GOWORA
JA:
The respondent is a company registered in the British Virgin Islands.
Its principal place of business is in Dubai, the United Arab
Emirates. The appellant was formerly one of the directors of
Rodstreet Trading (Private) Limited (Rodstreet), a company duly
registered as such under the laws of Zimbabwe.
In
or about August 2011, Rodstreet accessed loan facilities from
Interfin Bank (Interfin). The loan was secured by a Bankers
Acceptance in the sum of USD$117,335.91. The Bankers Acceptance
(BA) was issued on 22 August 2011 and was due for payment on
21 November 2011.
On
24 November 2011 Interfin wrote to the appellant and a co-director in
Rodstreet demanding payment of the debt. This was followed by a
letter to the appellant on 19 January 2012.
Both
letters went unanswered.
On
or about 7 March 2012, Interfin advised Rodstreet that it had sold
the BA to the respondent when the amount became due and that payment
on the BA was to be made to the respondent.
No
payment was made.
On
27 April 2012, the respondent issued out summons in the High Court
against Rodstreet for the payment of USD$117,335.91. On 18 June 2012,
the High Court granted a default judgment in favour of the respondent
in the sum claimed.
The
judgment was not satisfied.
An
attempt to execute the judgment at the last known address for the
company proved unsuccessful as Rodstreet appeared to have ceased
operating. The Deputy Sheriff was unable to locate the company.
On
30 April 2014, the respondent filed an application with the High
Court under section 318 of the Companies Act [Chapter 24:03].
The premise of the application was that the appellant, as a director
for Rodstreet, would have, or should have known that the company
would not be able to pay the amounts owed under the BA issued to
Interfin. It was contended by the respondent that, despite such
knowledge, the appellant, negligently or fraudulently represented to
Interfin that Rodstreet would liquidate the amount on the BA on the
maturity date.
The
further contention made was that the appellant, as a director knew,
or should have been aware of the financial position of the company
and its inability to pay the amounts owed under the facility.
It
was contended that the knowledge or lack thereof amounted to gross
negligence on the part of the appellant.
It
was suggested that the appellant owed a duty of care to all parties
that Rodstreet conducted business with to ensure that Rodstreet would
be able to meet its financial obligations. The appellant should
therefore be held liable on the basis that he was grossly negligent
in the performance of his mandate as a director for Rodstreet.
The
appellant opposed the application.
He
averred that he was no longer a director for Rodstreet having
resigned from the board on 3 November 2011. He was aware that for
some time the company operated an overdraft facility with Interfin.
He
denied knowledge of the BA which he alleged was issued and signed by
his co-directors without his knowledge. He contended further that
there was no board resolution authorizing the issuance of the BA.
He
averred that he was a non-executive director and was not involved in
the day-to-day running of the company. As such, he never made any
representation to Interfin or any other person on the financial
status of the company or the redemption of the BA.
He,
therefore, denied that he had been negligent in any manner, and
denied being liable to Interfin or the respondent in respect of the
BA.
In
so far as the respondent was concerned, the appellant denied ever
having dealt with it and denied further that Rodstreet had financial
dealings with the respondent. He contended that the respondent had
failed to exercise due diligence and should not have purchased the BA
without ensuring that the BA would be redeemed when due.
Lastly,
he challenged the rate of interest. He said that the respondent had
to prove the rate of interest at 30 percent per annum.
JUDGMENT
OF THE COURT A
QUO
The
court found that section 318 was applicable in the circumstances. It
further found that the provisions of the section extended liability
to both present and past directors and that his resignation a few
days before the BA fell due for payment did not serve to protect the
appellant from liability in respect of the debt.
The
court was of the view that the appellant had been negligent, despite
his knowledge of the perilous financial position of the company, in
permitting the company to carry on trading in order to create a good
impression of the company's name as a trading entity.
