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[2011] ZAGPJHC 84
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Hannover Reinsurance Group Africa (Pty) Ltd and Another v Gungudoo and Another (2009/35648) [2011] ZAGPJHC 84; 2012 (1) SA 125 (GSJ) (21 April 2011)
NOT REPORTABLE
SOUTH GAUTENG HIGH COURT, JOHANNESBURG
CASE NO
:
2009/35648
DATE:
21/04/2011
In the matter between:
HANNOVER
REINSURANCE GROUP AFRICA (PTY) LTD
......
First
Applicant
HANNOVER
REINSURANCE AFRICA LIMITED
..................
Second
Applicant
and
SHAUN
GUNGUDOO
.............................................................
First
Respondent
AYESHA
GUNGUDOO
......................................................
Second
Respondent
J U D G M E N T
TSOKA, J
:
[1] On 20 August 2009, the
Applicants’, on urgent basis, sought an order for provisional
sequestration of the joint estate
of the Respondents. The
application was opposed.
[2] On 23 August 2010 the matter
was argued before Willis J, who reserved judgment. The judgment was
delivered on 31 August 2010,
granting a provisional order of
sequestration returnable on 2 November 2010. On 2 November 2010 the
provisional order was extended
to 16 November 2010. As it was
envisaged that the argument would be longer than five hours, the
matter was allocated as a special
motion. On 16 November 2010, the
matter once again came before Willis J. The Respondents applied for
Willis J’s recusal
as they were of the opinion that the Judge
would be biased. The Judge acceded to the request. The provisional
order was again
extended to 30 November 2010 on which day the order
was extended to 22 March 2011, the date allocated by the Deputy Judge
President
for argument. This is the application before me.
[3] The Applicants seek
confirmation of the provisional order of sequestration. The
Respondents oppose the application and seek
an order discharging the
provisional order on the basis that the Applicants have failed to
satisfy the requirements of
section 12
of the
Insolvency Act 24 of
1936
(“
the Act
”).
[4] The Respondents raised a
point
in limine
that they have seven employees who have not been served with the
application for provisional sequestration contrary to the peremptory
provisions of
section 9(4A)(a)
and (b) of the Act.
[5]
Section 9(4A)(a)
and (b) of
the Act provides as follows –
“
(4A)
(a)
When a petition is
presented to the court, the petitioner must furnish a copy of the
petition-
(i) to every registered trade union that, as
far as the petitioner can reasonably ascertain, represents any of
the
debtor's employees; and
(ii)
to the employees themselves-
(aa)
by affixing a copy of the petition to any notice board to which the
petitioner and the employees have access
inside the debtor's
premises; or
(bb)
if there is no access to the premises by the petitioner and the
employees, by affixing a copy of the petition
to the front gate of
the premises, where applicable, failing which to the front door of
the premises from which the debtor conducted
any business at the time
of the presentation of the petition;
(iii)
to the South African Revenue Service; and
(iv) to the debtor, unless the court, at its
discretion, dispenses with the furnishing of a copy where the court
is satisfied that it would be in the interest of the debtor or of the
creditors to dispense with it.
(b)
The petitioner
must, before or during the hearing, file an affidavit by the person
who furnished a copy of the petition which sets
out the manner in
which paragraph
(a)
was complied with.”
[6] The Respondents contend that
the Applicants did not serve Respondents’ employees with the
application prior to the granting
of the provisional order. The
contend further that no attempts were made by the Applicants to serve
the application on the trade
union representing the employees. They
say as a result the Applicants’ attorney’s affidavit, in
terms of the provisions
of
section 9(4A)(b)
of the Act, is
insufficient, insofar as it does not state how service on
Respondents’ employees and the employees’
trade union was
effected.
[7] The Applicants contend that
having been appraised of the existence of the employees, they served
the application and the provisional
order on the said employees,
though this was done after the granting of the provisional order of
sequestration.
[8] Prior to dealing with the
provisions of
section 9(4A)(a)
and (b) of the Act, it is crucial to
sketch the relationship between the parties and how the issue of
employees arose in order
to appreciate the significance of the
provisions of
section 9(4A)(a)
and (b) of the Act in the context of
this matter.
[9] The Second Applicant is a
wholly owned subsidiary of the First Applicant. The Second Applicant
is a registered insurer under
the
Short-term Insurance Act 53 of 1998
and carries on business in the field of re-insurance. The First
Applicant is cited in its capacity as the parent company of the
Second Applicant. In this matter, the Second Applicant is the
creditor. For convenience I refer to the First and Second Applicants
as “Applicants” unless the context suggests otherwise.
[10] The First Respondent who is
married in community of property to the Second Respondent has been in
the employment of the Applicants
since 1986. At the time, the First
Respondent was employed as a clerk. During April 1995 he was
promoted to the position of Investment
Manager. With effect from 1
July 2002 he became the Senior Manager of the Investment Unit of the
First Applicant, the position
he held until his sudden resignation on
4 August 2009. It is Applicants’ case that the cause of action
arose during First
Respondent’s employment with themselves and
that First Respondent’s indebtedness must be understood in this
context.
[11] During July 2009 the First
Applicant’s audit committee was advised by Mr Quintin Landman,
Applicants’ Executive
Manager: Finance, that there were certain
investment trades with Barnard Jacobs Mellet (“
BJM
”),
a Stock Broking Firm, which could not be reconciled with Second
Applicant’s records. On two occasions during July
2009, the
First Respondent was asked for explanation as to the discrepancies
but was unable to furnish any satisfactory explanation.
Further
investigations were carried out by the Applicants. The Applicants’
internal auditors together with a team from
Deloitte and Touche: Risk
Advisory, were instructed to conduct a forensic investigation.
Suddenly, on 4 August 2009, the First
Respondent, without any
reasons, tendered his resignation. The Applicants, on receipt of the
letter of resignation, put the First
Respondent on special leave.
That the First Respondent had no employees until he was placed on
special leave, is obvious.
