When considering the above cumulatively, a dishonest director may be tempted to think along the following lines: If an order of specific performance is handed down against a company, isn’t having the company deregistered (for instance, by virtue of a failure to lodge annual returns – the proverbial “dying a natural death”) a way to avoid the issue entirely? Not so fast. In a recent judgment, the Western Cape High Court in Lupacchini N.O. v That Collective (Pty) Ltd and Others (Case No. 11348/2019) provided a reminder that directors may, in certain circumstances, face personal consequences for a company’s failure to comply with a court order – more specifically, and interestingly, via the route of a contempt of court order.

The judgment is particularly significant as the court not only held a registered director personally liable for contempt of court, but also found that an individual who was never formally appointed as a director was nonetheless a de facto director and equally accountable for conduct in relation to the company’s affairs.

Directors’ personal liability under the Companies Act

Section 77 of the Companies Act contains a number of provisions that expose directors to personal liability in certain circumstances. Directors may, for example, be held liable for breaches of fiduciary duties, reckless trading, or losses caused to a company through misconduct. But this is a liability to the company, not to outsiders such as creditors. Thus, section 77 is not of much assistance to the latter.

Importantly, the Companies Act recognises that the deregistration of a company does not necessarily extinguish or affect any liability that the directors attracted in their own right. In this regard, section 83(2) provides that the removal of a company’s name from the companies register does not affect the liability of any former director, shareholder or other person in respect of any act or omission that took place before the company was removed from the register. Section 83(3) further provides that such liability continues and may be enforced as though the company had not been removed from the register.

The initial dispute

The dispute arose from an agreement in terms of which That Collective (Pty) Ltd (Company) undertook to develop an educational mobile application for the applicant. Following disputes regarding delivery of the application and associated intellectual property, the High Court granted orders in 2019 and 2020 directing the Company and related parties to deliver the complete application and supporting materials. Despite these orders, compliance never followed.

By the time contempt proceedings were instituted, the Company had been deregistered. The applicant therefore sought contempt orders not only against the Company but also against the individuals behind it.

When are directors personally liable?

The second and third respondents, a married couple, one of whom was a registered director of the Company and the other not, argued that they had not personally been parties to the original proceedings and that the orders had been granted against the Company rather than against them.

The court accepted the general principle that directors of a company are not automatically liable for contempt merely because an order was granted against that company. What distinguished Lupacchini was the second and third respondents’ intimate involvement in both the litigation and the Company’s affairs.

The court found that the two individuals concerned were the “life-blood” of the Company. They had directed the Company’s opposition to the original proceedings, instructed attorneys, participated in communications regarding compliance with the court order, and had full knowledge of the order and its requirements. Most importantly, they were the persons through whom the Company could act.

Although part of the development work was subcontracted, the court rejected attempts to shift responsibility to the subcontractor. Significantly, the court observed that the directors appeared simply to have waited for the subcontractor to comply rather than taking active steps to ensure that the Company fulfilled its own obligations. The court was unconvinced that genuine efforts had been made to achieve compliance and concluded that the directors had failed to rebut the presumption of wilfulness and mala fides applicable in contempt proceedings.

Consequently, the court found both individuals to be in contempt of court, coupled with their sentences being suspended on condition that they ensured that the Company (which would now have to be re-registered by them) complied with the specific performance orders.

The rise of the de facto director

One of the more interesting aspects of the judgment concerns the court’s treatment of a so-called de facto director.

Only one of the individuals concerned was reflected in the Companies and Intellectual Property Commission records as a director. The other was not formally appointed. Nevertheless, the facts of the matter showed that he consistently held himself out as a director, dealt with the applicant as a director, directed communications on behalf of the Company, deposed to affidavits describing himself as a director and actively participated in the management of the business.

The court accepted the established principle that a de facto director is a person who assumes the functions of a director and acts as such despite not having been formally appointed. Looking beyond formal records, the court concluded that he participated in the management of the Company on an equal footing with the registered director and was effectively one of the individuals through whom the Company operated.

As a result, he was treated no differently from the registered director for purposes of responsibility for compliance with the court order.

Key takeaways

To be clear, Lupacchini is not a corporate veil-piercing case, and does not establish any form of novel personal liability on directors for the debts of a company, whether in respect of court orders or otherwise. The successful applicant did not end up with an order declaring the directors of the performance debtor (the Company) liable for the latter’s obligations. Rather, the directors were held to account for their own conduct, which liability does not dissolve together with the deregistered company. It was a contempt of court matter which demonstrates that there are nevertheless other relatively swift avenues available – even if they are, by far, a second prize – to a judgment creditor to apply enormous pressure on the debtor company’s directors to ensure that the company complies with its court ordered obligations.