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[2016] ZAWCHC 25
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Wallace and Others v WCP Hotel Property (Pty) Ltd (20159/2015) [2016] ZAWCHC 25 (8 March 2016)
IN
THE HIGH COURT OF SOUTH AFRICA
[WESTERN
CAPE DIVISION, CAPE TOWN]
Case
No.: 20159/2015
REPORTABLE
In
the matter between:
EUGENE
BRYAN WALLACE,
GARY
DONOVAN WALLACE
MOGAMAD
RAHIN JOSEPH
N.N.O
...........................................................................
APPLICANTS
And
WCP
HOTEL PROPERTY (PTY)
LTD
.......................................................................
RESPONDENT
JUDGMENT:
8 MARCH 2016
MEER
J.
Introduction
[1]
The Applicants in their capacity as the joint liquidators of Western
City Properties (Pty)
Ltd, (“West City”), in liquidation,
seek the provisional winding up of the Respondent. They do so on the
basis that
the Respondent is indebted to West City in the sum of at
least R9 492 374.00 (nine million, four hundred and ninety two
thousand,
three hundred and seventy four rand), as alleged by them.
It is common cause that the Respondent is no longer trading, has
disposed
of all of its assets and is unable to pay the debt claimed
by the Applicants.
[2]
The Respondent disputes its indebtedness, firstly on the basis that
the debt has been fully
paid with the result that West City is not a
creditor, and secondly on the basis that the claim has prescribed.
The Respondent
contends that the debt is
bona
fide
disputed on reasonable grounds and
that this application is an abuse of the court process. The
Applicants, it contends, persisted
with this winding up application
after it became clear that the debt was disputed. They ought instead
to have proceeded by way
of an action seeking the determination of
its indebtedness to West City.
[3]
This application would appear to be the third insolvency proceeding
in this Court involving
West City, the Respondent and its common
director one, Mr Gormley (“Gormley”), an Irish property
developer. The genesis
of these applications is a project for the
development of the Cape Town central business district, with the
injection,
inter alia,
of foreign funds, and the transactions flowing from such
development. The development spanned several years and although
it culminated in the construction of the Taj Hotel and the Mandela
Rhodes Building, in the Cape Town city centre, the project ended
in
insolvency proceedings. West City was placed under final liquidation
in May 2012 and the Applicants were appointed as its liquidators
in
June 2012. The estate of Gormley, the previous sole director of the
Respondent, was placed into sequestration in May 2013.
[4]
There are common dramatis personae and transactions that feature in
this application, which
spans some 500 pages. The founding and
replying affidavits on behalf of the Applicant are attested to by
Eugene Bryan Wallace (“Wallace”)
one of the liquidators
of West City. There is also the contested expert affidavit filed on
behalf of the Applicants by chartered
accountant, Mr Gregory Charles
Johnson (“Johnson”). The major affidavits on behalf of
the Respondent are attested to
by Martin Edward Luyt (“Luyt”),
a chartered accountant and director of LPH Chartered Accountants Inc
(“LPH”).
It is common cause that LPH have throughout been
the auditors of both West City and the Respondent and that Gormely
was, until
his sequestration in 2013, a director of West City and the
sole director of Respondent.
Application
to Strike Out
[5]
The Respondent applied to strike out various paragraphs in the two
replying affidavits filed
by Wallace. It is convenient to deal with
these applications briefly, at the outset. Firstly, they
applied to strike averments
from each of Wallace’s two replying
affidavits for being scandalous and vexatious. I am of the view that
the paragraphs and
averments sought to be struck are either
relevantly made on behalf of the Applicants in countering the
bona
fides
with which the debt is disputed,
or contain relevant contextual background information. Whilst they
cast aspersions, they are not
in my view scandalous, vexatious or
prejudicial, views in context. The striking of
those paragraphs and averments
is accordingly refused. Given
that the refusal is in respect of all the paragraphs and averments
sought to be struck, I do
not refer to them by number.
[6]
Secondly, and on the basis that they contained new matter, the
Respondent applied to strike
out paragraphs 10.6, 10.8 and 10.13 to
10.18 of the replying affidavit of Wallace dated 4 December 2015, and
paragraphs 5.2 to
5.6 and 6.7 of his further replying affidavit dated
4 February 2016. That application is granted on the basis that these
paragraphs
are not responsive, but constitute new matter, as alleged
by the Respondent.
[7]
The Respondent in addition applied to strike out the affidavit of
Johnson, deposed to as
an expert for the Applicants, on the basis
that it was filed out of time and raised new matter. That
application is refused.
The lateness of Johnson's affidavit is
adequately explained in the affidavit of Wallace dated 4 February
2016. Johnson's
affidavit does not raise new matter but deals
with allegations in the answering papers to the effect that the
Respondent is not
indebted to the Applicants. In particular, it deals
with the disputed assertion (elaborated upon later in this judgment),
that
the sum of R12million paid by the joint venture company was part
of the purchase price for properties transferred from West City.
The
reasons why the affidavit contains the hearsay evidence with which
the Respondent takes issue, are fully set out in the affidavit.
The evidence concerned is, in my view, relevant and I am inclined to
allow it. In the circumstances, the application to strike
out the
affidavit of Johnson is refused.
