Please note that this pertains to South African legislation and Best Practice requirements. I’m pretty sure though most countries have something similar in terms of legislation in place.
Over the last couple of years I have met with several small business owners who run their businesses in a less than moral manner.
In most instances they are well aware that what they are doing is wrong. In all fairness to them – they are perhaps not fully aware of the extent in which they have put themselves at risk.
That said, they are still very much aware that there are consequences if they run their businesses in a ‘reckless or fraudulent’ way.
In fact, the bottom line and the harsh reality of the matter is that both the Close Corporations Act and the Companies Act have put processes in place that allow the courts to make the members of a Close Corporation or the directors of a Company, personally liable for the debts incurred it they know that they are running their businesses in a ‘reckless or fraudulent’ way.
The Close Corporation Act says: “A member of a corporation shall be liable to the corporation for loss caused by his or her failure in the carrying on of the business of the corporation to act with the degree of care and skill that may reasonably be expected from a person of his or her knowledge and experience.”
The Companies Act says: “When it appears, whether it be in winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.”
So what does this mean exactly? Here’s the story . . . . .
Mike owns a CC (Close Corporation) and he is in construction, but because he has been sequestrated he cannot have it in his own name, so he puts it in the name of his wife Susan. Susan is a shipping clerk in a huge corporation, who has no idea of how to run a business, much less anything to do with construction.
Mike has five projects on the go and in the usual fashion with some construction people he has taken 75% of the fees up front to purchase materials and what have you. The balance of 25% will be paid when Mike completes the project and obtains sign off from the building inspectors and of course the client.
Mike has purchased material for project 1 and 2, using the deposit from project 1.
Mike has purchased material for project 3 and 4, using the deposit from project 2.
Mike has purchased material for project 5 using some of the deposit from project 3.
The balance of the deposit from project 3 and deposits from projects 4 and 5, Mike has used to buy a new bakkie.
The materials that Mike has purchased are of an inferior quality and workmanship and Mike is hoping that no-one is going to notice. Project 1 is about 80% done and just has to have the finishing touches, like the light fittings and what have you done but he has now run out of money and there are no new projects in the pipeline. Project 2 is about 50% done and project 3 has just been started. Neither projects 4 nor 5 have been started at all.
Mike has dealing with several suppliers during the course of these 5 projects and they know him and he has been paying cash up front or settling the bills on a pretty regular basis. A relationship has been forged and Mike goes to get more materials promising to pay as ‘soon as he gets to the office’. Mike has purchased sufficient materials to ‘finish’ project 1 and he is banking on the balance of the money for project 1 to continue with project 2. The problem is that Mike has used inferior fittings and finishes and both the building inspector and the client refuse to sign off because this is not what was ordered or paid for. In the mean time the suppliers are hounding Mike for payment and he is now not even taking their calls.
Mike is now deep in the smelly brown stuff – he has set up and is running a business fraudulently as being sequestrated is he is not allowed to register or run a business in his own name. He has accepted money for work, materials have not been purchased. Materials purchased are of an inferior quality and workmanship, he has not paid for some of the materials. Mike has spent the money that he was paid on other things. The workers have not been paid and there is now no money at all. Mike is now trying to file for bankruptcy which means that the suppliers will get a fraction of what he owes them. Mike has run this business in a fraudulent manner and the Court can hold him responsible in his personal capacity and actually prosecute him to the fullest extent of the law – this could mean not only fines and penalties, but it could also mean jail time. Actually of the truth be told, the Court will hold Susan responsible in her personal capacity a well since she is the legal owner of the business and she was complicit in the fraud in that she allowed Mike to register a business in her name.
None of what Mike did, was done by accident, it was all done deliberately and with forethought. Mike over estimated his own luck and his own intelligence. You see, by running the business in Susan’s name, Mike thought that he would be ‘outside’ of the law and could not be held responsible. How wrong could he actually get.
Please understand that the days when less than honest business owners could get away with this kind of behavior are long gone. Hundreds and thousands of small business owners and individuals lost their businesses and their livelihood and sometimes even their homes because of the unscrupulous behavior of some people – it may take a while, but these days, these people can be brought to justice and be held accountable for their actions.
Remember too, that ‘ignorance of the law’ is no excuse. Make sure that you understand what your obligations are and make sure that you follow them and that you are compliant.
Being proactive is always a lot easier than constantly trying to be reactive.