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The art of law –a chapter of the repealed Companies Act of 1973 remains applicable to companies that are being wound up as insolvent

In Noordman NO v Bruin [2016] ZAFSHC 9, in which judgment was handed down by the Free State High Court on 29 January 2016, the liquidators of an insolvent company were attempting (unsuccessfully as it transpired) to persuade the court to declare the sole director and shareholder of the defunct company personally liable for its unpaid debts on the grounds that he had been party to reckless or fraudulent trading.

The impugned conduct of the director had occurred prior to the date of the coming into force of the Companies Act 2008, namely, 1 May 2011. However, the liquidators had issued summons on 10 September 2013, that is to say, after the new Act came into force.

In these circumstances, did the old Companies Act 1973 or the new Companies Act 2008 apply? In terms of which Act must the liquidators institute legal proceedings against that director?

This was an important question for the old Companies Act of 1973 had a specific section, namely section 424, which provided for the imposition of personal liability for reckless or fraudulent trading. By contrast, the new Companies Act of 2008 has no provision that explicitly empowers a court to make a declaration of personal liability for a company’s debts in respect of a person who has been party to reckless or fraudulent trading; such an order can be sought only in terms of the general provisions of section 20(9)(b).

Companies that are being wound up on the grounds of insolvency

However, in relation to companies that are being wound up as insolvent, Chapter 14 of the Companies Act 1973 (which includes section 424 of that Act) continues to apply, notwithstanding the repeal of that Act by the new Companies Act. This extended existence of Chapter 14 of the old Companies Act is provided for in the transitional arrangements – see Schedule 5 item 9(1) of the Companies Act 2008.

Thus, in Noordman v de Bruin NO the liquidators of the insolvent company in question correctly took the view that, although summons was issued after the new Act came into force, relief could be claimed by instituting legal proceedings against the sole director of that company in terms of section 424(1) of the old Companies Act of 1973.

If the company was not being wound up as insolvent (for example, if it was being wound up on other grounds) that statutory provision would have not been applicable and any relief would have had to be claimed against the director in terms of the new Companies Act of 2008 unless the legal proceedings had been commenced before the new Act came into force.

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