| nowheresville |

| cc's afford less protection |

After the recent judgment in the case of Airport Cold Storage v Ebrahim it is clear that to carry on a business as a close corporation no longer serves as a watertight protection for personal liability for the debts of the business.

 

The general rule is that where debts are incurred by a close corporation, the corporation as a separate legal entity is liable for those debts thereby indemnifying the members of such a corporation against any personal liability for those debts. The mere fact that the close corporation is unable to pay its debts does not, of itself, imply or impose any personal liability on the members of the corporation in regards to the corporations debts.

 

Aggrieved creditors normally rely on section 64 of the Close Corporations Act which will allow a court to declare any person who was knowingly a party to reckless or fraudulent trading by the close corporation, to be personally liable for its debts. In the aforementioned case, however, the court invoked section 65 of the Close Corporations Act. This section provides that where any act by the close corporation amounts to a gross abuse of the juristic personality of the corporation as a separate entity, the court can declare that the close corporation is deemed not to be a juristic person in respect of such rights, obligations or liabilities of the corporation.

 

Briefly what happened in the abovementioned case was that the sole member of the close corporation had engaged in many irregular practises, including conduct that constitutes "reckless trading" as contemplated in section 54 of the Close Corporations Act. In addition to the above the court was also of the opinion that the member had ignored the separate legal existence of the close corporation when it suited him to do so.

 

The effect of the court order in the case above was that the close corporation was deemed not to exist with regard to the particular creditor and its sole member was consequently personally liable for the close corporations debts towards this particular creditor.

 

| contact us |

delport ward & pienaar

attorneys, notaries &  conveyancers
1st floor - cornerstone house

16 loop street

cape town

8001

 

telephone, cape town
+27-21-419.3733

 

telefax, general
+27-21-419.3743

 

telefax, collections dept
+27-21-421.6625

 

telephone, london
+44-20-8133.0337

 

telephone, washington dc
+1-202-657.6733

 

telephone, hong kong
+852-8139.7374

 

| info@dwp.co.za |

 

 

1st floor - cornerstone house, 16 loop street, cape town | docex 600, cpt | t, +27-21-4193733 | f, +27-21-4193743

info@dwp.co.za | www.dwp.co.za