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IN THE HIGH COURT OF SOUTH AFRICA NOT REPORTABLE

(EASTERN CAPE, GRAHAMSTOWN)

CASE NO: 3017A/2009

DATE HEARD: 15, 16 September 2011

24e January 2012

DATE DELIVERED: 2 February 2012

In the matter between

RAFLATAC SA (PTY) LTD ….............................................................................Plaintiff

AND

JUNE MARY BELL …............................................................................First Defendant

STUART THOMAS BELL ….............................................................Second Defendant

JUDGMENT

PICKERING J:

Plaintiff is UPM Raflatac SA (Pty) Ltd, a company carrying on business at Pinetown, Kwa-Zulu Natal. First defendant is June Mary Bell, an adult businesswoman of East London. Second defendant is Stuart Thomas Bell, an adult businessman also of East London. It is common cause that first and second defendants were at all material times employed by J & D Labels CC, a close corporation which was registered during 1993 but which was placed into liquidation on 5 October 2007. It is further common cause that with effect from October 2002 the first defendant was the sole member of the close corporation.

Plaintiff alleges in its particulars of claim that during the period 1 March 2005 to 19 September 2007 the defendants knowingly carried on the business of the close corporation, recklessly, alternatively in a grossly negligent fashion in that (a) no, alternatively no adequate accounting records were kept; (b) the defendants permitted the close corporation to trade in insolvent circumstances; and (c) they permitted the close corporation to incur credit with the plaintiff with little or no reasonable prospect of the close corporation being in a position to repay such debt.

Plaintiff alleges that as at 19 September 2007 the close corporation was indebted to plaintiff in the sum of R1 779 687,15 and that in the premises and in terms of section 64 of the Close Corporations Act 1984 (“the Act”) the defendants are jointly and severally liable to plaintiff in the said sum.

In an alternative to this claim plaintiff claims, against first defendant only, the sum of R641 225,06. In this regard plaintiff alleges that during October 2006 to 5 October 2007 the office of the accounting officer of the close corporation was vacant. During that period, so it is alleged, the first defendant was a member of the close corporation; was aware of the vacancy; and was still a member of the close corporation when it was liquidated. Plaintiff alleges further that during the aforesaid period the close corporation incurred credit with plaintiff in the aforesaid amount of R641 225,06. It alleges therefore that in terms of section 63(h) of the Act the first defendant is liable for the debt incurred by the close corporation.

In their plea the first and second defendants deny, inter alia, that the business of the close corporation was conducted in the manner alleged by plaintiff and deny further that the office of the accounting officer of the close corporation was vacant as alleged by plaintiff. Whilst admitting that the close corporation was indeed indebted to plaintiff at the time of liquidation they put plaintiff to the proof of the precise quantum of such indebtedness. The issue of the quantum was canvassed in considerable detail during the course of the trial. In the event it became common cause that the quantum of plaintiff’s claim was in fact R1 484 895,90. Plaintiff’s particulars of claim was amended accordingly.

It is common cause that plaintiff, an international company with its headquarters in Finland and its principal place of business in South Africa at Durban, is a supplier of paper products. The close corporation was involved in the printing of labels for affixation to various products. Plaintiff was one of the major suppliers of raw material to the close corporation.

Mr. Brett Armstrong, the holder of a BCompt degree who worked at Coopers and Lybrand Accountants for six years as well as for South African Revenue Services, testified that he had been employed by the close corporation in its administration department from early 2005 until his resignation during or about October 2006. His main duties were in relation to financial matters and he described himself as being the “main financial man” at the business. At that stage the sole member of the close corporation was Mrs. Bell. Her roles in the business varied from administration to supervision of staff. Her son, Mr. Stuart Bell was, however, effectively the main role player in the business. Mr. Armstrong’s testimony in this regard was that “effectively Stuart’s knowledge, experience and reputation in the printing industry meant that he had a big impact on the business in terms of sales, marketing, general running and production, even hands on printing. Stuart effectively was J&D Labels.”

