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[2013] ZAGPJHC 225
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Absa Bank Ltd v Ukwanda Leisure Holdings (Pty) Ltd (2009/35416) [2013] ZAGPJHC 225; [2013] 4 All SA 405 (GSJ); 2014 (1) SA 550 (GSJ) (9 September 2013)

Links to summary

IN
THE SOUTH GAUTENG HIGH COURT OF SOUTH AFRICA (JOHANNESBURG)
Case No: 2009/35416
DATE:09/09/2013
In
the matter between:
ABSA
BANK LTD
Plaintiff
And
UKWANDA
LEISURE HOLDINGS (PTY) LTD
Defendant
JUDGMENT
C.
J. CLAASSEN J
:
INTRODUCTION
The
case concerns the exchange trade of “derivatives” and
“futures” securities in the form of corporate
shares on
the ALT-X exchange. This type of trading has been explained as
follows:
"Futures
and commodity options trading is among humanity's more impenetrable
concepts. It involves selling what one does not
own and, as a rule,
buying what one does not want. It is deeply shrouded in terminology
that conceals its meaning. It operates
in an arena where opinion is
everything, where supply and demand are hard to distinguish from
supposition and doctrine, and where
inherent uncertainty has spawned
an endless holy war between two religious-sounding antagonists, the
"fundamentalists"
and the "chartists", not to
mention the new breed of computer-dependent faithful. Into this world
comes the general public,
eager to enjoy its riches and often
unprepared to become its poor."
1
A derivative
is a financial instrument whose value is derived from some other
things, such as:
. a physical commodity (for
instance, wool, cattle, oil, or gold)
. a financial asset (for
instance, shares or bonds)
. an index (for instance, a
share price index)
. an interest rate
. a currency
. another derivative.
All derivatives are based on
one or both of two primary elements:
(a) The
forward
contract
,
which is an agreement between two parties that take the opposite side
of a transaction having particular agreed terms on a future
date.
(b) The
option
contract
,
which obliges the grantor to enter into a transaction having
particular agreed terms on a future date,
generally in return for a premium, and gives the taker a right, not
an obligation, to take the opposite side of the transaction.
On
the first day of the trial and during the opening address of Mr
Harris, acting on behalf of the plaintiff, it transpired that
there
were no relevant disputes of facts between the parties. It also
appeared that the parties had substantially narrowed the
issues to
be decided during several pre-trial discussions. Upon my suggestion,
the parties then prepared a stated case for decision
by this court
which was handed in on the second day of trial as exhibit “H”.
As a result, I made an appropriate separation
order in terms of Rule
33(4) of the Uniform Rules of Court whereby the issues mentioned in
the stated case were to be decided
first and all other issues
postponed
sine die
.
In
exhibit “H”, paragraph 2, five issues are listed for
decision. It is further recorded in paragraph 3 of exhibit
“H”
that if any of the issues are determined adversely to the defendant,
then the parties agree that such determination
would be dispositive
of the defendant’s counterclaim and, furthermore, entitle the
plaintiff to judgment in its favour
as prayed for in prayers 1, 2
and 3 of the particulars of claim.
THE
STATED CASE
The
stated case in exhibit “H” reads as follows:
“
1. The issues proposed to
be determined separately in terms of rule 33(4) will be determined on
the following basis:
The
correctness of annexures C, E and H to the particulars of claim, as
admitted in terms of the defendant’s notice of
issues placed
beyond dispute (Bundle B: Notices p 426 para 6) and the defendant’s
admissions (Bundle A: Pleadings p 380-2
paras 5, 6 and 7) read with
the fourth pre-trial minute (Bundle D: Pre-trial p 51 para 5.3).
As
appears on annexure E, the account maintained by Cortex at the
plaintiff in respect of the defendant (‘the account’)

was in credit on 17 Nov 2008 and remained in credit until 26
November 2008 when it went into debit of R7 036 744.72.

