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[2011] ZAGPJHC 72
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Dorbyl Ltd v Vorster (06/15260) [2011] ZAGPJHC 72; 2011 (5) SA 575 (GSJ); [2011] 4 All SA 387 (GSJ) (28 July 2011)
SOUTH GAUTENG HIGH COURT, JOHANNESBURG
CASE NO
:
06/15260
DATE:28/08/2011
In
the matter between:
DORBYL
LIMITED
..................................................................................
Plaintiff
and
EDWIN
JUAN
VORSTER
..................................................................
Defendant
J U D G M E N T
MOSHIDI, J
:
INTRODUCTION
[1] The
plaintiff has instituted action against the defendant, its
ex-employee, based on three claims. In Claim 1, the plaintiff
claims
for the disgorgement of secret profits in breach of fiduciary duty on
the part of the defendant in the sum of R36 896 428,00.
In Claim 2,
the plaintiff seeks from the defendant payment of the sum of R316
016,79 being an amount disbursed by the plaintiff
at the instance of
the defendant in breach of the defendant’s duty of good faith,
contract of employment, and fiduciary duty.
As will be seen later,
this claim is not seriously in dispute. In Claim 3, the plaintiff
claims the amount of R4 510 000,00,
which represents payments made by
the plaintiff based on a management participation scheme agreement
(“
the
MPS
”).
[2] The defendant has filed a plea, a special plea of prescription
in regard to Claims 1, 2 and 3, as well as a counterclaim,
which is
related to the plaintiff’s Claim 3.
[3] Some
background, which reveals that most of the issues are not seriously
in dispute, is necessary. The plaintiff is a listed
company on the
Johannesburg Stock Exchange. The overview of the plaintiff shows that
the founding of Dorbyl Heavy Engineering in
1946 was to provide a
much-needed service to the fast growing Heavy Engineering Industry in
South Africa. Through the continuous
and constant expansion and
development of new businesses and new markets, new divisions were
incorporated over the years to form
self-sustainable business units.
With the purchase of the Dorbyl Engineering Division from Dorbyl
Limited, the self-sustainable
business units have been incorporated
into what is presently the DCD-Dorbyl Group of Companies. It is a
black economic empowered
company operating both nationally and
internationally under the division of the majority shareholder,
namely a management Consortium.
The DCD-Dorbyl Group is a
multi-faceted company serving its diverse clientele throughout the
Mining, Rail, Marine and Metallurgical
Industries.
[4] It is
common cause on the pleadings that at all material times the
defendant was a duly appointed director of the plaintiff.
He held
the position of Group Executive Director. In the plea, the defendant
confirms that he was a member of the Board of the
plaintiff from
about 1999, and that the scope of his responsibilities and authority
included from 2001 an active role in what the
defendant terms the
unbundling of the Dorbyl Group. As will be seen later hereunder, the
plaintiff holds a contrary view on the
latter assertion. It is also
not in dispute that the defendant’s contract of employment
provided that the defendant was
an officer of the plaintiff and
exercised supervising control related to the general administration
of the plaintiff. The general
conditions of employment of the
defendant by the plaintiff came into effect on 1 January 1998 and
were updated with effect from
1 July 2002. Clause 8 of the
conditions precluded the defendant from engaging himself in work for
remuneration outside his scope
of employment, without the written
permission of the plaintiff. It is common cause that no such written
permission was given.
It is further common cause that by the nature
of his employment, the defendant owed the plaintiff a duty of good
faith which included
the duty to serve the plaintiff faithfully and
honestly. It is also not in dispute that the defendant owed the duty
to avoid a
conflict of duty and self-interest, as well as a duty to
avoid obtaining for himself either secretly or without approval of
the
plaintiff any benefit arising out of his employment. Finally, and
of significance in this matter, the defendant does not dispute
that
he owed the plaintiff a fiduciary duty. The defendant, however,
contends that he obtained the benefits in question whilst
acting as a
consultant to the entities concerned, as indicated later herein.
[5] Consequently, the issue whether or not the defendant owed the
plaintiff a fiduciary duty is not to be determined in this trial.
It
is rather the consequences and implications of such fiduciary duty
that needs to be examined. The Court is also called upon
to
determine whether the defendant in fact acquired the benefits in
question with the approval of the plaintiff, particularly in
regard
to Claim 1.
[6] In 2000
to early 2001, and by means of the MPS, it was agreed between major
shareholders and management of the plaintiff that
the future strategy
of the group had to be changed. The main objective, and since the
plaintiff was at that stage too diversified
in nature, to improve the
rating of the Dorbyl share. It was generally agreed that the number
of operations were either not providing
an adequate return or
alternatively had declining prospects for the future. The evidence of
Mr W W Cooper, the Chief Executive
Officer of the plaintiff
(“
Cooper
”),
was to the effect that the MPS envisaged the unlocking of inherent
value, as opposed to what the defendant labels the
complete and
secret unbundling of the plaintiff. In the final analysis, nothing
truly turns on this divergence of use or interpretations
and the
finding of the Court in this regard is dealt with later in this
judgment. The end result was that for strategic reasons,
the
plaintiff resolved to sell off certain of its group operations, in
which the defendant participated on behalf of the plaintiff,
and
which forms the subject-matter of the instant litigation. The MPS
also provided as follows:
“
The
scheme recognises management’s ability to improve the group
share price during this refocusing exercise and incentives
would be
paid accordingly, both during and on finalisation of the exercise as
determined by the board. In view of the difficulty
interdicting the
course and eventual outcome of the refocusing exercise, the attached
Schedules have been prepared in totality
to assist in the
determination of the final value that is unlocked … In
addition, bonuses for divisional executives need
to be determined
against targeted values that may be realised for their divisions.