According to Mr. Armstrong the close corporation was trading well at the time that he commenced employment with it although, because of the death of Mrs. Bell’s husband Mr. Derek Bell, who had passed away during June 2002, “there were a lot of things going on.” Nevertheless, the business was trading well in the sense that it was managing existing clients, getting new clients and meeting its set targets.

From late 2005, however, matters became “a lot harder” and he described mid-2006 as being a very tough time. Mr. Stuart Bell was under considerable personal stress which impacted adversely on his work and on the business. A number of important clients were lost. Mrs. Bell was obliged, during August 2005 to put her own capital into the business in order to fund it. In this regard it is common cause that Mrs. Bell raised an amount of money on her Nedbank residential home loan during August 2005 which was utilised as follows:

“1. R95 478,68 was paid on 22 August 2005 into the Nedbank cheque account of J&D Labels CC

2. R550 000,00 was paid on 24 August 2005 into the Nedbank cheque account of J&D Labels CC.” (Exhibit C7)

It is further common cause that on the 14^th October 2005 Mrs. Bell injected a further amount of her own money in the sum of R210 000,00 into the business, making a total of R855 478,68. Mr. Armstrong stated that he, Mrs. Bell, Stuart Bell and Mrs. Bell’s daughter, Melony, would meet on a weekly basis to discuss issues relating to the business and in particular relating to cash flow, sales, production and projected sales, so Mrs. Bell was at all times aware of the situation in which the close corporation was trading. At these meetings the trading figures were gone through and projected as well as being compared to the figures for the corresponding period of the previous year.

As 2006 progressed these meetings became, in his words, a lot more serious. He stated that at a meeting during approximately June 2006 he had raised the “L-word”, the “L” meaning liquidation. He stressed, however, that he had done so as a “shock measure” and a motivational tactic to galvanise everybody into action. He had not raised it on the basis of any financial information.

He stated further that despite all this nobody “would have thought it would have been as bad” as the situation eventually turned out to be. He was at the time strongly of the belief that the business had potential and that it was a business “worth giving everything for”. Despite the financial pressures the business was viable and he believed that it could trade out of its difficulties. He stated that additional sales representatives were employed, staff morale was addressed; attempts were made to improve production and a shift system was implemented at one stage in an effort to increase the cash flow of the business. He believed that Mrs. Bell was trying her best to ensure that all the employees did what they could to improve matters. He confirmed that a major effort was made by all to keep a finger on the financial pulse of the close corporation.

He stated that early in 2006 he was going to Durban for personal reasons and it was agreed that whilst there he should take the opportunity of meeting with employees of the plaintiff in order, inter alia, to reassure them that the close corporation was doing its best to trade through difficult circumstances. He did meet a number of people employed by plaintiff, including Mr. Murray, plaintiff’s then general manager and, as far as he was concerned, the meeting was worthwhile. During the course thereof he was, so he said, “up front” and disclosed to them the cash flow problems which the business was experiencing and explained further the plans which they had in order to address these problems such as the employment of more sales staff and an increase in motivation from everybody. He rejected any suggestion that his purpose in holding the meeting was to hoodwink plaintiff as to the actual state of affairs.

He stated that when he resigned from the employ of the close corporation to pursue his own career he offered, because of the affection and respect he had for Mrs. Bell, to assist her daughter, Melony, with the preparation of the 2006 financial statements. In this regard he stated that during the course of 2006 work was being done on the 2006 statements in the form of management accounts, income and expenditure and sales and invoicing. The information was therefore at his fingertips and accordingly the financial statements were, in his view, very close to getting done. He was, however, not aware of what happened thereafter. It is common cause that the financial statements for the year ending 28 February 2006 were in fact never completed.

Mr. Stephen Hodge, a chartered accountant, testified that the original accounting officers of the close corporation were Wagner and Hodge, they having been appointed as such on 19 October 1993. Wagner and Hodge later practiced as Moors Rowland before becoming Hodge and Kashula.