The account remained in debit at all times thereafter.
The
defendant requested payment of the sum of R5 million on 17 November
orally and on 21 November in writing.
Cortex
conveyed the request to Absa. Absa refused the payment.
Cortex
did not pay the amount requested.
On
9 December 2008 the defendant conveyed its opinion to the JSE that
Cortex was in default as provided for in the Derivative
Rules
(Bundle C Vol 4 p 1190). On 11 December 2008 the JSE notified the
defendant that it disagreed with the defendant’s
contention
(Bundle C vol 4 p 1212) and accordingly held the view that Cortex
was not in default as provided for in the Derivative
Rules.
It
is common cause that no review proceedings were instituted arising
from the facts set out in the previous sub-paragraph.
The
issue of whether or not there was an agreement to maintain total
margin at 22.5% is not included and is to be disregarded
for
purposes of this determination and will stand over for
determination with any issues that might remain.
Save
in respect of the issue of whether or not there was an agreement to
maintain total margin at 22.5% which is not included
as set out in
paragraph 1.8 above, the parties may refer to the affidavits in the
application in the Bundle C: Core bundle
pp CB 1122.1 – CB
1373 in addition to any other relevant document in the core bundle
and the admitted facts.
The
facts set out in paragraphs 48, 49 and 50 of the plaintiff’s
opening address are correct.
2. On the basis of the
aforegoing the following issues (‘the issues’) are to be
determined:
2.1 Whether the JSE’s view
that Cortex was not in default in terms of the rules constituted
administrative action as defined
by the Promotion of Administrative
Justice Act, 3 of 2000 (as amended) (‘PAJA’);
2.2 If it did constitute
administrative action, whether the defendant is precluded from
raising the question of whether Cortex was
in default as provided for
in Derivative Rule 12 in these proceedings;
2.3 If not, whether Cortex was
in default as provided for in Derivative Rule 12;
2.4 If Cortex was in default as
provided for in Derivative Rule 12, was the consequence of the
default that the close out of Ukwanda’s
positions on 9 December
2008 was unlawful, and if so
2.5 If the close out of
Ukwanda’s position on 9 December 2008 was unlawful, did the
consequences set out in paragraph 52.5
of the defendant’s
counterclaim follow (Bundle A: Pleadings p 217.3 para 52.5).
3. If any of the issues are
determined adversely to the defendant the parties agree that this is
dispositive of the counterclaim
and furthermore that the plaintiff is
entitled to judgment in its favour as prayed for in prayers 1, 2 and
3 of the particulars
of claim (Bundle A: Pleadings p 18).”
The
annexures referred to in paragraphs 1.1 and 1.2 of the stated case
are all attached to the plaintiff’s particulars of
claim. The
Pleadings Bundle was handed in as exhibit “A”. The Core
Bundle (“CB”) of documents consists
of 4 volumes and
these were handed in as exhibit “C”.
Paragraph
1.10 of the stated case confirms the correctness of facts set out in
paragraphs 48, 49 and 50 of the plaintiff’s
opening address.
These facts referred to the default process as practised by the
Johannesburg Stock Exchange (“JSE”).
Mr du Toit for the
defendant was at pains to explain that although the facts set out in
these paragraphs are conceded as a factually
correct setting out of
the practice at the JSE, they do not necessarily constitute the
correct legal conclusions of how the applicable
Acts and Regulations
are to be implemented. He submitted that it remained for this court
to determine the correct interpretation
of all relevant statutory
and regulatory provisions. Subject to the aforesaid qualification,
it is then necessary to state the
default process as documented in
paragraphs 48 – 50 of the written opening address of Mr
Harris. These are:
“
48. For purposes of
ascertaining whether there was a default in any particular case,
which has severe and material consequences,
the JSE oversees the
relevant default procedure and makes a finding regarding default.
49. The consequences of default
are dire. Once a default is reported, the JSE conducts an
investigation and ascertains the reason/s
for the alleged default. If
the JSE determines that there was a default as contemplated in DR
12.10 by the member, the clearing
member has to effectively step into
the shoes of the member and take over the entire balance sheet of
that member in relation to
all its positions and all its clients.
This entails
inter
alia
an enormous
administrative and logistic process including notification to the
Financial Services Board, the orderly and structured
closing down of
the member’s business, the management of the member’s
staff complement, contacting and informing all
the member’s
clients of the situation that has arisen (which number could run into
the thousands), and investigating and
(the JSE) determining an
appropriate price for the position/s to be taken over. Where the JSE
determines that there is a default
of a member, it consults with the
clearing member in order to ascertain whether the clearing member can
take over all the positions
of the member, including positions where
clients are not in default. If the clearing member is unable to do
this, the JSE will
do so itself or appoint relevant persons to do so,
the cost of which is for the account of the clearing member. This
process necessarily
takes anything from a few days to several weeks.
It must be controlled and managed properly in order to avoid losses.
50. Any default in terms of DR12
is dealt with by the JSE (delegated to the JSE Executive Committee).
This is in turn practically
managed on behalf of the JSE Executive
Committee by
inter
alia
the head of
listings, the director of market surveillance, and the head of
legal.”
THE
SECURITIES ACT AND THE RULES
The
JSE is operated by the Johannesburg Securities Exchange Limited,
which is a self-regulatory organisation, being an exchange
as
defined in the Securities Act 36 of 2004 (“the Act”).
Although the Act has been recently repealed, it was the
Act in force
at all relevant times in this action.
The
JSE has made exchange rules in accordance with section 18 of the Act
which rules relate to transactions in “
listed
securities
”
which include “
derivative
instruments
”
2
as defined in section 1
3
of the Act.
4
By virtue of section 18(4) of the Act, such exchange rules are
“
binding on an
exchange, an authorised user, an issuer and their officers and
employees, and on clients
.”
A “
client
”
is defined in section 1 of the Act to mean “
any
person who uses the services of an authorised user or a participant,
as the case may be
.”
On
1 August 2005, the JSE made rules, in accordance with the Act,
relating specifically to derivative instruments. A copy of these