Background
Facts
[8]
During 2005, West City acquired various properties in the central
business district of Cape
Town for R20 500 000.00 (twenty million
five hundred thousand rand) and Gormley, as a director of West City,
initiated the Mandela
Rhodes development as hotel and apartments and
the construction of the Taj Hotel. The market value of the properties
is alleged
to have been R50 000 000.00 (fifty million rand). To
enable the developments, on 3 April 2007, a joint venture agreement
was concluded
between West City, the Respondent, TAJ International
Hotels South Africa (Pty) Ltd (“TISA”) and Eurocape
Investments
Ltd, (“Eurocape”). The terms of the joint
venture agreement were set out in a document called the “
Heads
of Terms
”
.
[9]
This was to the effect that further development of the properties
owned by West City would
be undertaken through the medium of a new
enterprise, a joint venture company to be owned jointly by the
Respondent and TISA, each
holding a fifty percent interest therein.
The company used for the joint venture was Good Hope Palace Hotels
(Pty) Ltd (“Good
Hope Palace Hotels”). It was agreed that
West City would transfer the properties it owned to the joint venture
company. In
return, the latter would pay “
pre-development
costs
”
in the agreed sum of
R12 000 000.00 (“twelve million rand”), by
settling a Nedbank loan secured by mortgage
bond over the properties
for this amount. It was also agreed that the joint venture company
would, as payment for the properties,
credit West City with a
R50 000 000.00 (fifty million rand) loan account, (“the
R50 million loan”).
[10]
It was further agreed that West City would assign
the R50 million rand loan claim against the joint venture
company to
the Respondent so that the Respondent would be indebted to West City
in the sum of R50 000 000.00 (fifty million
rand) and the
joint venture company would be indebted in that sum to the
Respondent.
[11]
Clauses 4.4 to 4.6 of the “
Heads
of Terms
”
in providing for the
above arrangement stated as follows:
“
4.4.
As payment for the Property transfer West City Precinct shall be
credited with a R50 million loan (subsequent to the JV agreement,
West City is to assign the loan to WCP).
4.5 The Pre-
Development costs up to the signing of the JV agreement has been
verified and agree to be R12m.
4.6
The new JV Company will settle the R12m loan that West City Precinct
has with Nedbank in settlement
of the contractually agreed Pre
-Development Costs”
.
[12]
Also on 3 April 2007, a “
Subscription
and Shareholders
”
agreement, in
relation to the joint venture, was entered into. The parties to
that agreement were TISA the Respondent, Eurocape
and West
City. Clauses 4.4 to 4.6 of the “
Heads
of Terms
”
agreement are mirrored,
as set out below, in the “
Subscription
and Shareholders
”
agreement.
The joint venture company is referred to in that agreement as “the
company”.
“
WCP
Loan
8.2.1
It is hereby recorded that, in terms of the sale agreement entered
into (or to be entered into) between
West City Precinct and the
Company, an amount of R50 000 000.00 (fifty million rand)
shall be credited in the books of
account of the Company as a loan
account in favour of West City Precinct which shall serve as the
consideration payable by the
Company for the Property as contemplated
in the aforementioned sale agreement (the “WCP Loan”).
Forthwith thereafter,
EIL and West City Precinct shall procure that
the WCP Loan is ceded and assigned by West City Precinct to WCP and
EIL and West
City Precinct hereby undertake to take all such steps
that are necessary and/or required in order to do so. EIL and
West
City Precinct shall bear all the costs, taxes and/or duties of
whatsoever nature in respect of the cession and assignment of the
WCP
Loan to WCP.
8.2.2
The WCP Loan shall not bear interest.
8.2.3
The WCP Loan shall be repaid as may agreed from time to time between
TISA and WCP.”
“
3.
SUSPENSIVE CONDITIONS
3.1.3.
to the extent required, Nedbank Limited agreeing to the transfer of
the Property from West City Precinct to JVCO
(as contemplated in
clause 3.1.4 below) and to the cession and assignment of the Nedbank
Loan and the Nedbank Bond to JVCO and/or
the cancellation of such
loan and bond and/or registration of a new mortgage bond over the
Property, in either case on terms and
conditions acceptable to TISA
in its sole and absolute discretion”.
[13]
The shareholding in the joint venture company was stipulated in the
following paragraphs:
“
5.4
TISA shall, forthwith after the date of signature hereof, subscribe
for 500 (five hundred) ordinary
shares of R1.00 (one rand) each in
the capital of the Company, constituting 50% (fifty per cent) of the
entire issued share capital
of the Company, at a subscription price
equal to the par value per share;
5.5
WCP shall, forthwith after the date of signature hereof, subscribe
for 500 (five hundred)
ordinary shares of R1.00 (one rand) each in
the capital of the Company, constituting 50% (fifty per cent) of the
entire issued
share capital of the Company, at a subscription price
equal to the par value per share.”
[14]
The property was transferred to Good Hope Palace Hotels on 8 November
2007 and the latter settled the
Nedbank Loan of R12 000 000.00
(twelve million rand) on transfer of the property into its name.
A new bond was registered
in its name.
[15]
In accordance with the agreements, West City was credited with a
R50 000 000.00 (fifty million
rand) loan by Good Hope
Palace Hotels. West City thereafter assigned the loan to the
Respondent with the Respondent then owing
the said amount to West
City and in turn being owed R50 000 000.00 (fifty
million rand) by the joint venture company.