It is common cause that the last signed annual financial statements of the close corporation were for the period ending 28 February 2005. There were no further financial statements. Those statements indicated that the close corporation had a nett loss of R234 075,00 for that period but, according to Mr. Hodge, the close corporation was still technically solvent, its assets exceeding its liabilities by R320 975,00. The statutory report (B23) compiled by Mr. Hodge is dated 17 November 2006. Mr. Hodge testified that the delay in finalising the report was attributable to the fact that he had not been timeously provided with the requisite information. He stated further that the loss for the period ended 28 February 2005 was attributable to a decrease in turnover and an increase in costs. The major increase in costs related to salaries which rose from R288 000,00 in 2004 to R487 000,00 in 2005. There was, however, nothing sinister in this.

Mr. Hodge testified that, to the best of his recollection, he had had three meetings with regard to the affairs of the close corporation. He stated that the first of these meetings was in March 2007 when he met Mrs. Bell and the new bookkeeper of the close corporation, Ellen Payne. The purpose of this meeting was to take Ms. Payne through the accounting systems of the close corporation. He stated that he vaguely recalled that Ms. Payne could not operate the Pastel system and that the suggestion had been made to introduce the so-called Quick Book System. He agreed under cross examination that this meeting could have been held in the second week of March. He stated in his evidence in chief that at that meeting he had discussed with Mrs. Bell the implications of the close corporation trading under insolvent circumstances and had pointed out that this could constitute reckless trading which would expose the members of the close corporation to personal liability. Mrs. Bell appeared to take this to heart. Under cross examination, however, it was put to him by Mr. Cole, that at the initial meeting with Ms. Payne the issue of trading in insolvent circumstances had not been raised. He conceded in response that he had no clear recollection thereof and accepted that it was possible that nothing had in fact been said about insolvent circumstances at that meeting. He was adamant, however, that he had held a later meeting in March with Mrs. Bell where he had raised that issue.

He stated that there had been a third meeting during or about May 2007 when Mr. Roland Puckering of the plaintiff company had been present. This meeting was held in his boardroom at East London at the specific request of Mr. Puckering. Mrs. Bell was also present. At that stage no management financial statements had been compiled and Mr. Puckering was extremely displeased. At that meeting the issue of reckless trading was specifically raised. It was put to him by Mr. Cole that in response thereto Mrs. Bell had requested that the close corporation be put on payment within 30 days or cash on delivery in order to prevent any possible damage. It was further put that this request was declined by Mr. Puckering who was of the view that it would only make the cash flow of the close corporation worse. Although Mr. Hodge had initially stated that he had no recollection of this he conceded that it was “quite possible” and “feasible”.

According to Mr. Hodge a decision was taken at that meeting that Moors and Rowland would produce management financial statements for the months of March, April and May 2007 in order to enable Mr. Puckering to assess the profitability of the close corporation.

Mr. Hodge then compiled the management accounts for the period March to May 2007. These took three weeks to a month to prepare. They showed that the close corporation was trading at a loss. He accordingly told Mrs. Bell at a subsequent meeting during June 2007 that it was her duty to liquidate the close corporation. He advised Mrs. Bell to consult with Mr. Andrew Paterson, an insolvency practitioner. He was further asked under cross examination whether he was aware of any arrangements about a so-called “parked debt”. He replied that he knew that there had been discussions around that issue but he had not been privy thereto.

Mr. Roland Puckering testified that he was employed by plaintiff at its Durban headquarters until 2008 as its Human Resources Business Partner and Company Secretary.

He stated that he was aware of the meeting which had been held in Durban during 2006 between Mr. Ian Murray, plaintiff’s then managing director, and Mr. Brett Armstrong. He himself had not been present.

During March 2007 he and Mr. Murray came to East London in order to have a look at how the close corporation was trading. At that stage its account with plaintiff was in the order of R1,3 million. Plaintiff was concerned because the terms of credit of the close corporation were payment within 60 days together with a limit of R650 000,00. The account was accordingly well over this limit.

This meeting was held at the factory of the close corporation. The business appeared to be busy and functioning and both he and Murray were satisfied and reassured. They were told by Mrs. Bell of a possible lucrative contract between the close corporation and Epol. She also told them that an application had been made to Nedbank for a loan, part of which, if granted, would be paid over to plaintiff.

