Howard v Herrigel and Another NNO

• Jurisdiction: South Africa
• Citation: 1991 (2) SA 660 (A)

Howard v Herrigel and Another NNO
1991 (2) SA 660 (A)

1991 (2) SA p660

Citation	1991 (2) SA 660 (A)
Court	Appellate Division
Judge	Joubert JA, Smalberger JA, Nestadt JA, Kumleben JA and Goldstone JA
Heard	February 18, 1991
Judgment	March 8, 1991

Flynote : Sleutelwoorde

Company — Directors and E officers — Director — Liability of for debts of company — Declaration of personal liability in terms of s 424(1) of F Companies Act 61 of 1973 for all or any debts of company against person who knowingly carried on business of company recklessly or fraudulently — Applicant for such declaration required to prove, on balance of probabilities, that person sought to be held liable had knowledge of facts from which conclusion properly to be drawn that business of company carried on recklessly or with intent to defraud creditors of G company or creditors of any person or for any fraudulent purpose — Not necessary to prove that person also had knowledge of legal consequences of such facts — Also not necessary to prove causal connection between fraudulent or reckless conduct of business of company and debts or liabilities for which person may be declared liable — Directors having H duty to observe utmost good faith towards company and to exercise reasonable skill and diligence — Where director thus sought to be held liable under s 424(1), such director may be found to have been 'party' to reckless or fraudulent conduct of company's business, even in absence of some positive steps by him in carrying on of company's business — I Supine attitude might even amount to concurrence in such conduct.

Company — Directors and officers — Director — Duties of — Duty to observe utmost good faith towards company and to exercise reasonable skill and diligence — Unhelpful and misleading to classify directors as J 'executive' and 'non-executive' for purpose of

1991 (2) SA p661

A ascertaining duties towards company or when any specific or affirmative action required of them — General rule is that, once person accepts appointment as director, he becomes a fiduciary in relation to company and in his dealings on its behalf — Application of rule to particular B incumbent depends on facts and circumstances of each case — One such circumstance is whether he was engaged full-time in affairs of company — Not helpful to say of particular director that his duties less onerous because he was not 'executive director' — Whether enquiry be one in relation to negligence, reckless conduct or fraud, legal rules same for all directors. C

Headnote : Kopnota

At common law a director of a company who is knowingly a party to a fraud on the part of his company would be liable in damages for any loss suffered by any person in consequence of the fraud. In order to fix the liability of such a director it would be necessary to establish a causal connection between the fraud of the company and the damages claimed from the director. The quantum of damages would also have to be proved. The D provisions of s 424(1) of the Companies Act 61 of 1973 enable the Court to declare such director liable 'for all or any of the debts or other liabilities of the company' without proof of the causal connection between the fraudulent conduct of the business of the company and the debts or liabilities for which he may be declared liable. In order to fix a director with liability under s 424(1), it must be established that he was 'knowingly a party to the carrying on of the business in the manner aforesaid' (namely 'recklessly or with intent to defraud creditors of the company or creditors of any other person or for any E fraudulent purpose'). Having regard to the provisions of s 424 and to its purpose, to be entitled to an order the applicant must prove, on a balance of probabilities, that the person sought to be held liable had knowledge of the facts from which the conclusion is properly to be drawn that the business of the company was being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. It would not be necessary to go further and prove that the person also had actual knowledge of the legal F consequences of those facts.

A director of a company has a duty to observe the utmost good faith towards the company and, in so doing, to exercise reasonable skill and diligence. A director has an affirmative duty to safeguard and protect the affairs of the company. It therefore follows that when the person sought to be held liable under s 424(1) is a director, he may well be found to have been a 'party' to the reckless or fraudulent conduct of G the company's business even in the absence of some positive steps by him in the carrying on of the company's business. His supine attitude might even amount to concurrence in that conduct. Whether such inference could properly be drawn would depend upon the facts and circumstances of the particular case.

It is unhelpful and even misleading to classify company directors as 'executive' and 'non-executive' for the purposes of ascertaining their duties to the company or when any specific or affirmative action is required of them. No such distinction is to be found in any statute and, H at common law, once a person accepts an appointment as a director, he becomes a fiduciary in relation to the company and in his dealings on its behalf. That is the general rule and its application to any particular incumbent of the office of director must necessarily depend on the facts and circumstances of each case. One of the circumstances may be whether he was engaged full-time in the affairs of the company. However, it is not helpful to say of a particular director that, because I he was not an 'executive director' his duties were less onerous than they would have been if he had been an 'executive director'. Whether the enquiry be one in relation to negligence, reckless conduct or fraud, the legal rules are the same for all directors. In an application of the aforesaid rules to the facts in a particular case, one of the factors relevant to judging the conduct of a director might be his access to information and the justification for relying upon the reports he receives from others, whether or not he is classified as an 'executive' J or 'non-executive' director.

