South African directors to face increased legal scrutiny in 2020

South African directors are set to face new pressures and legal challenges in 2020, according to legal experts.

Lee Astfalck, of Clyde & Co in Johannesburg, warned: “Following months of parliamentary enquiries, investigations and commissions, 2020 will see a significant shift towards active steps being taken by companies, regulators and state authorities in bringing directors to task for alleged misconduct.”

He said the flurry of legal action will encompass both state-owned enterprises and the private sector, and will involve the current climate of claims relating to financial irregularities and misleading financial statements, but will also likely go further and include other alleged misconduct and crisis events such as cyber breaches, regulatory investigations, environmental damage or even a plunge in share price following reputational harm.

“The recent decisions taken by government to place certain state-owned enterprises into business rescue proceedings or administration will sharpen the focus on the operation of companies in potentially insolvent conditions and may also lead to subsequent litigation,” said Mr Astfalck.

The move to recover damages will be driven not only by economic necessity but also by the “public demand to bring directors to account”.

He continued: “The likely spate of legal proceedings will involve not only claims for monetary damages but also relief in the form of having directors declared as delinquent or subject to probation under the Companies Act.”

Issues such as a director’s duty to act with the appropriate degree of care and skill and diligence, and the application of the business judgment rule will be applied, tested and developed in light of the particular facts and circumstances of such matters, Mr Astfalck believes.

Finally, he warned: “It is also anticipated that claimants such as trade unions and customers will utilise class action lawsuits and further develop our law insofar as the potential remedies against directors are concerned.

“Litigation funders may seize on such opportunities to drive litigation in the class action arena.”