TAGU
J:
At
the beginning of the hearing of this matter, counsels for the
respondent took a preliminary point that the last sentence on para 1
of p42 on the applicant's heads of argument which reads:
“……Respondent
at the material time was also a director of Interfin Bank Limited
('Interfin' or 'the Bank). The Bank which loaned and advanced
money to Rodstreet and accepted the Bankers Acceptances issued by
Rodstreet” be
struck out on the basis that the whole sentence was new evidence that
was being introduced in the heads of argument because it was not
anywhere in the papers, it was not in the founding affidavit, it was
not in the answering affidavit, and it was not in anything.
It
popped up for the first time on those heads of argument.
The
counsel for the applicant opposed the application on the basis that
heads of argument are not capable of being struck out. The respondent
persisted with the application.
It
is however, trite that heads of argument need not introduce new
evidence not previously pleaded.
However,
having read through Mr Jayesh Shah's founding affidavit, and his
answering affidavit, as well as all other correspondences filed of
record nowhere is it stated that the respondent was also the director
of Interfin Bank Limited. This piece of evidence was introduced
through the heads of argument.
I
find merit in the application by the respondent's counsels.
That
sentence which reads “respondent at the material time was also a
director of Interfin Bank Limited ('Interfin' or 'the Bank')”
is struck out of the applicant's heads of argument. The rest of the
sentence is left intact since it was pleaded that Interfin Bank
loaned and advanced money to Rodstreet and accepted the Bankers
Acceptances issued by Rodstreet.
I
now turn to deal with the merits.
BACKGROUND
This
is an application based on the provisions of section 318(1) of the
Companies Act [Chapter
24:03]
('the Companies Act') which has the effect of, on the direction
of this Honourable Court, holding the past and present directors of a
company personally responsible, without limitation of liability, for
all or any of the debts or other liabilities of a company as the
court may direct where they have conducted the business of the
company in a fraudulent, negligent or reckless manner. The section
says:
“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.”
What
is being alleged in
casu is
as follows:
The
applicant is a company registered in the British Virgin Island whose
principle place of business is Shed No. B1, AL Khabaissi, Dubai,
U.A.E. The respondent is a private individual and director of
Rodstreet Trading (Private) Limited of 14 Crowbrugh Road,
Groombridge, Harare.
Sometime
in or about 22 August 2011, Rodstreet accessed certain facilities
from Interfin Bank secured by a certain Bankers Acceptance (BA)
issued by Rodstreet and drawn on to the tune of US$117,335.91 availed
and accepted by Interfin Bank. The BA's due date was 21 November
2011.
Interfin
Bank then sold the Bankers Acceptance to the applicant and the
applicant became the legal holder of the Bankers Acceptance.
On
or about 7 March 2012, Interfin Bank advised Rodstreet that it had
sold the BA to the applicant and that when the amount due on the BA
became due and payable, such amount was to be paid to the applicant.
The
BA was presented for payment by the applicant to Interfin Bank on the
due date but Rodstreet and Interfin Bank failed to honour or
discharge the Bankers Acceptance.
The
applicant issued a letter of demand to Rodstreet demanding payment of
the sum of US$117,335.91. Rodstreet was unable to make any payment
towards the amount demanded.
The
applicant then issued summons against Rodstreet on 27 April 2012 in
case HC4556/12. A default judgment was obtained against Rodstreet on
the 18 June 2012. The applicant instructed the Deputy Sheriff to
proceed to Rodstreet's place of business and execute the order.
On
3 August 2012 the Deputy Sheriff advised that Rodstreet was no longer
operating from their premises. Despite a diligent search and enquiry
applicant failed to establish where Rodstreet is now operating from.
The
applicant averred that the respondent, as a director of Rodstreet at
all material times knew or should have known that his company would
not be able to pay amounts owed in terms of the Bankers Acceptance
that Rodstreet issued in the ordinary course of its business.
They
alleged that despite such knowledge of the company's incapacity to
pay in the ordinary course of business, the respondent, being the
director of the company, negligently and/or fraudulently represented
to Interfin Bank that Rodstreet would liquidate the amount owed on
the Bankers Acceptance on the maturity date of the same.
Further,
the applicant submitted that the respondent knew or ought to have
known of the financial position of the company and its inability to
pay amounts owed to applicant in terms of the Bankers Acceptance.
Hence
this knowledge, or lack of such knowledge of the company's financial
position amounted to gross negligence and reckless trading on the
part of the respondent for which the respondent must be personally
liable for at law.