rules name “
Derivative
Rules and Directives
”
(“DRD”), as amended and applicable at the time relevant
to the present action, is annexure “B”
to the
plaintiff’s particulars of claim.
5
These rules provide,
inter
alia,
for “
Single
Stock Futures”
(“SSF”)
contracts.
An
SSF is a contract in terms of which the purchaser is entitled to
demand delivery of the underlying share on the “
close
out”
6
date of the SSF. In essence, it is a contract in terms of which the
purchaser purchases and the seller sells the underlying shares
for
delivery at a future specified date, usually three, six or nine
months in the future. Each SSF covers a hundred of the underlying

shares. So, the purchaser of one SSF contract purchases and is
entitled to demand delivery of 100 of the underlying shares on
the
close out date. Each SSF has a particular close out date on which
all obligations in terms of that SSF must be settled.
The
price, at which an SSF trades, comprises the spot price at which the
share is trading in the market on the JSE, multiplied
by a hundred
to take account of the fact that the SSF covers 100 shares, plus an
interest component. This interest is to take
account of the fact
that the purchaser of an SSF is not required to put up the entire
price of the position on the day he/she
purchases the SSF, but is
required to pay only a percentage of the value of the position. This
is referred to in the Rules as
the “
initial
margin
”
7
which was held, in this case, as a deposit with the JSE. (In
addition, a purchaser may be required to put up “
additional
margin.
”)
8
The initial margin acts as a guarantee that the party undertaking to
pay or deliver something in future will comply with such

undertaking. Hence, it is to be paid at the inception of the
transaction. In this regard it was held by Stegmann, Blieden and

Cachalia JJ in
Nedcor
Bank Ltd v First Financial Futures (Pty) Ltd
2003
JDR 0260 (W) at page 2 as follows:
“
Because the futures
contract is a guarantee to deliver something in the future, some form
of financial guarantee is required from
the investor that the parties
will perform their obligations in the future. This is done in the
form of what is called a “margin”.
This is an amount of
money that is put up by the investor as a guarantee of performance.
The initial amount so put up is the “initial
Margin” and
this is determined by the risk management committee of SAFEX.”
Because
the purchaser of an SSF only has to put the initial margin, SSF’s
provide a capital efficient way to participate
in the market
movements of a particular share. For example, if a purchaser wished
to purchase a hundred shares in any particular
listed public company
and the price was R1 per share, the purchaser would be required to
pay R100 for the 100 shares. As already
indicated, the standard size
of 1 SSF contract on SAFEX is 100 shares. Therefore, if the
purchaser purchased one SSF contract
on SAFEX in respect of that
public company, he/she would only initially be required to put up
the required initial margin (leaving
aside, for the moment, any
additional margin which might be required). Assuming the initial
margin requirement was R10 per contract,
then the purchaser would be
required to put up a margin of R10 per SSF. Thus, the purchaser who
has R100 to buy shares could
obtain exposure to ten times more of
such underlying shares by purchasing SSF’s, than he could
purchase if he purchased
the underlying shares for immediate
delivery. With R100, he could purchase ten SSF contracts, i.e.
exposure to 1000 of the company
shares. Of course, assuming there
has been no price change from the date on which he purchased the
shares to the future date
on which he is entitled to take delivery
of the shares, he will have to come up with 100% of the purchase
price on the future
close out date (less the initial margin he has
already posted). In the example, this would mean that he would have
to come up
with R900 on the close out (i.e. the remaining R90 per
SSF times the ten SSF’s).
Assuming
the share price increased to R1.10 by the close out date, then by
having purchased a hundred of the underlying shares,
the purchaser
would have made a profit of R10. By purchasing ten SSF’s, he
would make a profit of R100. This is so because
he obtained exposure
to the price increase on one thousand underlying shares. On the
close out, if he takes delivery of the underlying
shares, he would
have a thousand shares, worth R1100 against which he would owe the
purchase price of R1000. From a cash-flow
point of view, he would at
that stage have to come up with R900, being the purchase price of
R1000 less the initial margin of
R100.
For
most clients, SSF’s provide a cheaper way, and sometimes the
only way, to obtain what is called in the industry, “
leverage”
.
By leverage is meant the ability to purchase shares with a greater
value than the amount required to be paid immediately.
There
is another way in which SSF’s can be used, and that is as a
means of obtaining a loan against an existing holding
of shares. For
example, if a party holds a hundred shares in a listed company which
are trading at R1 and he wishes to obtain
a cash advance against
this holding, but wishes to retain exposure to movement in the share
price, he can sell the shares to
a market maker (in this case
Nedbank) and simultaneously purchase the equivalent number of SSF’s
in the company, entitling
him to claim delivery from the market
maker of 100 shares on the close out. If he does so, he will
immediately obtain payment
of R100, but will only be obliged to put
up R10. He therefore has the use of R90 until the close out, when he
would be liable
to pay for and take delivery of a hundred underlying
shares. At that stage, he would have to pay R100 (initial margin of
R10
would be applied to the purchase price). So, he would have to
come up with an additional amount of R90. As already stated, the