The
learned judge in the court a
quo
concluded that the directors, including the appellant, traded
recklessly in general, and, in particular, in securing the debt with
the BA. The board had conducted the business of the company in a
manner that contravened the provisions of the Companies Act. They
were, as a consequence, personally liable for the debt due under the
BA. Judgment was entered against the appellant in the sum of
USD$117,335.91 with interest at 30 percent per annum with effect from
21 November 2011 and costs.
THE
APPEAL
The
appellant was aggrieved and has noted an appeal to this Court on the
following grounds:
“1.
The court a
quo
grossly misdirected itself in failing to determine the issue of the
validity of the Bankers Acceptances in the hands of the respondent
notwithstanding the fact that this was a legal point argued at length
by the parties in court.
2.
The court a
quo
erred in finding the appellant personally liable in terms of section
318 of the Companies Act [Chapter 24:03]
when no evidence was adduced by the respondent to meet the strict
requirements of section 318 of the Act before a person is held
personally liable.
3.
The court a
quo
grossly misdirected itself in finding that the respondent, in fact,
presented the Bankers Acceptances to Rodstreet (Private) Limited on
the due date when, on the papers, it was clear that Rodstreet
(Private) Limited was only advised of the sale of the Bankers
Acceptances to the respondent by Interfin Bank on 7 March 2012 after
the due date.
4.
The court a
quo
grossly misdirected itself in failing to determine the issue of
30 percent interest which had been placed before it for
determination which appellant contended was illegal.”
ARGUMENTS
ON APPEAL
Although
counsel for both parties settled written argument on all four
grounds, at the hearing Mr Chinake
took the position that grounds 1 and 3 were not relevant to the
determination of the issues in contention.
I
think that was a proper course to adopt.
The
stance taken narrowed the issues to two, viz; the finding by the
court on the liability of the appellant under section 318 of the Act
and the order by the court that the judgment should attract interest
on the judgment amount at 30 percent per annum.
As
a consequence, the only grounds that fall for determination are
Grounds 2 and 4.
AD
GROUND 2
Mr
Chinake,
who appeared for the appellant argued as follows.
In
respect of the BA, the contention made was that the court a
quo
had misdirected itself by placing reliance on the BA as proof of
liability against the appellant especially when regard is had to the
strict requirements under section 318 of the Act for the finding of
liability on the part of a director or any other person.
In
addition to the above, it was contended that the appellant had no
knowledge of the issuance of the BA, had not seen a resolution
authorising its issuance, and could therefore not be said to have
been liable for the debt which was secured by the BA.
He
argued that the other two directors would be the ones with the
requisite knowledge as they signed the BA.
Mr
Chinake
submitted that a finding of liability under section 318 of the Act is
rather drastic and has harmful effects on the status of any person
against whom liability is levied in terms of the section.
He
contended that the appellant had not participated in the issuance of
the BA and could not, therefore, be said to have been grossly
negligent in the running of the business of the respondent. As a
result, went the argument, the respondent was required to establish
by way of evidence that the appellant had been a party to the
carrying on of the business in order to defraud creditors of the
company or other creditors.
Mr
Chinake
submitted that the word “knowingly” in the section must be read
to mean that a director attracts liability when he has knowledge of
the facts surrounding the debt and the running of the business. The
appellant did not have such knowledge of the facts nor did the
respondent establish that he had.
He
argued that in this respect there were clear disputes of fact that
were incapable of resolution on the papers.
The
onus to show liability on the part of the appellant lay on the
respondent.
He
also contended that the appellant should be afforded a fair hearing
at the option of the respondent.
For
the respondent, Mr Uriri
contended that the BA issued by Rodstreet was accepted by Interfin.
He contended further that Rodstreet always had an underlying facility
with Interfin, a fact accepted by the appellant. He suggested that
once the appellant had conceded that he was aware of a facility, then
he must have had knowledge of the issuance of the BA. Further to
this, the appellant only resigned as director after the BA was
issued.
In
reply, Mr Chinake
countered that the underlying facility was not the basis of the cause
of action against the appellant. He argued that the test to establish
knowledge on the part of the appellant had not been met.
