dwp eNewsletter

Vol 2 : Ed 9 - February 2009

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| mekanik |

| reckless trading in a cc |

Creditors may at times be faced with a close corporation that does not settle its debts. In these scenarios one may look to the Close Corporations Act 69 of 1984 (hereinafter the Act) for a remedy. Section 64(1) of this Act grants a court the authority to affix personal liability for the debts of a close corporation on various persons if they are knowingly party to reckless or fraudulent trading by the close corporation.

Recently in Ebrahim and Another v Airport Cold Storage (Pty) Ltd 2008 (6) SA 585 (SCA) the Cape High Court held that the appellants, the Ebrahims (being father and son), were personally liable for the debts of a close corporation for carrying on its business recklessly in terms of section 64(1) of the Act.

The court held that the following poor conduct contributed to confirming their belief that the close corporation had been operated recklessly: no accounting system was in place; no accounting officer had been appointed for more than six months; the close corporation had abused its collection of VAT by not rendering returns nor paying them over to SARS; no payslips were kept for its employees or tax paid on their behalf and last but not least the close corporations funds were apparently “missing”.

This matter then came on appeal to the Supreme Court of Appeal and the court maintained that the son, alongside his father who assisted him in depth in the running of the close corporation, were personally liable for the debts of the close corporation. The appeal was thus dismissed.

The court maintained that acting recklessly consisted of a failure to consider the consequences of one’s actions, and moreover disregarding such consequences with a reckless attitude.

The court took the following points into account when determining whether reckless trading had occurred:

1. the corporation’s scope of operations;

2. the member’s role, functions and powers;

3. the amount of the debts;

4. the extent of the financial difficulties and the prospects of recovery;

5. the particular circumstances of the claim; and

6. the extent to which the member had departed from the standard of a reasonable man.

This result most certainly leaves one with a sense of justice being done.