”
Under the
management structure, the MPS, which was also co-signed by the
defendant, listed, amongst others, “
Messrs
W W Cooper, CEO, E J Vorster, Group Executive Director and D Orwin,
Group Financial Director (category 1 executives) to manage
the
refocusing process to its final conclusion …
”.
For the sake of convenience, the various operations disposed of by
the plaintiff based on the MPS, shall be termed the
entities with
specific names, where applicable. The entities, as well as the
joining fees received by the defendant, his initial
shareholding
therein, the shares subsequently sold, the proceeds of the shares
sold and dividends, are contained in Annexure “A”
to the
particulars of claim, which is, for convenience reproduced hereunder
as follows:
“
ANNEXURE
‘A’
Joining Fee Rands
Initial S/Holding
Shares Sold
Share Sale Proceeds Rands
Dividends and Other Rands
Dynamic Fluid Control
332’500
4.90%
-4.25%
2’858’980
441’133
Kulungile Metals
930’000
2.70%
-2.70%
1’233’000
Midas Group
780’000
3.60%
-3.60%
1’980’000
DCD-Dorbyl
1’350’000
3.00%
---
---
Global Roofing Solutions
860’000
2.50%
-2.50%
250’000
Other TFS’ Transactions
1’150’000
4’252’500
6’321’980
1’591’133
“
[7] On the pleadings, and with
reference to Annexure “A” above, it is not in dispute
that the defendant, from July
2001, participated in transactions to
purchase from the plaintiff the entities. The transactions were
concluded through the agency
of IFS Consulting (Pty) Ltd (“
IFS
”).
It is also not in dispute that arising out of the transactions
whereat the defendant participated, and concerning the
purchase of
the entities, in each case the defendant received certain benefits.
The latter consisted of a joining fee from the
IFS or the purchasing
entity; and initial beneficial shareholding in the entity which
acquired the plaintiff’s entity; proceeds
from the sale of some
or all of the shares so acquired, and dividends in respect of certain
of the shares so acquired, as contained
in Annexure “A”.
The quantification of the amount claimed in Claim 1 is therefore not
in dispute. However, in the
plea and further particulars for trial,
the defendant asserts that his scope of participation in the
transactions was limited to
an advisory role, on behalf of the
plaintiff for the purposes of facilitating the conclusion of the sale
transactions. In addition,
the defendant contends that after the
conclusion of the transactions, he assumed a role of a consultant to
the independent entities.
Furthermore, the defendant says that the
plaintiff is not entitled to seek to recover the amounts claimed as a
consequence of
the affairs of an entity called Dealco,
ex
turpi causa non oritatur
action.
In the end, the defendant denies that his participation in the
transactions constituted a breach of his contract of employment
or of
the fiduciary duty he owed to the plaintiff.
[8] For the plaintiff, three
witnesses testified. They are Mr B D Bhika (“
Bhika
”),
the current company secretary of the plaintiff; Mr H O B Smith
(“
Smith
”),
the present managing director D D Fluid Control (Pty) Ltd (previously
a division of plaintiff); and Mr Cooper. Bhika
testified that he
had been in the employ of the plaintiff for the past 23 odd years.
The plaintiff was still in existence and
listed on the Johannesburg
Stock Exchange. He confirmed the defendant’s remuneration for
the financial years ending 31 March
2002 until 31 March 2006. The
current corporate Head Office of the plaintiff consisted of the chief
executive officer, Mr R Ross,
the Financial Director, Mr Bernard
Wood, and himself, as company secretary. The plaintiff currently has
a castings and machinery
factory in Benoni which was fully
functional. The plaintiff was independent from the company Remgro.
The possible delisting of
the plaintiff was not discussed by the
Board. Between 2001 and 2006, the plaintiff downgraded considerably
resulting in the disposal
of several divisions such as Global Roofing
Solutions, Alpine Engineering Products (USA subsidiary), Smith Wheels
and Water Solutions
Business. In July 2005 the only operation left
was Automotive Technology. As a consequence, the turnover of the
plaintiff dropped
from R4,6 odd billion in 2000 to about R500 m in
March 2010. In 2000 the plaintiff was unquestionably a major
engineering conglomerate
in South Africa and was dominant in the
engineering industry. Bhika was not familiar with the workings of the
entity called Dealco,
which was overseeing the transactions under
discussion in the present matter. However, he had sight of the
agreements pertaining
to the various transactions, as well as the
Board’s minutes.
[9] Smith testified. The company
of which he is presently managing director, was previously a division
of the plaintiff. It was
known as Dorbyl Water Solutions (“
DWS
”).