futures price has a built-in interest component and this would
represent the interest cost to the purchaser of the SSF’s.
If
the purchaser has retained the R90 he received when he sold the
hundred PNG shares, then on the close out of the SSF, he would
be in
exactly the same position as if he had simply held onto his shares,
save that he will have had use of the R90 and will
have paid a
wholesale interest cost (built into the futures price which will be
marginally higher than the spot price of the
share). Of course, if
the purchaser has used the R90 for another purpose, he will have
exposed himself to the risk of not being
able to fulfil his
obligations on the close out to pay the balance of the purchase
price and to take delivery of the shares.
The
potential risk was that if the share price kept declining, the
client would have to keep funding the variation margin. It
is also
important not to lose sight of the client’s obligation to pay
the entire settlement value plus interest on the
expiry date of the
SSF. If the client wishes to own the shares on the expiry date, he
will be required to fund the full purchase
price of the shares
covered by the SSF (less any initial margin he has paid). If he does
not wish to own the shares covered by
the SSF on the expiry date, he
may sell the shares on the JSE and utilise the proceeds to settle
the balance of the purchase
price of the shares covered by the SSF
(after taking account of any initial margin). If the proceeds are
insufficient, the client
must pay the shortfall. The client’s
obligation is to pay the entire settlement value plus interest on
the expiry date.
Furthermore, if the market for shares is illiquid,
the client may not be able to realize all the shares at an
acceptable price
and, if it cannot do so, it would still have to
come up with the cash to settle the full purchase price of the
shares covered
by the SSF.
“
Variation
margins
”
9
are payable by the client to the trading member (in this case
Cortex) who then pays the clearing member (in this case, Absa).
The
variation margin paid by the clearing member is cleared through the
clearing house, Safcom, and paid to the clearing member
of the
counterparty who pays the trading member of the counterparty who
pays the client by crediting the accounts held by the
trading member
at a bank in respect of trades by that client. Exhibit “I”
gives a visual presentation of how this
works.
10
The
payment of the variation margin is dealt with in Rule 8.50.1 and
8.60.2:
11
Rule
8.50.1
12
provides that at 17:00 on each business day, the position in each
exchange contract of all members and their clients shall
be
marked-to-market on such basis as the JSE may determine.
Rule
8.60.2
13
provides that variation margins shall be paid to or by a member
or a client in whose name a position in the exchange contract
is
registered as the result of the marking-to-market of a position
in terms of Rule 8.50.
Rule
8.90
14
deals with the settlement procedures in relation to payments, so as
to ensure the integrity of the market. The Rule deals with
the
settlement procedures which are necessary to be effected so as to
ensure that when a trade occurs on SAFEX, the relevant
securities
are delivered by the seller to the trading member and in turn by the
trading member to the clearing member and in
turn by the clearing
member to the clearing house and down the chain on the other side,
by the clearing house to the clearing
member and by the clearing
member to the trading member and from the trading member to his
client. Correspondingly, the payment
due by the purchaser is
settled by the purchaser paying the trading member who traded on his
behalf, that trading member paying
the clearing member, who pays the
clearing house, who pays the seller’s clearing member, who
pays the seller’s trading
member, who ensures that the
settlement is completed by crediting the account of the seller,
maintained by the trading member
at a bank in relation to that
seller. In so far as variation margin is concerned, the settlement
procedures are designed to ensure
that the relevant cash flows are
settled through the settlement system so that the losers pay and
winners get paid and the integrity
of the market is thereby
maintained. Rule 8.90 does not deal at all with the contractual
arrangement between a trading member
and his client as to when the
money standing to the credit of the client in the trust account
maintained by the trading member
at a bank in relation to that
client becomes due and payable to that client. It merely ensures
that trades are settled as between
counterparties so that the
securities purchased are cleared through the system and delivered to
a trading member who allocates
them to a particular client account
and that payments due for securities purchased are made and credited
by the trading member
to the trust account maintained by the trading
member in relation to the client who is the seller of the
securities. When this
occurs, the trade has been fully settled as
far as the market is concerned. Variation margin payments are dealt
with in similar
fashion.
THE
CONTEXT IN WHICH PLAINTIFF’S CLAIM AROSE
This
is a claim by ABSA Bank Ltd (“Absa”) against the
defendant, Ukwanda Leisure Holdings (Pty) Ltd (“Ukwanda”)

