Constantaras v BCE Foodservice Equipment (Pty) Ltd

The defendant (Constantaras) signed two cheques on behalf of a close corporation (Cater-Mart CC registration number 2002/020821/23) dated 3 October 2004 and 3 November 2004, each for R65,229.25, in favour of the plaintiff (BCE Foodservice Equipment). However, the cheques reflected the printed description of the drawer as 'Cater-Mart (Pty) Ltd 2000/001852/07' rather than the correct name and registration number of the close corporation. The defendant signed the cheques without indicating he was signing in a representative capacity. When the cheques were dishonoured, the plaintiff sued the defendant personally under section 23(2) of the Close Corporations Act 69 of 1984, which imposes personal liability on persons who sign cheques on behalf of a corporation without ensuring the registered full name and registration number appear on the document. The defendant pleaded that he signed in his capacity as authorized signatory of the close corporation and sought rectification of the cheques to reflect either 'for and on behalf of' or to substitute the correct CC registration details. The plaintiff excepted to the plea, arguing that rectification was not available as a defence to statutory liability under section 23(2).

• Whether rectification is available as a defence to a claim based on personal liability under section 23(2) of the Close Corporations Act 69 of 1984
• Whether strict compliance with section 23(2) is required or whether substantial compliance suffices
• Whether the knowledge or awareness of the holder of the cheque is relevant to the imposition of personal liability under section 23(2)
• Whether a defendant whose plea is struck out on exception should be given leave to amend as a matter of course

The appeal against paragraph 1 of the court a quo's order was dismissed (i.e., the exception was upheld). Paragraph 2 of the order a quo (which granted judgment) was set aside and replaced with an order giving the defendant leave to file an amended plea within one month, failing which the plaintiff may set the matter down for judgment. The costs of the exception proceedings and the costs of appeal (including costs of the application for leave to appeal) were ordered to be paid by the defendant/appellant.

The ratio decidendi is that rectification is not available as a defence to personal liability imposed by section 23(2) of the Close Corporations Act 69 of 1984 because: (1) the liability arises ex lege as a statutory penalty for objective non-compliance with mandatory disclosure requirements, not from any contractual relationship between the parties; (2) rectification is an equitable remedy that requires proof of common contractual intention, which is irrelevant where liability is imposed by statute based on the objective fact of non-compliance; (3) the knowledge or state of mind of the holder of the instrument is irrelevant to the imposition of liability under the section; (4) section 23(2) creates both criminal and civil liability that attaches upon the mere act of signing, issuing or authorizing a non-compliant document, without reference to whether any person was actually misled; and (5) the legislative purpose is to protect the public by ensuring strict compliance with disclosure requirements, and permitting rectification would circumvent this statutory objective. As a matter of civil procedure, a defendant whose plea is struck out on exception should ordinarily be given leave to amend as a matter of course, unless the application is a mere delaying tactic.

Heher JA made several obiter observations: (1) While acknowledging that section 23(2) may bear hard and even unfairly upon responsible persons in some cases, the court noted there is a correlation between the amount of the instrument, the degree of responsibility of the signatory, and the loss suffered by the holder, and that the signatory typically has better insight into the corporation's ability to pay than the holder does - thus rejecting the argument that an implication of the holder's awareness is necessary to give proper effect to legislative purpose; (2) The court commented on the dictum in Penrose v Martyr suggesting that the statute was intended to provide personal security to those 'deceived' into believing they had unlimited liability security, noting this does not correctly reflect the anticipatory protective purpose of section 23(2) which operates without regard to actual deception; (3) The court expressed agreement with the view in Gower's Principles of Modern Company Law that it makes no difference that a third party has not been misled by a misdescription, while noting academic commentary suggesting it might be a useful reform to afford a signatory a defence if the holder was not actually misled; (4) The court observed that the relatively light criminal sanctions alone would not be sufficient to procure compliance, explaining why the legislature added personal civil liability as a penalty.

This case is a leading authority on the interpretation and application of section 23(2) of the Close Corporations Act 69 of 1984 (and by analogy section 50(3) of the Companies Act 61 of 1973). It establishes that: (1) Personal liability under section 23(2) is strict and statutory in nature, arising from objective non-compliance with the requirement to include the corporation's registered name and number on specified documents; (2) Equitable defences such as rectification are not available to defeat statutory liability that arises ex lege rather than from contract; (3) The knowledge or awareness of the holder is irrelevant to the imposition of liability; (4) The section must be strictly construed and any misdescription or omission triggers liability. The case also clarifies civil procedure by establishing that a defendant whose plea is struck out on exception should ordinarily be given leave to amend, following the same principle applicable when a plaintiff's declaration is struck out. The judgment represents a firm judicial endorsement of the protective policy underlying section 23, prioritizing public protection over individual hardship to signatories who fail to comply with mandatory disclosure requirements.