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[2015] ZASCA 12
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Clifton Dunes Investments 100 Limited and Another v City Capital SA Property Holdings Limited (169/14) [2015] ZASCA 12 (16 March 2015)
Links to summary
THE SUPREME
COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
NOT
REPORTABLE
Case
No: 169/14
In
the matter between:
CLIFTON
DUNES INVESTMENT 100
LIMITED
..........................................
FIRST
APPELLANT
MIDNIGHT
STORM INVESTMENTS 150
(PTY)
.....................................
SECOND
APPELLANT
LTD
and
CITY
CAPITAL SA PROPERTY HOLDINGS
LIMITED
.......................................
RESPONDENT
Neutral citation:
Clifton Dunes v City Capital
(169/14)
[2015] ZASCA 12
(16 March 2015)
Coram:
Lewis,
Maya, Majiedt, Pillay and Zondi JJA
Heard:
24 FEBRUARY 2015
Delivered:
16 MARCH 2015
Summary:
Property syndication – how
determination to be made in respect of loan amount due – high
court’s reliance on the
appellants’ audited financial
statements in making such a determination correct – loan amount
thus correctly determined
– application by appellants to adduce
further evidence on appeal – requirements not met.
ORDER
On
appeal from:
Western Cape Division,
High Court, Cape Town (Griesel J sitting as court of first instance):
The
appeal is dismissed with costs, including the costs of two counsel.
JUDGMENT
Majiedt
JA ( Lewis, Maya, Pillay and Zondi JJA concurring)
[1]
Property syndication schemes have a chequered history in this
country. Far too often they end up as civil or criminal cases
in our
courts. At issue in this appeal is the amount of a loan advanced by
the first appellant, Clifton Dunes Investment 100 Limited
(Clifton
Dunes) to the second appellant, Midnight Storm Investments 150 (Pty)
Ltd (Midnight Storm). This issue has a direct bearing
on the amount
due to the respondent, City Capital SA Property Holdings Limited
(City Capital) as a minority shareholder in Midnight
Storm. After
hearing oral evidence, Griesel J in the Western Cape Division of the
High Court, Cape Town, upheld the contentions
advanced by City
Capital (which was the applicant in the high court) and found the
amount of the loan to be R20 321 248.
This appeal is with
the leave of the high court.
[2]
Clifton Dunes and Midnight Storm are companies in a property
syndication scheme (the syndication). City Capital is a 15 per cent
shareholder of Midnight Storm. Clifton Dunes holds the balance of the
shares. The syndication is part of some 77 property syndications
involving about 160 companies in the Dividend Investment group of
companies. These syndication schemes were all similarly structured
in
the form of either an ‘Income Plan’ or a ‘Capital
Growth Plan’. In the former instance investors in
the
syndication scheme would receive interest on their investment on a
monthly basis, while in the ‘Capital Growth Plan’
investors would not receive interest, but would share in the capital
profit when the property invested in is eventually sold. The
rental
income from the property would be utilised to settle the mortgage
bond as soon as possible in order to secure a potential
capital
profit when the property is sold (referred to in the industry as
‘gearing’). The present syndication falls
into this
latter category.
[3]
The syndication was funded by investors who lent approximately
R25 million to Clifton Dunes during 2005 to 2006. In return,
investors acquired shares in Clifton Dunes from a company, Div-Vest
(Pty) Ltd (Div-Vest) – which company was part of the
Dividend
Investment group – and the right to be repaid their investment
plus any capital growth thereon. Clifton Dunes, as
the holding
company, then lent money to Midnight Storm, as the property-owning
company, to purchase immovable property in Hatfield,
Pretoria, known
as the KPMG building (the property), during February 2005 in the sum
of R34 305 748. The balance of the
purchase price was
financed through a Nedbank mortgage loan. Investors held 100 per cent
of the shares in Clifton Dunes which,
in return for its loan to
Midnight Storm, acquired 85 per cent of the shares in the latter from
Div-Vest, while Div-Vest Holdings
(another company in the Dividend
Investment group) held the remaining 15 per cent shareholding in
Midnight Storm. City Capital
later acquired this 15 per cent
shareholding through a merger with the Dividend Investment group of
companies.