THE
LAW
DIRECTORS
LIABILITY UNDER SECTION 318 OF THE COMPANIES ACT
At
common law, the board or individual directors are agents of the
company and stand in a fiduciary relationship with the company. As a
consequence, a director has all the common law duties of agents and
must act with utmost good faith as regards the affairs of the
company. Section 318 reads as follows in relevant part:
“318
Responsibility of directors and other persons for fraudulent conduct
of business
(1)
If at any time it appears that any business of a company was being
carried on —
(a)
recklessly; or
(b)
with gross negligence; or
(c)
with intent to defraud any person or for any fraudulent purpose; the
court may, on the application of the Master, or liquidator or
judicial manager or any creditor of or contributory to the company,
if it thinks it proper to do so, declare that any of the past or
present directors of the company or any other persons who were
knowingly parties to the carrying on of the business in the manner or
circumstances aforesaid shall be personally responsible, without
limitation of liability, for all or any of the debts or other
liabilities of the company as the court may direct.”
A
finding of personal liability against a director or any other person
under the section must be premised upon a finding by the court that
one or more of the elements specified therein was evident from how
the business of the company was being run.
The
relevant elements for discussion in this judgment, therefore, are the
following:
(i)
Recklessness;
(ii)
Gross negligence;
(iii)
Intent to defraud a creditor;
(iv)
Knowingly being a party to the running of the business in the manner
aforesaid.
In
Toakoana
Trading (Pvt) Ltd v Van Rooyen & Anor
HH684/14, MAFUSIRE J had occasion to discuss what connotes gross
negligence or recklessness under section 318. The learned judge said
the following:
“In
my view 'recklessness' or 'gross negligence' means someone
exhibiting an 'I don't care' attitude. One may not intend the
harmful consequences of one's actions which are reasonably
foreseeable, but nonetheless one persists with that conduct in total
disregard of the harmful consequences. Despite the separate depiction
of 'recklessness' and 'gross negligence' in section 318 of
the Act, in my view, both refer to the conduct of business in an
extremely very bad manner. But no matter how extremely bad that
conduct may be, the statute did not, in my view, intend to equate
'recklessness' or 'gross negligence' with dolus
……..
………………………
………………………
In
Attorney-General
v Munganyi
in
the context of reckless driving within the meaning of the Road
Traffic Act, then No.48 of 1976 (now Chapter
13:11),
where driving 'recklessly' and 'negligently' are now listed
separately and seemingly disjunctively following an amendment to that
Act, a pitched argument was presented that because of that amendment,
the Legislator intended to create two separate offences. The court
rejected that argument. It held that in the context of reckless
driving 'recklessness' had a well-settled meaning. It is one of
the categories of negligent driving which involves a gross and
aggravated degree of negligence. It does not require any element of
dolus.”
In
this context, recklessness is to be judged by the standards of
reasonable people in business. This means that the test on whether or
not a director exhibited recklessness in the conduct of the business
of the company as provided under section 318 must be objective and
not subjective.
As
concluded by the court in Toakoana
Trading (supra)
gross negligence is sufficient for a finding of liability under the
section in question.
The
court a
quo
found that the directors of Rodstreet conducted the business of the
company recklessly, negligently if not fraudulently.
I
turn to consider the element of fraud under the section and what
needs to be established as regards personal liability attaching to a
director.
This
element has received attention within this jurisdiction under the old
legislation. The precursor to section 318 was section 281 of the
Companies Act [Chapter
190]
(“the repealed Act”). The pertinent part to section 281(1) read
as follows:
“281(1)
If in the course of a winding-up or the judicial management of a
company it appears that any business of the company has been carried
on with intent to defraud creditors of the company or creditors of
any person or for any fraudulent purpose, the court, on the
application of the Master, or the liquidator or judicial manager or
any creditor or contributory to the company, may, if it thinks proper
so to do, declare that any of the directors, whether past or present,
of the company or any other persons who were knowingly parties to the
carrying on of the business in 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.”
In
Mayhew
v Alcock
NO 1991 (1) ZLR 203 (S), the court focused on what fraudulent conduct
under section 281 of the repealed Act entailed. At p208C-F, the court
surmised as follows:
“Basically,
as REYNOLDS J said, the purpose of the provision is:
'………to
render personally liable any person who is knowingly a party to the
carrying on of any business of a company in a……………fraudulent
manner' (per DE KOK J in Gordon
NO and Rennie NO v Standard Merchant Bank Ltd & Ors
1984
(2) SA 519 at 528G).