In
its view the respondent owed a duty of care to all parties that
Rodstreet conducted business with including the applicant to ensure
Rodstreet would be able to meet its financial obligations.
The
applicant is now seeking an order that the respondent be declared
personally liable to pay applicant the sum of USD117,335.91, interest
at the rate of 30% per annum from 21 November 2011 to date of full
payment plus costs of suit.
The
respondent opposed the application.
In
his founding affidavit the respondent stated that he is no longer a
director of Rodstreet (Private) Limited having resigned from the
board of the company on 3 November 2011 when he sold his shareholding
in the company.
He
however, conceded that as far he was aware for a period of time that
he cannot remember the company operated an overdraft facility with
Interfin Banking Corporation Limited.
He
further stated that the Bankers Acceptances which forms the main
issue in these proceedings was issued entirely and signed by his two
co-directors Mr Herbert Rinashe and Phillip Jonasi without his
knowledge. To the best of his knowledge no board resolution was ever
made to issue the Banker Acceptance in his presence.
He
said as a banker, he would have strenuously opposed the issuance of a
Bankers Acceptance as a way of financing trading stock as he was
aware that a Bankers Acceptance has a defined tenure and would
therefore be wholly unsuitable to finance trading stock since the
company would not be able to tell with any degree of certainty how
long it would take to sell the stock. In his view this would risk
creating a mismatch between the maturity of the Bankers Acceptance
and the realization of cash from trade.
In
short the respondent denied that as a director of Rodstreet he knew
or should have known that the company would not be able to pay
amounts owed in terms of the Bankers Acceptance because -
1.
at all material times he was a Non-Executive Director and not
involved in the day to day operations of the company;
2.
the board of directors never, to the best of his knowledge,
information and belief authorised any person to sign the Bankers
Acceptance;
3.
he did not sign the said Bankers Acceptance nor did he ever deal with
it in any way;
4.
he never made any representation to Interfin or any other person
whatsoever that Rodstreet would liquidate the Bankers Acceptance on
maturity or at any time thereafter;
5.
he was not grossly negligent or fraudulent or reckless in anyway
whatsoever with respect to the issuance of the Bankers Acceptance as
he did not even know of its issuance;
6.
further, the applicant chose to exclude from suing the existing
directors who signed the Bankers Acceptance;
7.
and further, to his knowledge, neither Rodstreet nor himself had any
dealings whatsoever with applicant.
It
was his contention that the applicant put itself in the position that
it found itself in buying or accepting a Bankers Acceptance from
Interfin without doing its own due diligence for the applicant had a
duty to perform at least some minimum amount of due diligence to
satisfy itself. Hence no reckless or fraudulent or gross negligent
trading is attributable to him.
8.
Lastly he challenged the rate of interest at 30% per annum and argued
that this has not been proved.
What
is not in dispute is that on or about the 3rd of
November 2011 the respondent was still one of the directors of
Rodstreet (Private) Limited. He resigned from the said company with
effect from 3 November 2011. The Bankers Acceptance in issue was
drawn on the 22nd August
2011. Its due date was the 21st of
November 2011.
It
is therefore common cause that at the material time when the Bankers
Acceptance was drawn and the money was advanced, the respondent was a
director of Rodstreet.
Interfin
Bank Limited sold the said Bankers Acceptances to applicant before
the respondent resigned from Rodstreet (Private) Limited.
Interfin
Bank advised Rodstreet that it had sold the Bankers Acceptance to the
applicant on or about the 7th of
March 2012 after the respondent had resigned from the company.
The
Bankers Acceptance was presented for payment by the applicant to
Interfin Bank on due date but Rodstreet and Interfin Bank failed to
honour or discharge the Bankers Acceptance. This resulted in a
default judgment being granted against Rodstreet (Private) Limited
after it was sued by the applicant. The company's whereabouts is now
unknown.
The
main issue to be decided is whether or not the respondent as a past
director of Rodstreet is personally liable in terms of section 318(1)
of the Companies Act [Chapter
24.03]
for the liability of Rodstreet in accessing certain facilities
secured by a Bankers Acceptance which Rodstreet defaulted in
honouring on its due date.
It
is trite that the provisions in section 318(1) of the Companies Act
extends personal liability not only to “the past or present
directors of the company” but also to “any other persons who were
knowingly parties to the carrying on of [its] business” recklessly
or with gross negligence or with intent to defraud: see David
Govere v (1) Ordeco (Private) Limited (2) Registrar of
Deeds SC25/14.