[4]
Midnight Storm utilised an amount of R20 321 248 from the
approximately R25 million raised from investors in Clifton
Dunes as
part payment on the purchase price of the property, which was
registered in the name of Midnight Storm on 11 February
2005. On that
same date, 85 shares in Midnight Storm were also transferred from
Div-Vest to Clifton Dunes. The purchase consideration
of these shares
is one of the aspects which requires closer scrutiny since it impacts
directly on the main issue. On 26 April 2012
the shareholders of
Midnight Storm approved the sale of the property at a purchase price
of R43.5 million and the deed of sale
was concluded on 8 May 2012.
This represented a return on investment of just over R9 million over
a seven year period for Midnight
Storm. It is common cause that
subsequent to the sale of the property investors were repaid the sum
of R30 million.
[5]
The present dispute arose because City Capital alleged that the
amount of the loan from Clifton Dunes to Midnight Storm (the
Clifton
Dunes loan) was R20 321 248, whereas the appellants contended it
to be R25 million. City Capital applied to the
high court for a
declaratory order that the Clifton Dunes loan was in the above amount
of R20 321 248 and for an order
directing Midnight Storm to
pay to it the sum of R3 160 608 in respect of the net
proceeds of the sale, together with
accrued interest. If the
appellants’ contentions are correct that the Clifton Dunes loan
actually amounted to R25 million,
a lesser amount would be due
to City Capital. By agreement between the parties, the amount claimed
by City Capital, R3 160 608,
is presently being held in an
interest bearing trust account by a firm of attorneys (the erstwhile
third respondent in the high
court who did not participate at all in
those proceedings) in terms of s 78 of the Attorneys Act 53 of 1979.
[6]
Due to the factual disputes on the papers, Smit AJ referred the
following issues to oral evidence:
(a) the amount (if any) of the loan repayable to Clifton
Dunes by Midnight Storm on 6 December 2012 pursuant to the
contractual
relations between the parties dealt with in the founding
affidavit; and
(b) the amount (if any) payable by Midnight Storm to
City Capital of the proceeds derived from Midnight Storm’s sale
of the
property.
After
hearing oral evidence from both sides, Griesel J found for City
Capital and granted the relief sought.
[7]
Before deliberating on the main issue, it is necessary to deal with a
preliminary issue, namely the appellants’ application
for leave
to adduce further evidence on appeal. We dismissed the application at
the commencement of the hearing. These are the
reasons for that
order. The new evidence concerned City Capital’s rights to
claim what was in effect a dividend from Midnight
Storm, based on its
rights as a shareholder. The appellants contended that the new
evidence suggests that City Capital was not
a shareholder. The
application was opposed broadly on the grounds that the new evidence
could and should have been adduced at the
trial, that it is neither
material to nor dispositive of the issue on appeal and that there are
no exceptional circumstances warranting
its admission, nor do the
interests of justice require its admission. The further evidence
emanated from an enquiry held in terms
of s 417, read with s 418 of
the Companies Act 61 of 1973, during November 2014. The appellants
claim that they were not aware
of these new facts before they emerged
at this enquiry. They say that the evidence at the enquiry shows that
a ‘resolutive
condition’ in the sale of shares agreement
between Div-Vest Holdings and City Capital was never fulfilled, that
consequently
the agreement is void from its inception and that City
Capital therefore never became a shareholder of Midnight Storm. Some
background
facts are necessary to place this aspect in its proper
contextual setting.
[8]
Div-Vest Holdings is part of the Dividend Investment group of
companies. It was the holding company of all the property-owning
companies in the group. On 28 September 2007 Div-Vest Holdings
concluded a sale of shares agreement with City Capital in terms
of
which it sold all its shares in the property-owning companies
(including Div-Vest) to City Capital for R32 169 751.76.
The
’resolutive condition’ under discussion appears in clause
5 which reads as follows:
‘
5.