[12] On 20 August 2009, pursuant
to discovering the First Respondent’s indebtedness to them in
the sum of R 10 582 000,
the Applicants launched the present
application which was served on the First Respondent on the same day
at 102 Rama Krishna Avenue,
Claudius, the address described in the
Sheriff’s return of service as First Respondent’s place
of residence. Service
was effected on a security guard. On the same
day, the Sheriff attempted to serve the application on the First
Respondent at his
second address 289 Simla Street, Claudius, but
service could not be effected as there was no 289 in Simla Street,
the highest number
in that street being 97. For the same reason, the
Second Respondent could not be served with the application at 289
Simla Street,
Claudius.
[13] On 26 August 2009, the
Respondents filed a Notice of Intention to Oppose. On 31 August 2009
the Respondents filed their Answering
Affidavit. Subsequent to
Applicants’ replying affidavit being filed, the Respondents
filed further affidavits. In the answering
affidavit and the further
affidavits filed, and during argument for the hearing of the
provisional sequestration, the Respondents
did not raise the issue of
employees. There was no suggestion at all that the Respondents have
employees. It was only in the
further affidavit deposed to on 26
October 2010, two months after Willis J had granted the provisional
order, that, suddenly, the
Respondents allege that they have seven
employees who have not been served with the application prior to the
granting of the provisional
order of sequestration. The seven
employees have filed affidavits in confirmation of their employment
with the First Respondent.
[14] It is common cause that the
provisions of
section 9(4A)(a)
and (b) are couched in peremptory
language. In terms of this section, the Applicants were obliged to
serve the application on
the entities specified in the section, prior
to the hearing of the application. In terms of the provisions of
section (9)(4A)(b),
Applicants’ attorneys were obliged to file
an affidavit, either before or during the hearing of the application,
wherein
the steps taken by the Applicants in compliance with the
provisions of
section 9(4A)
, are set out.
[15] In the present matter, it is
undisputed that the Applicants served the application on the South
African Revenue Service (“
SARS
”)
and the Respondents. It is further undisputed that Applicants’
attorney of record filed an affidavit setting out
steps taken in
serving the application on SARS and the Respondents. The application
was launched sixteen days after the First Respondent’s
resignation. The First Respondent was Applicants’ employee who
resigned, and was placed on compulsory leave. Consequently,
the
Applicants did not serve the application on the employees. At no
stage was there indication that the Respondents have employees,
As a
result the Applicants’ attorney could not file an affidavit in
terms of paragraph (b) of
section 9(4A)
of the Act with regard to
such employees.
[16] An observation needs to be
made prior to discussing the provisions of
section 9(4A)(a)
and (b)
of the Act. The wording of this section is identical to the wording
of section 346(4A) of the Companies Act 61 of 1973
as amended (“
the
Companies Act
”).
In respect of the provisions of section 346(4A) of the Companies
Act, the debtor, whose estate is being wound up, is
invariably a
company or a corporate entity such as a Close Corporation. Such a
debtor, necessarily, carries on business and the
question of such a
debtor’s insolvency arises in the conduct of its business. It
is in this context, in my view, that the
legislature speaks of trade
union and employees and that service of an application for winding-up
should be served on a trade union,
where applicable, and employees of
such a debtor. It is unthinkable in the case of a company, that such
a company could conduct
business without employees. The reference to
employees is a reference to the employees of such a debtor company.
This observation
is fortified by the use of two words ‘notice
board’ on the front gate of the premises where the company
‘conducts
its business at the time of the application’.
[17] With regard to the
provisions of section 9(4A)(a) and (b) of the Act, the legislature
speaks of employees of a debtor although
reference is still made to a
‘trade union’ and ‘a notice board’ at the
debtor’s premises. It is
difficult to appreciate the meaning
of ‘employees’ as referring to domestic workers,
gardeners, security guards and
so forth, whose employment has nothing
to do with the business of the respondents. I, however, proceed on
the basis that ‘employees’
in terms of the provisions of
section 9(4A)(a) and (b) of the Act mean, amongst others, domestic
workers, gardeners and security
guards.
[18] In the present matter the
Applicants’ cause of action, amongst others, is the alleged
fraud and theft. The facts reveal
that the alleged fraud and theft
perpetrated by the First Respondent occurred while the First
Respondent was in the employment
of the Applicants and while he
acted, ostensibly in the course of employment. It is therefore not
unreasonable for the Applicants
to have assumed that the First
Respondent did not have employees in relation to his activities
whilst in their employment. When
the Respondents filed their
answering affidavit one would have expected that they would have
brought the existence of the employees
to the attention of the
Applicants. This was not done. When the Respondents filed further
affidavits prior to 27 October 2010,
they again did not disclose the
existence of the employees to the Applicants. That fact was also not
argued before Willis J on
23 August 2010, in spite of the fact that
the Respondent vigorously opposed the application.
[19] According to the First
Respondent, his seven employees have been in his employment for
years. According to him, his residential
address is 85 Simla Street,
Claudius. One assumes that domestic workers, drivers and security
guards would be based at this address.
However, according to the
employees’ affidavits filed in this matter, their work address
is stated as 161 19
th
Avenue, Laudium, Pretoria. Mr Shamendram Pillay, the First
Respondent’s bookkeeper, does not disclose his work address.
He, however, states his residential address as 287 Saski Avenue,
Claudius, Centurion, Gauteng Province.
[20] In the circumstances of this
matter, I am unable to fault the Applicants for not having served the
application on the employees,
whose work address seems to be
‘unknown’ to the First Respondent. As the Applicants
served the application on the
Respondents and SARS, and the
Applicants’ attorney of record filed the necessary affidavit
with regard to such service, the
Applicants were entitled to obtain a
provisional sequestration order against the Respondents.
[21] Is the provisional
sequestration order susceptible to be discharged once the existence
of First Respondent’s employees
is disclosed? In my view, the
answer is no.
