By Sarah Robinson and Dylan Olivier

In South African company law, a private company is recognised as a separate legal entity, distinct from its directors and shareholders. This principle of separate legal personality is entrenched in the Companies Act 71 of 2008 and has long been a cornerstone of our corporate legal system.

As a general rule, directors are not personally liable for the debts of the company, unless they act outside the boundaries of their duties or legal protections. However, directors can still incur personal liability in specific instances, not only through delinquent conduct or piercing the corporate veil, but also through personal suretyship, which is often overlooked until it’s too late.

 

A Common Question from Directors of Distressed Companies

A recent legal question posed by a client, and one we encounter often when directors of financially distressed companies seek our advice, was:

“If I resign as a director, does my liability fall away?”

The answer, unfortunately, is no. Especially where the director has signed as a personal surety for the company’s debts.

 

Signing as Surety: A Personal Legal Commitment

In South African law, a suretyship agreement is a form of security governed primarily by the common law and the general principles of the law of contract. By signing as a surety, you bind yourself, in your personal capacity, to fulfil the obligations of the company if it defaults. This obligation is independent of your status as a director and remains binding even after resignation.

Many directors inadvertently bind themselves as sureties when completing standard credit applications, lease agreements, or loan documents, often without realising the legal implications. These documents frequently include clauses that extend joint and several liability to directors signing in both representative and personal capacities.

Once signed, you become a co-principal debtor, meaning the creditor is legally entitled to claim the full amount directly from you if the company fails to pay. Where the suretyship includes a “joint and several” liability clause, as most do, the creditor is entitled to pursue you personally, the company, or both, and may elect to proceed directly against the surety without first exhausting remedies against the principal debtor.

If you are married in community of property, the joint estate may be liable. This means that your spouse’s assets, i.e. house, salary, savings, could be attached alongside yours to satisfy the debt.

 

No Shield in Insolvency or Resignation

Even if the company is liquidated or placed under business rescue, the creditor can still proceed against the surety personally, unless a formal compromise is reached or the debt is extinguished.

Resignation from your position as a director does not affect the enforceability of a personal suretyship already given. It is a standalone contractual obligation that survives both resignation and liquidation of the principal debtor. Suretyship is a separate agreement with the creditor, and unless the creditor expressly and in writing releases you from that obligation, you remain bound.

 

When Else Can a Director Be Personally Liable?

Besides signing surety, South African law provides for other instances in which a director may incur personal liability, including:

1. Section 77 of the Companies Act

Directors may be held personally liable for:

• Breach of fiduciary duties;
• Carrying on the company’s business recklessly, with gross negligence, or with intent to defraud;
• Knowingly signing off on false or misleading financial statements.

2. Section 22 of the Companies Act

Prohibits a company from trading recklessly, negligently, or while insolvent. Directors who knowingly allow this may face personal liability.

3. Tax Liabilities

Under the Tax Administration Act 28 of 2011, directors may be held personally liable for certain unpaid tax debts, particularly PAYE, VAT, and UIF, where the director’s negligence or fraud contributed to the non-payment.

 

Practical Tips for Directors

Directors should take proactive steps to limit exposure to personal liability:

1. Always read the fine print: Never sign a document without understanding its full implications. Be alert to any suretyship clauses.
2. Understand your capacity: Ask whether you are signing in your personal capacity, and if so, whether you are willing to bear the full financial risk.
3. Avoid blanket suretyships: Where possible, negotiate the scope of the surety, and consider limiting the amount, duration, or specific obligations covered.
4. Document your resignation: Properly record your resignation at CIPC. While this won’t relieve you of pre-existing surety obligations, it helps to protect you from new liabilities.
5. Negotiate termination or release: If your involvement with the company ends, request a written release from any suretyships. Without this, your liability continues indefinitely.
6. Consider your marital regime: If married in community of property, be aware that your spouse’s assets could be attached in enforcement proceedings.

 

Conclusion

While directors of South African companies generally enjoy protection from personal liability, that protection has limits. Signing as a personal surety, even unintentionally, creates a separate and enforceable legal obligation that survives resignation or the failure of the business.

In tough economic times, these personal guarantees are often the first recourse for creditors. Directors must therefore exercise caution, seek legal guidance where needed, and understand the long-term consequences of signing any agreement that includes a suretyship clause.

Photo by Dylan Gillis on Unsplash