RESOLUTIVE CONDITION
5.1
This agreement is subject to the resolutive condition that a legally
binding and valid agreement be entered into and be successfully
and
fully complied with between City Capital Investment Holdings
(Proprietary) Limited (Registration No. 2005/028522/07) and
all
the Shareholders of Div-Vest Holdings (Proprietary) Limited
(Registration No. 1969/001986/07) as on the Signature Date in terms
whereof City Capital Investment Holdings (Proprietary) Limited
(Registration No. 2005/028522/07) shall purchase the entire
shareholding of all the Shareholders of Div-Vest Holdings
(Proprietary) Limited (Registration No. 1969/001986/07) held in
Div-Vest
Holdings (Proprietary) Limited (Registration No.
1969/001986/07) on the Signature Date.’
[9]
In the high court, the litigation was conducted on the basis that
this ‘resolutive condition’ had been fulfilled.
The
agreement also contains the standard non-variation and non-waiver
clauses. At the enquiry Mr Jacobus Carstens, director and
CEO of City
Capital, and Mr Chris Blaauw, a broker who assisted the Dividend
Investment group to source properties for syndication
schemes,
testified. According to them no agreement had ever been entered into
between City Capital Investment Holdings (Pty) Ltd
and Div-Vest
Holdings (Pty) Ltd. The upshot of this, say the appellants, is that
City Capital acquired no rights as a shareholder
in Midnight Storm
and consequently had in fact lacked the requisite
locus
standi
to have brought the application
in the high court.
[10]
As is evident from clause 5.1 above, it was not the respondent
company, but City Capital Investment Holdings (Pty) Ltd which
had to
conclude an agreement with all the shareholders of Div-Vest Holdings.
I shall for the sake of clarity refer to this other
company as ‘City
Capital Holdings’. The condition is described as ‘resolutive’
in clause 5.1. The appellants
say that this is a misnomer and that
the condition is in fact suspensive in nature. In R H Christie
and G B Bradfield
Christie’s The Law of Contract
in South Africa
6 ed (2011) at 145, the distinction is drawn
between these two conditions as follows:
‘
A
condition precedent [ie a suspensive condition] suspends the
operation of all or some of the obligations flowing from the contract
until the occurrence of a future uncertain event, whereas a
resolutive condition [sometimes referred to as a ‘condition
subsequent’] terminates all or some of the obligations flowing
from the contract upon the occurrence of a future uncertain
event.
’
As
the learned authors correctly point out (at 145-146), when such a
condition applies to only part of a contract, it is not easily
classifiable. The determination of the type of condition is a matter
of construction. A court will not restrict itself to the designation
that the parties afford the particular clause and the use of the
words ‘subject to’ are usually (but not always)
indicative
of a suspensive condition – see
Palm
Fifteen (Pty) Ltd v Cotton Tail Homes (Pty) Ltd
1978 (2) SA 872
(A) at 884E-G. A resolutive condition has the effect
that upon the happening of a designated future event, the agreement
itself
is terminated. In terms of clause 5.1, if the agreement
between City Capital Holdings and Div-Vest Holdings’
shareholders
came into being as envisaged, the entire sale agreement
would terminate. On the common cause facts this agreement never came
into
existence. The agreement of sale thus never lapsed as contended
by the appellants.
[11]
The condition is, on its plain language and in its contextual
setting, clearly resolutive in nature. And the parties conducted
themselves throughout on this basis and not as if the condition was
suspensive. The appellants made reference to and placed reliance
on
the agreement in a letter to investors by their director, Dr David
Ferreira, and in their answering affidavit in this matter
(deposed to
by Dr Ferreira). The appellants cannot in law after the fact avoid
the consequences of a contractual term, the meaning
of which they had
agreed upon with the respondent, and acted upon accordingly by both
parties (see:
Aussenkehr Farms
(Pty) Ltd v Trio Transport CC
2002 (4)
SA 483
(SCA) para 25). The material prejudice to the respondent is
self-evident – its
locus standi
is being subjected to attack at this late stage notwithstanding the
plain meaning of the clause as a resolutive condition and despite
the
fact that both parties to the contract have acted throughout on this
common understanding of what the clause entails. The application
does
not meet the well-established requirements for the adducing of new
evidence on appeal. For these reasons we dismissed the
application
with costs, including the costs of two counsel.