[22] In the present matter, once
the Applicants were appraised of the existence of the employees, the
Applicants served the application
on them. The employees and SARS
were also served with the provisional sequestration order whereafter
Applicants’ attorney
of record, again, filed an affidavit of
service in compliance with the provisions of section 9(4A)(b) of the
Act.
[23] The Respondents contend that
as the provisions of section 9(4A)(a) and (b) of the Act are
peremptory, non-compliance therewith
prior to, or compliance after
the granting of the provisional sequestration order, vitiates the
provisional order with the result
that such order ought to be
discharged and the application be dismissed. I was referred to
several decided cases as authority
for this contention. I deal with
the said cases below.
[24] In the unreported case of
Peter Wayne Roberts v
The Taylor of Buchingham CC and Others
,
Case no. 21864/2008 (W), Blieden J found that non-compliance with the
provisions of section 346(4A) of the Companies Act would
disentitle
an applicant from obtaining a provisional order of winding-up.
[25] The facts in
Roberts
are distinguishable from the facts in the present matter. In that
matter the debtor was a close corporation, probably with employees,
who had not been served with the application prior to the hearing
thereof. In the present matter, the Respondents are natural
persons.
The First Respondent was Applicants’ employee at the time
Applicants’ cause of action arose. It is common
cause that
none of the parties was aware prior to the granting of the
provisional order or during argument of the application,that
there
were employees entitled to receive notice of the application.
[26] Counsel for the Respondents
further relies on
Standard
Bank of SA Ltd v Sewpersadh and Another
2005
(4) SA 148
(C) as authority that non-compliance with the provisions
of section 9(4A) and the subsequent filing of the necessary affidavit
by Applicants’ attorney of record, necessarily, vitiates the
application.
[27] The submission by Counsel is
based on the misreading of the judgment. In
Standard
Bank,
the employees
were not served with the application. It appears to have been common
cause that the respondents, in that matter,
had employees. While
knowing very well that the employees were not served with the
application, the applicant’s attorney
furnished a false
affidavit that the provisions of section 9(4A)(a) had been complied
with. This is apparent from the reading of
paragraph (27) of the
judgment where Dlodlo J, said the following –
“
[27] In the absence of
proof that the matrimonial regime between the two Respondents is that
brought about by a marriage in community
of property, I am in law
precluded from finding that, in the first place, it was proper to
cite the second Respondent in these
proceedings. I have reiterated
that I have not been addressed on the
Muslim law
in this regard. The rule
nisi
cannot, in my view,
be confirmed in any event against the second Respondent. As far as
the First Respondent is concerned, I have
come to the finding that
the Applicant has not established that the First Respondent has
committed an act of insolvency or is actually
insolvent. It has
neither
been proved
that there is reason to believe that it will be to the advantage of
creditors of the First Respondent if his estate
is sequestrated. I
return to the aspect of s 9(4A) of the Act referred to above. I find
it very disturbing that an attorney (an
officer of this Court)
preferred to tell an untruth leading the Court to believe that there
has been proper compliance with the
peremptory provisions of the Act.
This conduct on the part of an attorney is viewed in a serious
light. If
Courts can no longer place reliance on assertions made under oath by
its own officers, then clearly the administration
of justice is under
threat of collapse. Information which is false by its very nature is
extremely dangerous
per
se
. The Applicant
did not therefore comply with the peremptory provisions of s 9(4A) of
the Act. By tendering a false affidavit in
this regard, the Applicant
showed, in my view,
mala
fides
. This failure
alone, in my view, vitiates this application.
I am therefore not
positioned to exercise my discretion in favour of the Applicant nor
order the final sequestration of the First
Respondent either.”
[28] In the present matter, the
affidavit of service by Applicants’ attorney relates to service
of the application to both
the Respondents, the Master of the High
Court and SARS. The affidavit did not state or suggest that the
application was served
on the trade union or employees. In this
context, there cannot be any falsehood on the part of the Applicants’
attorney.
Counsel’s reliance on paragraph (27) in the
Standard
Bank
matter is
misplaced.
[29] Counsel for the Respondents
further relies on the unreported judgment of
Elrich,
Amos and two Others v Ideal Diamond Co (Pty) Ltd
,
Case No. 2005/14823 (W) as authority that non-compliance with the
peremptory provisions of section 346(4A) is fatal to an application
for provisional winding-up. In that matter, Kuper AJ, was dealing
with a company debtor, which in the normal course of events,
in the
conduct of its business, would have employees. In that matter,
again, non-compliance with regard to service on the employees
was
prior to the service of the application. In the present matter the
provisional order had already been granted, unbeknown to
the parties
that there were employees in Respondents’ employment.
[30] I understand the submissions
of Counsel for the Respondents, to be that, prior to the issuing of
the application, the Applicants,
in the circumstances where they were
bringing an application against their employee, should first have
made enquiries from the
First Respondent whether he has employees
and, if so, to which trade union such employees were affiliated.
[31] Counsel’s submission
is, in my view, wrong. Compliance with the peremptory provisions of
section 9 (4A)(a) and (b) presupposes
knowledge of the existence of
employees. If there is no knowledge on the part of an applicant,
there must at least be reasonable
grounds to suspect in the
circumstances of a particular matter, that there may be employees.
Even where there are reasonable grounds,
the best an applicant, in
such circumstances can do, is to state that he is unable to state
whether there are employees and if
so, whether such employees are
unionised or not. If the circumstances in each particular case are
such as in the present matter,
where it appears that it was common
cause until 27 October 2010 that the Respondents had no employees,
that the debtor whose estate
was to be sequestrated was an employee
of the Applicants, and there was no evidence to suggest that the
Applicants deliberately
failed to comply with the provisions of
section 9(4A), there can be no obligation on the part of the
Applicants to comply with
the provisions of the section.
