The liability of directors for fraudulent and/or reckless trading: Section 424 of the Companies Act 61 of 1973

Master Thesis

1993

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One of the chief principles of company law is that a company is a separate legal personality and that the liability of a member in a company, limited by shares, is limited to the amount, if any, unpaid on his shares. A problem down the years has been to prevent these principles being exploited by the controllers of the company, largely its directors and thereby to protect creditors of the company. Although judges have at times regarded certain companies whose misdemeanours have come under the_ spotlight as a 'cloak' and a 'sham', 1 the fact remains that a company as a separate legal personality comes into existence on the date of incorporation and that no recourse can be f6unded on the proposition that a company's misdemeanours cause it ipso facto to forfeit its existence. The most important statutory incursion into the principle of the separate personality of a company is contained in what are commonly known as the fraudulent or reckless trading provisions of the Companies Act 61 of 1973, namely s 424. This provision replaces s 185 bis (1) of the Companies Act 46 of 1926 which was derived from what is presently s 630 of the Companies Act (1985) of the United Kingdom (s 332 of the Companies Act 1948) which is still limited to fraudulent trading only.
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