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 (Rodstreet) 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 Bankers
Acceptance'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 Trading
(Private) Limited that it had sold the BA to the applicant and that
when the amount due on the Bankers Acceptance became due and payable
such amount was to be paid to the applicant.
The
Bankers Acceptance was presented for payment by the applicant to
Interfin Bank on the due date but Rodstreet Trading (Private) Limited
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 Trading
(Private) Limited 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 18th
of 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, the applicant failed to establish
where Rodstreet Trading (Private) Limited is now operating from.
The
applicant averred that the respondent, as a Director of Rodstreet
Trading (Private) Limited 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
Trading (Private) Limited 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 the 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
Trading (Private) Limited would
be able to meet its financial obligations.
The
applicant is now seeking an order that the respondent be declared
personally liable to pay the 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
Trading (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
Trading (Private) Limited, he
knew, or should have known, that the company would not be able to pay
amounts owed in terms of the Bankers Acceptance because -
(i)
At
all material times he was a non- Executive Director and not involved
in the day to day operations of the company;
(ii)
The Board of Directors never, to the best of his knowledge,
information, and belief authorised any person to sign the Bankers
Acceptance;
(iii)
He did not sign the said Bankers Acceptance nor did he ever deal with
it in any way;
(iv)
He never made any representation to Interfin, or any other person
whatsoever, that Rodstreet
Trading (Private) Limited would
liquidate the Bankers Acceptance on maturity or at any time
thereafter;
(v)
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;
(vi)
Further, the applicant chose to exclude from suing the existing
Directors who signed the Bankers Acceptance; and
(vii)
Further, to his knowledge, neither Rodstreet
Trading (Private) Limited nor
himself had any dealings whatsoever with the 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.
(viii)
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
Trading (Private) Limited.
He resigned from the said company with effect from 3 November 2011.
The Bankers Acceptance in issue was drawn on the 22nd
of
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
Trading (Private) Limited.
Interfin
Bank Limited sold the said Bankers Acceptances to the applicant
before the respondent resigned from Rodstreet
Trading (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
Trading (Private) Limited and
Interfin Bank failed to honour or discharge the Bankers Acceptance.
This resulted in a default judgment being granted against Rodstreet
Trading (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
Trading (Private) Limited is
personally liable in terms of section 318(1) of the Companies Act
[Chapter
24.03]
for the liability of Rodstreet
Trading (Private) Limited in
accessing certain facilities secured by a Bankers Acceptance which
Rodstreet
Trading (Private) Limited defaulted
in honouring on its due date.
It
is trite that the provisions in section 318(1) of the Companies Act
[Chapter
24.03]
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 Ordeco (Private) Limited and Registrar of Deeds
SC25-14.
In
casu,
once it is found that the respondent was liable, further issues to be
decided are whether or not the respondent carried on the business of
Rodstreet
Trading (Private) Limited 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 the respondent's shoulders.
The
respondent sought to deny liability on the basis that he was not an
Executive Director of Rodstreet
Trading (Private) Limited.
I
do not agree with that.
In
the case of Howard
v Herrigel
and Another 1991 (2) SA 662…, 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 the
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 [Chapter
24:03].
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
HH79-06, BHUNU J…, 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 Rodstreet
Trading (Private) Limited,
only the Bankers Acceptance were recklessly taken by Rodstreet
Trading (Private) Limited
and the remainder of the debt was good debt. The facts in this case
show that Rodstreet
Trading (Private) Limited failed
to service the indebtedness arising out of the Bankers Acceptance at
all despite the fact that 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
Trading (Private) Limited 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.