[12]
Reverting to the main issue – a convenient place to start in
finding the answer to the divergent contentions is the series
of
tripartite agreements entered into between the investors, Clifton
Dunes and Div-Vest. These agreements form the genesis of the
entire
transaction. One such agreement, representative of all of the
agreements signed by the investors, is an annexure to the
appellants’
answering affidavit. It is called a ‘Property Capital Growth
Plan agreement’ and it is between an
investor, Ms Maria Johanna
Grobler (the investor), Div-Vest (the principal) and Clifton Dunes
(the company). I shall for the sake
of convenience refer to it simply
as ‘the tripartite agreement’. Its preamble records that
the investor and Clifton
Dunes had agreed to enter into a loan
agreement in terms of which the investor would advance money to
Clifton Dunes ‘to enable
it to purchase certain investments and
make other investments in terms of paragraph 2’. It is recorded
further that in return
Clifton Dunes would pay the investor interest
as set out in the agreement. Clause 2 is of decisive importance in
this case. It
reads as follows:
‘
2.
DUTIES AND OBLIGATIONS OF THE PARTIES TO THIS AGREEMENT:
2.1 The Investor hereby undertakes to loan the Company
upon signature of this agreement by all parties hereto the amount of
R200,000.
2.2 The Company undertakes to:
2.2.1 Purchase immovable property described as Erf 748,
Hatfield Township Registration Division J.R., Province of Gauteng;
measuring
5 716 square metres and to nominate a newly formed
unencumbered private Company as the purchaser thereof (hereinafter
referred
to as “the Property Company”)
of which
the Principal at its inception shall own all the issued share
capital.
2.2.2 loan an amount to the Property Company to be
utilized towards a
portion of the purchase price of the immovable
property
referred to in paragraph 2.2.1 above.
2.2.3 To raise a bond with a financial institution to
finance the balance of the purchase price.
2.2.4
to purchase 85% of the issued share capital of
the Property Company from the Principal on date of registration of
transfer
of the immovable property in the name of the Property
Company.
2.2.5
Credit the investor in the books of the Company with a loan account
reflecting the full value of the loan to the Company
and
to repay such loan account first before any other payments are made
in the event of the immovable property of the Property Company being
sold. (my emphasis)
[13]
It is common cause that, save for clause 2.2.4 (which is the primary
bone of contention), the parties have complied with their
obligations
set out in clause 2. The investors lent an amount of R25 million to
Clifton Dunes (in terms of clause 2.1 of the various
tripartite
agreements), which utilized R20 321 248 thereof as a loan
to Midnight Storm as part of the purchase price
of the KPMG building
(clauses 2.2.1 and 2.2.2). A loan, secured by a mortgage bond, was
raised with Nedbank to pay the balance
of the purchase price (clause
2.2.3). On the common cause facts the original loan amount was R23
million to make up for the shortfall
in the investor contributions at
the time of the acquisition of the property. These contributions
increased from approximately
R10.5 million at that time to the
eventual total of R25 million. The Nedbank loan amount was then
reduced to R14 million.
It is lastly common cause that the
investors were duly credited in Clifton Dunes’ books with loan
accounts reflecting the
full value of their loans and that they were
repaid a total of R30 million, ie an amount in excess of what they
had initially invested,
when the property was sold (clause 2.2.5).
What remains then for consideration is the dispute concerning clause
2.2.4.
[14]
On the common cause facts the amount of R4 678 752 (the
disputed amount) was transferred from the trust account of
attorneys
Minde Schapiro and Smith (MSS), who had received all the investors’
contributions, to Div-Vest. The appellants
contend that this payment
was irregular since it constitutes a ‘syndication fee’ or
‘gross profit’ to Div-Vest
which falls outside the
parties’ agreement. City Capital on the other hand, avers that
this amount constitutes the purchase
consideration in respect of the
85 per cent shareholding in Midnight Storm in terms of
clause 2.2.4 above. That amount
was paid over a period in different
sums to Div-Vest. The papers and the oral evidence hold the key to
this dispute.
[15]
City Capital placed strong reliance on the appellant companies’
audited financial statements and the evidence of Mr Gerrit
Nel, a
director of Clifton Dunes, who had been centrally involved as
in-house accountant in the preparation of the companies’
books.