He knew the defendant as Executive Director of the plaintiff. Smith
was aware of the offer made by New Adventure Investments
262 (Pty)
Ltd (“
NAI
”)
to acquire from the plaintiff the entire DWS in August 2001. The
offer was made by Mr C J Ransom on behalf of NAI, and
the offer was
addressed to the plaintiff for the attention of the defendant. The
offer was eventually accepted. NAI, which was
previously a shelf
company became known as Dynamic Fluid Control (Pty) Ltd (“
DFC
”).
It is not in dispute, as appears from Annexure “A” to
the particulars of claim, that the defendant took out
and ended with
4,9 percent of equity in DFC. At the time, Smith testified that he
was unaware of this shareholding of the defendant
until about 2004.
Smith disputed that the defendant ever acted as a consultant of DFC.
Neither did he render any services to
DFC. Smith also testified
about three subsequent transactions as contained in Defendant’s
Trial Bundle “DB282”,
and entitled “
IFS
transactions
”.
The first transaction on the schedule was the sale of 21 percent of
the share capital of DFC to an entity called Kagiso.
The second
transaction was the sale of shares totalling 13,5 percent of the
issued share capital of DFC to Madeira Industrial
Holdings (“
MIH
”).
The last transaction occurred in May 2007 where 100 percent of his
company’s shares were sold to a new shelf company
when Standard
Bank became a shareholder in the business. The schedule shows
details of the total shares sold, the value in Rands,
percentage and
per share and proceeds in Rand value in respect of the last three
transactions. For example, the schedule shows
that in the
transaction to Kagiso IFS sold 4 percent or 20 000 shares out of a
total of 500 000 shares in the business. The total
value of that
transaction, including interest, was R15 050 148,00. The Rand per
share value and the proceeds of IFS in that transaction
was about
R2,8 m. In the second transaction to MIH where 13,5% of the total
issued shares, IFS sold 8,75 percent and the total
of proceeds was
R9 560 185,19. In the last transaction, involving Standard Bank, IFS
sold 5,93% of their shares and the total
value was R155 m, and the
proceeds received by IFS was R9 188 144,33. The defendant’s
shares of the 4,9 percent, as on Annexure
“A” was some
500 000 shares. In cross-examination, the calculations of Smith as
reflected on the schedule were not
seriously disputed. He denied
that he made incorrect assumptions about the relationship between the
defendant’s shareholding
and that of IFS. His own shareholding
was in two trusts. The defendant’s interest was through IFS by
the trust into the
company. However, Smith did not know that the
defendant had an interest in IFS at the time. He visited Mr Ransom
on several occasions
and they discussed the transactions. Smith was
aware of IFS’s involvement in several other disposals, and also
that Absa
Bank was engaged to provide the necessary capital.
[10] Cooper, the former chief
executive officer of the plaintiff testified. He joined the
plaintiff in September 1994 until September
2006. He was headhunted
into the company. In his tenure, he restructured the management
structure. The day-to-day management of
people at Head Office
consisted of Mr Orwin, the defendant, and himself. In 1998 the
company also acquired an equity called Alpine
in the US which he also
restructured. It became a highly profitable company until 9 November
when the Twin Towers fell. From
February 2003 Cooper, and at the
recommendation of his Board, spent more time in the US.
[11] In regard to Annexure “A”
to the particulars of claim, the basis of Claim 1, Cooper testified
that the document
was handed to him at a meeting of 12 September
2005. It was the first time that Cooper had seen the document. All
the transactions
and disposals reflected on Annexure “A”
were essentially first investigated by the executive management and
thereafter
approved by the Board. Cooper was present at all such
board meetings. The defendant at no stage revealed his interests in
any
of the transactions. The plaintiff retained no further interest
in the disposed entities except to ensure that the purchase price
was
paid. In terms of the General Conditions of Employment, which
applied with equal force to the defendant, no employee was allowed
without written permission of the plaintiff, to engage in extramural
work for remuneration. Cooper testified that no such permission
was
granted to the defendant, particularly during the period 2001 and
2005 when the defendant was plaintiff’s Executive Director.
According to Cooper, all the benefits, whether shares or cash
received by the defendant as reflected on Annexure “A”,
were obtained contrary to his contract of employment, and without any
disclosure to the plaintiff. He said that even if such request
to
perform services to outside entities was made, it would not have been
granted since that would have interfered with the defendant’s
day-to-day responsibilities towards the plaintiff. Moreover, that any
benefit accruing from such outside work would have been for
the
benefit of the plaintiff. Cooper denied that he ever encouraged or
directed the defendant to engage himself in the management
of the
selling of businesses. At the time the benefits were paid to the
defendant, the plaintiff was unaware of the receipt thereof.
[12] Cooper was cross-examined
on the details of the MPS and the purpose thereof. The MPS was signed
on 10 September 2001. It will
be recalled that the MPS forms the
basis of plaintiff’s Claim 3, as well as the defendant’s
counterclaim. In the light
of the several common cause issues, and
the defendant’s version, it is necessary to repeat all the
evidence. The purpose
of the MPS was to refocus the plaintiff’s
Group as opposed to the complete dismantling thereof. In terms of
the MPS, the
defendant, Mr D Orwin and Cooper were classified as
category 1 executives. The MPS was not only aimed at retaining
executive management
until the end of the refocusing process to award
certain benefits to them, but also to maintain interest in the
plaintiff as employer.
