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SAA debacle puts spotlight on directors’ role

According to the Companies Act, the ultimate responsibility for ensuring a company’s solvent falls on the directors.
Image: Brent Lewin, Bloomberg

The board of South Africa’s national airlines recently took a unanimous decision to go into voluntary business rescue. The step removes the threat of the directors being sued by creditors for reckless trading – for now, at least.

The airline told its staff two weeks ago that it wouldn’t be able to pay staff salaries. It had become increasingly clear that the airline was in deep financial trouble. From available evidence – including information passed to the parliament’s standing committee on public accounts – the airline continued to trade even though it was technically insolvent and unable to pay its creditors.

If it is found that the airline continued to trade in insolvent circumstances, South African Airways could be guilty of reckless or fraudulent trading under the Companies Act. Fraudulent trading is when a company continues to trade and incurs debts when its directors know there is no chance of it ever being able to pay its debts.

This is both a criminal offence and a civil matter.

Reckless trading is where the directors do not know, but should reasonably have known, that the company was unable to pay its creditors. Reckless trading is a civil offence.

These laws apply to state owned enterprises too. Even though the government, as the shareholder of the airline, would have had a say over the board, it is the board that is legally accountable for the solvency of the company.

Breaches of company law have potentially serious legal consequences for the board of directors. Trading in insolvent circumstances means that the directors could be personally liable for the losses sustained by the airline. They could also, at worst, find themselves behind bars if they are found by a court to have traded fraudulently.

But there could perhaps be mitigating factors for the South African Airways board. For instance, there was some uncertainty about whether loan guarantees and additional financial support from government would be made available to the airline.

Nevertheless, the Companies Act stipulates that the ultimate responsibility for ensuring that a company is solvent falls squarely on the directors – regardless of whether it is state-owned.

The South African Airways saga serves as a warning to directors of other state-owned entities, such as the power utility Eskom and the South African Broadcasting Corporation, to be as mindful as directors of private companies or public companies of their fiduciary responsibilities.

There are four ways in which directors can be held responsible for reckless or fraudulent trading.

Four ways directors can be held liable

First, the directors can be held personally liable for any losses or debts sustained by a company as a consequence of their reckless trading. This means that they are at risk of having to compensate the company out of their own pockets.

In my book on company law remedies I explained that the directors could be sued for this compensation by trade unions, or by other stakeholders. They could do this by using what is called the derivative action on the company’s behalf. This a powerful weapon for stakeholders. It empowers them to sue the directors on behalf of the company to recover compensation for the company itself.

Stakeholders may, for example, use the derivative action when the directors are not complying with their legal duties to the company.

For example, the Lewis Group, a large South African furniture retailer, was recently subjected to derivative proceedings brought against it by a shareholder, David Woollam. He sought to bring the derivative action to hold the Lewis directors accountable for lack of corporate governance and various other matters. He was unsuccessful in his efforts, but the case underscored the potential use of the mechanism.

The derivative action is available in a wide range of countries, including the United Kingdom, the United States, Canada, Australia and New Zealand.

The second way in which directors can be held accountable is by having criminal charges laid against them for fraudulent trading under the Companies Act. The act makes provision for directors to be fined or imprisoned for as long as ten years if they are found to have traded fraudulently.

Thirdly, the Companies Act requires the court to declare directors delinquent if they trade recklessly or fraudulently. A delinquency order has severe consequences. It bars a person from being a director for at least seven years, or even for a lifetime.

Fourthly, creditors can hold the board of directors personally responsible for the company’s debts. They could claim the amounts that the company owes to them from the directors personally.

Business rescue

The board of South African Airways has gained some valuable breathing space by passing a resolution to put the airline under business rescue. This could serve to protect the directors from being sued for reckless or fraudulent trading. And it will protect the airline from any attempts by creditors to liquidate the company.

But the initiation of business rescue does not necessarily mean that the airline’s board is free of the consequences if it is found to have violated the Companies Act. This will only become clear as the business rescue attempt unfolds.

If the business rescue is successful, the directors are likely to avoid personal responsibility for trading recklessly or fraudulently. But if the attempts at rescuing the business fail, and the airline has to be put into liquidation, there is a risk that the directors would be held personally liable for the airline’s debts.

Likewise, resignation does not free directors from liability for any reckless trading that took place while they were on the board.

This all shows that the boards of all companies – including state-owned entities – must be careful, and must not allow the company to trade in insolvent circumstances.The Conversation

Maleka Femida Cassim, Professor of Company Law, University of Pretoria

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Very interesting! Reading this it would appear that the Board is liable as their is evidence of trading under insolvent circumstances.

Poor Mr Martin Kingston-sell the Picassos and start paying! Or are they already buried deep below the Bahnhoffstrasse ostensibly owned by a BVI company, with nominee shares, held by a Isle of Man trust whose beneficiaries are a Mauritius insurer etc etc

Boards have been complicit and getting away with it. It is time to go after directors with full legal force in these types of situations.