The appellants relied primarily on the content of the share transfer
form (the so-called ‘CM42 form’) reflecting
the transfer
of 85 shares in Midnight Storm to Clifton Dunes at a consideration of
nil Rand. This, so the appellants contend, together
with the absence
of any documentary proof that there has been payment for the
shareholding or that the information contained in
the audited
financial statements is factually correct, support their case that
the disputed amount constitutes an irregular payment.
[16]
The audited financial statements of Clifton Dunes for the 2007
financial year reflect the loan from Clifton Dunes to Midnight
Storm
as being R20 321 248. They record the ‘investment in
subsidiary’ as being R4 678 752 (ie
the disputed
amount). These entries are supported by the working papers prepared
by Mr Nel for the auditors, Price Waterhouse Coopers
(PWC). They were
signed off by the companies’ directors and they accord with the
2006 audited financial statements. In addition,
in a letter to
investors dated 23 March 2012, Dr Ferreira stated that the Clifton
Dunes loan was in the same amount.
[17]
I turn to a brief recital of the evidence germane to the dispute. Mr
Louis Meyer is an attorney and conveyancer from MSS who
was
instructed by Div-Vest to attend to the transfer of immovable
properties to property-owning companies in some of the Dividend
Investment syndications, including the present one. He only rendered
conveyancing services and his firm received the investors’
contributions into its trust account. Mr Meyer was not involved at
all in the details of the various property syndications. In
the
present matter he was aware of the existence of Midnight Storm as the
property-owning company in whose name the property was
to be
transferred. But he was understandably unaware of the existence of
the holding company, Clifton Dunes. The appellants’
criticism
of this aspect of his evidence is misplaced. Why, one might ask,
would a conveyancer in Mr Meyer’s position on
the present
facts, have had to be aware of the existence of a company which
played no role whatsoever in the conveyancing and registration
of
transfer of the property? Mr Meyer’s evidence was largely
unchallenged, understandably so, because he played a peripheral
role
insofar as the main issue is concerned.
[18]
Mr Nel gave direct evidence of how the property syndication was
structured and how the contentious amounts reflected in the
annual
financial statements were arrived at. Div-Vest employed him as an
accountant, responsible for attending to the investor
contracts,
liaison with MMS and the preparation of working papers for PWC in
connection with all the property syndications. He
was a director of
Clifton Dunes. At the time when he gave evidence, Mr Nel was no
longer in the employ of Div-Vest, or its successor,
City Capital. He
executed his tasks in the present matter by recording investors’
investments in Clifton Dunes, he kept the
accounts and financial
records for its subsidiary, Midnight Storm, for the purposes of the
audit and ensured that annual general
meetings were held for both
companies. He explained how the syndications were structured and
implemented. In respect of what his
duties entailed regarding the
bookkeeping for Midnight Storm as the property owning company, Mr Nel
testified as follows:
‘
That
would be the rental invoices that goes out on a monthly basis, any
expenses that have been paid during the year, VAT returns,
reconciling the sales and the VAT and then confirming the loan
accounts between the companies.’
And
in respect of Clifton Dunes:
‘
That
would basically be the working paper file on all the shareholders or
all the investors, what their loans are, how many shares
they have in
the company to make sure that that corresponds to the actual share
register of the company and then to confirm the
balance of the loan
to the property company as well as any other investments the holding
company would have.’
[19]
Mr Nel explained that in every Div-Vest property syndication, the
holding company would buy 85 per cent from Div-Vest
for the
difference between the syndication value and the actual purchase
price and in the Capital Growth Plan it would be the purchase
price
less the bond, which gives the net amount that investors had to put
in and the difference between the net amount and the
gross amount
that they actually put in was the investment in shares. Transposed to
the present instance, this means that the syndication
value was R39
million (investors’ contributions in the sum of R25 million
plus the eventually reduced Nedbank loan of R14
million), the actual
purchase price of the KPMG building was R34 305 748 and the
net amount was R20 321 248.
