Default judgment under section 424(1) of the Companies Act 61 of 1973: who cares about proof?

This is particularly the case when liquidators unearth reckless and fraudulent conduct of directors and prescribed officers, trusted to run the company in a legally compliant and professional manner. Section 424(1) of the Companies Act, No 61 of 1973 entitles the court, on application, to declare a party personally liable for a company’s debt where it is found that such party had conducted the business of the company in a reckless or fraudulent manner.

But is it possible for a court to grant an order by default, holding a director liable under s424(1), without any evidence being adduced by the party alleging reckless or fraudulent conduct? The Supreme Court of Appeal (SCA) in the case of Minnaar v Van Rooyen NO 2016 (1) SA 117 (SCA) had to deal with this question.

The Minnaar case involved the appeal of Mr Casper Minnaar against the judgment of Keightley AJ sitting in the Gauteng Division of the High Court, Pretoria (court a quo) who refused to grant a rescission, in terms of the common law and rule 42(1)(a) of the Uniforms Rules of court, of an order made against him by default.

Mr Minnaar was appointed as a financial director of Askari Mining and Equipment Ltd (Askari) in 2000 however he subsequently resigned in 2001. In June 2003 Askari was provisionally liquidated and finally liquidated July 2008. During the liquidation process an enquiry in terms of s417 of the Companies Act was conducted. It became apparent from the enquiry report that a possible s424(1) action should be taken against the former directors of Askari. It was on this basis that the liquidators of Askari instituted s424(1) proceedings against the five directors of Askari, including Mr Minnaar, in 2008. The directors had filed a joint plea. The liquidators during the course of the proceedings had tried to enter into settlement negotiations with the directors however Mr Minnaar, in professing his innocence, refused to take part. The liquidators had, with Mr Minnaar being aware, applied for a trial date, on 22 February 2012. Mr Minnaar had failed to attend the trial and as such the liquidators had, in terms of rule 39 (1) of the Uniform Rules of court, obtained a default judgment against Mr Minnaar. The court a quo, in granting default judgment, had only considered the allegations raised in the particulars of claim which were denied in the joint plea.

The SCA, in agreeing with Mr Minnaar’s argument that evidence needs to be led for recourse in terms of s424(1), found that although the court exercises its discretion in granting default judgments it cannot make a finding of recklessness or intent to defraud without any evidence brought before it. The effect of s424(1) is punitive in nature and requires a party alleging such conduct to prove it.

Mr Minnaar’s appeal was upheld and the rescission of the default judgment was granted. Like in all the Murder She Wrote episodes the evidence was critical in convicting a wife of her husband’s murder, even though he had it coming.