. While it is not clear how the discretion would be applied, there would seem to at least be the prospect of especially egregious cases not being precluded by a simple time-bar defence.

The approach to be considered by companies

In the interim, and pending the implementation of the legislative changes, all that could perhaps be considered would be to incorporate into the memorandum of incorporation of the company a provision which extends the time-bar in the Companies Act or perhaps having directors agree to be held liable for a period extending beyond the three years in, for example, their appointment letters. These approaches are not without considerable problems of their own, both around attempting to contract out of statutory provisions (especially given the Nebavest judgment) and whether an open-ended waiver (without reference to specific facts or context) is enforceable at all. 

What is clear right now though, is that a company potentially has no claim against a breaching director if it only becomes aware of the cause of that claim after the three-year period has expired.