The difference between the
gross amount that the investors contributed (R25 million) and the net
amount (R20 321 248)
is the actual investment of
85 per cent of the shareholding in the subsidiary (the
disputed amount).
[20]
In this court the thrust of the appellants’ attack was based on
two main interrelated grounds: First, that the CM42 form
does not, as
is to be expected if Mr Nel’s explanation was correct, reflect
the disputed amount, but nil Rand. Second, that
there is no
independent documentary proof supporting the entries in the PWC
financial statements. Mr Nel explained that the entry
on the CM42
form was a mistake. He was extensively cross-examined on this aspect
and several other similar entries in other similar
property
syndications were pointed out to him. These, he said, were all
mistakes. Before us the appellants’ counsel argued
with
considerable vigour that this explanation is untenable. Counsel’s
argument went that the CM42 form here, and in all
the other
instances, in fact correctly reflected the true position, namely that
there was no consideration paid for the 85 per cent
shareholding in Midnight Storm. Counsel submitted that the disputed
amount was in fact misappropriated by Div-Vest as ‘syndication
fees’. When pressed, counsel expressly refrained from labelling
Mr Nel a lying witness. But his evidence on these aspects
(the
purchase consideration for the 85 per cent shareholding,
the CM42 form’s contents and the information furnished
to PWC
for the audit in respect of the two disputed entries) falls to be
rejected, so it was contended.
[21]
Mr Tertius Bruwer, a chartered accountant and director at PWC, took
over the appellant companies’ audit as supervising
external
auditor from 30 June 2007. He testified that PWC had previously
prepared the financial statements and the audits for the
Dividend
Investment group of companies. From 30 June 2006, however, the
financial statements were prepared in-house and PWC was
responsible
for the audits only. Mr Nel played a central role in assisting PWC
with the audits, since he was the
de
facto
financial manager in charge of
the companies’ finances. PWC performed the audits (including
the present ones) by examining
Mr Nel’s working papers, the
source documents (where necessary) and by gaining a clear
understanding of the entries in previous
financial years. PWC’s
assessment of the working papers entailed an exercise of their
professional discretion after taking
into account all the documents,
their instructions, the parties’ intention in respect of the
contracts, the context, previous
financial statements and the way the
property syndication worked. In the present instance he was satisfied
that the 2006 audited
financial statements correctly reflected the
companies’ financial position and the intercompany transfers.
On this basis
he signed off the appellant companies’ financial
statements for the 2007 and 2008 financial years. Bruwer said he
regarded
CM42 forms as administrative documents which reflect the
outcome of a share transaction only and which do not necessarily
constitute
conclusive proof thereof. According to him, auditors did
not always retain the source documents inspected during the audit.
[22]
Dr Ferreira testified on behalf of the appellants. In his view,
investors had been deliberately misled by Div-Vest regarding
their
potential returns on investments. In his letter to investors, his
reference to the Clifton Dunes loan as being R20 321 248
was based in good faith upon the audited financial statements. When
he became involved between 2011 and 2012 as a director of a
number of
companies in the property syndications, including Clifton Dunes and
Midnight Storm, he did so out of concern for their
investments and he
investigated matters as fully as he could. He contested the accuracy
of the financial statements and alluded
to the fact that he and the
other directors had instructed PWC to correct the 2007 financial
statements in respect of the two disputed
entries, something which
had not been done at that stage.
[23]
There are a number of strongly persuasive factors which support City
Capital’s case. They are the audited financial statements,
Dr
Ferreira’s letter to investors and the tripartite agreement
itself. The only countervailing factor is the CM42 share transfer
form. Can it be a genuine mistake, particularly in view of the
similar entries in several other similar forms in respect of other
similar transactions? For this court to find that it is not would, in
my view, require us to find that Mr Nel lied under oath and
that he
was part of an elaborate scam to, in colloquial terms, ‘cook
the books’ to mislead investors. I have a number
of grave
difficulties in reaching such a drastic conclusion.
