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This was a claim by S for an order declaring B personally liable, in terms of s 424 of the Companies Act 61 of 1973, for payment of the sum of R164 653.55 being the amount of a default judgment granted in favour of S against company P. The question for decision was whether or not S had proved, on a balance of probabilities, that B had knowingly been a party to the carrying on of the business of the company ‘recklessly or with intent to defraud creditors of the company’ as contemplated in s 424 of the Act.

The facts, briefly stated, were that B had engaged a firm of auditors to form company P. Q was to be its sole director. The underlying purpose was to obtain the benefits of black economic empowerment initiatives. B had never been a director of the company, but had signed documentation enabling him to be appointed as such. This was never submitted to the Registrar of Companies. Nevertheless, all contracts between P and third parties were concluded by B, representing the company. No directors’ meetings were ever held, nor were any shareholders’ meetings held. B had never informed Q, the sole director, that the company had commenced operations. B had known all along that he was the only individual with intimate personal knowledge of the financial affairs of the company and the only individual with the ability to keep proper books of account. It was reasonable to infer from the facts that B had failed to keep proper financial records or had failed to disclose their whereabouts, or had destroyed some books of account.

B had persuaded S to extend the terms of credit available to P for a period of ten months. However the only payments made by P during this period were for COD purchases. In 2002 B decided, without consulting Q, to cease trading. At that stage P owed S R164 643.55 in respect of goods delivered on credit. P failed to pay, whereupon S
issued summons. B, represented P but closed the company’s case without leading any evidence. Default judgment was granted in S’s favour but the debt remained unpaid, following which S sought to hold B personally liable in terms of s 424 of the Companies Act.

The Court found in favour of S, and the reasoning was as follows:

The carrying on of any business of a company ‘recklessly’means carrying it on by actions which evidence a lack of any genuine concern for the company’s prosperity. On the facts, the actions of B evidenced just that.

The indebtedness of company P to S was incurred by B on behalf of P while he conducted the affairs of the company recklessly. The inability of P to pay the debt was caused by such conduct.

The true facts were within the exclusive knowledge of B, but he chose not to testify. In the circumstances, less evidence sufficed to establish a prima facie case against him. B’s failure to furnish an explanation also weighed heavily against him.

The Court further directed that the matter be referred to the Director of Public Prosecutions for consideration of a contravention of ss 250, 284 and 424 of the Companies Act. Section 284 deals with the failure by a company to keep proper accounting records, while s 250 makes it an offence for any person to conceal or destroy financial records or
statements of a company. An order was also made referring the matter to SARS for consideration of a possible failure to pay income tax and VAT.

Strut Ahead Natal (Pty) Ltd v Burns 2007 (4) SA 600 (D)