TOPIC 4: South African COMPANY LAW LIABILITY AND FRAUDULENT AND RECKLESS TRADING

Bright Technologies Limited ('Bright') carries on the business of developing and selling robotic products.

In January 2018 Bright's engineers came up with an idea for the development of a 'domestic robot' that can be remotely instructed, through a smart phone message, to perform basic domestic tasks such as turning lights and other devices on and off, closing curtains and cleaning floors.

The project was always highly speculative and there was never any certainty that it would be possible to produce a functional prototype. It was also very resource-intensive and required an initial investment of at least R10 million in developmental costs.

Bright was keen to attempt the project but was concerned about the impact that a possible failure and loss of investment would have on its balance sheet. It therefore decided to incorporate a wholly-owned subsidiary to undertake the project.

The wholly-owned subsidiary, On the Edge (Pty) Ltd ('On the Edge'), was incorporated on 1 March 2018. Bright invested an amount of R100 000 in the form of share capital in On the Edge and also appointed two senior Bright executives as On the Edge's only two directors. In addition, Bright loaned On the Edge an amount of R900 000. The remaining R9 million initial capital required by On the Edge was acquired in the form of unsecured loans from three entrepreneurs.

On the Edge began work on the protype in April 2018. By June 2018 it had already encountered some design challenges that required the re-design of a key component at a substantial additional cost. The project also proved to be a lot more complex than originally contemplated and over the course of 2018 On the Edge had to contract a number of international experts, at significant expense, to assist with various aspects of the project. By December 2018 On the Edge had used up the full initial R10 million capital and was in need of additional financing.

The On the Edge directors sent monthly reports on On the Edge's financial position and lack of headway on the project to Bright and periodically asked Bright for assistance and advice on how to proceed. Bright continually instructed the On the Edge directors to continue with the project despite the growing costs but refused to invest any further capital in On the Edge. Bright did however assist the On the Edge directors in negotiating an overdraft facility for On the Edge with Money Inc bank and a further loan from another private investor. Unfortunately, this proved insufficient to cover the costs of ongoing design challenges and by June 2019 it became clear that there is a good chance that On the Edge will not be able to produce a successful prototype. With its increasing debt, there are also concerns that it will not be able to repay its loan creditors.

One of the loan creditors, Ms Zen, has briefed you for an opinion on whether on which she would be able to hold Bright liable for On the Edge's debt to her in the event that On the Edge goes insolvent and has to be liquidated. Advise her accordingly in terms of section 22 of the Companies Act of 2008 and section 424 of the Companies Act of 1973, giving full reasons.