[24]
First and foremost, it is imperative to emphasize at the outset that
this case is not about fraudulent misrepresentation or
the
non-disclosure of material facts. The issues to be decided are crisp,
as outlined in the order of Smit AJ referring the matter
for oral
evidence (see para 6 above). This aspect appears to have been
obfuscated by the appellants’ case, both here and
in the high
court, an aspect commented on by Griesel J. Thus, for example, both
Dr Ferreira and Prof Willem van der Walt, an accounting
expert called
by the appellants, primarily complained about investors having been
deliberately misled. That is an aspect which
must be investigated by
the ongoing s 417 enquiry, referred to above. It is not for this
court to determine.
[25]
Second, Mr Nel is highly unlikely to have been complicit in such an
elaborate, epic scam. As stated, he was no longer in the
employ of
Div-Vest when he testified. He held no shares in the Dividend
Investment group, which was run by the Carstens brothers
and Mrs
Angela Carstens (Mr Etienne Carstens’ spouse). Mrs Carstens was
a director of Clifton Dunes, together with Mr Nel.
When asked why he
was also appointed as a director, Mr Nel answered as follows:
‘
It
[Clifton Dunes] was a public company which required two directors and
Mr [Etienne] and Mrs [Angela] Carstens asked me to be the
other
director’.
Mr
Bruwer’s evidence went largely unchallenged, correctly so. But
the appellant’s case is that PWC had drawn up the
disputed
financial statements on incorrect information from Mr Nel. An
auditor, said Boshoff J in
Tonkwane Sawmill Co Ltd v Filmalter
1975 (2) SA 453
(W) at 455C-D, is a watchdog, but not a
bloodhound. In approving this dictum, Holmes JA described the duty of
an auditor appointed
under the Companies Act as follows in
Lipschitz
and another NNO v Wolpert and Abrahams
1977 (2) SA 732
(A) at
741G-H:
‘
An
auditor appointed under the Companies Act is a professionally
qualified person. He is a scrutineer with a critically enquiring
mind. He maintains his independence at all times. He takes no
instructions from directors, shareholders or creditors. He carries
out his statutory prescribed duties with a reasonably high degree of
skill and diligence in the circumstances and in the light
of modern
conditions and standards.’
In
my view, Mr Bruwer and PWC had duly fulfilled their duties. It is
evident from the papers that they queried numerous entries
in the
working papers with handwritten notes. And, where required, they
issued modified audit reports. There is nothing untoward
in the
manner in which Mr Bruwer and PWC performed their functions. Of
considerable importance is Mr Bruwer’s evidence that
a CM42
form is largely administrative proof of the result of a transaction
and that it is not conclusive proof of the transaction
itself.
[26]
The third aspect, which relates primarily to Mr Nel’s evidence,
but also to that of Mr Bruwer’s, is the manner
in which they
were cross-examined. It was never put to Mr Bruwer in
cross-examination on what basis it was alleged that the Clifton
Dunes
loan amounted to R25 million and not as reflected in the financial
statements, nor why PWC should have recorded the loan
amount thus.
And, even more importantly, it was never put to Mr Nel that his
evidence about the CM42 form contaminated his entire
evidence and, in
direct terms, that he was a liar and in what respects this was so.
While the general tenor of the cross-examination
was to the effect
that the nil Rand entry on the form could not have been a mistake,
this does not suffice. In the by now well-known
dictum of the court
in
President of the RSA and others v South African Rugby Football
Union and others
2000 (1) SA 1
(CC) at para 61, the duties of a
cross-examiner were outlined as follows:
‘
The
institution of cross-examination not only constitutes a right, it
also imposes certain obligations. As a general rule it is
essential,
when it is intended to suggest that a witness is not speaking the
truth on a particular point, to direct the witness’s
attention
to the fact by questions put in cross-examination showing that the
imputation is intended to be made and to afford the
witness an
opportunity, while still in the witness-box, of giving any
explanation open to the witness and of defending his or her
character. If a point in dispute is left unchallenged in
cross-examination, the party calling the witness is entitled to
assume
that the unchallenged witness’s testimony is accepted as
correct’.
Mr
Nel was never afforded an opportunity to deal directly with the
contentions now being advanced on appeal, namely that he was
part of
a grand and elaborate scam to fleece unsuspecting investors of their
moneys. This the law does not countenance. In any
event, while the
mistake may at first blush appear to be somewhat startling, one must
not lose sight of the fact that Mr Nel, on
his uncontested evidence,
had signed reams of documents at that time. The extent of the
Dividend Investment group’s involvement
in property
syndications is evident from para 2 above.
