Food & Nutritional Products (Pty) Ltd v Neumann

• Jurisdiction: South Africa

Food & Nutritional Products (Pty) Ltd v Neumann
1986 (3) SA 464 (W)

1986 (3) SA p464

Citation	1986 (3) SA 464 (W)
Court	Witwatersrand Local Division
Judge	Schabort J
Heard	May 1, 1985
Judgment	June 7, 1985

Flynote : Sleutelwoorde E

Company — Directors and officers — Directors — Liability of for debts of the company — Reckless or F fraudulent conduct of the business of the company — Act 61 of 1973 s 424 (1) — Proceedings against director — Word "application" in s 424 (1) not intended to have the narrow meaning of proceedings by way of motion only — Proceedings under section can be by way of action as well.

Headnote : Kopnota

The word "application" in s 424 (1) of the Companies Act 61 of G 1973 (which provides for an "application" to Court for an order declaring that a director, or any other person, is personally responsible for the debts of the company concerned where the business of the company has been carried on recklessly or fraudulently) was not intended to have the narrow meaning of proceedings by way of motion only, but was intended to embrace proceedings by way of action as well. H

Case Information

Exception to a special plea. The nature of the pleadings appears from the reasons for judgment.

P N Levenberg for the excipient (plaintiff).

S J Nochumsohn for the respondent (defendant).

Cur adv vult. I

Postea (June 7).

Judgment

Schabort J:

This matter came before me as an exception to the defendant's special plea to the plaintiff's combined summons. The point taken in the special plea is that s 424 (1) of the J Companies Act 61 of 1973 ("the Act"), upon which the plaintiff's cause of action is based, enjoined

1986 (3) SA p465

Schabort J

the plaintiff to proceed on motion. The exception is to the A effect that the special plea does not disclose a defence.

Section 424 reads as follows:

"Liability of directors and others for fraudulent conduct of business:

(1) When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to B defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or C other liabilities of the company as the Court may direct.

(2) (a) Where the Court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to the declaration, and in particular may make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him or any company or person on D his behalf or any person claiming as assignee from or through the person liable or any company or person acting on his behalf, and may from time to time make such further orders as may be necessary for the purpose of enforcing any charge imposed under this subsection.

(b) For the purposes of this subsection, the expression 'assignee' includes any person to whom or in whose E favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for valuable consideration given in good faith and without notice of any of the matters on the ground of which the declaration is made.

(3) Without prejudice to any other criminal liability incurred, where any business of a company is carried on recklessly or with such intent or for such purpose as is mentioned in ss F (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be guilty of an offence.

(4) The provisions of this section shall have effect notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the declaration is made."

The particulars of the plaintiff's claim may be summarised as G follows: it is alleged that the defendant was the sole director and sole shareholder of W Newman and Co (Pty) Ltd during the period September 1980 until 21 April 1981; that the company was provisionally wound up on the latter date and that it was subsequently wound up finally; that the company was at H the date of liquidation indebted to the plaintiff in the sum of R29 541,55, being the balance payable in respect of goods sold and delivered by the plaintiff to the defendant; that the plaintiff duly proved a claim against the company but that the plaintiff as a concurrent creditor has not and will not receive any dividend in respect of the claim, the surplus of assets I over liabilities being insufficient for this purpose.

It is further alleged that as from 1 September 1980 until 21 April 1981, the business of the company was carried on

"(a)

with intent to defraud creditors of the company, or alternatively

(b)

recklessly, or alternatively,

(c)

both with intent to defraud creditors of the company and recklessly".

J and that the defendant was knowingly a party thereto.

1986 (3) SA p466

Schabort J

A Details of the manner in which the company's business was allegedly carried on as aforesaid are the following:

"9.1

The defendant permitted a situation to arise where a man known as Lukka and also known as Nevine Patel was able to and did:

(a)

dispose of goods purchased by the company, B without the company receiving the proceeds of such disposition;

(b)

dispose of goods purchased by the company, whilst making out fictitious invoices to account for the disposal of such goods;

(c)

receive payment from third parties in respect of goods purchased by the company C and resold to the said third parties, not for the benefit of the company.

9.2

The defendant credited his loan account in the company with an amount of at least R3 289, when in truth and in fact he had not lent the aforementioned sum or any portion thereof to the company.

9.3

The defendant failed to maintain a banking account or D savings account for the company separately to his own savings accounts.

9.4

The defendant failed to separate adequately his own affairs from those of the company.

9.5

The defendant failed to maintain a system of accounting which adequately differentiated between E cash deposits deposited in his personal savings accounts for his own account and cash deposits deposited for the company's benefit in his personal savings accounts.

9.6

The defendant was a party to the failure by the company to maintain adequate accounting records in F accordance with s 284 of the Act.

9.7

The company continued to trade at a time when no annual financial statements had been made out or laid before an annual general meeting of the company or approved by shareholders of the company since approximately 1977.

9.8

The defendant failed to cause annual financial G statements to be made out and to be laid before an annual general meeting of the company for a period commencing in approximately 1977 until the date of provisional winding-up of the company, as required by s 286 of the Act.

9.9

The defendant entrusted a large portion of the H purchasing and selling of the company to a person whose identity he failed to confirm.

9.10

The defendant entrusted a large portion of the buying and selling of the company to a person about whom he had made inadequate enquiries.

9.11

The defendant failed to disclose to creditors of the I company or persons who sold to the company on credit that he had entrusted a large portion of the buying and selling of the company to a person about whom he had made inadequate enquiries and about whom he knew very little.

9.12

The defendant failed to maintain adequate control over J the person to whom he had entrusted a large portion of the buying and selling of the company.

1986 (3) SA p467

Schabort J

9.13

The defendant failed to ascertain whether sales A purportedly effected by one Lukka, also known as Patel, on behalf of the company were in fact:

(a)

effected;

(b)

delivered to the address to which they were B to be delivered; and

(c)

effected to non-fictitious persons.

9.14

The defendant failed to make adequate enquiries as to the creditworthiness of persons purchasing goods from the company.

9.15

The defendant permitted a rapid and substantial increase in the purchasing activities of the company, C whilst failing to ensure that the company was able to pay for and to sustain the rapid increase in purchasing activities by the company.

9.16

The defendant permitted the company to purchase large quantities of goods and to incur large credit without the company having the necessary means to pay for such purchases.

9.17

Having purchased goods on credit on behalf of the D company, the defendant failed to ensure that the goods were in fact delivered to genuine addresses and genuine purchasers.

9.18

The defendant rapidly incurred large credit for the company in a completely new sphere of operation in E which he lacked the necessary expertise.

9.19

The defendant failed to disclose all or any of the aforementioned to creditors of the company and in particular to the plaintiff."

The plaintiff's claim, apart from claims for interest and costs of suit, is for an

"... order in terms of s 424 (1) of the Companies Act 61 of 1973 declaring that the defendant...