When Companies Are Harmed By Their Own Directors

The classic scenario for a derivative action is where the wrongdoers who harm the company are the directors or controllers of the company, so that the wrongdoers are able subsequently to use their control to prevent the company from instituting legal proceedings against them to remedy the wrong that they themselves have inflicted on the company. The new statutory derivative action under section 165 of the Companies Act of 2008 has failed to give proper recognition to this, and instead imposes additional barriers and obstacles to the availability of the derivative action in cases of directorial misconduct. This is the Achilles heel of the new statutory derivative action, which has the potential to strangle the use of the remedy where it is most greatly needed. The weakness lies squarely in the rebuttable presumption in terms of section 165(7) read with (8). This article focuses on this presumption, its shortfalls and its practical effects, which require legislative amendment. Submissions are made for the reform of the relevant provisions of the Companies Act of 2008 to cure the defects, and guidelines are suggested for the proper judicial approach to the rebuttable presumption, until such time as the suggested amendment to the Act is effected. This article also discusses the role and the relevance of shareholder ratification of a wrong done to the company, in terms of section 165(14). This provision also requires legislative amendment, in the absence of which a court may on a literal interpretation find it to be nonsensical. (See also Part 1 of this article Cassim MF 'When Companies Are Harmed By Their Own Directors: The Defects in the Statutory Derivative Action and the Cures (Part 1)' (2013) 25(2) South African Mercantile Law Journal 168 - 183).