After the transactions disposing off the
entities, and if there remained a surplus, there would be a pool from
which management
would be rewarded financially. The refocusing of
the plaintiff was ongoing. The plaintiff was still listed although
with a somewhat
truncated operating division. In terms of the MPS,
and the category 1 executives, and in the event of a nett surplus
after the
successful disposal of the entities, Cooper would have
received half thereof, Mr D Orwin and the defendant would have
received
a quarter, respectively.
[13] In the period when Cooper
was spending most of his time in the US with plaintiff’s Alpine
Division, Mr D Orwin as Financial
Director and the defendant as Group
Executive Director essentially carried out the preliminary in
negotiations in regard to the
disposal of the entities. IFS was the
vehicle used for the disposal of the entities. The entity called
Dealco was like a committee
initiated by Cooper. Dealco regulated
and monitored the MPS in regard to the viability of the various
disposals. Some of the
disposals took an inordinately long time to
put together. Not all the members of the Board sat on Dealco. It was
essentially Remgro
and Allan Gray representatives, and Cooper, D
Orwin and the defendant. At the time that Cooper left the plaintiff
in 2006, the
proceeds of the various disposals was in the region of
R2 billion. Mr C J Ransom negotiated on behalf of the consortium of
the
deals that he was involved with and indicated the question what
price the consortium was prepared to pay in each case. The defendant
was involved in the early stages of the negotiations. Cooper had the
last say on the question of the price. Although most of
the
potential disposal deals involving the entities were taken to the
plaintiff’s Board for approval, the disposal of the
US based
Alpine Division occurred as a result of a direct instruction Cooper
received from his Board. Cooper testified that the
entities which
were sold off had to be clean deals with no later comebacks or
outstanding issues since purchasers invariably required
numerous
guarantees or warranties from the plaintiff. The entities were also
sold as complete entities, and there was no subsequent
and further
involvement in the operation sold, managerially or financially once
the purchase price was paid. Although the defendant,
as Executive
Director, held the Human Resource brief at the plaintiff, Cooper
testified that there were no comebacks which required
the involvement
of the defendant in entities which were disposed off. The
involvement of the plaintiff in the disposed off entities
was through
its Financial Director, Mr D Orwin, in issues where the purchase
price was outstanding. The payments to the three
category 1
executives, including the defendant, in terms of the MPS, were made
progressively as disposals were made.
[14] Cooper further testified in
cross-examination that there was no specific time-table for the
disposals of the various entities.
However, all the shareholders in
the plaintiff, including Remgro and Allan Gray were informed that
there was the refocusing process
which was ongoing. It was aimed at
unlocking shareholder value. The share value in fact increased from
about R14/15, progressively
to about R70 nett. In the process, there
was compliance with the Companies Act and the JSE rules and
regulations.
[15] Cooper testified that the
deal between the plaintiff (represented by the defendant and Cooper)
and Public Investment Commissioners-Isibaya
Fund (“
PIC
”)
in December 2004 fell through. PIC were not prepared to proceed with
their initial tentative offer at the price that was
acceptable to the
plaintiff’s Board. Similarly, the transaction, which was in
fact a reverse take-over between the plaintiff
and Calchelf (“
NEWCO
”)
Investments 108 (Pty) Limited in August 2005 fell through. It was a
proposal by C J Ransom on behalf of NEWCO. Cooper
testified that he
was not involved in this deal. In the end, there was a dispute
between the category 1 executives and Mr Emile
Buhrmann regarding the
interpretation of the MPS in 2005. Mr Buhrmann was the offer of the
MPS. During the whole process of disposing
the entities, the
category 1 executives (including the defendant) were being paid their
salary and benefits in terms of the contracts
of employment with the
plaintiff. The three category 1 executes were members of Dealco
whilst Messrs Phillips and Buhrmann represented
the shareholders in
plaintiff. Phillips was a non-executive chairman of the plaintiff and
was not a Remgro representative. On the
other hand, Buhrmann who was
on Dealco, was a Remgro representative. All the members of Dealco
were in any event also main board
directors of the plaintiff. The
executive directors on the plaintiff’s board were specifically
excluded from Dealco. They
could not sit on Dealco and have a
general discussion about either the timing of the disposals of the
entities or the potential
value that was anticipated in that disposal
when they were also part of the potential purchasing team on the
other side. Cooper
said this would have been a complete conflict of
interest to act on behalf of both purchaser and the seller. The
defendant was
not excluded from Dealco. He did not disclose his
interests in the disposed entities. This was essentially the
complaint against
the defendant in the present proceedings. Cooper
testified that although he spent most of his time in the US at that
stage, the
defendant and Mr D Orwin performed the initial
investigations regarding the disposal of the entities. The defendant
communicated
continuously with Cooper about the negotiations. He
relied on the defendant. Cooper said that had he known of the
defendant’s
interests in the transactions disposing the various
entities, the defendant would have had to recuse himself, and in fact
not conduct
any further dealings. Cooper himself, did so recuse
himself during the Alpine deal.
