Ozinsky NO v Lloyd and Others

• Jurisdiction: South Africa

Ozinsky NO v Lloyd and Others
1995 (2) SA 915 (A)

1995 (2) SA p915

Citation	1995 (2) SA 915 (A)
Case No	283/92
Court	Appellate Division
Judge	Joubert JA, E M Grosskopf JA, Nestadt JA, Nienaber JA and Howie JA
Heard	February 15, 1995
Judgment	March 29, 1995

Flynote : Sleutelwoorde F

G Company — Directors and officers — Liability of for debts of company — Companies Act 61 of 1973, s 424(1) — Allegation of fraudulent non-disclosure of fact that company's liabilities exceed its assets — Trading in insolvent circumstances except on cash basis not per se dishonest and unlawful — Cannot be said that directors under general duty to disclose de facto insolvency before accepting goods on credit — H Interests of neither State nor private sector demanding that trading in insolvent circumstances except on cash basis be branded as dishonest or unlawful — Company applying for credit facility impliedly representing no more than that it will be able to pay in terms of its undertaking to do so, and that it has no reason to believe that it may not be able to pay on I due date.

Headnote : Kopnota

It cannot be said, for the purposes of establishing the liability of directors and officers under s 424(1) of the Companies Act 61 of 1973, that trading in insolvent circumstances except on a cash basis is per se dishonest and unlawful and that the directors of a company whose J liabilities exceed its assets are under a general duty

1995 (2) SA p916

A to disclose its de facto insolvency to a seller before accepting his goods

on credit. The interests of neither the State nor the private sector require that trading in an insolvent situation other than on a cash basis be branded dishonest or unlawful. In any event, to stigmatise such trading as a social evil appears to be unnecessary and unrealistic, both in terms of actuality and in terms of contemporary commercial morality in the market-place. (At 918F-G/H.)

The dicta of the Court a quo in Ozinsky NO v Lloyd and Others 1992 (3) SA 396 (C) B at 419C-F read with 417B-E approved.

The decision in the Cape Provincial Division in Ozinsky NO v Lloyd and Others 1992 3) SA 396 (C) confirmed.

Case Information

Appeal from a decision in the Cape Provincial Division (Van Deventer J), C reported at 1992 (3) SA 396 (C). The facts appear from the judgment of Nienaber JA.

A J Nelson for the appellant.

L A Rose-Innes for the respondent.

The following authorities were referred to by counsel on both sides:

Anderson and Others v Dickson and Another NNO (Intermenua (Pty) Ltd intervening) 1985 (1) SA 93 (N); D

Bickle v Joint Ministers of Law and Order 1980 (2) SA 764 (R);

Dorklerk Investments (Pty) Ltd v Bhyat 1980 (1) SA 443 (W); E

Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in Liquidation) 1993 (1) SA 493 (A);

Ex parte De Villiers NO: In re M S L Publications (Pty) Ltd (in Liquidation) 1990 (4) SA 59 (W);

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

Ex parte Strydom NO: In re Central Plumbing Works (Natal) (Pty) Ltd; Ex F parte Spendiff NO: In re Candida Footwear Manufacturers (Pty) Ltd; Ex parte Spendiff NO: In re Jerseytex (Pty) Ltd 1988 (1) SA 616 (D);

Fisheries Development Corporation of SA Ltd v Jorgensen and Another; Fisheries Development Corporation of SA Ltd v A W J Investments (Pty) Ltd and Others 1980 (4) SA 156 (W);

Government of the Republic of South Africa (Department of Industries) v Fibre Spinners and Weavers (Pty) Ltd 1977 (2) SA 324 (D); G

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

Howard Smith Ltd v Ampol Petroleum Ltd and Others [1974] AC 821 (PC) ([1974] 1 All ER 1126);

In re: City Equitable Fire Insurance Co [1925] Ch 407;

Joh-Air (Pty) Ltd v Rudman 1980 (2) SA 420 (T); H

R v Grunwald and Others [1960] 3 All ER 380;

R v Latib 1973 (3) SA 982 (A);

Rosenthal v Marks 1944 TPD 172;

S v Dhlamini 1988 (2) SA 302 (A);

S v Goertz 1980 (1) SA 269 (C);

S v Harper and Another 1981 (2) SA 638 (D) at 681A-C; I

S v Parsons en 'n Ander 1980 (2) SA 397 (D);

S v Smith en Andere 1973 (3) SA 217 (T).

