Section 77 of the Companies Act, No 71 of 2008 has always provided for the liability of directors of private companies in certain circumstances, but a recent Constitutional Court (Court) judgment necessitates revisiting this section.
On 15 June 2017, the Court, in the matter Black Sash v The Minister of Social Development & Others  ZACC 20 reiterated the considerations to be taken into account for public officials to be held personally liable for legal costs in certain circumstances in light of the Constitution.
What are the criteria?
There is nothing new about the criteria identified and applied by the Court. These criteria stem from our common-law rules for granting costs orders against people acting in a representative capacity. Simply put, where the impugned conduct was motivated by malice, negligent or unreasonable, liability will follow. Courts have also made costs orders against public officials who acted in bad faith.
However, the rules re-emphasised by the Court are now underpinned by the basic principles governing public administration under s195(1) of the Constitution, namely: a high standard of professional ethics; the promotion of the efficient, economic and effective use of resources; accountable administration, whether public or private; transparency; and reliance on accurate information.
In answering the question of what constitutes improper conduct, the Court argued that institutional competence and constitutional obligations must be considered. In particular, where specific constitutional and statutory obligations exist, the proper foundation for a personal costs order may lie in the Constitution or statute itself.
In the public sector, in the same way that a city manager is accountable for services delivered to the people within its municipal area, a cabinet minister is accountable to the people of South Africa. In the private sector, a CEO is accountable to the company’s shareholders. In terms of s77(2) of the Companies Act, No 71 of 2008, directors or prescribed officers may be held liable in accordance with the principles of the common law relating to breach of a fiduciary duty or commission of a delict for any loss, damages or costs sustained by the company as a result. Section 77(3) further lists additional circumstances in which these persons may be held personally liable for damages suffered by the company and, as a consequence, the shareholders.
In Black Sash the Court employed some of the founding values of our democracy, being effectiveness and accountability, in establishing liability. Although the Court, in no uncertain terms, spelt out the criteria for good governance, the same principles apply to the private sector. CEOs in the private sector must take cognisance of this judgment. Failure to do so may result in CEOs finding themselves in the same situation as the Minister of Social Development in future: with a sword hanging over them in respect of personal liability for legal costs.
An example of such improper conduct may be a failure to act where the CEO became aware of impropriety or incompetence within the company. In terms of s77(3) of the Companies Act, a prescribed officer or director may be held liable if they acquiesced in the carrying on of the company’s business, despite knowing it was being carried on in a reckless manner. When such failure to act results in the company being subjected to litigation and the CEO’s improper conduct comes to the fore, in accordance with s77 of the Companies Act, the CEO may be joined as a party and ordered to answer certain questions in their personal capacity and be ordered to pay legal costs on the highest scale possible.
CEOs cannot be held responsible for everything that happens in a company. However, in light of the developing precedent holding public officials personally liable for costs where gross misconduct has been committed, CEOs in the private sector should take heed that where a CEO should have been aware, or is aware, of certain circumstances, but fails to act in good time, the CEO may be held liable for legal costs.