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The art of law - the fraudulent and reckless provisions of the (repealed) Companies Act 1973 continue to apply where an insolvent company is being wound up

The fraudulent and reckless trading provisions of the Companies Act 1973 live on where an insolvent company is wound up

One of the most egregious forms of misconduct in the corporate world occurs where a director uses his company to commit a fraud and then attempts to hide behind the company's separate legal personality to avoid being personally called to account for the financial loss that was inflicted on the outside party.

Whilst the now-repealed Companies Act 61 of 1973 was in force, the remedy of the outsider in such circumstances was to institute legal proceedings against the responsible director, seeking a court order declaring the director in question to be personally liable for the debts or other liabilities of the company. This remedy was contained in section 424 of the Act, which also applied where there had been conduct which, though not fraudulent (ie deliberately dishonest), was reckless.

Significantly, the opening words of section 424 state that this section applies whether in a winding-up 'or otherwise', and the remedy it provides is thus available irrespective of whether the company was solvent or insolvent, and whether or not it was being wound up.

There is no direct counterpart to section 424 in the new Companies Act 2008

A noteworthy aspect of the Companies Act 71 of 2008, which repealed and replaced the Companies Act 1973, is that it contains no provision directly equivalent to section 424 of the latter Act.

However, as a transitional measure (pending the enactment of a new Insolvency Act, which is still being drafted) section 424 of the Companies Act 1973 remains in force - but only in the context of the winding up of an insolvent company. See the Companies Act 71 of 2008 schedule 5, item 9(1) - (2).

The transitional provisions also provide that the provisions of the old Companies Act of 1973 continue to apply to legal proceedings that were commenced in terms of that Act prior to its repeal.

All of the aforegoing principles were critical to the relief sought by the plaintiff in Tourvest Holdings (Pty) Ltd v Nonkam [2014] ZAGPPHC 720 where judgment was delivered on 26 September 2014.

The facts in the Tourvest Holdings case

In this case, the plaintiff, Tourvest Holdings (Pty) Ltd, was in the business of arranging visits to Pretoria by inter alia civil servants who were attending courses in that city, and this involved booking hotel accommodation in the name of the company.

On the occasion in question, Tourvest arranged accommodation at the Pretoria Hotel for a group of civil servants, who were to stay at the hotel for an extended period, at a cost of some R755 000.

The Pretoria Hotel was owned by a company called Madeleine Properties (Pty) Ltd, and Tourvest therefore became liable to that company for the aforesaid accommodation charge of R755 000 which, of course, Tourvest intended to recover from its client.

Tourvest paid this sum into a bank account of a company called Tulah Trading (Pty) Ltd, believing that this was the account into which payment of the amount due to Madeleine Properties (Pty) Ltd had to be made. Tourvest had previously made payments into this particular account for similar purposes; it was the account used by the defendant, one Pascal Nonkam, whilst he was in control of his commercial empire.

Unbeknown to Tourvest, however, control of Madeleine Properties (Pty) Ltd had passed out of the hands of Pascal Nonkam into the control of another member of the Nonkam family.

In his judgment, Bertelsmann J said (at para [12] of the judgment) that Tourvest -

'was an outsider to the family feud and was entitled to assume that the payment made into an account used for the purpose of settling Madeleine Properties' claims in the past was regular.'

Its depositing of funds into the wrong account became known to Tourvest when Madeleine Properties (Pty) Ltd demanded payment for the reserved accommodation. The bank refused to reverse the payment that had been made to Tulah Trading (Pty) Ltd without authorisation from the latter company.

The defendant, Pascal Nonkam had been a director of Tulah Trading (Pty) Ltd, but was removed as a director after he took funds that were in the company's bank account for his own benefit in terms of a writ of attachment. The funds so taken by him from the company's bank account (see para [22]) consisted of the money that had been deposited into the account by Tourvest for the accommodation in question; Pascal Nonkam was in effect taking back into his own hands the money that Tourvest had deposited into the account.

Bertelsmann J said (at para [17] - [18] ) that Pascal Nonkam was aware that Tourvest had deposited funds into the Tulah Trading account in error and that -

'There can therefore be no shadow of doubt that [Pascal Nonkam] was fully aware . . . that, if such funds were to be removed out of this bank account, Tulah would never be able to refund the plaintiff . . .'

Against whom did Tourvest's claim lie for repayment?

Tourvest issued summons before the Companies Act 2008 had come into effect, with the result that - even though the new Companies Act 2008 had come into force by the time of the trial - the case had to be determined in accordance with the provisions of the Companies Act 1973.

The first point of interest in the judgment is that Tourvest chose to issue summons for repayment, not against Tulah Trading (Pty) Ltd into whose account Tourvest had deposited the moneys for accommodation, but against Pascal Nonkam personally.

Bertelsmann J concluded (at para [32]) that the actions of Pascal Nonkam -

'amount to a clear fraud upon the plaintiff and upon Tulah. Depleting [Tulah's] account for his own ends left the company insolvent and unable to pay its creditors. He must therefore be declared liable to plaintiff [Tourvest] for any prejudice suffered by the latter, not only for the sum he appropriated for himself, but for any and all liabilities that Tulah has incurred.'

Thus, the finding of fraud on the part of Pascal Nonkam enabled the court to impose personal liability on him in terms of section 424 of the Companies Act 1973 for the debt of Tulah Trading (Pty) Ltd (ie its legal liability to reimburse Tourvest) and the court therefore ordered him to repay Tourvest the sum of R755 000 plus interest.

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