1 July 2009

Defining the 'limited' in limited liability

One of the many benefits of trading through a company or close corporation is the limited liability of the directors and members respectively for the losses of the entity. In principle, companies and corporations have their own juristic personality, can sue or be sued in their own names, and for all intents and purposes, are separate and distinct from those who control them.

Limited, for good reason, does not mean absolute exemption from liability in all circumstances. Although for the most part directors or members will not be held personally liable for the debts of the company or close corporation, there are certain notable exceptions which prevent directors or members from abusing the separate juristic personality of corporations.

Section 26(5) of the Close Corporations Act 69 of 1984 provides that the members of a close corporation are jointly and severally liable for the debts of the corporation, if such indebtedness existed at the date of its deregistration. In practice, this may assist creditors who are owed monies by dormant close corporations or close corporations that were established for a limited business purpose only and which are simply deregistered once that purpose has been fulfilled, regardless of the corporation having outstanding liabilities. If the corporation has not yet been deregistered but is clearly not trading, a creditor may address the Registrar with the request that it be deregistered, so rendering each and every member personally liable for the corporation's indebtedness.

Section 64 of the Close Corporation's Act provides that the members shall find themselves personally liable where they are found to have carried on the corporation's business either recklessly, fraudulently or with gross negligence. This has been held to include circumstances where the business is allowed to continue trading in insolvent circumstances (i.e. where the value of its liabilities exceeds the value of its assets).

The corporate cloak of a company may similarly be lifted where directors, or others, seek to abuse the company's separate identity. Section 424 of the Companies Act provides that any person, knowingly a party to the reckless or fraudulent trading of a company, may be held liable for the debts of that company. This section applies even in circumstances where the company is not insolvent.

Although it may be tempting to follow the ostrich approach in the case of corporations, it is prudent to deal with one's creditors by defending litigation or placing the corporation in liquidation, rather than taking the risk of deregistration by a third party. Likewise, trading in insolvent circumstances ought to be carefully considered, as the decision to do so, or acquiescence as the case may be, may result in the corporate debts being passed on to the individual members and directors.

Brigit Rubinstein and Natasha Steinberg

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