Cur adv vult.

Postea (March 29). J

1995 (2) SA p917

Judgment

Nienaber JA:

The appellant is the liquidator of a company, Hi-Class A Kitchens (Atlantis) (Pty) Ltd (to which I shall refer as 'Atlantis'). He was the plaintiff in the Court below. I shall continue to refer to him as such. The three respondents in the appeal (henceforth referred to as 'the defendants') were directors of Atlantis and of its sister company, Hi-Class Kitchens (Pty) Ltd ('Kitchens'). Atlantis's business consisted B of the design, manufacture and installation of household kitchen cupboards and fittings of high quality. Kitchens was responsible for the marketing of the products. Both companies were liquidated at the instance of the Lloyd Family Trust (which was controlled by the first and third defendants), provisionally on 5 December 1986 and finally on 25 February C 1987. This was a stratagem to pre-empt an application for liquidation by one of Atlantis's main trade creditors, PG Wood Ltd ('PG Wood'). PG Wood is the catalyst for and the promoter of the present litigation. In it the plaintiff, on the instructions of the creditors, seeks an order in terms of s 424(1) of the Companies Act 61 of 1973 declaring the three defendants personally liable 'for all or any part of the debts or other liabilities D of the company to an amount of R226 188,40'. This is the amount, broadly speaking, by which Atlantis's liabilities exceeded its assets at the time of liquidation. (The litigation relates solely to Atlantis; the plaintiff was not the liquidator of Kitchens and PG Wood was not its creditor.) The action was heard by Van Deventer J in the Cape Provincial Division. It E failed. The judgment is reported sn Ozinsky NO v Lloyd and Others 1992 (3) SA 396 (C). I shall refer to it as 'the reported judgment'. This is an appeal, with leave from the Court a quo, against the refusal of the relief sought by the plaintiff.

Section 424(1) of Act 61 of 1973 reads as follows:

F '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 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 G aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.'

There are two parts to the body of this section: (1) the business of the company must be carried on in a certain manner, ie (i) recklessly or (ii) with intent to defraud creditors (of the company or of any other person) H or (iii) for any fraudulent purpose; and (2) the person concerned must (a) be a party to the carrying on of the business (cf Howard v Herrigel and Another NNO 1991 (2) SA 660 (A) at 674G-I) and (b) have knowledge of the facts from which the conclusion is properly to be drawn that the business of the company was or is being carried on (i) recklessly or (ii) with intent to defraud creditors (of the company or of any other person) or I (iii) for any fraudulent purpose (Howard v Herrigel and Another (supra at 673I-J).

The case on the pleadings was that all three defendants were parties to the carrying on of the business of the company either recklessly or with intent to defraud creditors of the company and that all three did so with J knowledge that the affairs of the company were being conducted in that

1995 (2) SA p918

Nienaber JA

A fashion. The pleadings are summarised in the reported judgment at 398H-399H. The gist is that the defendants, knowing that Atlantis was trading in insolvent circumstances, (a) permitted it to incur debts when there was no reasonable prospect of payments being made when due, alternatively, (b) adopted a policy towards the payment of the company's debts which was grossly unreasonable and prejudicial to the company and B its debtors, and/or (c) deceived creditors into believing that the company had cash flow problems (in order to induce them to extend credit to the company which, on liquidation, became irrecoverable) when the company in fact experienced no such problems.

Nienaber JA It was common cause during the trial that the defendants, C after 1 March 1986, knew that Atlantis's liabilities exceeded its assets and that they nevertheless permitted the company to incur further debts, such as those of PG Wood and Designaire (Pty) Ltd ('Designaire'), eventually totalling R24 837,78 and R15 530,33 respectively; that the defendants, at the time when such debts were incurred, did not advise the D creditors concerned that the company's liabilities exceeded its assets; and that PG Wood and Designaire were told by the second defendant that the company experienced cash flow problems.

On the strength of a series of judgments delivered by Stegmann J those facts, in themselves, may well have rendered the defendants liable in terms of the section. Those cases are: Ex parte Lebowa Development E Corporation Ltd 1989 (3) SA 71 (T); Singer NO v M J Greeff Electrical Contractors (Pty) Ltd 1990 (1) SA 530 (W); Ex parte De Villiers NO: In...