[32] Counsel’s further
submission, that the Applicants ought to have foreseen that the First
Respondents, whose salary was
over R 800 000 per annum, inclusive of
bonuses, would have employees and therefore should have served the
application prior to
the granting of the provisional sequestration,
is incorrect. The salary of the First Respondent could not, in my
view, have suggested
to the Applicants that the First Respondent has
employees that deserve to be heard prior to the granting of the
application. This
inference, is not the only reasonable inference to
be drawn. It is not unusual for persons earning more than R 800 000
per annum
to have no employees. Again, it is not unusual that
persons earning more than R 800 000 per annum engage the services of
independent
contractors rendering house services such as domestic
work, gardening and security services. Accordingly, the fact that a
debtor
is highly remunerated, does not suggest that such debtor has
employees. In this matter, in any event, the employees in their
affidavits
state their address as being different to the residential
address of the Respondents. In this context, it is unclear whether
the
said employees are Respondents’ employees or that of his
Close Corporation, Shaneil Financial Management CC, in particular
having regard to the affidavit of Shamendram Pillay, First
Respondent’s bookkeeper. Any bookkeeping services the First
Respondent would have required as an employee of the Applicants,
would have been rendered by the Applicants’ employees.
[33] It is now common cause that
the employees have been served with the application and the
provisional order of sequestration.
The employees were given the
right to be heard. Other than filing affidavits confirming their
employment with the First Respondent,
they have not filed any
affidavit that should be considered whether to discharge or confirm
the provisional order. In this matter,
they evidently elected not to
be heard.
[34] Counsel submits further that
the Applicants’ service of the application and the provisional
order is defective in that
the Sheriff’s return of service does
not state what enquiries the Sheriff made in establishing whether the
employees are
unionised or not. Furthermore, it is Counsel’s
submission that the provisional order served still reflected the
return date
of the order as 2 November 2010 while the order was
served on 16 February 2011.
[35] In my view, the employees
were informed of the nature of the application against the
Respondents that resulted in the provisional
order being granted.
This order was served on them. If they had any interest in this
matter, they whould have enquired from their
employer, the First
Respondent, of the day on which the provisional order was extended.
In any event, the submission raises a
formal defect which in terms of
section 157 of the Act, may be condoned. The omission of the next
return date, when the order
was served on 16 February 2011, is a
formal defect. It is condoned.
[36] That the provisions of
section 9(4A)(a) and (b) are peremptory is without doubt. What is
not obvious, however, is that the
provisions are cast in stone. That
the provisions are not cast in stone is borne out by Davis J’s
remarks in
Moodliar
N.O. and Others v Hendricks N.O. and Others
[2009]
JOL 24459
(WCC) in paragraph [28] of the judgment where the learned
Judge said the following –
“
[28] To
sum up, a court cannot condone non-compliance with the requirement
that a copy of the application must be furnished
on the parties which
are specified in section 346(4A). I do not consider that the inherent
jurisdiction would extend the power
of the court.
But
a court may, in my view, determine whether the Applicant has been in
substantial compliance with each of these sections. In
other words,
it is for the court to determine whether the nature of the furnishing
of the application, pursuant to the section,
has been met.
”
[My emphasis]
[37] In
Sutter
v Scheepers
1932 SA
165
(AD) the Appellate Division reasoned that the words “must”,
although peremptory, ought to be interpreted contextually
to
establish whether they do not convey any other meaning but “must”.
At page 174 the Court said the following –
“(3)
If, when we consider the scope and object of a provision, we find
that its terms would, if strictly carried out, lead
to injustice and
even fraud, and if there is no explicit statement that the act is to
be void if the conditions are not complied
with, or no sanction is
added, then the presumption is rather in favour of the provision of
being directory”
[38] In the context of this
matter, the peremptory provisions of section 9(4A)(a) and (b) ought
to be regarded as directory, rather
than peremptory. In the
circumstances of this case, I find that there was no obligation on
the Applicants to have served the application
on the employees prior
to the granting of the provisional order of sequestration. The
provisions of section 9(4A) are peremptory
where it is either common
cause or there are facts suggesting the existence of employees. In
circumstances such as in the present
matter, where after the granting
of the provisional order of sequestration, it is disclosed that there
are employees that should
have been served with the application, the
court, in my view, is entitled, in terms of section 9 of the Act, to
extend the order
so that the necessary service could be effected and
the necessary affidavit be filed. This is what was done in this
matter. The
point
in
limine
has no merit.
It is dismissed.
[39] The Respondents applied for
striking out of the applicants’ alleged raising of new cause of
action in its replying affidavit,
as well as the filed provisional
trustees’ report which was filed without being attested to.
[40] The Applicants launched the
application after a forensic audit was undertaken. The forensic
audit was prompted by certain
investment trades with BJM which were
irreconcilable with Second Applicant’s records and first
Respondent’s sudden
resignation without reasons. The
Applicantion was launched in terms of the provisions of Section 10 of
the Act. The applicants,
based on the interim forensic audit report,
realized that the First Respondent was indebted to them. They
realized further that
on the information then available, the
Respondents were insolvent, and that to proceed to obtain a
provisional order of sequestration
would be in the interest of the
creditors. They thus launched the application for provisional
sequestration of the Respondents’
estate.
[41] The interim trustees’
report alludes to the fact that more investigations need to be
carried out to determine the extent
of Applicants’ loss. The
further losses stated by the Applicants are as a result of the
further revelations found by the
forensic investigations. This is
not a new matter. In the event that this is found to be a new
matter, I find that no prejudice
is occasioned to the Respondents,
who filed affidavits dealing with all the further losses uncovered by
the Applicants.
[42] With regard to the trustees’
report, the Respondents’ complaint is that the report is not
under oath and is only
signed by one trustee. The trustees were
appointed by the Court. There is, therefore, no basis to reject
their report on the
basis that same has not been attested to or that
it is signed only by one trustee. Counsel was unable to furnish me
with authority
for this submission. In any event, this court often
receives Master’s reports as well as trustees’ reports
without
such reports having been attested to. The application for
striking-out has no merit. It is refused.
