Liability for loss

22 June 2022 11:00 by Merilyn Kader

In Gore NO and Another v Ward and Another [2022] 2 All SA 178 (WCC), liability for loss caused by fraudulent acts committed by company director, the authority of directors to control companies is vested and actual.

By Merilyn Rowena Kader LLB (Unisa), Legal Editor at LexisNexis South Africa.

Corporate and commercial law - Liability for loss caused by fraudulent acts committed by company director: In Gore NO and Another v Ward and Another [2022] 2 All SA 178 (WCC) as joint liquidators of a company (Brandstock), the applicants sought the setting aside, in terms of s 26 of the Insolvency Act 24 of 1936 read with s 340 of the Companies Act 61 of 1973, of payments of R250 000 made to each of the respondents; alternatively, for a declaration that the payments were made sine causa. Orders were also sought directing the respondents to repay the amounts to the applicants, either pursuant to the relief granted in terms of s 26, or on the grounds of their alleged unjust enrichment at the company’s expense.

Opposing the application, the respondents contended that the payments were made not by Brandstock but rather by its sole shareholder and director one, Philp, using funds stolen by him from a third party (Louw). The payments had been made to the respondents in satisfaction of a long-standing debt owed to them by Philp and were made immediately after Philp had secured over R2 million from Louw as financing for a sale transaction. Louw had paid the money into Brandstock’s account at Philp’s request.

The respondents contended that the funds used to make the payments had not become the property of Brandstock, and that the company’s banking account had been used as a conduit for the purpose of fraudulently receiving and disposing of the money that Philp had stolen. In other words, the respondents denied that Brandstock had made dispositions to them within the meaning of that word in s 26 of the Insolvency Act. They also denied that they were enriched by the payments.

It was held that a company has no mind of its own, and is, therefore, capable of acting only through a human agency. The law treats the company as the principal in relation to the actions undertaken in its name and on its behalf and the persons acting for it as its agents. A company is, therefore, bound only by the actions of persons who have authority to represent it. The court acknowledged the possibility of persons acting, or purporting to act, on behalf of a company, to misuse the opportunity for fraudulent purposes, and to do so entirely for their own dishonest ends to the prejudice of those with whom they purported to transact in the name of the company, and often at the same time also to the prejudice of their supposed principal. That leads to the question of where the resultant loss should fall.

The ultimate control of a company’s affairs is vested in its board of directors. Philp, as Brandstock’s sole director, fell to be regarded as its authorised agent. His authority was actual, not apparent or ostensible. Actual authority arises from the legal or consensual relationship in place between the principal and the agent and exists quite independently of the third party’s understanding of the facts. Brandstock was thus accountable to Louw for the money that was stolen by Philp.

The court rejected the respondents’ seeking to resort to the directing mind doctrine to displace the law of agency where those are applicable and available to determine a company’s liability in a contractual context.

In the circumstances of this case, the funds received from Louw became Brandstock’s property when it received the payment. By disposing of the funds credited to its account because of Louw’s payments, Brandstock exercised the personal right it had acquired against its banker in consequence of the payments.

There being no suggestion by the respondents that the dispositions were for value, the court set aside the payments as dispositions without value.

Merilyn Rowena Kader
Legal Editor at LexisNexis