[16]
According to the Applicants, from the above agreements there are
self-evidently two separate undertakings
by Good Hope Palace Hotels.
There is a clear distinction between payment of agreed
pre-development costs prior to the transfer
of the properties and the
loan of R50 000 000.00 (fifty million rand). In contrast,
the Respondent contends that the
payment of the R12 000 000.00
(twelve million rand) pre-development costs, was to be in part
payment of the purchase price
of R50 000 000.00 (fifty million rand).
Upon payment thereof, the debt to West City was settled, and West
City is in fact indebted
to the Respondent in the sum of R2.5
000 000.00 (two and a half million rand). The Respondent
contends that due to an accounting
error, more of which appears
below, this was not correctly reflected in West City's financial
statements.
[17]
After the conclusion of the agreements, the replying affidavit of
Wallace, on behalf of the Applicants,
states that in addition to the
TISA loan of R50 000 000.00 (fifty million rand), a loan for the
development was secured by
mortgage bond over the property in the sum
of R317 939 661.00 (three hundred and seventeen million, nine
thousand and thirty nine,
six hundred and sixty one rand), from the
Hong Kong and Shanghai Banking Corporation Limited (“HSBC”).
[18]
It is common cause that the loan of R50 000 000.00 (due by
Good Hope Palace Hotels and ceded
to the Respondent, receivable by
West City for the transfer of the properties), was reduced initially
to the sum of R9 606 241.00,
due to shareholders claims against West
City on loan account being transferred to the Respondent and a
deduction of R14 750 000.00,
(being 50% of the difference between
what West City had originally paid for the property and
R50 000 000.00).
[19]
West City’s audited financial statements for the 2009 financial
year reflect a further reduction
of the loan to R9 492 374.00 (nine
million, four hundred and ninety two thousand, three hundred and
seventy four rand) as a result
of a deduction in the sum of R 113
867.52 in respect of “
Christies
Commission Adjustment
”
. A loan
account certificate signed by Gormley, as director of the Respondent
certified that the sum owing to West City by the Respondent
as at 28
February 2009, was R 949 374.00 ( nine hundred and forty nine
thousand, three hundred and seventy four rand).
[20]
The R50 million loan account assigned to the Respondent against Good
Hope Palace Hotels (as provided for at Clause
4 of the “
Heads
of Term
”
agreement) was paid in
full to the Respondent in September 2012. Pursuant to a “
Sale
of Shares and Claims
”
agreement
the Respondent then disposed of its interest in Good Hope Palace
Hotels for R500 to “IHMS” Hotels, which I
understand to
be the parent body of TISA. This agreement also
provided for the Respondent to sell 100% of all
claims which it may
have against Good Hope Palace Hotels to IHMS, but specifically
excluded “
the designated WCP
claim
”
(a reference to the ceded
loan account of R50 000 000.00 by Good Hope Palace Hotels
to the Respondent arising from the
transfer of West City’s
Properties), which was repaid by Good Hope Palace Hotels to the
Respondent.
[21]
The Applicants aver that they learnt of the
repayment of the R50million loan to the Respondent by Good
Hope
Palace Hotels, from a third party, early in 2015, the
Respondent not having disclosed this to them. The replying
affidavit of Wallace states that attempts to establish what the
Respondent had done with the R50 million loan repayment, were
frustrated by the Respondent, Gormley and their accountant Luyt on
the basis that the Appicants had no right to the information.
[22]
West City, as aforementioned, was placed under final liquidation in
May 2012 and the Applicants were
appointed as liquidators in June
2012. The estate of Gormley, as also aforementioned, was placed into
sequestration in May 2013.
The replying affidavit of Wallace states
that prior to his sequestration, Gormley disposed of numerous
shareholdings and members'
interests owned by him in South Africa to
a Gormley family trust formed by Luyt. These dispositions, it is
alleged included shares
in the Respondent and payments from the loan
of R50 million rand received from Good Hope Palace Hotels.
[23]
Wallace further mentions in reply, that this application is one of
several matters flowing from the
financial affairs and dealings of
Gormley. Another, is a pending action also in this Court
relating to alleged collusive
dispositions without value by Gormley
to his family trust, including a substantial shareholding in the
Respondent and a loan account
against the Respondent. Wallace
contends that the sole reason for the Respondent's opposition to this
application is to attempt
to prevent the unravelling of the payment
of the R50 million loan repayment to other parties in preference to
the general body
of creditors.
The
Implementation of the Agreements and the Financial Statements of the
Pparties to the Agreements.
Financial
statements of Good Hope Palace Hotels
[24]
After Good Hope Palace Hotels paid the sum of R12 000 000.00
(twelve million rand) to Nedbank
on 8 November 2007 in accordance
with the agreements, its audited annual financial statements
reflected its continuing loan
liability to West City, ceded to the
Respondent in the sum of R50 000 00.00 (fifty million rand).
A loan account in
this sum is recorded in the audited financial
statements at year end 31 March 2008, 31 March 2009, 31 March 2010
and until the
loan was re-paid. The Respondent’s annual
financial statement for the year ended 28 February 2010 similarly
record
the loan account claim against Good Hope Palace Hotels as R50
000 000.00 (fifty million rand).