[43] Turning to the merits of the
application, the Respondents contend that the order should be
discharged as the Respondents resist
confirmation thereof on bona
fide and reasonable grounds.
[44] Counsel for the Respondents
relied on the so-called
Badenhorst-rule
in terms whereof a court hearing an application for provisional
winding-up should refuse such an application where the debt is
disputed on bona fide and reasonable grounds. The rule emanates from
Badenhorst v Northern
Construction Enterprises Ltd
1956 (2) SA 346
(TPD). In that matter, the court, correctly in my
view, pointed out that the process for winding-up is not meant to
decide doubtful
debts.
[45] In
Kalil
v Decotex (Pty) Limited and Another
1988 (1) SA 943
(AD), the Court reasoned that the
Badenhorst-rule
is not inflexible. At 982E the Court reasoned that departure from
the
Badenhorst-rule
is called for ‘…
even
though it might not be said that Decotex’s indebtedness to the
appellant is disputed on bona fide and reasonable grounds
…’
as the creditor did not resort to winding-up proceedings to enforce a
disputed debt.
[46] In
Helderberg
Laboratories v Sola Technologies
2008 (2) SA 627
(CPD) the Court, dealing with the evidential burden
on a respondent, in paragraph [23] of the judgment, said the
following –
“
[23] I am in respectful
agreement with the aforesaid dictum of Milne J, which has been
approved by the Appellate Division in
Kalil
v Decotex (Pty) Ltd and Another
(1988
(1) SA 943
(AD)) at 980E. It therefore appears to me that it would be
preferable to refer to this duty, of a respondent to show that the
alleged
debt is disputed on bona fide and reasonable grounds, as an
evidential burden and not an onus. Be that as it may, it should be
borne in mind, as explained by Thring J in the
Hülse-Reutter
case (
Hülse-Reutter
and Another v Hey Consulting Enteprises (Pty) Ltd (Lane and Fey NNO
Intervening,
1988 (2) SA 208
(C)
)
at 219F - G, that a respondent merely has to satisfy the court that
the grounds which are advanced for its disputing the debt
are not
unreasonable. The learned judge further emphasised that it is not
necessary for the respondent to adduce on affidavit,
or otherwise,
the actual evidence on which it would rely at a trial. It is
sufficient if the respondent bona fide alleges facts
which, if proved
at a trial, would constitute a good defence to the claim made against
it.”
[47] Do the Respondents dispute
the Applicants’ claims on reasonable and bona fide grounds?
Examination of Respondents’
various affidavits filed, provide
an answer to this question.
[48] In the main, the First
Respondent denies being indebted to the Applicant. According to him,
the losses that were suffered
by the Applicants were not as a result
of the alleged fraud or theft by the First Respondent but because of
short trades that the
First Respondent carried out on behalf of the
Applicants. According to the First Respondent, the Applicants
suffered trade losses
which are in the nature of short trades which
the First Respondent was authorised to engage in. The losses being
trade losses,
so contends the First Respondent, must be borne by the
Applicants.
[49] To appreciate the First
Respondent’s contention, is essential to briefly sketch the
relationship between the different
parties in this matter as well as
the short trades that the First Respondent conducted on behalf of the
Applicants.
[50] The First Respondent was
employed by the Applicants for 23 years. At the time of the alleged
fraud and theft, he was the senior
investment manager entrusted with
assets to the value of R3,4 billion to trade on the Johannesburg
Stock Exchange (“
JSE
”).
He is an intelligent and successful investor. He was the only
person in Applicants’ business who dealt with the
stock
brokers, although he reported to the Applicants’ investment
committee. As a result of his success in the stock market,
even the
senior employees of the Applicants entrusted him with their personal
assets for investment on the JSE. It appears that
he had
carte
blanche
in dealing
with Applicants’ assets. He interacted with the stock brokers
on a regular basis. In this context, he was the
face of the
Applicants, if not himself seen as the Applicants.
[51] It is common cause that
short trades take place when an investor believes that a particular
share is over-priced and wishes
to take advantage of the expected
decline in the share price, he would then sell the share short. This
means such an investor
would sell a share that he does not own with
the intention of purchasing it later at a lower price. Such an
investor would typically
borrow the share from another investor
through a stock broker, to sell the share in the market and
subsequently replace it at a
price lower than the price at which such
a share was sold. The investor who lends the share utilises the
proceeds of the sale
as collateral and can invest the proceeds in
short-term interest free securities. The loan may, however, be
terminated at any
time upon notice. For the investor to make profit,
the share must fall in value. Should the value of such share rise,
the investor
will sustain a loss. No short sales may take place
without a Security Borrowing Agreement in place. This is the
requirement of
the JSE. The object of the agreement is to lend
credibility and integrity to short trades as an investment tool.
[52] It is also common cause that
the First Respondent is an investor who engages in short trades on
behalf of his alter ego, Shaneil
Management Services CC (“
Shaneil
”).
The First Respondent is the sole member of Shaneil. All the
investments of Shaneil are conducted by the First Respondent.
In
this capacity, he interacts with the stock brokers on regular basis.
Shaneil is also expected to have a Security Borrowing
Agreement in
place before conducting any short trades.
[53] It is against this backdrop
that the Applicants’
locus
standi
and Respondents
defence should be assessed.
[54] Initially, Applicants’
locus standi
was
based on three claims plus the fourth claim being a contingent loss
of R23 million. The fourth claim, as I understand the Applicants’
contention, was not, unsurprisingly, pursued with any vigour, as the
Applicants’
locus
standi
cannot be
premised on a contingent liability but only on a liquid claim.