It
is not sufficient to prove an intent to prefer one creditor over
another: see Dorklerk
Investments (Pty) Ltd v Bhyat
1980 (1) SA 443 (W) at 447 and In
re Sarflax Ltd
[1979] 1 All ER 529 at 545. And, although the case turned on the
question of 'recklessness' which is not part of our statute, the
decision in Howard
v Herrigel & Anor NNO 1991
(2) SA 660 is useful because of its reference to the liquidator's
right to choose between motion proceedings and action (664E). The
respondent must establish at least some element of dishonesty.”
I
think it appropriate at this stage to refer to the dicta in Howard
v Herrigel (supra).
At 673I-674A, the court remarked:
“Having
regard to the provisions of section 424 and to its purpose, to be
entitled to an order the applicant must prove, on a balance of
probabilities, that the person sought to be held liable had knowledge
of the facts from which the conclusion may be drawn that the 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.
It
would not be necessary to go further and prove that the person also
had actual knowledge of the legal consequences of those facts.”
The
court, in that case, had to consider whether a director could be held
personally liable for the debts of a company under section 424(1) of
the Companies Act in South Africa, the provision of which read as
follows:
“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.”
It
is evident from the dicta
in Howard's
case quoted above that the court was considering elements of fraud
and recklessness in the running of the business of the company.
What
is of import is that the finding of liability on the fraudulent
running of the company must be premised on the knowledge of such fact
on the person sought to be found personally liable. According to the
court in Mayhew,
the element of dishonesty must be established.
Where
before, the relevant statute did not provide for recklessness as one
of the necessary elements for liability as discussed in Mayhew's
case, the new statute in terms of section 318 does.
The
ambit for finding directors personally liable has been expanded in
the Act to include gross negligence and recklessness which were
encompassed in the law in South Africa.
The
result is that the law in both jurisdictions is now in sync and the
authorities under which the liability of directors was discussed and
decided become a useful guide to courts in this jurisdiction.
I
will therefore place heavy reliance on such authorities in the
determination of this appeal.
In
addition to recklessness, gross negligence, or fraud, a director must
be shown to have knowingly been a party to the manner of carrying on
the business which resulted in the prejudice to the creditor or
creditors or of how the affairs of the company are being conducted.
I
can only say that knowledge must be subjective as regards such a
director.
This
aspect of the law has received extensive attention by courts in South
Africa. The concept of being a party to the manner in which a company
was run for purposes of liability in this context was discussed in
Powertech
Industries Ltd v Mayberry and Another
1996 (2) SA 742 (W). At 749D-I the following passage appears and is
pertinent:
“Those
considerations aside, in my view a more fundamental reason why the
plaintiff cannot succeed is that to which I have already adverted.
The submissions by the plaintiff's counsel seem to assume that one
may be a 'party' to the carrying on of business without in some
way participating in it. To be a party to the conduct of business
requires an association within a common pursuit. That is the ordinary
meaning of the word as it is used in the statute. The meaning given
to that sense of the word by the Oxford English Dictionary is one who
takes part, participates, or is concerned in some action or affair; a
participator; an accessory, conveying the idea of a person who
associates with the company not in pursuit of his own ends, but in
pursuit of those of the company.
A
party to the carrying on of a company's business is one who has
joined with the company in a common purpose. Generally, this would
include its directors and managers, all of whom are acting in common
pursuit of the company's business. If the business is conducted
recklessly, they are liable therefor, and for good reason, as they
ought not to be permitted to shield behind the limited liability
accorded to the company in these circumstances.”
In
order to be held liable under section 424(1) knowledge of the
aforesaid facts is not on its own sufficient. It is further necessary
that the person was “a party to the carrying on of the business in
the manner aforesaid”.
