Kalinko v Nisbet and Others

• Jurisdiction: South Africa

Kalinko v Nisbet and Others
2002 (5) SA 766 (W)

2002 (5) SA p766

Citation	2002 (5) SA 766 (W)
Case No	20283/2001
Court	Witwatersrand Local Division
Judge	Claassen J
Heard	March 14, 2002
Judgment	March 14, 2002
Counsel	A R Duminy for the plaintiff.; E Wessels for the defendants (excipients).

Flynote : Sleutelwoorde D

Company — Directors and officers — Directors — Liability of for debts of company — Companies Act 61 of 1973, s 424(1) — Whether 'debt' contemplated in s 424(1) referring only to debts incurred at time of E alleged fraudulent or reckless conduct or also to debts incurred before alleged wrongful conduct — Section 424(1) expressly relieving claimant from duty of proving causal connection between fraudulent conduct of business of company and debts for which wrongdoer may be declared liable — Fact that debt incurred prior to wrongful conduct not exonerating fraudulent or reckless director from declaration under s 424(1) — Critical time is when business carried out unlawfully, not F when debts negatively influenced by such conduct concluded, ie it is effect on current debts at time of wrongful conduct which is of significance when applying s 424(1), irrespective of when such debts incurred.

Company — Compromise — Scheme of arrangement in terms of s 311 of Companies Act 61 of 1973 — Whether creditor's rights in terms of G s 424(1) of Companies Act extinguished ipso jure upon sanctioning and implementation of s 311 compromise — Semble: Legislature would not have provided meaningful remedy against fraudulent and reckless conduct by directors and other officers of company and in same breath intended that remedy to be frustrated or lost by sanctioning and implementation of compromise. H

Company — Winding-up — Creditors — Subordination agreement — Whether natural death of subordination agreement upon liquidation of company precluding right of creditor to seek relief against wrongdoing directors or officers in terms of s 424(1) of Companies Act 61 of I 1973 — Best course to consider subordinated claim to remain residually extant for purposes of unravelling fraud or recklessness under s 424(1), for it is in such circumstances that need for remedy in s 424(1) most pressing — Contrary course would allow reckless or fraudulent directors and officers to benefit from their actions. J

2002 (5) SA p767

Company — Shares and shareholders — Shareholders — Actions by and A against — Representative (or 'derivative') action by minority shareholder — For wrong done to company resulting in diminishing of value of his shares — As minority shareholder in such circumstances acting as representative of company, such action not appropriate where company itself has claim against wrongdoer — This would result in double recovery by both minority shareholder and company from wrongdoer — To be B kept in mind that rule that only company itself may sue wrongdoer not absolute — Where risk of double jeopardy non-existent and shareholder left with diminished patrimony, continued operation of rule amounting to unwarranted and technical obstruction of course of justice — Additional reason why rule not applicable that shareholder, though lacking proprietary interest in company's business, having C financial interest therein — Semble: Rule should also not apply where majority shareholder placed in minority position in respect of appointment, removal and replacement of directors — Argument that shareholder should in such circumstances avail himself of s 220 of Companies Act 61 of 1973 to be rejected since such rights lapsing upon insolvency of company. D

Headnote : Kopnota

Section 424(1) of the Companies Act 61 of 1973 supplements common-law remedies by coming to the aid of a claimant in circumstances where a claim under the common law may be difficult to prove. It enables the Court to impose liability where no common-law liability exists, in particular by relieving the claimant of the duty of proving E a causal connection between the fraudulent or reckless conduct of the company's business and the debts or liabilities for which the wrongdoer may be declared liable. The section is to be given a wide interpretation so as to provide a meaningful remedy against the abuses contemplated by the Legislature. (At 774A/B - E.)