[25]
Significantly, Note 11 to the financial statements of Good Hope
Palace Hotels for the year ended 31
March 2010 states as follows
in respect of the WCP loan account ceded by West City to the
Respondent in the sum of R50 000 000.00
(fifty million
rand) :
“
11.
Amounts owing to joint venture shareholders
2010
2009
R
R
IHMS
Hotels (SA) (Proprietary) Limited
50 000 000
50 000 000
WCP
Hotel property (Proprietary) Limited
50 000 000
50 000 000
100 000 000
100 000 000
The
above loans are unsecured, interest free and have no fixed
terms of repayment. WCP Hotel Property
(Proprietary) Limited’s
contribution
was by way of land and buildings. These loans have
been subordinated in favour of Hong Kong and
Shanghai
Banking Corporation Limited
and cannot be repaid in full or in
part
until such time as the bank loan has been settled (refer to
note 10).”
[26]
Note 10 records that the HSBC loan has as its
final date of repayment, 20 September 2015.
Financial
Statements of West City
[27]
The audited annual financial statements of West City for the year
ended 29 February 2008 record the
R12 000 000.00 (twelve
million rand) payment in settlement of agreed pre-development costs,
as a credit against “
costs of
sales
”
and not as having
been made in reduction of the loan account liability. The loan of
R50 000 000.00 (fifty million
rand) arising from the
transfer of properties by West City to Good Hope Palace Hotels and
ceded to the Respondent, is reflected
as having been reduced to R9
606 241.00 (nine million, six hundred and six thousand, two hundred
and forty one rand). The audited
financial statements of West City
for the financial years ended 28 February 2009 and 2010 record the
reduced debt as R9 492 374.00
(nine million, four hundred and ninety
two thousand, three hundred and seventy four rand), and still owing.
[28]
The two then directors of West City, Messrs Gormley and Coleman
acknowledged their responsibility for
the content and integrity of
the annual financial statements of 2009 and 2010, which they signed
and approved on 22 December 2010.
It is common cause that no
amount has been repaid by the Respondent to West City since the end
of the financial year ending 28
February 2010.
Financial
Statements of the Respondent
[29]
The Respondent's audited financial statements for the 2008 financial
year similarly reflect the loan
of R50 000 000.00 (fifty
million rand) having been reduced to the sum of R9 606
241.00 (nine million, six
hundred and six thousand, two hundred and
forty one rand) and that of 2009 reflect the further reduction to R9
492 374.00 (nine
million, four hundred and ninety two thousand, three
hundred and seventy four rand). A loan account certificate by
Gormley,
in his capacity as director of the Respondent, certified
that the sum owing to West City by the Respondent as at 28 February
2009
was this sum.
[30]
The Respondent's annual financial statements for the year ended 28
February 2010 record the ceded loan
account claim against Good Hope
Palace Hotels arising from the transfer of West City’s
properties, as R50 000 000.00
(fifty million). A note
thereto at record page 126, is essentially identical to the recordal
at note 11 to the annual financial
statements of Good Hope Palace
Hotels, quoted above at paragraph 25. It too refers to the ceded loan
as unsecured, interest free
and having no fixed terms of repayment
and only repayable once the loan to HSBC, owed by Good Hope
Palace Hotels, is
paid back in its entirety, the repayment date
of which loan, being 20 September 2015.
[31]
Against this backdrop I turn to consider the legal context and
whether the debt is
bona fide
disputed by the Respondent on reasonable grounds.
Is
the debt
bona fide
disputed on reasonable grounds or is the
application an abuse of process?
[32]
It is well established that where in a provisional winding up
application, the issue in dispute
is the indebtedness of a
Respondent, the onus is on the Respondent to show that the debt is
bona fide
disputed on reasonable grounds. In
Hülse-Reutter and Another v HEG Consulting Enterprises (Pty)
Ltd (Lane and Fey NNO Intervening)
1998 (2) SA 208
(C), a case
similar to the present, where the party challenging the application
for the winding-up of a company contended it was
an abuse of the
process of the court, Thring J, at 218 E – F, succinctly set
out what constituted a
bona fide
defence in the context of a
provisional winding-up application:
“
The
legal position in this regard is conveniently set out as follows in
Henochsberg on The Companies Act 5
th
ed vol 1 at 693 – 4:
‘
Abuse
of the process of the Court
In
addition to its statutory discretion, the Court has an inherent
jurisdiction to prevent abuse of its process and, therefore,
even
where a good ground for winding-up is established, the Court will not
grant the order where the sole or predominant motive
or purpose of
the applicant is something other than the bona fide bringing about of
the company’s liquidation for its own
sake, eg the attempt to
enforce payment of a debt bona fide disputed. . . .