[16] Mr C J Ransom (“
Ransom
”),
a chartered accountant, testified for the defendant. He founded IFS
Consulting (“
IFS
”).
It is a boutique private equity and investment banking firm, and an
owner-managed business. It was in the business of
making money.
[17] In the light of the fact
that a large chunk of the issues became common cause, it is
unnecessary to detail the evidence of
Ransom. He became acquainted
with the plaintiff’s senior management in or about January
2001. He later met Cooper, and
studied the plaintiff’s
business. He made business transaction offers to the plaintiff such
as the Leverage Buy-Out and the
unbundling proposals (“
LBO
”)
in February 2001. He discussed the proposal with certain management
of the plaintiff, including the defendant and Cooper.
The
transactions were sponsored by Absa Bank. The proposal was also
communicated to Mr Visser, the chief executive officer of
Remgro as
well as Mr Emile Buhrmann, also of Remgro. The LBO came to nothing in
about July 2001. In August 2001, Ransom also made
an offer to secure
plaintiff’s Dorbyl Water Solutions Business (“
DWS
”)
for some R50 m. The offer was signed. The transaction was
implemented in September/October 2001. Ransom through IFS,
also made
proposals to the plaintiff for the purchase of other entities
concerned in these proceedings. Joining fees were paid
to every
single one of the participants in a trust, including the defendant.
[18] Ransom testified that in
the newly acquired entities from the plaintiff, he utilised the
skills of the various management
who came with the company. In the
case of the defendant, as Human Resources Director of the plaintiff,
his expertise in this regard
were used. After all, the defendant
knew the management teams now assumed by Ransom. The defendant also
knew the HR issues relating
to some 5 000 employees that Ransom
acquired as a result of the successful transaction involving the
entities. The defendant was
known as a general “
fix
it
”, as he had
intimate knowledge of the entities disposed off by the plaintiff. In
the process of acquiring the various entities
from the plaintiff,
Ransom understood that the plaintiff would stop operating completely
in about two year’s time. That
Mr Cooper would join Alpine in
the US, Mr Daniel Orwin would retire, whilst the defendant would be
retrenched. All the entities
acquired by Ransom through IFS
subsequently proved their worth in profitability.
[19] In regard to the profits, consisting of joining fees,
shareholding and cash from subsequent sales of the shares, received
by the defendant from IFS, Ransom confirmed the figures as testified
by Smith. These figures are reflected on the schedule prepared
by
Smith, Annexure “DB282”, incorporating the handwritten
figures. These figures also accord with the figures in the
defendant’s bundle page 179, which tables the extent of the
benefits received by the defendant from his participation and
involvement in the five entities which acquired various businesses
from the plaintiff. In regard to the defendant’s disclosure
of
his profits, Ransom testified that a schedule of such profits,
prepared by IFS at the instance of the defendant, was presented
to Mr
Phillips and Cooper at a meeting in September 2005.
[20] In cross-examination,
Ransom conceded readily that he was aware of the MPS, namely that
inter alia
the category 1 executives of the plaintiff would be reimbursed for
their efforts in refocusing or unbundling process. In addition,
that
the defendant was not only reimbursed, but was still receiving his
monthly salary from the plaintiff. He did not or could
not dispute
that the defendant received the profits as contained in Annexure “A”
to the particulars of claim. The profits
consisted of
inter
alia
, joining fees and
a share allocation in IFS in each of the five transactions in
question. The joining fees were in the region of
R4 m. In addition,
the defendant received a further R14 m odd in the form of shares that
were later sold, and received the proceeds
thereof. The R4 m odd
paid to the defendant was in fact in anticipation of services to be
rendered which were not defined, apart
from the HR issues. The
joining fees were paid to the defendant into an account nominated by
him. Ransom testified that it was
not his responsibility to ensure
that the defendant disclosed his interests in the entities disposed
off to the plaintiff or revenue
authorities. All he saw in the
defendant was a resource which he required. He also believed that
the defendant would be retrenched
by the plaintiff in the near future
and would thereafter probably join IFS on a full-time basis.
[21] The defendant did not
testify. As a consequence, and in spite of the evidence of Ransom,
most of the issues became increasingly
common cause. The evidence of
Ransom in fact, corroborated the version of the plaintiff to a large
extent. In addition to the
common cause facts mentioned earlier in
this judgment, and for the sake of completeness, the following facts
are also not disputed.
In 2001 the plaintiff commenced a process of
disposing off some or all of its various entities. The alleged
dispute advanced
by the defendant that the process was intended to
unbundle the plaintiff to complete extinction is capable of easy
disposal. The
uncontroverted evidence of Bhika was that the
plaintiff was still listed on the Johannesburg Stock Exchange at the
time of the
trial. Cooper also disagreed consistently with the
version of the defendant put to him in cross-examination. He
explained cogently
that the plaintiff had resolved to embark on a
journey that it would stop from time to time, following on disposals
of the entities,
to reassess the situation. He testified that this
was in fact also the view of the plaintiff’s chairman, the late
Mr Phillips.
The version put to Cooper regarding the process, could
only have been the version of the defendant himself, who as executive
director
of the plaintiff at all material times, was intrinsically
involved in the decision leading to the MPS and the process.