[55] The Applicants’ claim
must be understood as having been provisional in the sense that the
investigations were ongoing
and at the time the application was
launched, the Applicants’ claim was thought to be a loss of R10
582 000. As at the hearing
of the application for the provisional
sequestration of Respondents’ estate on 23 August 2010,
Applicants’ claim had
escalated to R41 million. According to
the Applicants, the said loss is made up as follows –
55.1 R9,5 million arising out of
a loss suffered by the Applicants as a result of unauthorised short
trades which were implemented
by the First Respondent;
55.2 R25 million which was
unlawfully transferred from various Applicants’ stock broker
accounts to the account of Shaneil;
55.3 R6,5 million in respect of
three share transfers from Applicants’ stock broker accounts to
the account of Shaneil and
to the account of other third parties on
the authority of the First Respondent.
[56] On 31 August 2010, Willis J,
having been satisfied that the Applicants made a prima facie case in
terms of section 10 of the
Act, granted the provisional order of
sequestration.
[57] The Applicants seek an order
for confirmation of the order. To succeed the Applicants must prove,
on a balance of probabilities,
that the requirements of the
provisions of section 12 of the Act, have been met. Section 12
provides that –
“
12(1) If at the hearing
pursuant to the aforesaid rule
nisi
the court is
satisfied that-
the
petitioning creditor has established against the debtor a claim such
as is mentioned in subsection (1) of section
nine
; and
the debtor has committed an act of insolvency or is insolvent;
and
(c)
there is reason to believe that it will be to the advantage of
creditors of the debtor if his estate is sequestrated,
it may sequestrate the estate of the debtor.
(2) If at such hearing the
court is not so satisfied, it shall dismiss the petition for the
sequestration of the estate of the debtor
and set aside the order of
provisional sequestration or require further proof of the matters set
forth in the petition and postpone
the hearing for any reasonable
period but not
sine
die.”
[58] There is no onus on the
Respondents but an evidentiary burden on them to show that the
provisional order is resisted on bona
fide and reasonable grounds.
If the Respondents succeed in doing so, the provisional order should
be discharged and the application
dismissed.
[59] It seems to me that the
Applicants’ reliance on the amount of R9,5 million is tenuous.
The claim is based on breach
of mandate by the First Respondent in
not adhering to the Applicants’ Investment Guidelines in terms
whereof the First Respondent
was prohibited from engaging in short
trades on behalf of the Applicants. This breach of mandate is
disputed by the First Respondent.
In this context, it is my view
that this amount is not liquid as evidence is required to prove
whether the First Respondent breached
the investment mandate or not.
[60] With regard to the R25
million, it is undisputed that the Applicants’ shares in Anglo
American, Sappi and Harmony were
transferred from the Applicants to
Shaneil on the First Respondent’s instructions. The
explanation proffered by the First
Respondent is that Shaneil was the
beneficial owner of these shares which were lent to the Applicants
for purposes of short trades.
This explanation is implausible.
Firstly, Shaneil had no Security Borrowing Agreement entitling it to
engage in short trades.
Secondly, there is nothing on the papers
that suggests that Shaneil was ever the beneficial owner of these
shares other than the
say so of the First Respondent.
[61] In argument, Counsel for the
Respondents relied on a document titled “ISLA” –
Global Master Securities Lending
Agreement, as authority for Shaneil
to conduct short trades. This document appears on page 1094 of the
paginated papers. It is
not a Security Borrowing Agreement. It is a
draft authority for Shaneil to engage in short trades on the stock
market with an
entity described only as “Party A”. Other
than being initialled by the First Respondent who signed it on the
last
page, it is unsigned by the undefined “Party A’. It
is illogical to describe this document as an agreement. In
fortifying
its contention that Shaneil had the authority to engage in
short trades, the First Respondent relied on a document that appears
on page 1082 of the paginated papers. This document contains the
particulars of Shaneil. It appears to have been signed on 16
October
2000 by the First Respondent. Attached to this document is another
document headed: “MATERIAL OBLIGATIONS OF BUYERS
AND SELLERS OF
LISTED SECURITIES”. As the heading of this document suggests,
it sets out the duties and obligations of buyers
and sellers of
listed securities. It is not a Security Borrowing Agreement as
contended by the First Respondent. What is fatal
to First
Respondent’s contention that this document is a Security
Borrowing Agreement, appears in clause 4 of the same document.
In
terms of this clause, prior to a bear sale order, that is a short
trade, being entered into, a broker is obliged to ensure
that a
Security Borrowing Agreement is in place for the full quantity of
securities to facilitate settlement. There is no such
Security
Borrowing Agreement that Shaneil entered into with Applicants’
stock brokers. In the result, I find that Shaneil
had no authority to
engage in short trades on the JSE as it had no Security Borrowing
Agreement with any of the stock brokers utilised
by the Applicants.
The movement of these shares from Applicants’ accounts to
Shaneil’s account through the conduct
of the First Respondent
amounts to misappropriation of these shares.
[62] The First Respondent’s
explanation of Applicants’ loss of R25 million is neither bona
fide nor reasonable. On
this ground alone, I find that the
Applicants, have succeeded in establishing, on a balance of
probabilities, that the Respondents
are indebted to them in the said
sum of R25 million. The threshold of R 100 or R 200 in aggregate, in
respect of two creditors,
having been satisfied, it is unnecessary to
determine whether the Applicants have, on a balance of probabilities,
proved the other
claims. I will return to the other claims when
dealing with the factual insolvency of the Respondents.
[63] The bona fides of the First
Respondent is determinative of whether his opposition to the granting
of a final order is reasonable
or not.
[64] The First Respondent filed
not less than five affidavits in resisting the granting of the final
order of sequestration. In
the affidavits in spite of having seven
employees, some of them since 1994, the First Respondent did not
mention them in the affidavits.
During the hearing of the
application for the granting of the provisional order of
sequestration, which was heavily contested,
nothing is said about the
employees. The raising of the question of employees at the very late
stage of the application is, in
my view, tactical. This fact reveals
that the First Respondent is not bona fide and the raising of
non-compliance with the provisions
of section 9(4A) is unreasonable
in the circumstances of this matter.