In casu once
it is found that the respondent was liable, further issues to be
decided are whether or the respondent carried the business of
Rodstreet recklessly, with gross negligence or with intent to
defraud.
In
the present case although the respondent resigned mere days before
the maturity of the Bankers Acceptance, this does not protect him
from being personally liable for the debt arising therefrom, as the
material time was actually the time when the Bankers Acceptance was
drawn up and the sum in question was advanced.
This
is because, this was the time when due consideration of the financial
and business state of the company, and whether or not the company
could afford to repay any loans or other debts falling on it.
Liability
therefore falls squarely on respondent's shoulders.
The
respondent sought to deny liability on the basis that he was not an
executive director of Rodstreet.
I
do not agree with that.
In
the case of Howard v Herrigel and
Another 1991 (2) SA 662 at p674 the court held:
“In
my opinion it is unhelpful and even misleading to classify company
directors as 'Executive' or 'Non-Executive' for purposes of
ascertaining their duties to the company or when any specific or
affirmative action is required of them. No such distinction is to be
found in any statute. At common law, once a person accepts an
appointment as a director, he becomes a fiduciary in relation to the
company and is obliged to display utmost good faith towards the
company and in his dealings on its behalf. That is the general rule
and its application to any particular incumbent of the office of the
director must necessarily depend on the facts and circumstances of
each case.
One
of the circumstances may be whether he is engaged full time in the
affairs of the company….
However,
it is not helpful to say of a particular director that, because he is
not an 'Executive Director' his duties were less onerous than
they would have been if he were an Executive Director. Whether the
enquiry be one in relation to one's negligently, reckless conduct or
fraud, the legal rules are the same for all directors.”
Therefore,
the fact that respondent was not an Executive Director does not
absolve him from personal responsibilities for the company's debts
and liabilities under section 318(1) of the Companies Act.
As
to what constitutes recklessness, gross negligence and fraud this was
decided in a number of cases.
In
the case of Chibwe
t/a Ross Motors (Private) Limited v Fawcett Security
Operations (Private) Limited & Anor HH79/2006
Bhunu J (as he then was) citing Rosenthal v Marks 1944
TPD 172 described gross negligence as being tantamount to wilful
non-performance of one's contractual duties and obligations.
See
also Philotex
(Pty) Ltd and Others v Snyman and Ors; Braitex (Pty)
Ltd and Ors v Snyman and Others 1998
(2) SA 138 (SCA); Ozinsky
NO v Lloyd and Ors 1992
(3) SA 396. Ebrahim
and Another v Airport Cold Storage (Pvt) Ltd 2008
(6) SA 585; and Expart Lebowa Development Corporation Ltd 1989 (3) SA
71 (T).
Given
the facts of this matter it is my view that drawing up the Bankers
Acceptance and accepting the money despite knowledge of the company's
precarious financial position was within the respondent's knowledge.
The
liability at law, is not in a company accepting a time-bound debt,
but in allowing an insolvent company to keep on trading to create a
good impression of the company.
As
a director the respondent had a duty of care in the running of the
company which he failed to uphold.
As
submitted by the applicant it is inconceivable that, of the extent of
liability owed by Rostreet, only the Bankers Acceptance were
recklessly taken by Rodstreet, and the remainder of the debt was good
debt.
The
facts in this case show that Rodstreet failed to service the
indebtedness arising out of the Bankers Acceptance at all despite the
fact funds were received.
Therefore,
it can safely be concluded that the directors, including the
respondent, traded recklessly in general and in particular in the
securing debt with Bankers Acceptances. The board of directors which
then included the respondent conducted the business of the company in
a manner which contravenes the provisions of the Companies Act. The
respondent, therefore conducted the business of Rodstreet recklessly,
negligently if not fraudulently and in this regard is consequently
personally liable.
In
the result the application is granted and I accordingly make the
following order -
IT
IS ORDERED THAT:
Respondent
be and is hereby declared personally liable to pay to the applicant:
(a)
The sum of USD117,335.91;
(b)
Interest on the sum of USD117,335.91 at the rate of 30% per annum
from 21 November 2011 to the date of payment in full; and
(c)
Costs of suit.
Dube
Manikai & Hwacha,
applicant's legal practitioners
Moyo
and Partners,
respondent's legal practitioners
