Section 424 of the Companies Act, 1973 (the “Act”) provides that when it appears that any business of a company was or is being carried on recklessly or for any fraudulent purpose, the court may on application declare that any person who was knowingly a party to the carrying on of the business in this manner be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
In this case before the South Gauteng High Court (the Court), McLuckie (McLuckie) had in terms of an agreement, paid an amount to a company (the Company) of which Sullivan (Sullivan) was the sole director. The Company did not perform its obligations to McLuckie and shortly thereafter applied for liquidation.
McLuckie applied to recover his debt from Sullivan based on section 424(1) of the Act. The Court found that Sullivan, as the sole director and shareholder of the Company, was aware that there was no possibility of the Company being able to perform its obligations without his financial input and despite this knowledge, purposely caused the Company to be wound up, fully aware that McLuckie could not expect to receive any dividend from the insolvent estate of the Company.
The Court concluded that Sullivan’s conduct fell within the definition of ‘reckless conduct’ as described in the Act as it was “an entire failure to give consideration to the consequences of one's actions, in other words, an attitude of reckless disregard of such consequences.”
Accordingly, the Court made an order in favour of McLuckie and held Sullivan personally liable.