Ex parte Lebowa Development Corporation Ltd

• Jurisdiction: South Africa
• Judge: Stegmann J
• Judgment Date: 06 February 1989
• Court: Transvaal Provincial Division

Ex parte Lebowa Development Corporation Ltd
1989 (3) SA 71 (T)

1989 (3) SA p71

Citation	1989 (3) SA 71 (T)
Court	Transvaal Provincial Division
Judge	Stegmann J
Heard	August 9,1988
Judgment	February 6, 1989

Flynote : Sleutelwoorde B

Company — Directors and officers — Liability of for debts of company — Section 424(1) of Companies Act 61 of 1973 — Declaration of personal liability for all or any debts of company against persons C who knowingly carried on company's business recklessly or fraudulently — Such remedy is additional to and supplements common law remedies available against wrongdoers who cause injury by their dolus or culpa — Statutory remedy under s 424(1) presupposes existence of debts or other liabilities on part of company — Section 424(1) cannot be D brought into operation unless there is already some independent cause of action against company — When pre-existing cause of action lies against company alone, s 424 enables Court to extend company's liability to such persons as may be shown to have carried on company's business recklessly or fraudulently — Claims by persons already enjoying cause E of action against company may thereby be enforced against wrongdoers personally — Where pre-existing claim lies against company and against persons qualifying to be declared as wrongdoers, s 424 provides additional (and possibly more expeditious and less costly) remedy F against declared wrongdoers — Declaration under s 424(1) appears to be intended also for benefit of company itself — Intention may have been to indemnify company completely from declared wrongdoers in appropriate cases.

Company — Directors and officers — Liability of for debts of company under s 424(1) of Companies Act 61 of 1973 — Nature of G conduct rendering person liable to be declared personally responsible for debts of company — Section specifies that conducting business of company fraudulently or recklessly may result in declaration — 'Recklessly' in context of s 424 implies existence of objective standard of care which would be observed by reasonable man conducting business of company in particular circumstances — A serious departure from such H standard is recklessness.

Company — Compromise — Scheme of arrangement under s 311 of Companies Act 61 of 1973 — Meeting(s) of creditors to consider proposed scheme — Requirements to be met before Court will authorise summoning of such meeting(s) — Firstly, proposal to be in terms clear I and comprehensible without to ordinary people without their requiring skilled professional assistance — Secondly, proposal must embody compromise or arrangement as contemplated by s 311, ie compromise or arrangement to be between company and its creditors or members — Thirdly, it must be probable that, if Court were to authorise summoning J of meeting(s) of creditors, proposal

1989 (3) SA p72

A will be put to them — Must also be probable that, if requisite majority were to agree to proposal, any conditions contained therein will be fulfilled — Fourthly, information required for creditors to be placed before Court to enable Court to consider its sufficiency for its intended purpose — Information should include (a) explanatory B statement required by s 312(1)(a)(i); (b) disclosure of any material interest of company directors, as members or as creditors, and effect of proposal on such interests; (c) all other information required to enable creditors to assess relative merits of proposal and alternatives to it — Relevant information in regard to (c) would include proper C assessment of prospect of establishing that loss suffered by company recoverable from directors or other officers personally — Fifthly, it must be shown that practical business merits of proposal such that a man of business could reasonably approve of it — Sixthly, there should be nothing in proposal or circumstances in which it is put forward to show D that no Court could possibly approve of it — In this regard, Court would take into account not only wishes of majority of creditors, but also considerations of commercial morality.