He stated that defendants were requested to furnish financial statements to plaintiff and arrangements were made that he would return to East London in May in order to peruse these statements.

During evidence in chief he was referred to an email (Exhibit C6) allegedly sent to him by Mr. Stuart Bell. This email reads, inter alia, as follows:

“Hi Roland, sorry I missed your call on Friday. The document forwarded to us by yourself, should be returned to me later today. I will sit down with June tomorrow to discuss the amount we will commit ourselves to. Could you please provide me with the total of the amount to be parked and what the current balance would then be that needs to be settled.”

He stated that he had no recall of having received that letter and that had he received it he would have responded thereto. He stated that it would appear that the document was possibly in the context of an acknowledgment of debt which would also have had a payment claim constituent to it.

With reference to this letter it was further put to him in evidence in chief that it had been suggested by defendants that plaintiff “parked off some of the debt and put current purchases on a COD basis.” He replied that he was not aware of this and denied that it had ever happened. He stated further that he would have had to approach plaintiff’s management for permission to park the debt as any form of parking had to be authorised by Mr. Murray. If the request had been concerned only with payment on a COD basis then he himself could have dealt with it.

During May 2007 he did indeed travel to East London for the specific purpose of viewing the financial statements. A meeting was held at the offices of Mr. Hodge at which were also present Mrs. Bell and one of Mrs. Bell’s daughters. At this stage the running account with plaintiff with the close corporation was R1,6 million.

It transpired at the meeting that no financial statements were available. He became extremely upset and voiced his concern questioning, inter alia, how the close corporation could trade in such circumstances. He told the other participants at the meeting that he felt that the situation was improper because it was reckless. He asked Mr. Hodge if Mrs. Bell knew what reckless trading was. Mr. Hodge spoke to Mrs. Bell and explained the import of such trading. Mr. Hodge also undertook to put together financial statements.

Under cross examination it was put to him that there was in fact a later meeting in the middle of May 2007 at the close corporation’s factory at which he, Mr. Murray, one Quinton, (a sales representative), Mr. Stuart Bell, Mrs. Bell and her daughter Melony were present. He stated that he had no recollection of such a meeting.

It was put to him further that the defendants at that meeting had requested to be placed on a cash before delivery basis and that it was in fact Mr. Murray who had suggested that the debt be parked and paid off over an undetermined period. He replied that he had no recall not only of any such meeting but of any such suggestion by Mr. Murray. A letter written by himself on 14 May 2007 (Exhibit D) was then put to him. In this letter he had stated, inter alia, as follows:

“Hi Stuart. No worries thanks though for keeping in contact and letting me know how far you are with discussion with your accountants. I attach your statement below. We suggest we park R1 398 000,00 etc. If at all possible you will need to settle your current purchases .... the total is R1 700 000,00 odd. It is very important that you hereafter keep your current portion current, so you need to structure your payments carefully. We are also not adverse to a debt holiday which if you call me I will talk you through so that you understand what I mean.”

Confronted with this letter he stated as follows:

“I can’t answer it, you are putting evidence in front of me and it is definitely something from me.

Q: Mr. Puckering does it mean that your evidence that you never discussed the parking of a debt was false?

A: No I am not lying, it is just I don’t recall.”

He then stated with reference to his letter (Exhibit D) that all that he could think of was that he would have sent a payment plan or acknowledgment of debt to Mr. Stuart Bell to enable him to peruse the content thereof and to move forward from there.

He conceded that he had been wrong in denying that there had been discussions regarding the parking of the debt. He conceded too that a parking of the debt in return for R20 000,00 a month was more acceptable than the debt holiday to which he himself had referred in his letter. Such a “debt holiday” would have entailed that an amount specified by the general manager would have been put to one side for a period of time, whilst trading continued, without payments being made in respect of that amount, so as to enable the debtor to trade itself out of trouble. The following question was put to him:

“You never saw the financials at that time yet you were happy that J and D continue on a 60 day credit basis?

A: We looked at the business and were confident that the business was trading and had the potential to trade out of the debt situation.”

