Reckless Trading - the Poison Chalice

Section 424 of the Companies Act 61 f 1973, which remains active, provides that:

“424?Liability of directors and others for fraudulent conduct of business

(1) 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 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.”

Reckless trading is in essence trading under circumstances where it is reasonably foreseeable that a company may not be able to pay its debts when they fall due.

The section is not limited to directors and includes any person who was knowingly a party to the carrying on of the business in such a manner.?

The end result is the directors or participant can and is held liable for all the debts of the company which may be extensive.

Philotex (Pty) Ltd and others v Snyman and others; Braitex (Pty) Ltd and others v Snyman and others 1998 (2) SA 138 SCA elucidated the concept of??“knowingly” as follows:

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“having 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 recklessly; it does not entail knowledge of the legal consequences of those facts. It follows that `knowingly’ does not necessarily mean consciousness of recklessness. Being a party to the conduct of the company’s business does not have to involve the taking of positive steps in the carrying on of the business; it may be enough to support or concur in the conduct of the business.”

Section 424 attracts liability to any person, whether director or ordinary employee such as a financial manager who has knowledge of the reckless or fraudulent conduct of the business and is a party to such continued actions.

In recent case law there have been attempts to extend section 424 liability to shareholders. In the circumstances of?Cooper and Another NNO v Myburgh and others?[2021] 2 All SA 114?(“Cooper v Myburgh“),the court held that in the passing of certain resolutions to dispose of assets shareholders needed to consider the interests of third parties and indication are that shareholders may indeed be held liable under section 424.?

As such all parties involved in a company which cannot pay its debts cannot adopt a supine attitude and must take the appropriate action.

June Marks

B Com (cum laude) LLB (cum laude) LLM (cum laude) (Liquidations and Company Law)

June Marks is currently engaged in a LLD in Public Constitutional and International Law focussing on extradition