The distinguishing characteristic of the personal liability company is that its Memorandum of Incorporation must specifically state that it is a personal liability company. This has had the effect that its current directors, including its past directors, are jointly and severally liable, together with the company, for any debts and liabilities of the company which are or were contracted during their respective periods of office which has been elucidated in section 19(3) of Companies Act 2008.
The effect of section 19(3) on a personal liability company is that it renders the current directors and past directors as co-directors with the company. The directors and the company are therefore singuli et in solidum for the contractual debts and liabilities of the company.
The liability of a director or a past director is limited to the debts and liabilities of the company which were contracted during his period of office as a director. It is further limited to the contractual debts and liabilities of the company, as opposed to debts and liabilities of some other nature.
The directors’ joint and several liability does not include any liability for delictual claims or unjustified enrichment claims against the company, because these liabilities are not contracted. Nor does the directors’ liability extend to liability for tax and other statutory charges including statutory liability in respect of voidable and undue preferences under the Insolvency Act 24 of 1936, as none of these liabilities are of a contractual nature. The intention of the legislature was to relate directors’ liability to nothing other than the company’s ordinary financial or commercial commitments.
The intention of the legislature was not simply to impose on the directors a liability equivalent to the common law liability of partners. It was rather to impose on the directors an entirely new statutory liability, and to give creditors an entirely new remedy which would enable them to hold the directors liable singuli et in solidum for the company’s debts and liabilities before its liquidation.
There is accordingly a twofold effect:
- creditors are entitled to hold the directors jointly and severally liable for the company’s contractual liabilities contracted during their periods of office;
- if a director pays any such debt of the company, he would have a right of recourse against his directors for their proportional shares of the debt.
Importantly, however, the company itself does not have a right of recourse against its directors, where the company has paid any of its debts. This would presumably continue to apply to personal liability companies under the new Act.
Under the previous company law regime, an additional safeguard for creditors was that the consent of the Court was required for a special resolution to remove the personal liability provision from the company’s Constitution. The Court had to be satisfied that the removal or alteration would be just and equitable.
Companies Act 2008 has now dispensed with this protective measure for creditors of the company. Instead it provides, in relation to the conversion of a personal liability company, that if an amendment to the Memorandum of Incorporation of a personal liability company has the effect of transforming that company into any other category of company, the company must give at least ten business days advance Notice of the filing of the Notice of Amendment to any professional or industry regulatory authority which has jurisdiction over the company’s business activities.
Such Notice must also be given to any persons who, in their dealing with the company, may reasonably be considered to have acted in reliance upon the joint and several liability of any of the directors for the company’s debts and liabilities, and to any persons who may be adversely affected if the joint and several liability of any of the directors for the company’s debts and liabilities is terminated. Persons who receive, or are entitled to receive, the Notice may apply for a Court Order to protect their interests.
The personal liability company is expected to be used primarily by associations of professional persons, such as attorneys, stockbrokers, public accountants, auditors and quantity surveyors, who wish to have the convenience and advantages of separate legal personality, especially perpetual succession, while still complying with their Professional Rules, which require personal liability of all of the directors in a personal liability company. It may also be used by persons who are not members of professions, yet wish for the directors of the company to bear personal liability.
Like the private company, the personal liability company need only have a minimum of one director on the board of directors, subject to the Memorandum of Incorporation, which may specify a higher minimum number in substitution.
Therefore:
- the personal liability company may have shareholders who are not directors of the company;
- the directors have a choice whether they want to be shareholders of the company or not;
- the minimum directors required for a personal liability company is one director. Section 66(2)(a) of the Act provides that the board of a personal liability company must comprise at least one director, who may therefore not be a trust
Source Reference
Courtesy of: Adv. L Hefer. Executive Chairman | Genesis Corporate Services CC. www.genesiscorporate.biz