Wednesday, February 11, 2009

Close Corporations - Personal Liability for Reckless Trading

In certain circumstances the members of a Close Corporation may be held personally liable for its debts.

In the case of Ebrahim and Another vs. Airport Cold Storage (Pty) Ltd 2008 (6) 585 SCA the Corporation did not keep books of account, did not have an accounting officer for a period of more than 6 months, collected VAT but did not file VAT returns or pay it, did not file PAYE returns or pay it, did not issue pay slips, failed to deposit most of the money it received into a bank account and its funds went missing. In addition the corporation assumed the liability for a large debt without receiving adequate value for it.

The Supreme Court of Appeal found that the facts of this case indicated a consistent disregard for the independent well being of the corporation as a separate entity. It was found that this constituted a reckless carrying on of its business and that accordingly the members of the corporation were personally liable for its debts.

The Court also set out guidelines for a finding of recklessness. These were an entire failure to give regard for the consequences of one’s actions and an attitude of reckless disregard of such consequences. The surrounding circumstances such as the corporation’s type of business, its members’ roles, functions and powers, the financial circumstances and amount of its debt and the prospects of a recovery from financial difficulty should also be taken into account. In addition the degree to which the corporation’s members have departed from sound business practices having regard to the standard of the reasonable man should be considered.

It is therefore imperative that the members of a CC ensure that proper compliance to the laws and regulations, particularly the tax, disclosure and bookkeeping aspects of running a CC be adhered to in order to avoid the possibility of incurring personal liability for its debts.

Bruce Lyle
Membership Services Manager


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