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Opens the door to shareholder and creditor action against directors

Should it survive in its existing form, Section 157 of the Companies Bill will bring the class action into mainstream corporate and commercial activity in South Africa.

To date the class action has been a seldom-used procedure, restricted in its application to matters involving actual or threatened infringement of rights protected in the Bill of Rights.

Section 157 will change all of that when, in terms of the Act, an application can be made to, or a matter can be brought before, a court, the Companies’ Ombud, the Take-over Panel or the Commission, that right can be exercised by a person who is:

• directly contemplated in the particular provision of the Act;
• acting on behalf of such a person who cannot act in their own name;
• acting as a member of, or in the interest of, a group or class of affected persons or an association acting in the interests of its members; or
• acting in the public interest, with leave of the court.

The formulation follows the wording used in Section 38 of the Constitution so that there is precedent available as to how a class action ought to work in practice. 

Judge Cameron in the SCA judgment of Ngxuza (the Eastern Cape Welfare benefits saga) described the process as follows:

“In the type of class action at issue in this case, one or more claimants litigate against a defendant not only on their own behalf but on behalf of all other similar claimants.  The most important feature of the class action is that other members of the class, although not formally and individually joined, benefit from, and are bound by, the outcome of the litigation unless they invoke prescribed procedures to opt out of it.”

The court or office before whom the action is brought establishes the procedure to be followed in pursuing the class action.

The Companies Bill establishes many specific actionable wrongs that would give rise to civil liability on the part of directors and officers of companies.  Section 218(2) removes any doubt as to the existence of civil remedies. 

It provides that:

“Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.”

One of the first questions asked by insurers considering entry into the D&O market in South Africa is whether class actions are allowed.  The fact that they have now arrived will require this market to be re-rated in recognition of the increased exposure. 

One needs only to think of the failed attempts to create a group claim on behalf of the victims of the Masterbond group to recognise the relevance of this newly established right. 

Up to now it has been liquidators who have sought to obtain redress on behalf of creditors and shareholders of failed corporations.  Frequently these actions have been complicated by competing interests of major creditors. 

The class action opens the door to shareholder and creditor action against directors and officers independently of liquidators and without the constraints of the legislation dealing with corporate insolvency. 

Yet another reason for carefully considering that appointment as a company director!