[65] Although the First
Respondent was not the director of either of the Applicants, in my
view, his position as a senior investment
manager entrusted with
assets to the value of R3,4 billion, demands of him the utmost good
faith in dealing with his employers’
assets. He was implicitly
trusted by not only the Applicants, but by its directors as well.
While being in full-time employment
with the Applicants, earning a
substantial salary, he competed with his employers through Shaneil,
his alter ego. To this end,
he was unafraid to change documents to
misrepresent that Shaneil not only is a close corporation but also
that it is a public company,
and that it is a subsidiary of the First
Applicant. Well-knowing that Shaneil could not engage in short
trades with various stock
brokers, he, in his own hand-writing,
amended the face of the Security Borrowing Agreement that the
Applicants had with Finsettle
Services (Pty) Ltd (“
Finsettle
”),
to include Shaneil as part of the First Applicant’s subsidiary
companies. This facilitated Shaneil in engaging
in short trades
using Applicants’ assets at his disposal.
[66] The First Respondent’s
explanation that he unthinkingly described Shaneil as a company, and
a subsidiary of the First
Applicant, is not true. If one has regard
to the contents of the Security Borrowing Agreement that the
Applicants had with Finsette,
a ‘borrower’ means
‘Hannover-Re’ (
the
applicants
) being the
borrower of loaned securities and ‘Hannover-Re’ means any
one of First Applicant’s subsidiary companies
including SHL
Financial Management Limited. In his evidence, the First Respondent,
in justifying ‘unthinkingly’ describing
Shaneil as a
public company, explains that Finsette prepared the Security
Borrowing Agreement with the result that he is unable
to explain the
inclusion of Shaneil as a borrower and one of First Applicant’s
subsidiary companies.
[67] The portrayal of Shaneil as
a public company and as one of First Applicant’s subsidiary
companies was made with the deliberate
intention to facilitate
Shaneil, a close corporation with no Security Borrowing Agreement in
place, to engage in short trades with
the stock brokers utilized by
the Applicants. It is in this context that the First Respondent and
Shaneil were able to engage
in short trades to the prejudice of the
Applicants. Whenever a loss occurred, the First Respondent and
Shaneil would pass the
loss to the Applicants’ account.
However, whenever profit was made, this was passed unto Shaneil’s
account. That
Shaneil and the First Respondent were never
financially exposed, is without doubt. The First Respondent’s
attempts to explain
the losses suffered by the Applicants as trade
losses, is not bona fide and is not reasonable. Even if the First
Respondent was
authorized to engage in short trades on behalf of the
Applicants, it makes no sense that the Applicants would use Shaneil,
an unrelated
close corporation solely owned by the First Respondent,
to trade on their behalf with their securities, to their detriment.
[68] The First Respondent’s
attempt to justify his unauthorized activities as short trades
carried out in his normal duties
as an investment manager of the
Applicants would not make his explanation bona fide and reasonable.
His reliance on William Henry
Kirkham’s (“
Kirkham
”)
opinion evidence is misplaced. Although Kirkham’s opinion is
that wherever the narratives such as ‘loan position
closed’;
or ‘loan returned by you’; or ‘script loan
received’; or loan due from you’; or ‘loan
returned by you’; or ‘collateral delivered’,
suggest short selling transactions, this opinion is diluted by the
fact that the First Respondent’s Attorney of record had not
provided him with several material documents, such as Broker
Notes,
Broker Statements and P.Stats reports which are produced daily by the
JSE, with the result that he was unable to ‘track
any of the
transactions forming the subject matter of the dispute between the
parties in their entirety’.
[69] That Shaneil was not
authorized by the Applicants to trade on their accounts with either
BJM or SPI, is beyond doubt. Shaneil
could only trade on Applicants’
securities through the deliberate misrepresentation made by the First
Respondent that Shaneil
was a public company and a subsidiary of the
First Applicant as stated in the Security Borrowing Agreement the
Applicant had with
Finsette. Even on Kirkham’s opinion, the
short trades conducted by Shaneil cannot be elevated to be short
trades by the
Applicants. The activities of both the First
Respondent and Shaneil, in my view, appear to be fraudulent. The
activities resulted
in Applicants’ loss.
[70] On 23 April 2003, James
Campbell (“
Campbell
”)
of Finsette, in an email sent to the First Respondent, requested the
First Respondent to transfer an amount of R1,5 million
to BJM to
top-up Shaneil’s account. Should the First Respondent so wish,
the email continues, Campbell can move more funds
from Hannover-Re,
the First Applicant, to Shaneil. Again on 5 May 2003, Campbell
repeated the same request to the First Respondent.
The funds
involved, this time, were R9 million. No plausible explanation is
proffered why, Shaneil, which is unrelated to the
Applicants would
benefit from the assets of the Applicants. This is, in my view,
misappropriation of Applicants’ assets.
It is cold-comfort for
the First Respondent to allege that the Security Borrowing Agreement
the Appplicants had with Finsette
was signed by Mr Bill Skirving (“
Mr
Skirving
”),
Applicants’ compliance officer.
[71] It is undisputed that Mr
Skirving signed the agreement on behalf of the Applicants. Mr
Skirving takes responsibility for the
signing. He, however, explains
that the First Respondent, in whom the Applicants, including
Applicants’ Senior Personnel,
had implicit trust, handed him
the agreement, which, without any hesitation, he signed. It is
logical to guess that had Skirving
been aware that Shaneil was
reflected in the agreement as a borrower and a subsidiary of the
First Applicant, he would have queried
this with the First
Respondent, unless Skirving colluded with the First Respondent.
This, however, is not First Respondent’s
contention.
[72] During 2004 in an attempt to
comply with the
Financial Intelligence Centre Act 38 of 2001
, the
First Respondent submitted a document to BJM marked as “FA16”,
representing that Mr A Klennert, the Group Managing
Director of the
First Applicant, was a director of Shaneil. In this document, Mr M
Akoob, the Applicant’s erstwhile Chief
Financial Officer is
also reflected as a director of Shaneil, a close corporation. That a
close corporation cannot have directors
could not have escaped the
First Respondent.
