The Veil Is Thinner Than You Think

Section 19(2) of the Companies Act 71 of 2008 says what most people think the whole Act says: a person is not liable for the obligations of a company solely because they are an incorporator, shareholder or director. Read that word “solely” slowly. It is doing enormous work. It means the mere fact of your directorship doesn’t make you liable for the company’s debts — but it says nothing at all about liability that arises from what you actually did or failed to do while holding the office.

So there are two entirely separate shields, and first-time directors routinely confuse them. The first is separate legal personality — the company owes its own debts, and the creditor who supplied it can’t come after you for the invoice. That shield is intact and it works. The second is a shield against your own conduct as a director, and it barely exists. The Companies Act codified directors’ duties precisely so that the second shield would be thin.

Even the first shield has a trapdoor. Section 20(9) allows a court, on application by an interested person, to find that the incorporation of a company, the use of a company, or any act by or on behalf of it, amounts to an unconscionable abuse of its juristic personality — and to declare the company not to be a juristic person in respect of a particular right, obligation or liability.

The Supreme Court of Appeal engaged with exactly this in Groundswell Developments Africa (Pty) Ltd and Others v Brown, [2025] ZASCA 170. In that matter a property seller discovered that the estate agent handling her sale was also the sole director and shareholder of the company that had quietly been given possession of her property and a builder’s lien over it for renovation costs exceeding the purchase price. The High Court found the company was a façade for the individual’s personal dealings, applied Section 20(9), treated him and the company as one person, and set the sale agreement aside. When leave to appeal was refused and the SCA was asked to reconsider, it declined to disturb those findings, and in a related appeal upheld a punitive costs order.

The commentary on that judgment puts the principle better than I can paraphrase it: the veil stays in place for honest business, and is lifted only when it is being worn as a disguise. That is genuinely reassuring — provided you understand which side of the line you are standing on.

Section 77 replaced the old Section 424 of the 1973 Act and expanded it considerably. It operates on two levels. The first is general: under Section 77(2), a director can be held liable for loss, damage or costs sustained by the company as a consequence of breaching a fiduciary duty under Sections 75 or 76, or through ordinary delictual conduct — negligence, in plain terms.

The second level is a specific statutory list in Section 77(3), and this is the part first-time directors have usually never read.

On timing: claims under Section 77 have long been subject to a three-year prescription period under Section 77(7). Since the Companies Second Amendment Act 17 of 2024 came into force on 27 December 2024, a court may extend that period on good cause shown. The change applies retrospectively — so it reaches conduct that predates the amendment.

This is where the fear should turn into method. Section 76(4) contains what is commonly called the business judgment rule, and it is a real, usable defence — not a formality. A director is taken to have satisfied the duty to act in the best interests of the company and with the required degree of care, skill and diligence if three things are true.

Section 76(4) and 76(5) also permit a director to rely, in good faith, on information and opinions from employees the director reasonably believes to be reliable and competent, from professional advisers on matters within their expertise, and from board committees on which the director does not serve. That reliance is protected — but only where the belief in the source’s competence is itself reasonable. Reliance on an adviser you knew to be conflicted is not reliance; it is cover.

And Section 77(9) preserves a court’s discretion: where a director acted honestly and reasonably, and the circumstances make it fair to do so, the court may relieve the director wholly or partly from liability on the terms it considers just.

Notice what every one of these defences has in common. Each of them requires evidence of process, produced at the time, not reconstructed under pressure two years later. Minutes that record what information was before the board, who declared what interest, who abstained, and what reasoning was applied are not administrative housekeeping. They are the primary asset of your defence, and they are almost free.

If you take one thing from this article, take this: the Companies Act is not the most aggressive route to your personal assets. Tax law is.

The SARS exposure deserves particular attention right now, because the shift over the past two years has been from theory to practice. Recent reporting in South African financial press has documented SARS issuing formal notices of personal liability to directors — invoking Sections 155, 157 and 180 read with Section 184(2) of the Tax Administration Act — with short deadlines to settle before collection steps commence. The mechanisms available include third-party appointments against bank accounts, certified statements filed with a court, and ultimately sequestration of a personal estate.