[27]
Mr Nel’s evidence in general and his explanation of how the
property syndication worked and how the figures are arrived
at is
consonant with the tripartite agreement, the structure of all the
other property syndications and the audit papers. The tripartite
agreement expressly stated in clause 2.2.4 that Clifton Dunes
undertook to
purchase
85 per cent of the issued share capital of Midnight Storm
from Div-Vest on the date of registration of transfer of the
KPMG
building. It is beyond comprehension why Div-Vest would have been
prepared to part with 85 per cent of the shares
in Midnight
Storm for no consideration whatsoever from the Clifton Dunes
shareholders (the investors). This would amount to an
unbusiness-like
gratuitous donation. On a balance of probabilities, absent any proof
by a party who alleges a donation, a court
will be disinclined to
presume that the other party would part with property for no
consideration – see the general discussion
in the title on
‘Donations’, 8(1)
LAWSA
(2 ed) para 315 by P R Owens.
[28]
Much was made during argument by appellants’ counsel of the
fact that some of the disputed amount had been utilised by
Div-Vest
to pay sundry expenses such as broker commissions. The criticism is
unfounded. As correctly pointed out by the learned
judge in the high
court during the course of Mr Nel’s cross-examination, these
funds were part of the proceeds of the sale
by Div-Vest of the
85 per cent of Midnight Storm’s shares to Clifton
Dunes. Div-Vest was at liberty to do with
those proceeds as it
pleased. During the course of the exchange with Griesel J,
appellant’s counsel remarked that the appellant’s
difficulty was that Div-Vest ‘talk[s] about a syndication price
but that money is not there’. In this court argument
for the
appellants was presented much along the same line. But this is a
misunderstanding of how the transaction worked. So too
is the oft
repeated submission before us that the money (ie the disputed amount)
could only have been used once – it could
not have been used as
a syndication fee as well as the purchase consideration for the
shares. The obfuscation arose as a result
of counsel’s constant
reference, particularly during the Mr Nel’s cross-examination,
to the disputed amount as being
Div-Vest’s ‘syndication
fee’. That it may well have been in the end, but in strictly
legal technical terms that
disputed amount was simply the purchase
consideration paid by Clifton Dunes to Div-Vest for the 85 per cent
shareholding
in Midnight Storm in terms of clause 2.2.4 of the
tripartite agreement. And, in strictly accounting technical terms, it
was as
correctly reflected in the audited financial statements of
Clifton Dunes, an ‘investment in the subsidiary’. Upon
the
purchasing of the 85 per cent shareholding, Midnight
Storm became a subsidiary of Clifton Dunes (ie the latter owned a
majority of the share capital of Midnight Storm). In marketing
documents the disputed amount was at times referred to as the
‘opportunity
cost to the investor’. This simply meant, as
Mr Nel explained, that the investor was able, through the
syndication, to buy
into a top grade commercial property for as
little as R100 000 (the minimum investment amount).
[29]
In summary and in conclusion: I am satisfied that the entry in the
CM42 form relating to the present transaction was an honest
mistake
on the part of Mr Nel. The audited financial statements correctly
reflect the Clifton Dunes loan as being R20 321 248.
The
disputed amount was similarly correctly reflected as an ‘investment
in subsidiary’. It follows that the high court
was correct in
its findings in favour of City Capital on the two issues which were
referred for oral evidence. The appeal must
therefore fail.
[30]
The following order is issued:
The
appeal is dismissed with costs, including the costs of two counsel.
________________________
S A Majiedt
Judge
of Appeal
Appearances
For the Appellants: F Joubert SC (with him J de Vries)
Instructed
by:
Lombard
& Kriek Attorneys, Parow
Webbers
Attorneys, Bloemfontein
For Respondent: A C Oosthuizen SC (with him R J Howie)
Instructed
by:
Werksmans
Attorneys, Cape Town
Rosendorff
Reitz Barry Attorneys, Bloemfontein