Two recent decisions of the Supreme Court of Appeal (SCA) have provided important clarification on issues relating to the liability of directors and officers. The judgments address two areas that have generated ongoing legal uncertainty: the application of prescription to claims involving reckless or fraudulent trading, and the interpretation of directors’ fiduciary obligations when exercising corporate powers. Together, these cases offer useful guidance on how South African courts are likely to approach claims against directors and corporate decision-makers.
Liability for Reckless or Fraudulent Trading and Prescription
Godfrey Goliath Nicholls N.O and Others v Magdalena Gaybba and Another 2026 (1) SA 111 (SCA)
This case arose from the acquisition of a business by a trust in 2010. As part of the transaction, the trust obtained various claims previously held by the company, including a claim relating to the alleged diversion of funds through so-called “rondskyf” transactions. The disputed amount was approximately R10 million. The trustees instituted proceedings against the sole member of a close corporation in her personal capacity. Their claim relied on section 64 of the Close Corporations Act 69 of 1984, which allows courts to hold individuals personally liable where business activities have been conducted recklessly or with fraudulent intent. One of the defences raised by the respondent was prescription. The argument was that the claim had become unenforceable because more than three years had passed since the alleged conduct occurred, and that the claim therefore constituted a “debt” under the Prescription Act 68 of 1969. The High Court accepted this argument and concluded that the claim had prescribed. However, the matter was overturned on appeal. The Supreme Court of Appeal held that proceedings brought under section 64 do not constitute a “debt” in the sense contemplated by the Prescription Act. Instead, liability only arises once a court exercises its discretion to declare that the relevant conduct amounts to reckless or fraudulent trading. Because no enforceable obligation exists until such a declaration is made, the court concluded that prescription does not begin to run in the usual way. As a result, the claim could not be regarded as having prescribed.
Implications for Directors and Insurers
The judgment has important consequences for directors and officers’ liability exposure. It confirms that claims relating to reckless or fraudulent trading may be pursued long after the conduct in question occurred. From a risk perspective, this means that directors may face personal liability for actions taken many years earlier. It also raises considerations for Directors and Officers (D&O) insurance policies, as insurers may need to account for extended exposure periods when structuring policy terms and coverage limits.
Clarifying the “Proper Purpose” Requirement for Directors
Msibithi Investments (Pty) Ltd and Others v African Legend Investment (Pty) Ltd and Others 2026 (1) SA 394 (SCA)
The second case concerned a dispute over a board resolution that authorised the company to enter into a subscription agreement with a trust. The applicants sought to have the resolution set aside, along with all subsequent transactions arising from it. Their challenge relied on section 76(3)(a) of the Companies Act 71 of 2008, which requires directors to exercise their powers in good faith and for a proper purpose. The applicants argued that the agreement served an improper purpose and that the directors had therefore breached their fiduciary duties. The High Court dismissed the application and the matter proceeded to the Supreme Court of Appeal.
The Challenge of Multiple Motives
The central issue before the SCA was how to assess a director’s conduct where a decision is influenced by more than one motive. In many commercial situations, decisions are taken for a variety of reasons, some of which may be legitimate and others potentially questionable. The court addressed this complexity by applying what is known as the “dominant purpose” test. Under this approach, the court examines whether the primary or prevailing purpose behind the exercise of power is legitimate. If the main objective is proper, the existence of additional or secondary motives will not automatically render the decision unlawful. The court therefore confirmed that mixed motives do not necessarily amount to a breach of directors’ fiduciary duties. What matters is whether the principal purpose behind the decision aligns with the requirements of the Companies Act.
Practical Significance for Directors
This judgment provides valuable reassurance for directors navigating complex business decisions. Corporate actions are rarely driven by a single objective, and directors often need to balance several strategic considerations. The SCA’s reasoning confirms that the presence of secondary motivations will not automatically invalidate a board decision, provided that the dominant purpose remains lawful and aligned with the company’s interests.
Key Takeaways from the Two Decisions
These judgments collectively strengthen the legal framework governing directors’ responsibilities in South Africa. The first decision clarifies that claims relating to reckless or fraudulent trading are not subject to the standard prescription rules applicable to ordinary debts. Directors may therefore face liability long after the underlying conduct occurred. The second decision confirms that the evaluation of directors’ fiduciary duties must consider the primary purpose behind a decision rather than focusing on the mere presence of mixed motives. For directors, corporate advisors and insurers, these rulings provide clearer guidance on the risks and responsibilities associated with corporate governance.