If your company is behind on PAYE or VAT and you are the person who decides which creditors get paid this month, you are not a bystander to that decision. You are the statutory target of it.

Section 162 allows a range of parties — the company, a shareholder, a director, a company secretary, a registered trade union, and certain regulators — to apply to court for an order declaring a director delinquent or placing them under probation. The grounds in Section 162(5) include gross abuse of the position of director, taking personal advantage of information or an opportunity, intentionally or by gross negligence inflicting harm on the company, and acting in a manner amounting to gross negligence, wilful misconduct or breach of trust.

Two features make this the sharpest instrument in the Act. First, a delinquency declaration carries disqualification from holding office for a minimum of seven years, and for life in the most serious categories. Second — and this is the part boards underestimate — once the statutory grounds are proved, the court has no discretion to decline the order.

The Supreme Court of Appeal reinforced exactly that in Msimbithi Investments (Pty) Ltd and Others v African Legend Investment (Pty) Ltd and Others (628/2023) [2025] ZASCA 61, handed down on 14 May 2025. In a sprawling governance dispute over a company and its subsidiary, the court found multiple breaches of fiduciary duty on essentially undisputed facts and declared the director delinquent for seven years. The distinction the judgment draws is the one to hold onto: breaches that are egregious rather than technical or trivial are what attract the sanction.

The 2024 amendments changed the arithmetic of this remedy considerably.

Read those rows together and a pattern emerges. If you resigned from a troubled board in 2023 believing the two-year clock had nearly run out, it hasn’t. It restarted, longer, and it reaches backwards.

Start with the statutory frame, because in South Africa the insurance question sits inside Section 78 and cannot be understood without it.

Section 78(2) is the hard boundary. Any provision of an agreement, MOI, company rule or resolution is void to the extent that it purports to relieve a director of a duty under Section 75 or 76, or of liability under Section 77, or to negate, limit or restrict the legal consequences of wilful misconduct or wilful breach of trust. You cannot contract out of being a director. Nobody can indemnify you into safety.

Within that boundary, the Act permits three distinct things: advancing defence expenses (Section 78(4)), indemnifying a director for liability other than the excluded categories (Sections 78(5) and 78(6)), and purchasing insurance to protect a director against liability or expenses for which the company is permitted to indemnify — and to protect the company itself against amounts it has properly indemnified (Section 78(7)). All of this is subject to the MOI, which may restrict or exclude it entirely. That is the first document to read.

Section 78(6) sets out what the company may not indemnify: liability arising from acting without authority, from Section 77(3)(b) reckless or insolvent trading, from acquiescing in conduct calculated to defraud, and from wilful misconduct or wilful breach of trust. And Section 78(3) prevents a company from paying, directly or indirectly, a fine imposed on a director following conviction for an offence — unless the conviction was based on strict liability.

What a policy will not do is equally important. Fraud, dishonesty, wilful misconduct and personal profit to which the director was not legally entitled are standard exclusions — although well-drafted policies apply them only on final adjudication, which means defence costs are funded up to the point the conduct is actually proved. That single drafting point is worth more than a large chunk of limit. Fines and penalties are generally not covered, which aligns with Section 78(3) in any event. Bodily injury and property damage sit in other policies. And “known circumstances” — matters you were already aware of at inception and did not disclose — will be excluded.

Two further clauses deserve your attention before you rely on any policy. Severability determines whether one director’s dishonesty, or a misstatement in the proposal form, taints cover for the innocent directors. And the insured versus insured exclusion can shut out precisely the claim the company brings against its own former director — the most common Section 77 scenario in a private company. Both are negotiable; neither is negotiable after the claim.

And once you are in the seat: read the pack before the meeting, insist that your questions and any dissent are minuted, declare interests in writing rather than verbally, and never sign a solvency and liquidity resolution you have not personally interrogated. If the company becomes financially distressed, the moment to take advice about Chapter 6 business rescue is the moment you first suspect it — not the month the creditors arrive. Section 77(3)(b), read with Section 22(1), is aimed squarely at the director who kept trading and hoped.