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DIRECTORS, RECKLESS TRADING: "HONEST BELIEF" IRRELEVANT
Posted on: 01 April 2010
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."
SELLERS AND CLEARANCE CERTIFICATES - NOTE THE 2-YEAR LIMIT ON RATES!
A sold property cannot be transferred to the buyer thereof unless and until the local authority issues a "clearance certificate", being its confirmation that it has received full payment of all amounts due in connection with the property in respect of "municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate."
The danger here for sellers of course is that these debts could include substantial service fees, run up by tenants without your knowledge. If the outstanding amounts relate to the property and fall within the 2-year period, you have no option but to pay them in full, regardless of whose debts they actually are.
But at least this danger is limited to the 2 years. In a recent case before the Supreme Court of Appeal, a municipality had attempted to force the seller to pay older debts by allocating all payments to the oldest debts, and then refusing to advise the seller how much of the debt fell within the 2-year period.
However, ruled the Court, a municipality cannot do that. It is required to: -
SELLERS AND CLEARANCE CERTIFICATES - NOTE THE 2-YEAR LIMIT ON RATES!
A sold property cannot be transferred to the buyer thereof unless and until the local authority issues a "clearance certificate", being its confirmation that it has received full payment of all amounts due in connection with the property in respect of "municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate."
The danger here for sellers of course is that these debts could include substantial service fees, run up by tenants without your knowledge. If the outstanding amounts relate to the property and fall within the 2-year period, you have no option but to pay them in full, regardless of whose debts they actually are.
But at least this danger is limited to the 2 years. In a recent case before the Supreme Court of Appeal, a municipality had attempted to force the seller to pay older debts by allocating all payments to the oldest debts, and then refusing to advise the seller how much of the debt fell within the 2-year period.
However, ruled the Court, a municipality cannot do that. It is required to: -
1. Advise you what part of the debt relates to the 2-year period, and
2. Issue a clearance certificate to you against payment of no more than that part of the debt.
(Municipalities - tailor your credit control and debt collection policies to avoid debts ageing to anywhere near the 2-year limit. Collecting older debts is not going to be easy without the leverage provided by a seller's reliance on your clearance certificate before transfer can be effected!)
SUPPLIERS: GOODS SUPPLIED FROM 24 APRIL SUBJECT TO DAMAGES RISK
Consumers as well as suppliers of goods and services need to bear in mind that, although most of the provisions of the Consumer Protection Act will only come into force on 24 October 2010, certain "transitional provisions" apply from 24 April: -
SUPPLIERS: GOODS SUPPLIED FROM 24 APRIL SUBJECT TO DAMAGES RISK
Consumers as well as suppliers of goods and services need to bear in mind that, although most of the provisions of the Consumer Protection Act will only come into force on 24 October 2010, certain "transitional provisions" apply from 24 April: -
- Although the Act will generally not apply to "pre-existing transactions and agreements", some exceptions will apply to relationships still in effect on 24 October; and
- The liability of all suppliers of goods to pay damages caused by defective goods "applies to any goods that were first supplied to a consumer on or after" 24 April. The danger here (for everyone in the supply chain) is that liability is "strict" or "no fault", i.e. you are liable even if you have not been in any way negligent.
Consumers: remember that your rights under the new Act only become enforceable in October.
Suppliers: your risk starts now. Manage it: -
Suppliers: your risk starts now. Manage it: -
1. Take legal advice on the extent of your exposure, have all your supply contracts checked, and beef up your quality control procedures
2. Check whether your "product liability" insurance will cover you for claims in terms of the Act.
BANKS: DANGER IN FINANCING PROPERTY COMPANY SHARE SALES
Companies are prohibited - subject to a few limited exceptions - from financing the purchase of their own shares.
Any financial institution providing loan finance for such a prohibited transaction runs the risk of having the loan declared void and unenforceable (and any supporting mortgage bond invalidated).
That's exactly what happened in a recent High Court case, where the purchasers of a farm-owning company's shares (and the partnership which operated the farm) obtained a bank loan for the purpose. Although a loan obtained with the intention of financing a prohibited deal "is not void where the third party is unaware of such intention", in this case the bank had intimate knowledge of how the transaction had been structured by the parties. Its loan - and bond - were accordingly declared invalid.
STATE TENDERS - YOUR RIGHTS
In setting aside the tender process followed by SAA in awarding a contract for ground handling services, the High Court recently examined the obligations in this regard of any "organ of state exercising a power in terms of the Constitution or performing a public function in terms of legislation".
In essence, there is an "ever flexible duty to act fairly" - fairness in this instance entailing "a consideration not only of the interests of the excluded tenderer ... but also the interests of all the constituents who are affected thereby" (in this case the State, taxpayers and the flying public).
The Court commented that "tender procedures are vital to the very essence of effective government procurement policies. These procedures may well be described as intended to ensure that government, and therefore SAA, before it procures goods or services, or enters into contracts for the procurement thereof, has ensured that a proper evaluation is done of what is available, at what price and whether or not that which is procured serves the purposes for which it is intended. It has as its duty the obligation to ensure that SAA gets the best price and value for that which it pays."
Finding that one of the tenderers had been denied both sufficient time and sufficient information to enable it to formulate a bid, it set aside the whole tender process as "a sham".
THE APRIL WEBSITE: FREE MARKETING MAGIC WITH "STREET VIEW"
Google Earth has serious marketing potential for any business needing exposure to potential customers - estate agents, tourist services, restaurants, hotels, B&Bs, wineries, garages etc, etc.
Get going with these steps: -
1. Download Google Earth free from http://earth.google.co.uk/intl/en_uk/download-earth.html (or click "Check for Updates Online" under the Help menu to ensure you have the latest version)
2. Learn all about it with the "User Guide" under Help. You have a treasure trove to explore (one example - see what your house/office/favourite beach looked like 10 years ago, by clicking "Historical Imagery" under the View menu)
3. Register your free business listing by clicking "Add/Edit a Business Listing" under Help. That takes you to Google Maps - make the best use of it with their Help page at http://maps.google.com/support/bin/static.py?page=guide.cs&guide=21029&topic=21032, and with the Biz Community article at http://www.bizcommunity.com/Article/196/16/44549.html. The more creative you are with adding photos, videos, website links, customer/client reviews, etc, the more response you will get! (Note that your business will only be "marked" in Google Earth if you fall into one of the business categories listed in the Layers box under "More", "Place Categories".)
4. Encourage happy customers to add their photos with Panoramio - full directions on their website at http://www.panoramio.com/help/adding_photos.
And Now For Something Completely Different! Get ready for "Street View" - zoom in on 360° photos of individual streets, with houses, offices and tourist attractions. Europe, North America and Australia already have it; we launch soon!
Try it out in the meantime -
Try it out in the meantime -
- In the "Layers" box (bottom left of your Google Earth screen) make sure that the "Street View" box is ticked
- In the "Search/Fly To" box (top left of the screen) enter the street address of cousin Joe in Nashville or Auntie Agatha's Pancake Palace in Portsmouth - with luck, you will very shortly be looking at their front door (is that Charlie the cat in the window?).
Get ready - when Street View launches here, be the first to use it for your marketing! (To see how Aussie estate agents are doing it, go to Marketing Magazine's website at http://www.marketingmag.com.au/news/view/domain-com-au-leads-the-charge-for-real-estate-companies-using-google-maps-street-view-532
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