A debt to company that is subject to a subordination agreement (an agreement that the enforceability of the debt shall be dependent on F the solvency of the company and the prior payment of its debts to other creditors), dies a natural death upon liquidation of the company and cannot be proved against it in insolvency. This does not, however, mean that the creditor's right to seek a declaration under s 424(1) of the Companies Act against the wrongdoing directors or officers of the company should suffer the same fate, for, if the shareholder's G remedies under s 424(1) were to be rendered nugatory upon liquidation of the company, it would allow fraudulent directors and officers to get off scot-free in circumstances in which the very recklessness or fraud contemplated by the section had caused the lapse of the creditor's claim. The proper view to adopt would be to consider the subordinated claim to have died a natural death only for purposes of proving a claim H against the company in liquidation, but residually extant for the purposes of unravelling the fraud or recklessness which had caused its demise. (At 775C - 776B.)

With regard to the question whether a creditor's rights under s 424(1) are ipso iure extinguished upon the sanctioning and implementation of a compromise in terms of s 311 of the Companies Act, the better view is that the Legislature would not have provided a I remedy against fraudulent and reckless conduct by company directors and officers and in the same breath allowed such remedy to be frustrated or lost by the sanctioning and implementation of a s 311 compromise. It would, a fortiori, be unthinkable for the parties to a subordination agreement to have contemplated the loss of the creditor's right to recover the debt in circumstances where the J

2002 (5) SA p768

director or officer of the company caused its demise by fraud or A recklessness, for it is in such circumstances that the need for the remedy in s 424(1) is most pressing. (At 776B - F.)

The dictum in Pressma Services (Pty) Ltd v Schuttler and Another 1990 (2) SA 411 (C) at 417B approved and applied.

That a debt incurred by the company prior to the wrongful conduct does not exonerate the fraudulent or reckless director or officer from a B declaration under s 424(1) of the Companies Act follows from the fact that s 424(1) expressly outlaws the doing of 'any business of the company' in a reckless or fraudulent manner. The critical time is when such business is carried out unlawfully and not when the debt that is negatively influenced by such conduct was concluded. In other words, it is the effect on current debts at the time of the wrongful C conduct that is of significance when applying the provisions of s 424(1), irrespective of when such current debts were incurred. As long as the debt existed at the time of the wrongful conduct it is irrelevant when the debt was concluded. (At 776I - 777D/E.)

The rule in Foss v Harbottle (1843) 2 Hare 461 (67 ER 189), namely that, if a company is defrauded by a wrongdoer, only the company D itself may sue for the damage, is subject to the exception that a representative (or 'derivative) action is afforded to minority shareholders to be brought on behalf of the company against wrongdoers who are in control of the company (directors or majority shareholders) on the ground that the minority shareholders are representatives of the company and therefore entitled to obtain relief on its behalf. A shareholder may not, however, in circumstances in which the company E itself has a claim against the wrongdoer, institute a derivative action on the ground that his shares have diminished in value because of a wrong done to the company. This is so because to allow the shareholder to claim such a loss might result in double recovery from the wrongdoer by both the shareholder and the company. The mischief of a double recovery is not, however, a matter that falls to be decided at the exception stage of proceedings. (At 777H/I - 778H.) The rule in Foss v Harbottle is not an absolute rule: where the risk of F double recovery is non-existent and the shareholder is left with diminished patrimony, the continued application of the rule would amount to an unwarranted and technical obstruction of justice. Another reason why the rule might not be applicable is that although a shareholder lacks direct proprietary interest in the business of the company, he does have a financial interest in it. (At 779B - D.) G

Where a majority shareholder is, in terms of the shareholders' agreement, placed in a minority position at director's level (by, for example, being allowed to appoint, remove and replace only one director while the other shareholders are allowed to do so in respect of three directors), he is not in a position to 'control' the company, and it would seem that the rule in Foss v Harbottle should also not apply. The argument that the majority shareholder should in such a case H rather have sought to oust the directors who had wrongfully conducted the affairs of the company by utilising s 220 of the Companies Act cannot be upheld where the company had subsequently been liquidated, since any rights the shareholder may have had in terms of s 220 would have lapsed upon liquidation. (At 779H - 780A.) I

Cases Considered

Annotations

Reported cases

Body Corporate of Greenwood Scheme v 75/2 Sandown (Pty) Ltd and Others 1999 (3) SA 480 (W): dictum at 488I - J applied

Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (In Liquidation) 1992...