Winding-up
proceedings ought not to be resorted to in order by means thereof to
enforce payment of a debt, the existence of which
is bona fide
disputed by the company on reasonable grounds; the procedure
for winding-up is not designed for the resolution
of disputes as to
the existence or non-existence of a debt (Badenhorst v Northern
Construction Enterprises (Pty) Ltd
1956 (2) SA 346
(T) at 347 –
8 and authorities there cited; Gillis-Mason Construction Co (Pty) Ltd
v Overvaal Crushers (Pty) Ltd
1971 (1) SA 524
(T) at 529-30; Walter
McNaughton (Pty) Ltd v Impala Caravans (Pty) Ltd
1976 (1) SA 189
(W)
at 191; Machanick Steel & Fencing (Pty) Ltd v Wesrhodan (Pty) Ltd
1979 (1) SA 265
(W) at 269; and see Kalil v Decotex (Pty) Ltd
1988
(1) SA 943
(A) at 980; and see eg Re a company (No 0012209 of 1991)
[1992] 2 All ER 797
Ch)). Where prima facie the indebtedness exists
the onus is on the company to show that it is bona fide disputed on
reasonable
grounds (Meyer NO v Bree Holdings (Pty) Ltd)
1972 (3) SA
353
(T) at 354-5; Commonwealth Shippers Ltd V Mayland Properties
(Pty) Ltd
1978 (1) SA 70
(D) at 72; Machanick case supra at 269).”
[33]
In like vein, in
Orestisolve
(Pty) Ltd
t/a Essa Investments
v NDFT Holdings (Pty) Ltd and another
2015
(4) SA 449
(WCC), Rogers J at paragraph 7-8 stated:
“
In
an opposed application for provisional liquidation the applicant must
establish its entitlement to an order on a prima facie
basis, meaning
that the applicant must show that the balance of probabilities on the
affidavit is in its favour. (Kalil v
Decotex (Pty) Ltd and
another
1988 (1) SA 943
(A) at 975 J – 979 F). This would
include the existence of the applicant’s claim where such is
disputed.
Even
if the applicant establishes its claim on a prima facie basis, a
Court will refuse the application if the claim is bona fide
disputed
on reasonable grounds. The rule that winding-up proceedings
should not be resorted to as a means of enforcing payment
of a debt,
the existence of which is bona fide disputed on reasonable grounds,
is part of the broader principle that the Court’s
process
should not be abused. In the context of liquidation proceedings
the rule is generally known as the Badenhorst rule
from the leading
eponymous case on the subject, Badenhorst v Northern Construction
Enterpirses (Pty) Ltd
1956 (2) SA 346
(T) at 347 H – 348 C, and
is generally know treated as an independent rule, not dependant on
proof of actual abuse of process
(Blackman et al Commentary on the
Companies Act vol 3 at 14-82 to 14-83)... At the provisional
stage the other requirements
must be satisfied on a balance of
probabilities with reference to the affidavits. In relation to
theapplicants claim, however,
the court must consider not only where
the balance of probabilities lies on the papers but also whether the
claim in bona fide
disputed on reasonable grounds. A Court may
reach this conclusion even though on a balance of probabilities
(based on the
papers) the applicants claim has been made out (Payslip
Investments Holdings CC v Y2K Tec Ltd
2001 (4) SA 781
(C) at
783G-I). However, where the applicant at the provisional stage
shows the debt prima facie exists, the onus is on the
company to show
that it is bona fide disputed on reasonable grounds (Hülse-
Reutter and Another v HEG Consulting Enterprises
(Pty Ltd (Lane and
Fey NNO Intervening)
1998 (2) SA 208
(C) at 218D- 219C).
[34]
Thring J in
Hülse-Reutter supra
considered what it is
that Respondents have to establish in order to resist a winding up
application at the provisional stage,
with success. He stated
at 219 F – 220 B as follows:
“
Apart
from the fact that they dispute the applicants’ claims, and do
so bona fide... what they must establish is no more and
no less than
that the grounds on which they do so are reasonable. They do
not have to establish, even on the probabilities,
that the company,
under their direction, will, as a matter of fact, succeed in any
action which might be brought against it by
the applicants to enforce
their disputed claims. They do not, in this matter, have to
prove the company’s defence in
any such proceedings. All
that they have to satisfy me of is that the grounds which they
advance for their and the company’s
disputing these claims are
not unreasonable. To do that, I do not think that it is
necessary for them to adduce on affidavit
or otherwise, the actual
evidence on which they would rely at such a trial. This is not
an application for summary judgment
in which, in terms of Supreme
Court rule 32 (3) a defendant who resists such an application by
delivering an affidavit or affidavits
must not only satisfy the Court
that he has a bona fide defence to the action, but in terms of the
Rules must also disclose fully
in his affidavit or affidavits ’the
material facts relied upon therefor’. (cf Standard Merchant
Bank Ltd v Rowe and
Others
1982 (4) SA 671
(W) at 676H-677A and
Chairperson, Independent Electoral Commission v Die Krans
Ontspanningsoord (Edms) Bpk
1997 (1) SA 244
(T) at 247F-250F).
It
seems to me to be sufficient for the trustees in the present
application, as long as they do so bona fide, and I emphasise again
that their bona fides are not here disputed, to allege facts which,
if proved at a trial, would constitute a good defence to the
claims
made against the company.”
I
would respectfully qualify the latter statement by adding, that the
facts to be alleged must be reasonable facts, capable of sustaining
a
defence.
Discussion
on grounds upon which the debt is disputed by the Respondent
The
Respondent, as aforementioned, disputes the debt on two grounds which
it alleges are reasonable, firstly, that the debt has
been paid and
secondly, that it has prescribed.