1991 (2) SA p662

Case Information

Appeal from a decision in the Witwatersrand Local Division (Morris AJ). The facts appear from the reasons for judgment.

A The appellant, who appeared in person, referred to the following authorities: Joh-Air v Rudman 1980 (2) SA 420 (T) at 428B; Food & Nutritional Products (Pty) Ltd v Neumann 1986 (3) SA 464 (W) at 477G; Room Hire Co (Pty) Ltd v Jeppe Street Mansions (Pty) Ltd 1949 (3) SA B 1155 (T) at 1161 - 2; Korff v Scheepers en Andere 1962 (3) SA 83 (W) at 85D; R Bakers (Pty) Ltd v Ruto Bakeries (Pty) Ltd 1948 (2) SA 626 (T) at 631; Adbro Investments Co Ltd v Minister of the Interior 1956 (3) SA 345 (A) at 350; Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd 1978 (4) SA 696 (T) at 698H - 699A; Standard Bank of SA Ltd v C Newgarten and Others 1987 (3) SA 695 (W) at 699C - G; Metallurgical & Commercial Consultants (Pty) Ltd v Metal Sales Co (Pty) Ltd 1971 (2) SA 388 (W) at 390; Sewmungal and Another NNO v Regent Cinema 1977 (1) SA 814 (N) at 819A - C and 820E - F; Trust Bank van Afrika Bpk v Western Bank en Andere 1978 (4) SA 281 (A) at 371A; Wiese v Joubert en Andere 1983 (4) SA 182 (O) D at 202E - 203C; Da Matta v Otto NO 1972 (3) SA 858 (A) at 868G - 869; S v Parsons and Another 1980 (2) SA 397 (T) at 400G; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd and Others; Fisheries Development Corporation of SA Ltd v Jorgensen and Another 1980 (4) SA 156 (W) at 165F; In re Brazilian Rubber Plantations E & Estates Ltd [1911] 1 Ch 425 at 437; In re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 427; Re Maidstone Buildings Provisions Ltd [1971] 3 All ER 363 (Ch) at 368g ; Huckerby v Elliot [1970] 1 All ER 189 (QB) at 193 - 4; Gower Principles of Modern Company Law 4th ed at 602 - 3; Pennington's Company Law 5th ed at 676 - 7; W A Joubert (ed) The Law of South Africa vol 4 para 231 at 226; Cronje NO v Stone en 'n Ander F 1985 (3) SA 597 (T) at 615D - E; Meskin Henochsberg on the Companies Act 4th ed vol 2 at 822; Mouton v Die Mynwerkersunie 1977 (1) SA 119 (A) at 147B - E.

S du Toit SC (with him G S Coetzee) for the respondents referred to the following authorities: In re City Equitable Fire Insurance Co Ltd G [1925] ChD 407; Sackville-West v Nourse and Another 1925 AD 516; Mahomed v Malk 1930 TPD 615; Van Niekerk and Van der Westhuizen v Weps and Morris 1937 SWA 99; R v Zackey 1945 AD 505; S v Van Zyl 1969 (1) SA 553 (A); Da Mata v Otto NO 1972 (3) SA 858 (A); Sewmungal and Another NNO v Regent Cinema 1977 (1) SA 814 (N); Fisheries Development Corporation of H SA Ltd v AWJ Investments (Pty) Ltd and Others; Fisheries Development Corporation of SA Ltd v Jorgensen and Another 1980 (4) SA 156 (W); S v Harper and Another 1981 (2) SA 638 (A); Tamarillo (Pty) Ltd v B N Aitken (Pty) Ltd 1982 (1) SA 398 (A); Gordon NO and Rennie NO v Standard Merchant Bank Ltd and Others 1984 (2) SA 519 (C); Cronje NO v Stone en 'n Ander 1985 (3) SA 597 (T); Food & Nutritional Products (Pty) Ltd v I Neumann 1986 (3) SA 464 (W); Meskin Henochsberg on the Companies Act 4th ed; Cilliers, Benade et al Korporatiewe Reg (1987); Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 (CA) at 435; In re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425 at 437; Dovey and Another v Cory [1901] AC 477 (HL) at 486, 492; In re Denham & Co [1883] 25 Ch 752; J Huckerby v Elliot [1979] 1 All ER 189 at 194c ; L C B Gower Principles

1991 (2) SA p663

of Modern Company Law 4th ed at 606; Pennington's Company Law 4th ed at 545 et seq...