Ozinsky NO v Lloyd and Others

• Jurisdiction: South Africa
• Judge: van Deventer J
• Judgment Date: 20 February 1992
• Court: Cape Provincial Division

Van Deventer J:

This action for an order in terms of s 424(1) of the Companies Act 61 of 1973 was instituted by the plaintiff in his capacity C as the liquidator of Hi-Class Kitchens (Atlantis) (Pty) Ltd, to which I shall refer as 'the company' or as 'Atlantis' whenever it may be necessary to distinguish it from its associated company named Hi-Class Kitchens (Pty) Ltd ('Kitchens'), which was simultaneously liquidated on 5 December 1986, but of which the plaintiff was not appointed the liquidator and in D which liquidation a similar action has not been brought.

This action was of course authorised by the company's creditors, the driving force behind it being PG Wood Ltd, a company which was one of the regular suppliers, on a monthly account, of raw materials and other requisites used by the company in its business of manufacturing kitchen cupboards and fittings. As at the date of liquidation, PG Wood was the E company's biggest trade creditor with a claim of some R24 000, representing purchases made during the months of June to October 1986.

The plaintiff claims an order in terms of s 424 declaring the defendants personally liable 'for all or any part of the debts or other liabilities F of the company to an amount of R236 188,40', which amount approximates the excess of the company's liabilities over its assets.

Section 424(1) of the Act reads as follows:

'When it appears, whether it be a winding-up, judicial management or otherwise, that any business of the company was or is being carried on G 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 aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company H as the Court may direct.'

The plaintiff's case as set out in the particulars of claim (as amended) is that the company's business was being carried on fraudulently, alternatively recklessly, in that:

'(a)

to the knowledge of defendants as from March 1986 the liabilities of Atlantis exceeded its assets;

(b)

I defendants knew during the latter part of 1986 that Atlantis was trading in insolvent circumstances;

(c)

during the latter part of 1986 defendants permitted the company to incur certain debts while they knew that there existed no reasonable prospect of payment on due date by the company'

J (my italics). These debts were the following:

Van Deventer J

A Cape Laminates	R 1 389,36
Cape Handle Bar (Pty) Ltd	R 4 436,12
Unitraco (Pty) Ltd t/a B & B Plastics	R 2 167,72
PG Wood Ltd	R 24 837,78
Designaire (Pty) Ltd	R 15 530,33
Lautenschläger (Pty) Ltd	R 242,28
B Waste-Tech (Pty) Ltd	R 516,96
Walters McNaughton (Pty) Ltd	R 1 245,97
Total	R 50 366,52

The aforegoing list represents trade creditors with whom the company ran C current monthly accounts for materials such as wood and other items used in the process of manufacturing kitchen fittings.

It was common cause that these trade suppliers had been paid regularly until June 1986 and that the debts listed above represented mainly unpaid purchases made during the months of August to November 1986.

D During the trial and in consequence of evidence elicited in the cross-examination of the first and second defendants, plaintiff's counsel, with leave from the Court, amended the particulars of claim by the insertion of the following new paragraph:

'8.4

Alternatively to para 8.3 and to the extent that the company was in a position to pay its creditors timeously or at all, first and/or E second and/or third defendant:

8.4.1

adopted a policy towards the payment of the company's debts which was grossly unreasonable and severely prejudicial to the company and its creditors; and/or

8.4.2

consciously deceived creditors, alternatively unreasonably induced F them into believing, that the company had "cash-flow problems" in order to induce them to extend further credit to the company and/or not to enforce their claims against it, at times when they knew, alternatively ought reasonably to have known, that the company did not have such problems; and/or

8.4.3

G deposed to affidavits in support of the winding-up of the company which were untruthful and/or grossly misleading.'