The
defence that the debt has been paid
[35]
In asserting that the debt has been paid, the Respondent's stance is
that the payment of the sum of
R12 000 000.00 (twelve
million rand) of agreed pre-development costs by Good Hope Palace
Hotels on 8 November 2007, was
made in part payment of a total
consideration of R50 000 000.00 (fifty million rand) with
the effect that the amount
of the loan was only R38 000 000.00
(thirty eight million rand).
[36]
The Respondent claims that all the prior recordals and
admissions since 2007 of its liability
to West City of the
R50 000 000.00 (fifty million) debt, reduced to at least R9
492 374.00 (nine million, four
hundred and ninety two thousand, three
hundred and seventy four rand) in annual financial statements and
written explanations under
oath in affidavits under other application
proceedings, were in consequence of a bookkeeping misallocation in
the records of West
City. The debt, it says, has been paid.
[37]
The answering affidavit of Luyt, states as follows in this regard:
“
35.
In part payment of the purchase price of R50 million the joint
venture company was to settle the Nedbank
loan on behalf of West
City. The “pre-development costs” referred to in
the heads of terms is actually a reference
to the Nedbank loan which
partially financed the acquisition of the properties.
38.3.
When the Nedbank loan was settled by Good Hope Palace, the correct
amount was debited and it was reflected
in the financial statements
of West City that the Nedbank loan had been settled in full.
However, in West City’s financial
records, Eurocape erroneously
credited costs of sales instead of “Amounts receivable from
related parties”.
38.4.
Consequently, due to a bona fide posting error, the bookkeeping staff
of Eurocape failed to take proper
account of the payment of the sum
of approximately R12 million by Good Hope Palace and that mistake was
perpetuated in the financial
statements.
39.
LPH was not aware of the allocation error and audited the financial
statements, based on
figures provided by Eurocape.
41.
In these circumstances the debt to West City has been paid and, in
fact, it appears that
West City is indebted to the Respondent in the
sum of approximately R2.5 million resulting from the Respondent
taking over more
loan accounts than it should have.
“
Role
of Eurocape bookkeeping staff and LPH
23
Eurocape’s bookkeeping staff (including Smith) and the
representatives of LPH
(including me) were not involved in the
transaction relating to the sale of West City’s properties and
we were not fully
versed in the facts of the matter (as alleged in
paragraphs 8.45 and 8.47 of the replying affidavit).”
Finding
on whether the debt has been paid
[38]
The agreements and the implementation thereof, in my view, do not
bear out Luyt’s averments.
It is, as the Applicants contend,
self-evident from the “
Heads of
Terms
”
and the “
Subscription
and Shareholders
”
agreement that
there were two separate undertakings by Good Hope Palace Hotels.
There is a clear distinction between the payment
of agreed
pre-development costs prior to transfer of the properties on the one
hand and a loan by West City on the other of R50 000 000.00
(fifty million rand) as payment for the properties.
[39]
The agreements make abundantly clear that West City was lending
R50 000 000.00 (fifty million rand)
and in addition
thereto, Good Hope Palace Hotels would pay R12 000 000.00
(twelve million rand) pre-development costs.
If West City was
only lending R38 000 000.00 (thirty eight million rand) to
Good Hope Palace Hotels, the agreements would
have stated that West
City would have to cede a loan claim of R38 000 000.00
(thirty eight million rand) to the Respondent
and not the
R50 000 000.00 (fifty million rand) loan claim against Good
Hope Palace Hotels, as provided for in the agreements.
[40]
The Respondent's contention that the sum of R12 000 000.00
(twelve million rand) was included
in the purchase price of
R50 000 000.00 (fifty million rand) is simply not borne out
by the written agreements which
clearly provide for two obligations,
a payment of R12 000 000.00 (twelve million rand) for
pre-development costs and
a loan of R50 000 000.00 (fifty
million rand)
in lieu
of the transfer of the properties by
West City. The literal meaning of the two agreements and a
consideration of the agreements
in the light of all relevant and
admissible context, including the circumstances in which the
documents came into being favour
this conclusion. See
Bothma
– Batho Transport (Edms) Bpk
v S Bothma & Seun
Transport (Edms) Bpk
2014 (2) SA 494
(SCA) at 499 per Wallace JA.
The
subsequent conduct of the parties and in the implementation of the
terms of the agreement as separate obligations, also favours
this
conclusion.
[41]
Whilst the Respondent avers that the crediting of the R12 000 000.00
(twelve million rand)
payment by Good Hope Palace Hotels in West
City’s financial records to costs of sale was an error and that
the sum ought
to have been credited to “
amounts
receivable from related parties
”
they
do not explain, as is contended by the Applicants, why this error was
only discovered some 7 years after the agreements were
implemented.
Nor, as is also aptly contended by the Applicants, is it
explained why the same indebtedness is reflected
in both the annual
financial statements of the Respondent and the annual financial
statements of Good Hope Palace Hotels, whose
records are
independently kept, and whose annual financial statements are audited
by KPMG auditors and not the common auditors
of Respondent and West
City. It is also strange, that if as is asserted by Respondent, it is
West City who is in fact indebted
to it for some R2,500 000.00
(two and a half million rand), why there is no hint of a claim to
recover this amount.