A further letter (Exhibit E) addressed to him by Mrs. Bell and dated 17^th May 2007 stated as follows:

“I would like to express my gratitude to you for the opportunity to rectify our financial situation with you, I do not take this lightly and apologise for the concerns this would have caused. I have thought long and hard about the advice you gave us at the meeting regarding not overstepping ourselves regarding the back monies to be paid back and after discussing this with Stuart and Melony I have come up with the following. We would like to offer a minimum of R20 000 per month but trust that in the next few months this could be raised to a sum more acceptable to you. Our plans are coming to fruition with HP Labels and our first order to them should be processed within a week. The monies that we make from this venture would be passed to Raflatac directly it is received by us.”

This letter was obviously written in reply to the letter (Exhibit D) of 14 May 2007.

Mr. Puckering stated that he did not believe that the general manager would have accepted a payment of R20 000,00. Asked how he had responded to the letter (Exhibit E) he stated that he thought he had responded by saying that this was not acceptable. Pressed on this issue he said that he was not too sure how he would have responded. He stated that he “would imagine” that he would have spoken to Mrs. Bell over the telephone but he would have had entered into a proper acknowledgment of debt with the close corporation. He agreed that he was merely assuming that he had spoken to her and that he had no independent recollection thereof.

He conceded that the close corporation had exceeded the credit limit without plaintiff intervening in any way. In this regard he stated that Mr. Ian Murray had a very long relationship with the close corporation and that a feeling of trust had been built up between them. At the time of the meeting at the factory during March 2007 he knew that the account was way over the R650 000,00 credit limit and that the close corporation was struggling to service it.

He could not deny that after the meeting with Mr. Murray in May at which the debt holiday and the parking of the debt had been discussed the close corporation went onto a cash before delivery basis from June 2007. He conceded that thereafter two payments of R20 000,00 had been made by defendant on 11 June and 17 July respectively and that they had not been returned as being insufficient.

Mr. Paterson, the aforementioned insolvency practitioner, was a co-liquidator of the close corporation. It is not necessary to set out his evidence in detail. What does appear therefrom is that, contrary to the allegations contained in plaintiff’s particulars of claim to the effect that no, alternatively inadequate accounting records were kept by the close corporation there were in fact a considerable number of accounting records which were handed to him. He stated that there were, for instance, reasonable debtors and salary records and that, in particular, the records pertaining to the South African Revenue Services were “pretty good”, so much so that he was in due course able to reject its claims and, instead, obtain a tax refund from it, something, so he said, which “takes some doing.”

It appears further from his evidence that he in fact had very little recall of the details of the matter.

That then was the evidence led on behalf of plaintiff. Defendants closed their case without leading any evidence.

I was very favourably impressed by Mr. Armstrong who created the impression of being a fair, honest and sincere witness whose evidence was clear and satisfactory in all respects. Mr. Hodge and Mr. Paterson were also patently honest witnesses. It was obvious, however, that in many respects their recollections of events were, understandably, not of the best. Mr. Puckering, however, did not create a good impression in the witness box. His initial confident bearing foundered on the rock of the letter (Exhibit D) written by him to Mr. Bell. Mr. Cole submitted that he was a dishonest witness. I did not gain that impression. What is clear, however, is that his recollection of events is open to serious criticism. The discussions between himself and the defendants concerning the parking of the debt were very material to the issues between the parties. The fact that his memory thereof was so defective that he was able categorically to deny that they had taken place must cast very considerable doubt on his further denial that Mrs. Bell had requested at the meeting with Mr. Hodge that the close corporation’s business with plaintiff be on a cash on delivery basis.

Section 64(1) of the Act reads:

“If at any time appears that any business of a corporation was or is being carried on recklessly, with gross negligence or with intent to defraud any person or for any fraudulent purpose, a court may on the application of the Master, or any creditor, member or liquidator of the corporation, declare that any person who was knowingly a party to the carrying on of the business in any such manner, shall be personally liable for all or any such debts or other liabilities of the corporation as the court may direct, and the court may give such further orders as it considers proper for the purpose of giving effect to the declaration and enforcing that liability.”

