DIRECTORS, RECKLESS TRADING: "HONEST BELIEF" IRRELEVANT
One of the nightmare scenarios facing any company director is being held personally liable for the debts of his/her company.
Commonly, a creditor of the company (or the liquidator thereof acting for the general body of creditors) claims from the director personally on the basis that he/she was party to "fraudulent or reckless" trading.
A recent High Court case, in which a director was held personally liable for a substantial (over R3m) company debt, illustrates the difference between fraud and recklessness -
- In the case of fraudulent trading, "a director's honest belief as to the prospects of payment when due" is critical, i.e. the question is "what did the director actually believe at the time?"
- But in the case of reckless trading, the test is objective, and the director's "honest belief" - i.e. genuine belief that creditors will be paid - will be irrelevant "if a reasonable person of business in the same circumstances would not have held that belief."
Ordinary negligence or carelessness does not expose a director to personal liability; recklessness (which includes "gross negligence") goes beyond that. But be careful here - if, for example, a company "continues to carry on business as to incur debts when, in the opinion of reasonable businessmen, standing in the shoes of the directors, there would be no reasonable prospect of the creditors receiving payment when due, it will in general be a proper inference that the business is being carried on recklessly."
Recent Articles for April 2010;
Source: www.dotnews.co.za
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