[42]
I agree further that it is unsustainable for the Respondent to claim
that Good Hope Palace Hotels was
only indebted in the loan sum of
some R38 000 000.00 (thirty eight million rand) after
payment of the agreed pre development
costs, when the annual
financial statements of Good Hope Palace Hotels record its
indebtedness after the R12 000 000.00
(twelve million rand)
payment and throughout all subsequent years in the sum of
R50 000 000.00 (fifty million rand),
and the Respondent was
subsequently paid the full sum of R50 000 000.00 (fifty
million rand) in settlement of the loan
account by Good Hope Palace
Hotels, and not R38 000 000.00 (thirty eight million
rand). The Applicants' categorisation
of Respondent's reliance
on a bookkeeping error as a recent fabrication and its insistence
that the loan amount was R38 000 000.00
(thirty eight
million rand), as egregious, is, in the circumstances,
understandable.
[43]
In view of the abundantly clear provisions of the agreements which
reflect the R50 000 000.00(fifty
million rand) loan and the
R12 000 000.00 (twelve million rand) payment as separate
obligations, the clear recordal of
the debt in the annual financial
statements and the implementation of the agreements by the parties
referred to above, the Respondent,
in my view. has not shown that the
debt is disputed on
bona fide
reasonable grounds.
The
dispute of the debt on the grounds of Prescription
[44]
In disputing the debt on the grounds of prescription, Mr Van Rooyen
on behalf of the Respondent contends
for two scenarios as to when the
debt prescribed. The first of these has the prescription date as 1
March 2014, being 3 years after
the last acknowledgment of
indebtedness on 2 March 2011. The second scenario, asserts the
Respondent, comes into operation
if it is found that the debt became
due when the order for the winding-up of West City was granted. In
that case, says the Respondent,
the debt prescribed in August 2015,
three years after the Applicants were appointed as West City's
liquidators in August 2012.
On either scenario, contends the
Respondent, the debt has prescribed.
[45]
The Respondent refutes the Applicants' assertion that the ceded
R50 million loan had been
subordinated and could not be
repaid until 20 September 2015, as is stated in note 11 to the
annual financial statements
of Good Hope Palace Hotels for the year
ended 31 March 2010, and in the note to the financial statements of
the Respondent for
that year,( as quoted respectively at paragraphs
25 and 30 above). The Respondent's contention as articulated by
Luyt is
that the subordinated loans of R50 000 000.00
(fifty million rand) which were due in September 2015, were the two
loans
owed by Good Hope Palace Hotels to its two shareholders,
one of which was owed to the Respondent, and had nothing to
do
with the Respondent's loan to West City. That the latter loan
was in fact a cession of a loan owed by Good Hope Palace
Hotels to
West City, was not, according to the Respondent, a consideration.
Finding
on Prescription
[46]
Central to the Respondent’s argument on prescription is the
premise that there was no conjunction
between the debt that Good Hope
Palace Hotels owed to the Respondent and the debt that the Respondent
owed to West City. I do not
agree with this premise. Both debts
or loans had their origins in one transaction, namely, the
transfer of property
by West City to Good Hope Palace Hotels for a
consideration of R50 000 000.00 (fifty million rand), and
one loan account
of R50 million flowing therefrom. It was that loan
account and no other, that was thereafter assigned to the Respondent
in favour
of West City. Under these circumstances,
there was clearly a conjunction between the debt that Good Hope
Palace
Hotels owed to the Respondent and the debt that the Respondent
owed to West City.
[47]
Those involved in the transactions, for their own reasons, elected to
structure the repayment of the
debt, so that it would be repaid
through two loans. The fact that the financial statements
referred to each loan as a separate
and discreet transaction, does
not detract from the fact that the two loans had their origin in the
transfer of the properties
from West City and a single ceded loan.
[48]
It is common cause, as is reflected in Good Hope Palace Hotels
financial statements, that the ceded
loan of Good Hope Palace Hotels
to the Respondent, was subordinated in favour of HSBC and could not
be repaid until that bank loan
had been settled in September 2015.
The financial statements reflect the loan as an agreed profit share.
[49]
The replying affidavit of Wallace states it is common cause that the
joint venture was a new enterprise
and that Good Hope Palace Hotels
would for a number of years during the hotel construction phase incur
debt without any income
and would thereafter, for a period, be
obliged to apply its income firstly to the reduction of the HSBC loan
secured over its immovable
property and repayable by 20 September
2015. Respondent similarly would have no liquidity and no
assets to pay its loan liability
of R9 492 374.00 (nine million, four
hundred and ninety two thousand, three hundred and seventy four rand)
to West City,
the Respondent being merely a vehicle to hold the
50% shareholding and the loan account against Good Hope Palace
Hotels.
I note that whilst this assertion was sought
unsuccessfully to be struck, it was not gainsaid.
[50]
As is aptly stated by Wallace, Luyt's attempt to suggest a
disjuncture between the due date of Respondent's obligation
to West
City for the debt of R9 492 374.00 (nine million, four hundred and
ninety two thousand, three hundred and seventy four
rand), and the
due date of its claim against Good Hope Palace Hotels for payment of
the claim ceded by West City to the Respondent,
ignores the fact that
the Respondent had no funds of its own to pay West City and that its
ability to pay West City was linked
to payment by Good Hope
Palace Hotels to it.
[51]
In this regard, Mr Mitchell for the Applicants drew, my attention to
paragraph 176 of Gormley’s
answering affidavit in the
application for the sequestration of his estate, in which he said the
following:
“
WCP
Hotel Property (Pty) Ltd was a brand-new start-up company whose only
asset was shares in a company which was entirely funded
by debt.