All these fancy laws may work well in theory in the real world but not in Africa.Nothing works in Africa. Look North. These”directors” were all political appointments and will never be held accountable.

Would love to see Gerrie Nel or outa getting involved here. Just to watch these miscreants squirm and hopefully get 10 years. That goes for all SOEs.

If they had a huge boardroom at Pollsmor prison, then the SOE directors could all meet there once a month to exchange ideas to keep their SOE running smoothly. Live on the premises and work on the premises too. I can see good things coming from keeping all these directors in one place and their combined knowledge and experience would be beneficial to all those in this huge Pollsmor boardroom.

‘’Justice must not always seem to be done but has to be seen to be believed’’
J.B. Morton (1893-1979)

Hence my persistent and strong views pertaining to the shenanigans and theft during the so-called Invescgate / Kebblegate/ Tsecgate /JCIgate/Western Areasgate, sages. Sunny SA has become a paradise for white-collar crime as the quantum of the aforementioned scams and crimes must be in excess of ZAR 45 billion already – without any prosecutions, so far!

Its mind-boggling, but Kebble’s criminal schemes and frauds revolved around listed entities, led by JCI and involving Randgold but the JSE never showed any interest in the debacle. Most of the Directors involved in all these money laundering scams and crimes, ripped the ‘’poep*l’’ out of the Companies act, to accommodate their ‘’building block’’ views of the act.
Investec was part of a consortium that was exposed to the tune of billions of Rand in the form of unrealized gains – on a toxic ‘’naked’’ gold hedge structure, to Western Areas.

Investec (who was the joint investment bank and transaction sponsor on the transaction for Western Areas), was well aware that Gold Fields did not perform an in depth due diligence on Western Areas. Hence Investec was directly involved in scamming a New York-listed company Gold Fields, by exposing it to undisclosed claims of billions of Rand.

When Gold Fields on October 30, 2006, published a thick circular detailing its composition of Western Areas – there was not a word about Randgold’s claims against Western Areas. Neither did Gold Fields pay a cent to compensate for its claims for billions against Western Areas.

All the above obtained from a plethora of articles in the mainstream media, to date – and also represents my experience and views of these crimes – ask me I know.

Private sector ‘’white-collar crime’’ sets the stage and accommodates Governmental crime – as these two ‘’ markets’’ trade with one another, as illustrated by the ‘Zondo, ‘’truth and reconciliation Commission”, so far this year!

Maleka’s article is most interesting – the law may have some serious implications for Wiese et al of Steinhoff notoriety as they could all be declared delinquent and would have to resign their directorships over many companies – could be fun, just wish the legal/justice system was not so snail paced

Graham:

I never knew Sanlam made personal loans, never mind almost R1b loans! Yet they lent Jooste that into a company where the sanlam ceo was also a director. And yet he is generally held in high esteem…

How much, including interest, has sanlam recouped on that investment?

It is time the assorted overpaid hired help are held to the measure that the law very clearly dictates. It seems that shareholders’ funds are a kitty for the hired help to play with.

So, eventually a court imposed a fine. The shareholders foot that bill 5 years after the directors retired on their R30m severances.

Appalling!

Most interesting article. But “the law” means little in S.A. At best it is purely academic. The parties referred to have means at their disposal to argue their case in court for the next twenty years. That’s what “the law” is all about …. court cases ……. lawyers’ fees ….. appeals, more lawyers’ fees, ….
WEALTH = “JUSTICE” & FREEDOM
POVERTY = JAILTIME.

Ag please we have had this act since 2008 and has one person actually been prosecuted and locked up? For the last 10 years, we have had a daily barrage of news of corruption and we also had the Zondo commission? Is one person sitting in jail for state capture or the Steinhoff fraud? It is lovely words on paper, but not worth the paper it is written on.

SAA was trading recklessly since 2011. Line up all the cadre-directors for full liability and disqualification to act as directors anywhere.

Two posters have asserted than “nobody has been prosecuted” for white-collar crime. This is not strictly true as in the Tigron scam, one, Milne, pleaded guilty and served time, two more, Bennett and Porritt are leading the court a merry dance that makes Zuma’s Stalingrad Strategy seem capitulation.

The fact that the Tigron matter is unknown (occasional lack-of-progress reports in only MW)is indicative that Justice is not “seeing to be done”, with concomitant breakdown in respect for the Law.

In the case of SAA, Outa seems to be about to hold Dudu Myeni accountable [as an aside, it seems even prosecutions have been privatised, thanks to the incapacitation of the “capable state” Hawks & NPDA].

What would be interesting is whether those who APPOINTED such a patently unqualified and inept director carry any guilt or liability; sort of application of the_dolus eventualis_ rule. Comment, Prof?

End of comments.

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