South Africa: No Link Needed, Fraudulent Directors Will Pay

Last Updated: 21 December 2012
Article by Caroline Theodosiou

In a unanimous judgment delivered by the Supreme Court of Appeal (SCA) in the matter of Fourie v FirstRand Bank Ltd [2012] ZASCA 119 (578/2012) on 18 September 2012, the Court found a director liable in his personal capacity for wrongfully contributing to the loss of a creditor under section 424 of the Companies Act, No. 61 of 1973 (the Act). The Court furthermore found the director's employer vicariously liable for the conduct of the director.

The Court, against the background of apparently conflicting authorities, held that section 424 of the Act does not require a causal link between the reckless or fraudulent conduct of the director and the loss suffered by the creditor.

This clears up what had become a "grey area" after judgment was handed down by the SCA in L & P Plant Hire BK v Bosch 2002 (2) SA 662 (SCA) (L&P Plant Hire), which was considered as authority for the proposition that a causal link was required. Placed in context, what L&P Plant Hire intended to say is that if, despite the reckless conduct, the company is able to pay its debts, then the creditor has no cause of action.

Section 424 of the Act, which remains in force despite the implementation of the Companies Act, No. 71 of 20081, provides that:

"When it appears ... 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... 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" [own emphasis].

As an aside (set out by the Court in the case of Philotex (Pty) Ltd and others v Snyman and others; Braitex (Pty) Ltd and others v Snyman and others 1998 (2) SA 138 SCA), "knowingly" means:

"... 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."

In this case, Fourie (an accountant) was a director of a company trading as Supreme Car, although he was employed at all times by Mr du Preez (an auditor). Supreme Car entered into an agreement with FirstRand whereby FirstRand would finance the purchase of various second-hand cars for sale to the general public. FirstRand owned these cars, which constituted the security for Supreme Car's loan. The agreement dictated that Supreme Car would repay FirstRand within one week of the sale of a FirstRand-financed vehicle.

When Supreme Car failed to make payment as per the agreement, FirstRand attempted to repossess the 136 vehicles which it had financed. Fifty-two vehicles could not be accounted for, with the result that when Supreme Car was placed under liquidation, FirstRand could not recover the value of those vehicles from Supreme Car.

The North Gauteng High Court, which sat as the court of first instance, found that:

  • Fourie knowingly prepared false financial statements and thus committed fraud; and
  • the business of Supreme Car was conducted in a reckless manner and Fourie was knowingly a party to this conduct.

Interestingly, the court of first instance found that the misrepresentation (embodied in the false financial statements) did not factually cause the loss. The Court found that the factual cause of the loss was reckless spending on the part of the owners of Supreme Car.

Nonetheless, the court of first instance found that in terms of section 424 of the Act, it was not necessary to prove a causal connection, and found against Fourie. But, given the absence of a causal connection, Du Preez was not held to be vicariously liable for Fourie's conduct.

The SCA agreed that section 424 does not require a causal link between the reckless or fraudulent conduct of the director and the loss suffered by the creditor, but differed on the finding in respect of causation.

The reason for this difference was that the Court of first instance, in considering factual causation, sought to find a link between each of the five misrepresentations to the damages suffered. This was found to be an incorrect application of the "but for" test. The correct approach is to consider the misrepresentations on a globular basis. In doing so the court found that, but for the series of misrepresentations, the credit facility which ultimately led to Supreme Car's indebtedness would not have been granted.

Fourie's appeal was dismissed and he was ordered to pay in excess of ZAR 10 million, plus costs.

The cross-appeal on the issue of vicarious liability was upheld in light of the finding of a causal connection, with the result that the executor of the deceased estate of Du Preez (who took his own life during the course of the trial) was found to be vicariously liable for the conduct of Fourie and liable, jointly and severally, for the damages.

Footnotes

1. Item 9(1) of Schedule 5 to the Companies Act No. 71 of 2008 provides that Chapter 14 of the Companies Act of 1973 will remain in force, which chapter includes section 424 of the 1973 Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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