Company — Compromise — Scheme of arrangement under s 311 of Companies Act 61 of 1973 — Commercial morality of — Scheme E proposed in terms whereof company under judicial management would have assets of R71 000 and liabilities of R1 191 623 — Offeror undertook to subordinate claim for R1 191 623 to claims of all future creditors and to pay all future creditors if company unable to do so — Proposal subject to company being discharged from judicial management — F Argument that proposal should be accepted because, although company's liabilities exceed its assets, company would be able to pay its debts and should therefore not be regarded as insolvent rejected as fallacious — Company whose liabilities exceed its assets so that it is actually G insolvent cannot resist winding-up merely because current liabilities being met — Furthermore, mere fact that company which is actually insolvent has not yet defaulted on current liabilities does not give it right to continue trading in insolvent circumstances — In casu, Court holding that, if proposed scheme sanctioned, company would be freed to trade in insolvent circumstances — Public policy precludes Courts H from condoning, encouraging or facilitating practice of trading in insolvent circumstances — Application for leave to summon meetings of creditors to consider proposed scheme rejected.

Company — Compromise — Scheme of arrangement under s 311 of Companies Act 61 of 1973 — Scheme proposed in terms of which company I would have assets of R71 000 and liabilities of R1 191 623 — Offeror would be sole creditor and gave contractual undertaking to subordinate its claim to claims of all future creditors — Court holding that such contractual subordination effecting no permanent change to statutory J ranking of claims — Subordination could be undone by contract or be overtaken by

1989 (3) SA p73

A events and disappear — In any event, such subordination not converting de facto insolvency into solvency.

Company — Directors and officers — Liability of for debts of company — Generally — Directors and officers authorised to expose capital provided by members to normal risks attendant upon company's business — Nothing entitles them to expose assets of other persons B (including creditors' claims) to such risks in absence of consent — Conduct of director or officer who exposes claim of creditor to foreseeable loss through risks attendant upon company's own business is culpable — Such conduct departs from standards of reasonable man and constitutes delict of negligence — May also amount to gross C negligence or recklessness — When company is insolvent, there is always a risk that the terms of payment to creditors may not be honoured — Director or officer who obtains credit for insolvent company without disclosing such risk to creditor, commits fraud — Such fraud involves D dishonest exposure of creditor's economic interest to unauthorised risk — Honest belief that creditor would not be prejudiced of no avail — Potential prejudice in exposing creditor to risk sufficient to establish fraud — At common law, anyone who injures another by fraud or negligence is personally liable to victim for resulting patrimonial loss E — Companies Act 61 of 1973 offers limited protection to directors and officers from personal liability in s 248 — But Act provides no immunity from personal liability for fraud — Additional remedy in form of declaration of personal liability against any person carrying on business of company recklessly or fraudulently provided by s 424.

F Company — Directors and officers — Liability of for debts of company — Liability for debts resulting from negligence — Section 248 of Companies Act 61 of 1973 provides only limited relief from liability for negligence — Court empowered by s 248 to grant relief to directors and officers against (i) claims by company (or its G liquidator) and (ii) criminal liability — Relief against claim by company not absolute - Such relief limited to situation in which directors and officers found to have acted honestly and reasonably — Legislature intending that Court's readiness to find that negligent director or officer acted reasonably should vary inversely in relation H to degree of negligence proved — Unlikely, therefore, that Court would find reasonableness where gross negligence or recklessness proved.

Company — Directors and officers — Liability of for debts of company — Criminal liability — In addition to common law crime of fraud, directors and officers may be charged with contravening ss 424(3) I and 425 of Companies Act 61 of 1973 read with s 135(3)(a) of Insolvency Act 24 of 1936 — On charge of statutory offence, if director or officer concerned incurred debts when company's liabilities exceeded its assets, presumption that he incurred debts without reasonable J expectation of being able to discharge them unless he can prove the contrary.

1989 (3) SA p74

A Company — In liquidation or under judicial management — Duties of liquidators and judicial managers under ss 402(d) and 433(k) of Companies Act 61 of 1973 — Requirements for proper performance of such duties set out.

Company — In liquidation or under judicial management — B Companies trading in insolvent circumstances — Results in companies being wound up at stage when so few assets remaining that concurrent creditors receive only a few cents in the rand for claims — Court holding that such practice unacceptable and contrary to public policy — Reduction of incidence of practice requiring more widespread C enforcement of common law and statutory remedies available against directors and officers who cause loss to companies through dolus or culpa — More widespread enforcement depends upon liquidators and judicial managers...