Using a company to commit a fraud has serious consequences for the responsible individuals
The Supreme Court of Appeal clamps down on those who try to hide their dishonesty behind the façade of a company
In a judgement handed down on 29 March 2010 in the case of Pitelli v Everton Gardens Projects CC  ZASCA 35 the Supreme Court of Appeal said that -
The limited liability that is afforded to persons who conduct business through the medium of a company is not there to protect them against conduct that is reckless or that takes place with fraudulent intent. Section 424(1) of the Companies Act 61 of 1973 protects creditors in those circumstances. It provides that, when it appears to a court that 'any business of a company was or is being carried on recklessly or with intent to defraud creditors of the company' the court may declare that 'any person who was knowingly a party to the carrying on of the business' in that manner shall be 'personally responsible … for all or any of the debts or other liabilities of the company'.
In effect, therefore, this section of the Act empowers the court to take a company's debts (for which, ordinarily, only the company would be liable) and impose liability for the payment of those debts on the individuals who were "knowingly party to" the fraudulent or reckless carrying on of the company's business.
Significantly, the individuals who can be declared personally liable for the company's debts in terms of this provision of the Companies Act are not limited to the directors of the company. The expression "party to the carrying on of the business" has been interpreted to mean anyone who took managerial decisions for the company, irrespective of what position that person held in the company - and even if he or she held no official position at all.
In the case of Pitelli v Everton Gardens Projects CC the individual against whom the court made such an order, namely Pitelli, was the sole director and shareholder of a private company.
What had happened was that Everton Garden Projects CC had mistakenly overpaid, by almost a million rand, the company in question for services that the latter company had rendered, and the company then failed to refund the overpayment.
The evidence showed that Pitelli was in charge of the company's financial affairs and was aware that the money in question was an overpayment. The court said that, for the company not to refund the overpayment, was fraudulent - deliberate dishonesty - and that, on the evidence, Pitelli was "knowingly party to" that fraudulent conduct.
Pitelli used every trick in the book to try to wriggle out of repayment. He applied for the voluntary winding up of his company, no doubt thinking, naively and mistakenly, that this would expunge both the company's liability and his own potential personal liability. The Registrar of Companies declined to wind up the company, no doubt on the grounds that a company can only be voluntarily wound up if it has no debts.
When Everton Garden Projects CC instituted legal proceedings in the High Court, claiming repayment, and applied for summary judgement, Pitelli perjured himself in the affidavit that he filed in court to defend the claim.
The court regarded this as a continuation of his deceitful conduct, aimed at evading the repayment of money that Pitelli knew ought to be repaid.
In the result, the Supreme Court of Appeal dismissed Pitelli's appeal against the judgement that had imposed personal liability on him.