In
Re
Maidstone Buildings Provisions Ltd
[1971]
3 All ER 363 (ChD) at 368f-g, PENNYCUICK V-C said of the
corresponding provision of the 1948 English Companies Act (s332(1)):
“The
expression 'party to the carrying on of a business' is not, I
think a very familiar one but, so far as I can see, the expression
'party to' must on its natural meaning indicate no more than
'participates in' or 'concurs in'. And that, it seems to me,
involves some positive steps of some nature. I do not think it can be
said that someone is party to carrying on a business if he takes no
positive steps at all. So in order to bring a person within the
section, one must show that he is taking some positive steps in the
carrying on of the company's business in a fraudulent manner.”
As
liability is premised on an intent to defraud creditors, it is
necessary in my view that the claimant establish a subjective
intention to defraud.
In
Ex
Parte Lebowa Development Corporation Ltd
1989
(3) SA 105 (TPD), the court clarified the elements necessary for
proof in establishing personal liability on the part of directors
where an intent to defraud creditors is alleged. At pp103G-104E
stated:
“……… Fraud
is not committed without dishonesty. It necessarily involves an
element of conscious deceit on the part of the person making the
false representation. That element can never be identified without
enquiry as to the state of mind of the representor as known to
himself. The test is inevitably subjective.
………………
………………
That,
I think, is the substance of the distinction between gross negligence
and fraud that was re-emphasised by Greenberg J in R
v Myers
1948 (1) SA 375 (A) at 382-4. If the question to be determined is
whether fraud has been proved, the maxim
culpa lata dolo aequiparatur
does not apply. A subjective intention to deceive must be shown, both
in our own law and, apparently, in English law. Lord Herschell's
statement of the law as being that '… fraud is proved when it is
shown that a false representation has been made … recklessly,
careless whether it be true or false' is misunderstood if it is
thought to import the objective test of the reasonable man. It uses
the term 'recklessly' in a narrow sense in which (in the context
of a representation of fact) the elements of recklessness in the
state of mind of the representor are not all present unless they
include ignorance of the truth of the subject matter of the
representation and an absence of honest belief in the truth of the
representation itself.
Whether
those elements are present is a question that can only be determined
'subjectively' by examining the facts reflecting the state of
mind of the representor suspected of fraud.
When
those elements are found to be present they lead, inevitably, to the
inference that the representor intended the representee to understand
that the representor had an honest belief; and hence to the further
inference that, viewed subjectively from the representor's point of
view, he intended to deceive the representee about his own state of
mind, and that he accordingly intended (assuming the element of
prejudice or potential prejudice) to commit fraud.”
A
high standard of honesty is required from directors of a company both
as it relates to their relationship with the company or in dealings
with other persons concerning the business of the company.
A
director may cause loss to the company but is not liable unless it is
established that he acted with gross negligence, fraud, or
recklessly.
However,
the legislature has found it necessary to make provision for the
directors in a company that has been managed in a manner that shows
reckless, negligent, or fraudulent conduct on the part of the
directors which results in a party associated with the company
suffering loss resulting from an inability by the company to pay its
debts.
A
director cannot contract out of these duties and it matters not that
he is a non-executive or an executive director. He cannot indemnify
himself from liability that would otherwise attach to him for failing
to act in the best interest of the company in breach of good faith or
trust concerning his duties as a director. He thus must safeguard the
interests of the company.
This
was made clear in
Fisheries Development Corporation of SA Ltd v Jorgensen and Another;
Fisheries Development Corporation of SA Ltd v AWJ Investments
(Pty) Ltd and Others
1980 (4) SA 156 (W), where MAGO J said the following:
“Obviously,
a director exercising reasonable care would not accept information
and advice blindly. He would accept it, and he would be entitled to
rely on it, but he would give it due consideration and exercise his
own judgment in the light thereof. Gower (op
cit at 602 et seq)
refers to the striking contrast between the directors heavy duties of
loyalty and good faith and their very light obligations of skill and
diligence. Nevertheless, a director may not be indifferent or a mere
dummy. Nor may he shelter behind culpable ignorance or failure to
understand the company's affairs.”