[73] During 2005 the Applicants
divested themselves of one of their subsidiary companies known as
Goodall and Bourne Assurance (Pty)
Ltd (“
Goodall
and Bourne
”).
In spite of this, the First Respondent continued to trade on behalf
of this company, purportedly, on the authority of
one Mr Garth Curry
(“
Curry
”)
who was employee of Sanlam Private Investments (Pty) Ltd (“
SPI
”).
However, on 6 August 2009, Curry telephonically requested the First
Respondent to confirm First Respondent’s authority
to trade on
Goodall and Bourne’s account. This does not make sense and is
also illogical as it is the First Respondent who
should have
requested Curry’s authority, not the other way round. The
explanation is a implausible. It is mala fide and
is tendered in an
attempt to justify the unauthorized trading in Goodall and Bourne’s
securities using Applicants’
Security Borrowing Agreement with
SPI to engage in short trades on his own behalf or on behalf of
Shaneil. This illogical explanation
is belied by the affidavit of
Mark Sinclair Paton (“
Paton
”),
the Chief Executive Officer of Conduit Risk and Insurance Holdings
(Pty) Ltd (“
CRIH
”)
who purchased Goodall and Bourne from the Applicant during 2005.
Paton states that CRIH was unaware that the First Respondent
was
purporting to act on behalf of CRIH and that CRIH did not at any time
authorize the First Respondent or anyone else to trade
on the SPI
account on behalf of Goodall and Bourne.
[74] The First Respondent was
dealing in Applicants’ securities and engaging in short trades
with himself for the benefit
of himself and Shaneil. It is
inexplicable therefore for the First Respondent, who was the only
person dealing with either SPI
or BJM on behalf of the Applicants,
not to give reasonable and plausible explanation of his conduct.
However, I find it reasonable
and plausible that the Applicants,
without information from the person who was entrusted with their
investment, were unable to
determine, at the launching of the
application the extent of their loss. In the result I find, on the
conspectus of the evidence
before me, that the Respondents’
defence to the granting of the final order is mala fide and
unreasonable.
[75] I now turn to the issue of
Respondents’ factual insolvency. According to the First
Respondent, he is a wealthy man whose
estate is worth over R12
million. He has a substantial pension with the Applicants. The
Respondents contend that taking into
account the value of their
estate, First Respondent’s pension and his equity in Shaneil,
their joint estate is not factually
insolvent.
[76] As pointed out above, I did
not deal with Applicants’ other claims. According to the
Applicants, the First Respondent
is indebted to them in the following
amounts –
R27 307 847 in respect of cash
or shares unlawfully transferred from the Applicants’
accounts with BJM and SPI to Shaneil;
The First Respondent’s
admitted liability in the amount of R5 613 251;
Unexplained transfers of cash
from the Applicants’ accounts by the First Respondent in the
sum of R1 971 496;
Shares misappropriated by the
First Respondent from the Applicants’ accounts with BJM and
SPI, in the sum of R6 500 000,
destination unknown;
The alleged shortfall in
refunding the value of Applicants’ Absa shares by Shaneil.
The shortfall amounts to R3 687 392.09;
The unlawful transfer of 10 000
Applicants’ shares in Goldfields during 2007 by the First
Respondent into Shaneil’s
account. The total value in
respect of these shares is R1 212 100;
The unexplained transfer of 1
million Cape Empowerment Fund Shares from the Applicants’
account with SPI, to persons unknown
to the Applicants. The total
value of the shares is R1 560 000;
A contingent liability of R23 million which liability is subject of
a pending litigation.
[77] On this basis the total amount of Respondents’
indebtedness to the Applicants’ is over R 70 million.
[78] If one has regard to the
value of Respondents’ estate and Applicants’ claims
against the Respondents, it is obvious
that the Respondents’
liabilities far exceed the value of their estate. The Respondents’
estate is accordingly insolvent.
If one takes into account the
trustees’ interim report that reflects the value of
Respondents’ estate as R1,3 million
against the liability of
R50 million, that the Respondent’s estate is indeed insolvent,
is beyond doubt.
[79] The web of unauthorized
dealings weaved by the First Respondent in dealing with Applicants’
assets appears to be far-reaching
and complex. It requires further
investigations. The fact that after the launching of the
application, the First Respondent disposed
of some of his assets is
worrisome. In my view, the granting of a final order of
sequestration will be to the advantage of the
creditors.
[80] The applicants were
authorised to launch the application on an urgenct basis, in order to
obtain a provisional order of sequestration
to bring a
concursus
creditorium
. The
matter was urgent having regard to the unexplained discrepancies
which were discovered in Second Applicant’s trading
records,
and the person responsible for keeping such records, refuses to shed
light on such discrepancies and, suddenly, resigned
without reasons.
[81] In the result I find that
the Applicant has proved on a balance of probabilities that they are
suited to obtain a final order
of sequestration of Respondents’
estate which is factually insolvent and that the granting of the
final order of sequestration
will be to the advantage of the
creditors.
[82] The following order is made
–
The provisional order is
confirmed and the Respondents’ estate is finally
sequestrated;
The Respondents are ordered to
pay the costs of the application which costs shall include costs
consequent upon engaging the
services of two counsel.
_____________________________
M TSOKA
JUDGE OF THE SOUTH GAUTENG
HIGH COURT, JOHANNESBURG
COUNSEL
FOR APPLICANT : M.R. HELLENS SC
C.L. ROBERTSON
INSTRUCTED
BY : WEBBER WENTZEL ATTORNEYS
COUNSEL
FOR RESPONDENT : A.G. SOUTH
INSTRUCTED
BY : F VALLEY ATTORNEYS
DATE OF HEARING : 22 –
24 MARCH 2011
DATE OF JUDGMENT : 21 APRIL
2011