Lessons to be Learned from Reckless and Fraudulent Trading by a Company—Section 424(1) of the Companies Act 61 of 1973 and Sections 22 and 77(3)(b) of the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Published date: 20 August 2019
• Pages: 238-249
• Date: 20 August 2019
• Citation: (2016) 28 SA Merc JL 238
• Author: Simphiwe Phungula

LESSONS TO BE LEARNED FROM RECKLESS

AND FRAUDULENT TRADING BY A

COMPANY: SECTION 424(1) OF THE

COMPANIES ACT 61 OF 1973 AND SECTIONS

22 AND 77(3)(b) OF THE COMPANIES ACT 71

OF 2008

SIMPHIWE PHUNGULA*

Lecturer, School of Law, University of KwaZulu-Natal

I INTRODUCTION

(a) Background

When directors of a company conduct its business, they are not acting in

their personal capacities but as agents of the company.

1

It is the company

itself that is entering a contract or transaction, and directors — when

they sign and enter into those contracts and transactions — are acting on

behalf of the company. To prevent the abuse of the separate legal

personality of the company, company law derives its source from

common law and statutory law. Common law has what is known as

‘piercing of a corporate veil’, which was aimed at giving the courts

powers to disregard the legal personality of the company and hold liable

any person who is in control, or is a party, while the company acts

recklessly or fraudulently.

2

The focus then would shift to a natural

person acting on behalf of the company.

The common-law position is also provided for by statutory law.

Section 424(1) of the Companies Act 61 of 1973 allows for the piercing

of the corporate veil, and gives the court powers to impose personal

liability on directors and anyone who was a party to reckless and

fraudulent trading of the company.

3

However, the Companies Act 61 of

*LLB LLM (UKZN).

1

Cassim (ed) et al, Contemporary Company Law 2 ed (Juta 2012) 33.

2

Steyn, ‘Corporate managers and their potential liability for company debts in terms of

Section 424 of the Companies Act’ (2005) 14(3) Journal of the Southern African Institute for

Management Scientists at 59.

3

Williams, ‘What degree of recklessness is required for reckless trading?’ (2007) Sep/Oct

Professional Accountant at 30.

238

(2016) 28 SA Merc LJ 238

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