The defendants' plea as initially filed was a denial of all the material allegations contained in the plaintiff's particulars of claim, although certain admissions were recorded in the pre-trial minute and during the H trial. An amendment of the plea was also effected in terms whereof the defendants pleaded, in the alternative to the denial of recklessness, that they should be relieved in terms of s 248(1) of the Act from liability on the ground that they had acted honestly and reasonably in the conduct of the company's business.

In terms of the pre-trial minute and a 'Minute of Admissions' handed in I from the Bar, various admissions were made of which the material ones were the following:

(1)

that Atlantis commenced business during May 1985;

(2)

that the various financial statements of the two companies, Atlantis and Kitchens, as filed of record, accurately reflect the financial affairs of the two companies for the periods stated J therein;

Van Deventer J

(3)

A that the subordination agreements appearing as items 2 and 3 in the bundle of general documentary exhibits had been duly entered into on the dates reflected therein;

(4)

that Atlantis continued to trade as manufacturers up to 5 December 1986;

(5)

that defendants were directors of Atlantis from date of B commencement of business to 5 December 1986 and that second defendant was also in the employ of the company as its 'manufacturing director';

(6)

that at all material times after 1 March 1986, the defendants knew that the company's liabilities exceeded its assets and that they C permitted the company to incur the debts listed above.

Lastly, a factual issue which was partly covered in the aforesaid minute of admissions, but became unqualifiedly common cause at the conclusion of the trial, was that the defendants, at the time when the debts listed above were incurred, did not advise the creditors that the company's D liabilities exceeded its assets.

However, it was common cause that some of the creditors, in particular Designaire (Pty) Ltd and PG Wood, were advised by second defendant that the company had 'cash-flow problems'.

In view of legal issues, some of which involve a subjective test, it is necessary to set out the historical background of this litigation. This E resumé is based, inter alia, on the factual elements of first defendant's evidence, which I have accepted in toto for the reasons set out later in this judgment.

First and third defendants are wife and husband and the second defendant is first defendant's brother.

F First defendant is a woman of considerable means.

She was previously married to a Mr Bates, an American who was a commercial pilot (like her present husband) and a professional hunter.

Mr Bates and the third defendant were shareholders in an air charter company named Bates and Lloyd Aviation of which company first defendant was also a director. She ran the charter business from her home and also G attended to the basic bookkeeping, having had accountancy as a matric subject.

In April 1978, Mr Bates died in a crash in one of the company's two planes, after which setback business was ceased. After successful litigation with an insurance company, first defendant received payment of H approximately R120 000 which was later invested in Kitchens. Apparently she also received payment from an insurer of a director's loan account in the aviation company of some R800 000 in consequence of the loss of the aeroplane in the crash.

However, the bulk of first defendant's wealth accrued from her inheritance of the late Mr Bates' estate in the United States, which was I worth almost a million US dollars. Although the Bates estate, which was being administered in Chicago by an American attorney (who was also a friend of the first defendant and the late Mr Bates), was only wound up after 1986, the first defendant during the relevant period of 1984 to end 1986 was in receipt of a monthly income of some 3 000 to 4 000 US dollars J from the estate.

Van Deventer J

A In addition to this income, she had access to cash funds from the estate at all times. All she had to do to draw money was to make a telephone call to her American attorney, after which the transfer of the money to her bank account in South Africa would take place within two weeks.

By December 1986, the capital still available to her in the United B States amounted to some 300 000 US dollars, ie more than R600 000.

The idea of venturing into the kitchen cupboard and layout business occurred to the third defendant in 1984 when he and first defendant needed to install a new kitchen in a home they had bought in Llandudno, Cape Town, but could not obtain satisfactory service from the kitchen cabinet makers they dealt with.

C They consequently decided to set up a small kitchen designing and fitting business and to this end incorporated Hi-Class Kitchens (Pty) Ltd early in 1984 with a nominal share capital. The company was financed ab initio by shareholders' loans.

A small showroom was established in central Cape Town with the object of designing and assembling kitchens to order, utilising cabinet units bought D from other dealers or manufacturers.

When reliance on other...