As was pointed out by Cameron JA in Ebrahim and Another v Airport Cold Storage (Pty) Ltd [2008] ZASCA 113; 2008 (6) SA 585 (SCA) at para 13, 591 A – B, section 64 of the Act is to all intents and purposes identical to section 424 of the Companies Act 61 of 1973 save that the Act adds “gross negligence” to the Companies Act’s “list of impugned business methods”.

Cameron JA found it unnecessary to decide whether there was a meaningful difference between recklessness and gross negligence in the context of section 64. He referred in this regard, however, to the dicta of Howie JA (as he then was) in Philotex (Pty) Ltd and Others v Snyman and Others; Braitex (Pty) Ltd and Others v Snyman and Others [1997] ZASCA 92; 1998 (2) SA 138 (SCA) where Howie JA noted that the ordinary meaning of “recklessness” included gross negligence (143F) and that recklessness itself connotes “at the very least gross negligence”. (144A)

Cameron JA stated further, at paragraph 14, with reference, inter alia, to S v Dhlamini 1988 (2) SA 302 (A) as follows:

“Acting ‘recklessly’ consists in ‘an entire failure to give consideration to the consequences of one’s actions, in other words, an attitude of reckless disregard of such consequences.’ In applying the recklessness test to the running of a close corporation the Court should have regard to amongst other things the corporation’s scope of operations, the members’ roles, functions and powers, the amount of the debts, the extent of the financial difficulties and the prospects of recovery, plus the particular circumstances of the claim ‘and the extent to which the [member] has departed from the standards of a reasonable man in regard thereto.’”

At paragraph 15 the learned Judge stated:

“The section retracts the fundamental attribute of corporate personality, namely separate legal existence, with its corollary of autonomous and independent liability for debts, when the level of mismanagement of the corporation’s affairs exceeds the merely inept or incompetent and becomes heedlessly gross or dishonest. The provision in effect exacts a quid pro quo: for the benefit of immunity from liability for its debts, those running the corporation may not use its formal identity to incur obligations recklessly, grossly negligently or fraudulently. If they do, they risk being made personally liable.

I bear the above principles in mind.

I find myself quite unable to agree with the submission by Mr. De Beer, who appeared for plaintiff, that plaintiff has discharged the onus upon it of proving that the business of the close corporation was knowingly carried on recklessly or with gross negligence by the defendants. Indeed, when one views the evidence presented by plaintiff holistically, the picture that emerges is, in my view, very different from that which Mr. De Beer sought to draw.

In developing his argument Mr. De Beer relied strongly on what he categorised as being the defendants’ culpable and grossly negligent delay in failing to produce the financial statements of the close corporation for the year ended 28 February 2005 within the period of six months stipulated in section 58 of the Act. Had the statements been timeously produced, so he submitted, the defendants would have appreciated that the close corporation was trading at a loss and was in dire financial straits.

It is indeed unfortunate that such a delay occurred. Experience teaches one, however, that such delays are in practice not uncommon, hence, no doubt, the absence of a penal provision in the particular section. Be that as it may, even had the statements been produced within the requisite six month period, by August 2005, there is, in my view, no reason to suppose that the defendants would have acted any differently. The statements, when produced, showed that the close corporation had indeed traded at a loss for that period but that it was still solvent. By August 2005, as appears especially from the evidence of Mr. Armstrong, the defendants were well aware of the difficult financial circumstances in which the close corporation was trading and of the fact that it was experiencing cash flow problems. It was in all probability because of this that Mrs. Bell injected R855 000,00 of her own money into the close corporation at that time.

Mr. De Beer submitted that these payments by Mrs. Bell gave rise to an irresistible inference that she was aware of the dire financial position of the close corporation and of the fact that it was incurring credit with plaintiff which it could never repay but that, despite this knowledge, she and Mr. Bell recklessly allowed the close corporation to continue trading and, in particular, continued to order products from plaintiff.