It
seems to me that the law does not distinguish between those who are
executive directors and ordinary directors. Their role in so far as
the company is concerned is the same. They all have an affirmative
duty to safeguard and protect the interests of the company.
ANALYSIS
OF THE FACTS
It
seems to me that in the arguments presented to the court by counsel,
a vital factor required for proof of liability under the section was
omitted.
The
section refers to the recklessness in the management of a business
such that it incurs debts which it cannot pay with an intent to
defraud creditors.
I
heard both counsel speak mainly on the issue of knowledge of the
manner of conducting business. In my view, before the court can
decide on the knowledge or lack thereof by a director, a plaintiff
seeking judgment against a director based on the provisions of
section 318 must establish that the company was being run recklessly.
Where
it is claimed in any proceedings that any business of a company was
being carried on recklessly, or with gross negligence or with intent
to defraud any person or for any fraudulent purpose so as to
establish that any director, past or present was knowingly a party to
the carrying on of the business in the manner or circumstances to
find the director personally liable, it was necessary that the party
so claiming to adduce evidence to that effect.
The
nature of the business, how the business was being managed and,
whether recklessness or gross negligence was a feature in the
business, the knowledge of the director in the conduct of the
business were all issues of a factual nature to be established by
evidence.
It
is a trite principle of our law that he who alleges must prove. See
Nyahondo
v Hokonya
1997 (2) ZLR 457 (S) at 459.
In
casu,
the appellant was found liable based on a BA that was not met. The
circumstances under which the BA was issued were not set out. The
level of indebtedness of Rodstreet was not established.
I
do not believe that merely alleging that a company issued a BA which
was not met upon presentment on its own, can be sufficient proof
under section 318 that the business of a company was being run
recklessly with the intention to defraud creditors or any other
person.
In
this case, the respondent bore the onus
to show reckless conduct on the part of the appellant and his
co-directors in the running of the affairs of Rodstreet. The
respondent chose to rely on the BA.
It
failed to discharge the onus
that it bore.
Besides,
the respondent needed to establish knowledge of the running of the
business in the manner aforesaid by the appellant.
The
appellant resigned after the BA was issued. However, his stance was
to the effect that he had no knowledge of its issuance.
This
raised a dispute of fact which the respondent had to establish. The
respondent did not.
The
appellant further stated that although he was aware of an underlying
facility, that did not necessarily mean that he had knowledge of the
BA. He was not aware that the BA had been issued as security for the
BA.
The
dispute of fact raised by his disavowal required facts to be placed
before the court to counter this.
Given
the absence of evidence as to the state of mind of the appellant
herein, it stands to reason that a critical element in the inquiry
that must be conducted in order to find liability on the part of the
appellant is missing.
A
state of mind is subjective and in this instance, it is not clear how
the finding as to his intent to defraud creditors could have been
arrived at.
As
argued by Mr Chinake,
the cause of action in this instance was not the underlying facility.
The respondent chose the BA as the cause of action.
It
had to establish therefore that the appellant had knowledge of the
BA.
No
evidence was adduced to that effect.
Based
on the dicta
in the authorities referred to above, the respondent needed to
establish on a balance of probabilities that the appellant had been
party to the issuance of the BA.
It
chose not to lead any evidence.
DISPOSITION
In
my view, the appellant has succeeded in establishing that the court a
quo
misdirected itself in applying section 318 of the Act and holding the
appellant personally liable for the debt due under the BA.
There
was no basis for the finding. The judgment must be vacated.
I
do not consider it necessary to deal with the question of interest.
Once the judgment is vacated the question of what interest rate
should have been applied to the judgment becomes academic. The court
does not engage itself in issues that do not serve to resolve real
disputes.
In
the premises an order will issue in the following terms:
1.
The appeal is allowed with costs.
2.
The judgment of the court a
quo
is set aside and in its place is substituted the following:
“The
application is dismissed with costs.”
MAKONI
JA: I
agree
BERE
JA: (No
longer in office)
Kantor
& Immerman,
appellant's legal practitioners
Dube,
Manikai & Hwacha, legal practitioners for the respondent
1.
1986 (2) ZLR 137 (SC)
