Both the Close Corporations Act and the Companies Act have similar provisions that grant a court power to attach personal liability for the debts of a corporation or company to its members or directors if they are knowingly party to reckless or fraudulent trading by the corporation or company.
Section 43(1) of the Close Corporations Act provides:
A member of a corporation shall be liable to the corporation for loss caused by his or her failure in the carrying on of the business of the corporation to act with the degree of care and skill that may reasonably be expected from a person of his or her knowledge and experience.
Section 424(1) of the Companies Act reads:
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.
In Ebrahim v Airports Cold Storage (Pty) Ltd a judgment recently handed down by the SCA, the judge found that the Ebrahim family had used ‘a host of entities and trading names at different stages’ to pursue their business interests, and that in doing so they had ‘scant regard’ for the entities’ separate corporate identities. The SCA found that the family conducted the CC’s business with blithe disregard of statutory requirements; that they had no conception of, nor respect for, the fact that the CC was a distinct legal entity with a separate legal existence; and that they showed reckless disregard for the CC’s capacity to accumulate assets of its own.
The court found the members personally liable for the debt of the corporation in these circumstances. This case, the SCA held, illustrates why the provisions play an important role in corporate governance – they remind those who run corporations, and those knowingly party to their business methods that the shadow of personal liability can fall across their dealings.