Die roekelose en bedrieglike dryf van besigheid in die Suid-Afrikaanse maatskappyereg
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Date
1996-10
Authors
De Koker, Louis
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
This study researched the rules regarding so-called reckless and fraudulent trading by companies. These rules provide a measure of protection to company creditors because they sanction dishonest and reckless 'trading by company management. To study these rules in their broader legal context, the specific angle of so-called insolvent trading was utilized. Insolvent trading in this context, refers to the procuring of credit on behalf of an insolvent company based on a negligent or intentional misrepresentation regarding the company's intention and/or ability to repay the debt. Historically as well as in practice procurement of credit by misrepresentation is intimately associated with the conduct which constitutes reckless or fraudulent trading.
The study determined that a debtor, apart from other potential representations, impliedly represents when he concludes a credit agreement that he honestly intends to repay the debt in accordance with the terms of the agreement and that he honestly believes at that moment that he will be able to repay the debt in that manner. If the debtor does not intend to repay the debt in accordance with the terms of the agreement or does not honestly believe on reasonable grounds that he will be able to repay the debt in this manner, he makes a misrepresentation to the creditor unless he discloses these facts to the creditor. The basic rules regarding this representation form part of the South African criminal law, the law of delict, the law of contract and the law of insolvency. The criminal sanctions of the law of insolvency in this respect are also applied by the Companies Act to a company director and an officer of a company who incur a debt on behalf of the company without reasonable grounds to expect that the company will be able to repay it.
These rules provide a dynamic foundation for the legal protection of creditors in general. Without sufficient consideration for the existence of these rules in our law the classic English fraudulent trading-provision was incorporated into the South African companies’ legislation where it appears at present as section 424 of the Companies Act.
The uncritical incorporation of this provision into the South African law was unfortunate. The relationship between the new provision and the other rules was never properly considered and coordinated. As a result, there are certain gaps in the regulatory' structure. Apart from these gaps there are also discrepancies among the applicable rules. These discrepancies became more prominent due to the dynamic development of the law of delict and especially the recognition of a delictual action for a negligent misrepresentation which induces a contract. As a result of the wording and interpretation of section 424 the section is currently ineffective as a regulatory provision and inequitable as a remedial provision.
The comparative study determined that England, Ireland, Australia, and New Zealand replaced the traditional fraudulent trading provision with a new set of provisions. These provisions are broadly aimed at criminalizing fraudulent trading and at affording aggrieved creditors an effective remedy where directors of an insolvent company acted negligently. In the majority of these jurisdictions, but especially in Australia, the objectionable negligent conduct relates to incurring debts without reasonable grounds to expect that the company will be able to repay the debts.
The study concludes that the lack of effectiveness and the undesirability of section 424 in its present form necessitate legal reform in this field. The basic rules regarding misrepresentation and specifically the rules regarding incurring of debts without an honest and reasonable prospect of regular repayment provide a natural foundation for the formulation of a new set of rules regarding insolvent trading which will limit the present exposure of company creditors to prejudice. Such a set of rules should require of company directors to ensure that their companies do not incur debts without a reasonable belief in its ability to repay the debts regularly. Where they breach this duty and injure the creditors the rules ought to provide the creditors with an equitable and effective statutory remedy against the responsible parties. The study concludes with draft legislative proposals in this respect.
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Keywords
Thesis (LL.D. (Mercantile Law))--University of the Free State, 1996, Bankruptcy -- Law and legislation -- South Africa, Intentional misrepresentation, Fraudulent trading