I disagree. It is, in my view, utterly improbable that if Mrs. Bell knew that the close corporation was trading in a hopelessly insolvent situation she would have gone to the lengths of raising the amount of R855 000,00 on her residential home loan in order to inject this sum into the black hole of the close corporation, thereby ensuring that she lost her home as well as her business.

The reason why Mrs. Bell was prepared to inject this large sum of money is probably not that hard to find when regard is had to the evidence of plaintiff’s own witness, Mr. Armstrong. He was satisfied, at the time that he left the employ of the close corporation, that, despite all its difficulties, the close corporation was viable and “worth giving everything for”. It is in the light of this evidence that the conduct of the defendants must be weighed when considering whether they entirely failed to give consideration to the consequences of their actions and adopted “an attitude of reckless disregard of such consequences”. It must further be borne in mind that Mr. Armstrong was the “main financial man” of the close corporation. As far as the defendants were concerned he had his finger on the financial pulse of the close corporation. In these circumstances of the matter of Fisheries Development Corporation v AWJ Investments 1980 (4) SA 156 (W) referred to by Mr. Cole, who appeared for the defendants, is apposite. At 166 C - D the learned Judge set out the principles applicable to a director’s duty of care and skill as follows:

“In respect of all duties that may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. He is entitled to accept and rely on the judgment, information and advice of the management, unless there are proper reasons for querying such. Similarly, he is not bound to examine entries in the company’s books... Nevertheless, a director may not be indifferent or a mere dummy. Nor may he shelter behind culpable ignorance or failure to understand the company’s affairs.” See too Philotex v Snyman supra at 144 H – J.

In my view the defendants were entitled to accept and rely on the judgment and financial acumen of Mr. Armstrong and his view that the close corporation was viable.

Furthermore defendants did not adopt a supine approach to the close corporation’s difficulties. As appears from the evidence of Mr. Armstrong a number of steps were taken in an attempt to remedy the situation, including the employment of more sales staff and the implementation of a shift system. This is hardly the conduct of a reckless businessman.

It is also clear from the evidence that the defendants were at all times entirely frank and open in their dealings with plaintiff. Nothing was hidden from plaintiff. Plaintiff was advised during early 2006 by Mr. Armstrong of the close corporation’s problems. This did not deter it from trading with the close corporation. Mr. Murray and Mr. Puckering visited the factory as late as March 2007 and were satisfied and reassured that everything was not only functioning well but that the business “had the potential to trade out of its cash crisis.” As was submitted by Mr. Cole, despite the fact that the close corporation was well over its credit limit and despite plaintiff not having seen financial statements, plaintiff made a calculated business decision to continue supplying the close corporation with product in circumstances where the defendants had disclosed their difficulties to them.

Furthermore, far from recklessly incurring further credit with plaintiff, every effort was made by Mrs. Bell to limit the prejudice to plaintiff by seeking to park the existing debt and to make future purchases on a cash on delivery or cash before delivery basis. Plaintiff was not only prepared to agree to the parking of the debt but also offered the close corporation a debt holiday.

In these circumstances it cannot be said, in my view, that the defendants were in any way reckless and/or grossly negligent in their conduct of the business of the close corporation. Plaintiff’s main claim accordingly falls to be dismissed.

Mr. De Beer in effect conceded, as he was constrained to do in the light of the evidence of Mr. Hodge in particular, that the plaintiff had failed to establish that the office of the accounting officer was vacant as alleged in the particulars of claim and that therefore the alternative claim fell to be dismissed.

The parties were agreed that there should be no order as to the previously reserved costs of a postponement of the matter.

Accordingly the following order will issue:

1. The plaintiff’s claim against first and second defendants is dismissed.

2. The plaintiff is ordered to pay the costs of the first and second defendants save that in respect of those costs previously reserved each party shall bear their own costs.

__________________

J.D. PICKERING

JUDGE OF THE HIGH COURT

Appearing on behalf of Plaintiff: Adv. De Beer S.C

Instructed by Nolte Smith Attorneys, Mr. Niesing

Appearing on behalf of Defendant: Adv. S. Cole

Instructed by Wheeldon Rushmere and Cole, Mr. Laing

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