Liability of directors for reckless and fraudulent trading : the continuance of s424 (1) of the Companies Act 61 of 1973 together with the coming into force of s22 and s77 (3) (b) of the Companies Act 71 of 2008.

Abstract

This research paper focuses on the s424 (1) of the Companies Act 61 of 1973. It is deals specifically with the wording of the section and how courts have interpreted it. It critically explains the most cherished principles of corporate law as to the interpretation of the section. Notwithstanding the existence of s424 (1), in 2011 the new Companies Act 71 of 2008 came into force. The new Companies Act also deals with the liability of directors for reckless and fraudulent trading. However, the new Companies Act deals with such liability differently from s424 (1) of the companies Act of 1973. The difference between the s424 (1) of the Companies Act of 1973 and the new Companies Act of 2008 can be seen on the application of both Acts. Section 424 (1) of the Companies Act of 1973 applies by the application of creditors at the winding up of the company whereas the new Companies Act of 2008 introduces s22 which applies even when the company is still continuing to do business. Furthermore, s424 (1) of the Companies Act provides remedies to the creditors for the debts incurred by the company whereas the new Companies Act introduces s77 (3) provides for remedies to the company for any loss, damages, or costs sustained by the company as a direct or indirect consequence of the directors’ conduct. Accordingly, despite the coming to force of the Companies Act 71 of 2008, s424 (1) of the Companies Act 61 of 1973 still exist in the circumstances of winding up the company. The application of both s424 (1) and s22 and s77 (3) has encouraged me to deal with the topic of liability of directors for reckless and fraudulent trading. This research paper tries to look at both Acts and how they approach the liability of directors in the aforesaid manner. The research paper tries to look at what courts have said since the coming into force of the Companies Act of 2008 since 2011. I wish to deeply pass my gratitude to supervisor Professor RC Williams of University of KwaZulu Natal who has helped and guided me in completing this research paper. I also wish to thank Professor B Grant and D Subramanien who have also helped me in formulating the structure of this research paper.