However,
the defendant chose not to testify. For these reasons, the
evidence of both Bhika and Cooper must be accepted on this issue of
the process. In this regard, compare
Denissoka
NO v Heyns Helicopters
[2003]
4 All SA 74
(C). The contention of the defendant in this regard is
clearly inconsequential. What remains common cause was the decision
of
the plaintiff to sell the five business entities in question and
that they were in fact sold.
[22] It is further common cause
that the plaintiff and the defendant were parties to the MPS
agreement which was to regulate the
disposal of the entities and the
benefits which the defendant would attain from representing the
plaintiff in such disposals, as
a category 1 employee. The basis of
the MPS was settled by the defendant and Mr Emile Buhrmann in the
absence of Cooper. There
is no dispute that until his dismissal by
the plaintiff in March 2006, following a disciplinary hearing, the
defendant continued
to be paid his normal remuneration as executive
director of plaintiff. This was the situation whilst the disposals
of the entities
were in process and accomplished. In addition to the
normal remuneration, the defendant received from the plaintiff
(admittedly),
under the MTS, some R4,5 m. This is the basis for
plaintiff’s Claim 3, as well as the defendant’s
counterclaim.
[23] As the seller of the
business entities, the plaintiff was undisputedly represented by the
defendant during the negotiations
in respect of each of the five
disposals. As a member of Dealco, an informal committee created by
Cooper which acted as a sounding
board for ideas connected with each
of the entities disposed, the defendant played an active and vital
role in the success of the
MPS. He was aware of the asking price
which the plaintiff would be prepared to accept for each entity
disposed. The IFS took
up shareholding in each of the entities
disposed of which would conduct business of such entities. In
participating in each disposal
on behalf of the purchaser, IFS, the
defendant received benefits in the form of cash and shares from the
purchaser, as stated earlier
in this judgment. The total of such
benefits was R36 896 428,00. All these were equally common cause.
What is of crucial importance
in this matter, and also not in
dispute, is that the defendant failed to disclose his interest in the
transactions for a disposal
off the entities as required by sections
234 and 235 of the Companies Act 61 of 1973. In the particulars for
trial, the defendant
contended that the benefits which he received
were remuneration for consultancy services rendered by him to the
purchasers of the
disposed entities. However, he did not contend
that he in fact received the written permission from the plaintiff to
perform work
for reward outside the services of the group as
envisaged in the plaintiff’s General Conditions of Employment.
Cooper, the
central figure in these proceedings, and as stated
previously, testified that he only became aware of the defendant’s
involvement
with the purchasers of the various disposed entities on
12 September 2005. Furthermore, Ransom testified that not a single
document
existed which recorded the defendant’s involvement
with the sold entities or indeed with his consulting company, IFS.
Neither
did the defendant discover any such documents.
[24] I deal with some applicable legal principles. However, before
doing so, reference to the defendant’s opening address
is
rather instructive. Mr Sutherland, for the defendant, put it crisply
as follows:
“
A
nd
the defence is quiet straightforward in respect of each of them. On
the Regal Hastings claim the defendant’s defence is
simply that
there were no inappropriate profits made from the interest which it
took indirectly in the companies which bought the
plaintiff’s
business as going concerns. We say that these benefits never were
and could never properly be described as corporate
opportunities for
the plaintiff.
”
This opening address clearly relates to the plaintiff’s Claim 1
and Claim 3 only.
[25] In the case referred to in
the defendant’s opening address,
Regal
(Hastings) Ltd v Gulliver and Others
[1942] 1 All ER 378
(HL), at 386, Lord Russel of the Killowen said:
“
The
rule of equity which insists on those, who by use of a fiduciary
position make profit, being liable to account for the profit,
in no
way depends on fraud, or absence of bona fides; or upon such
questions or considerations as whether profit would or would
otherwise have gone to the plaintiff, or whether the profiteer was
under a duty to obtain the source of the profit for the plaintiff,
or
whether he took a risk or acted as he did for the benefit of the
plaintiff, or whether the plaintiff has in fact been damaged
or
benefited by his action. The liability arises from the mere fact of
a profit having, in the stated circumstances, been made.
The
profiteer, however honest and well-intentioned, cannot escape the
risk of being called upon to account.
”
In
Robinson
v Randfontein Estates Gold Mining Company Limited
1921 (AD) 168, at 175 Innes CJ, said:
“
When
one man stands to another in a position of confidence involving a
duty to protect the interests of that other, he is not allowed
to
make a secret profit at the other’s expense or place himself in
a position where his interests conflict with his duty.
The principle
underlies an extensive field of legal relationship. A guardian to
his ward, a solicitor to his client, an agent
to his principal,
afford examples of persons occupying such a position. As was pointed
out in the Aberdeen Railway Company v Blaikie
Bros. (1 Macqueen 474),
the doctrine is to be found in the civil law (Digest 18.1. 34.7), and
must of necessity form part of every
civilised system of
jurisprudence.