Moreover, the first two years of trading of the latter company
incurred over R60 million in trading losses.
Any value is very
long term and its assets are fully pledged to creditors and banks.”
[52]
He also referenced paragraph 72 of the answering affidavit of Marc
Smith (“Smith”), (the
financial manager of Eurocape), in
the application to liquidate West City. There, Smith referred to the
debt owed to West City
as a deferred profit share and explained the
repayment thereof as follows:
“
A
high value was put on the properties but on the basis that the
surplus over costs would not be paid until the new operation was
trading profitably and had the funds to make payment. As a
result of this “gain”, the respondent’s records
reflect a loan owed by Good Hope Palace Hotels (Pty) Ltd which did
not involve any advance of money but is in fact a deferred profit
share from the transaction ... and stated that West City “made
an excellent profit though deferred, on the disposal.”
[53]
The debt is similarly referred to as an agreed
profit share in the Respondent’s annual financial statements
for the year ending 28 February 2010. With neither Good Hope Palace
Hotels nor Respondent having any funds with which to repay
the
loan for a number of years, the statement refers to the
indebtedness to West City as a “
non-current
liability
”
.
“
The
agreed profit share payable by Good Hope Palace Hotels (Pty) Ltd is
unsecured, interest free and has no fixed terms of repayment.
This agreed profit share payable will only be repaid once the loan to
HSBC owed by Good Hope Palace Hotels (Pty) Ltd is paid back
in its
entirety, the repayment date of this HSBC loan being 20 September
2015.”
Given
my finding that the two loans are conjoined, I do not accept the
Respondent's stance that the profit sharing was that payable
by Good
Hope Palace Hotels to its shareholders and had nothing to do with
West City.
[54]
As the debts were conjoined and the Respondent had no funds of its
own, it follows, in my view, that
the debt payable by the
Respondent to West City could not have been paid until such time as
the debt owed by Good Hope Palace Hotels
to the Respondent was due in
September 2015. Accordingly, payment of the debt by the Respondent to
West City was also only due
in September 2015.
[55]
As the Applicants contend, both Gormley and Luyt would have had
intimate and complete knowledge of
the affairs of West City, the
Respondent and the transactions in respect of Good Hope Palace
Hotels. Mr Mitchell submitted that
Gormley, as sole director of the
Respondent, would have been aware that the loan due to the Respondent
from Good Hope Palace Hotels
was subordinated and due by 2015.
Gormley as a director also of West City, would have carried that
information over to West City.
Mr Mitchell argued that in the
circumstances, it would have been a tacit term of the loan agreement
that West City could not call
up the loan against the Respondent
until 2015, when the latter would come into funds to pay. Had
it done so sooner, it would
have run the risk of bankrupting the
Respondent. I am inclined to agree.
[56]
In the premises and in the light of all of the above, I come to the
view that the Respondent has failed
to advance reasonable grounds for
its claim that the debt has prescribed. It has therefore failed
to establish that the debt
is
bona fide
disputed on reasonable grounds on the
basis of prescription.
Abuse
of Process
[57]
It follows from my finding of there being no
bona
fide
dispute of the debt on
reasonable grounds, that this application has not been an abuse of
the Court process.
It remains briefly to say a few words
about the Respondent’s contention that there was an abuse of
process because the Applicants
persisted with the winding up
application after it became clear that the debt was disputed. This
submission is without merit. The
grounds relied upon in this
application by the Respondent for disputing the debt were not
conveyed to the Applicants before the
commencement of the
application. The defences that the debt was not owed due to a
bookkeeping error and because the payment
of R12 000 000.00
(twelve million rand) was made in part payment of the R50 000 000.00
(fifty million rand) purchase
price, was first mentioned in the
Respondent's answering affidavit, as was the defence that the claim
had prescribed. The correspondence
referred to by the Respondent in
support of its averment that the application was an abuse, whilst
contending that the debt had
been paid and that West City was owed
some R2 500 000.00 (two and a half million rand), did not
mention the defences
relied upon by the Respondent in this
application.
Costs
Given
that the Respondent has not succeeded in its dispute of the debt, the
Applicant is entitled to a cost award in its favour
for the two days
of the hearing being 22 and 23 February 2016. I am satisfied that
such should include the costs of two Counsel.
The hearing scheduled
for 9 February 2016 was postponed by agreement, as, I am informed,
was an earlier hearing scheduled for October
2015. I make no order as
to costs in respect of those two postponed hearings.
[58]
I grant the following order:
1.
The Respondent is placed under provisional liquidation.
2.
A Rule
Nisi
is issued calling on the Respondent or any other
interested party to show cause on Monday 4 April 2016, why the
Respondent should
not be placed into final liquidation and the costs
of this application not be ordered to be costs in the winding-up.
3.
Service of this order shall be effected on:
3.1
The Respondent;
3.2
The South African Revenue Service;
3.3
The Master of the High Court, Cape Town;
3.4
By publication in one edition of The Cape Times and Die Burger
newspapers.
4.
The Respondent shall pay the costs of the opposed application for
provisional liquidation, such costs to be on a party and party
scale
and to include the costs of two Counsel.
Y
S MEER
Judge
of the High Court