Personal liability of directors
In Bellini v Paulsen and Another  2 All SA 26 (WCC) the court was asked to interpret and give meaning to the phrase ‘conducting the business of a company recklessly and fraudulently’, contemplated in s 424 of the Companies Act 61 of 1973 (1973 Act).
The facts were as follows: Bellini was a creditor of a company under winding-up. The two directors (on behalf of the company) bought certain technology from Bellini. At all relevant times the directors were aware that the company was unable, and would never become able, to pay its debts to Bellini, been admitted by one of the directors when under cross-examination.
Bellini sought to hold the directors liable for the debts and other liabilities of the company by virtue of s 424 of the Act.
The court, on the evidence presented, held that:
- the first director had concluded an agreement on behalf of the company at a time when it had no assets, no bank account and no means of paying any debt incurred on its behalf;
- the first director was untruthful in the relevant transactions and this conduct, in turn, constituted not only reckless conduct but also amounted to a “wilful perversion of the truth with intent to defraud [creditors of the company]”;
- “recklessness” must be given its ordinary meaning. It requires gross negligence, not only in relation to foreseen circumstances, but also to culpably unforeseen consequences, whatever they may be;
- the two directors failed to act as reasonable business people and their conduct, measured against the provisions of s 424(1) of the Companies Act (1973), constituted fraudulent and reckless management of the company’s affairs;
- thus the two directors were liable to Bellini [and the company’s other creditors] for the debts incurred by the company.