”
In the context of the present
matter, it is common cause that the defendant, as a paid executive
director of the plaintiff, received
the profits, in the form of
joining fees, share allocation and proceeds of the resale of the
shares, without the knowledge of the
plaintiff in breach of his duty
of trust. The plaintiff only came to know of the secret profits in
September 2005. The profits
must be returned to the plaintiff. It is
common cause that the defendant was, at the time, in a fiduciary
position.
[26] In
Phillips
v Fieldstone Africa (Pty) Ltd
2004 (3) SA 465
(SCA) at para [31] Heher JA said:
“
The
rule is a strict one which allows little room for exceptions …
It extends not only to actual conflicts of interest but
also to
those which are a real sensible possibility … The defence is
open to a fiduciary who breaches his trust are very
limited: only
free consent of the principal after full disclosure will suffice …
Because the fiduciary who acquires for
himself is deemed to have
acquired for the trust, … Once proof of a breach of a
fiduciary duty is adduced it is of no relevance
that (1) the trust
has suffered no loss or damage …; (2) the trust could not
itself have made use of the information, opportunity
etc ..., or
probably would not have done so, …; (3) the trust although it
could have used the information, opportunities
has refused it or
would do so …; (4) there is no privity between the principal
and the party with whom the agent or servant
is employed to contract
business and the money would not have gone into the principal’s
hands in the first instance …;
(5) it was not part of the
fudiciary’s duty to obtain the benefit for the trust: …;
or (6) the fiduciary acted honestly
and reasonably: …
(although English and Australian Courts make some allowance for
equity in calculating the scope of the
disgorgement in such cases).
The duty may extend beyond the term of the employment …
”
In the present matter, the
defendant was employed by the plaintiff until he was dismissed in
2006. There was therefore privity
of contract between the plaintiff
and the defendant (cf.
Volvo
Southern Africa (Pty) Ltd v Gert Yssel
(247/08)
(2009) ZASCA 82)).
[27] On the pleadings, the
version of the defendant in the instant matter evolved several times
until the defence as conveyed in
the opening address. This latest
defence is that the benefits are not and could never be corporate
opportunities for the plaintiff.
The defence has no merit as shown in
the legal principles set out above. The plaintiff has argued,
convincingly in my view, that
the benefits received by the defendant
as described in evidence, was a secret profit or bribe in the
classical sense. The contention
that Ransom was prepared to pay
millions of rand by way of training fees alone as a reward for some
unspecified services which
the defendant might render to him in
regard to the entities where the defendant had had no direct
involvement is highly improbable.
The only real value the defendant
could bring to IFS was during the negotiations where he was a member
of the plaintiff’s
negotiating team who had done, at the very
least, the initial ground work and he had been a member of Dealco. It
was also highly
unusual that the defendant, as a full-time Board
member of the plaintiff, participated in discussions leading up to
the approval
or otherwise of a proposed sale, whilst the other
members of the Board did not know that the defendant in fact had a
very real
interest in the purchaser whose transaction was under
discussion. It is also strange that whilst in the particulars of
claim the
plaintiff unambiguously alleged that the benefits received
without its consent, in breach of the defendant’s fiduciary
duty,
and constituted secret profits or commissions, the defendant
chose not to testify and explain himself.
[28] On the evidence and
pleadings, and as argued by the plaintiff, at best for the defendant,
his defence suggests that he received
about R37 m whilst an executive
director of the plaintiff, as well as a category 1 employee under the
NPS from the purchaser as
remuneration for what he termed consultancy
services. On this basis, the defendant alleged that this was a
benefit which could
never have been a corporate opportunity for the
plaintiff. In
Da Silva
and Others v C H Chemicals (Pty) Ltd
[2008] ZASCA 110
;
2008 (6) SA 620
(SCA) at para
[19]
, the Court said:
“
It
is of no consequence that in the particular circumstances of the case
the opportunity would not or even could not have been taken
up by the
company (Regal (Hastings)) Ltd v Gulliver and Others
[1942] 1 All ER 378
(HL) at 389D, 392H-393A; Phillips v Fieldstone Africa (Pty) Ltd and
Another
2004 (3) SA 465
(SCA) ([2004]
1 All SA 150
at para [31]).
But the opportunity in question must be, one which can properly be
categorised as a ‘corporate opportunity’.
While any
attempt at an all-embracing definition is likely to prove a fruitless
task, a corporate opportunity has been variously
described as one
which the company was ‘actively pursuing’ (Canadian Aero
Service v O’Malley
[
1973]
40 DLR (3
rd
edition) 371 (SCC) at 382); or one which can be said to fall within
‘the company’s existing or prospective business
activities … Ultimately, the enquiry will involve in each
case a close and careful examination of all the relevant
circumstances,
including in particular the opportunity in question,
to determine whether the exploitation of the opportunity by the
director,
whether for the director’s own personal interest and
those of the company which the director was then duty-bound to
protect
and advance.
”
In the present matter the answer
to that question is self-evident: apart from anything else the
agent’s interests on behalf
of the purchaser was to reduce the
price payable as far as possible; on behalf of the seller it would
be to increase that price
by the same margin. The distinction was
conclusively answered in
Phillips
v Fieldstone Africa (Pty) Ltd and Another (supra)
at para [35]:
“
…
The fundamental question is not whether the appellant appropriated
an opportunity belonging to the respondents, but whether he stood
in
a fiduciary relationship to them when the opportunity became
available to him; if he did, it ‘belonged to the
respondents’.
”
In the present matter, it was expressly admitted that the defendant
stood in a fiduciary relationship to the plaintiff when the
so-called
opportunity became available to him. The defendant plainly breached
his fiduciary duty to the plaintiff. He failed to
inform the
plaintiff of the offer to him or even its terms and he took it for
himself without plaintiff’s consent. On the
credible evidence,
the suggestion that the defendant in fact deliberately concealed the
offer from the plaintiff, is not out of
place. Not only was he paid
his monthly remuneration at all material times, but he also benefited
and stood to benefit further
under the MPS.
[29] Based on the above, and as
a direct consequence of the defendant’s breach of his fiduciary
duty and other duties, the
plaintiff has argued cogently, that the
defendant has forfeited all the benefits, secret or otherwise, that
he has received under
his contract of employment with the plaintiff
and the MPS. To the extent that the bulk of the benefits the
defendant had obtained
consisted of shares, he is obliged to pay over
to the plaintiff either the shares themselves or their value, the
value being the
highest value he had in his hands. In Amler’s
Precedence of Pleadings,
6
th
ed p 23, and with reference to
Mallison
v Tanner
1947 (4) SA
681
(T), the following is said:
“
An
agent who accepts, or agrees to accept, a secret commission forfeits
the right to remuneration and is liable in damages for any
loss
sustained by the principal and is, furthermore, liable to account for
any profit to the principal.
”
On his version, the defendant has
since disposed of his shares and he is accordingly obliged to account
to and pay the plaintiff
the amount he received. In as far as Claim 3
in particular is concerned, Cooper’s evidence that payment to
the defendant
under the MPS had been made before the discovery of the
defendant’s conduct described above, was not challenged and
controverted.
The defendant is now obliged to repay those payments.
It follows logically that the defendant’s counterclaim cannot
succeed.
The same applies to the defendant’s special plea of
prescription to the effect that the plaintiff’s claims, or
portions
thereof fell due on or before 20 June 2003 prior to the
issue of the summons. Very little can be said of the special plea
since
it is devoid of all merit. It is difficult to fathom how the
plaintiff was to know of a state of affairs which the defendant on
the face of it set about concealing from it. In my view, the
plaintiff has proved Claims 1 and 3 on a preponderance of
probabilities.
The secret profits amounted to R36 896 428,00. The
defendant had chosen not to testify on matters which are material in
this
trial. The evidence of Ransom did not advance his course at
all.
[30] I deal briefly with Claim
2. The details of the various amounts misappropriated by the
defendant are not in dispute. The
defendant had to justify what
appeared to be inordinate disbursements paid by the plaintiff. The
defendant pleaded that he has
tendered to repay the amounts against
the production by the plaintiff off an amount. The defendant has
both formally and informally,
during his disciplinary proceedings,
undertook to repay the amount stolen by him on receipt of an account
from the plaintiff. The
argument advanced on behalf of the defendant
that the plaintiff has not made out a case in evidence in regard to
Claim 2, is without
merit at all. Instead of justifying the regular
disbursements, the defendant elected not to enter the debate but
closed his case
without testifying himself. In any event, the fact
of the matter is that the plaintiff by instituting this claim against
him,
effectively rendered the account the defendant sought. It
follows that the plaintiff in regard to Claim 2 as well, must
succeed.
[31] I deal with the question of
costs. There is plainly no reason why the costs should not follow
the result. The issues were
fairly complex with some ten arch lever
files to work through. Both parties engaged the services of two
counsel.
[32] For all the aforegoing reasons, the following order is made:
In regard to Claim 1, the defendant shall pay to the plaintiff the
sum of R36 896 428,00 (Thirty Six Million Eight Hundred and
Ninety
Six Thousand Four Hundred and Twenty Eight Rand).
In regard to Claim 2, the defendant shall pay to the plaintiff the
sum of R316 016,79 (Three Hundred and Sixteen Thousand Sixteen
Rand
and Seventy Nine Cents).
In regard to Claim 3, the defendant shall pay to the plaintiff the
sum of R4 510 000,00 (Four Million Five Hundred and Ten Thousand
Rand).
Interest on the above amounts
a
tempore morae
.
Costs of suit, which are to include the costs occasioned by the
employment of two counsel.
The defendant’s special plea of prescription and counterclaim
are dismissed with costs.
______________________________
D
S S MOSHIDI
JUDGE OF THE SOUTH GAUTENG
HIGH COURT, JOHANNESBURG
COUNSEL
FOR PLAINTIFF
…...................
C
W JORDAAN SC
ASSISTED
BY
…...........................................
G
D DOUBELL
INSTRUCTED
BY
.........................................
WEBBER
WENTZEL
COUNSEL
FOR THE DEFENDANT
............
R
T SUTHERLAND SC
ASSISTED
BY
…...........................................
D
G VETTEN
INSTRUCTED
BY
.........................................
KNOWLES
HUSSAIN LINDSAY INC
DATE
OF HEARING
......................................
24
FEBRUARY 2011 – 4 MARCH 2011
DATE
OF JUDGMENT
..................................
28
JULY 2011