for an amount owing of R732 191 068.00. The claim arose
out of Ukwanda’s default in respect of SSF contracts
which it
held. The SSF’s which are the subject matter of this action
are SSF’s on the listed securities of a company,
Pinnacle
Point Group Limited (“PNG”). Previously Pinnacle Point
Group Limited was known as Acc-Ross Holdings Limited.
These were
small capital shares listed on the ALT-X exchange.
The
purchasers in this case were holders of approximately 1.2 billion
PNG shares. They utilised SSF’s primarily in the second
way
described above, i.e. as a means to obtain finance whilst still
retaining exposure to share price movements. Obtaining such
finance
was the attraction of buying SSF’s in the present case.
Many
of the entities had received their shares in Acc-Ross upon the
initial listing (in approximately 2004) of Acc-Ross on the
JSE’s
ALT-X market, an alternative exchange, being a division of the JSE.
They had acquired their shares at a subscription
price of R1. By
November 2006, the share price had declined to around the 20 cent
level. The initial idea of utilising SSF’s
was proposed by
Mark Weetman, then the managing director of Cortex Securities. The
idea proposed was to enable Acc-Ross shareholders
who had purchased
shares in Acc-Ross on listing at R1 to reduce the average price
required to break even. The idea was to utilise
the finance obtained
by selling the Acc-Ross shares to Nedbank, and then to
simultaneously buy back an SSF for an equivalent
number of Acc-Ross
shares from Nedbank. Since the clients would only have to pay the
full purchase price for the SSF on the close
out date, the client
could, in the meanwhile, utilise the proceeds of the sale of the
Acc-Ross shares to Nedbank, to purchase
more Acc-Ross shares.
In
essence, the transaction worked as follows:
Nedbank
purchased the shares held in PNG by various entities (“the
entities”) which were later consolidated
into Ukwanda,
which is an investment holding company.
Nedbank
paid the entities for the shares and simultaneously sold SSF
contracts to the entities in respect of PNG shares.
The
ultimate expiry date of the relevant futures contracts was 18
December 2008. At each previous expiry date, the entities
had
managed to extend the positions by closing out the existing
positions and buying corresponding SSF’s expiring
on the
next expiry date. This is known as “rolling over the
positions”. In order to roll over the positions,
it is
necessary for the counterparty (Nedbank) or another counterparty
to be willing to enter into the new positions and
for the
purchaser to be able to find the then required margins. For so
long as a purchaser is able to roll over the position,
he is not
required to come up with the purchase price, but merely has to
come up with the initial margin in respect of
the SSF’s on
the roll-over date. If the position is not rolled over, the
purchaser would have to close out the position
on the expiry date
of the position and, on that date, the purchaser would have to
pay the purchase price for the shares
covered by the SSF at the
then current market value and would be entitled to take delivery
of the PNG shares covered by
the SSF.
On
a daily basis, the JSE marks all futures contracts to market
(which is essentially a daily valuation of the SSF, with

reference to the discounted expected value of the share at the
close out).
15
A
variation margin is payable daily by one of the counterparties to
the other, depending on the daily marked-to-market price
of the
contracts. The variation margin represents the daily price
movement in the share multiplied by 100 (to take account
of the
fact that one SSF covers 100 of the underlying shares). It is in
simple terms the profit or loss on a daily basis
in respect of
the SSF with reference to the previous day’s price. Thus,
if the previous day’s price of a PNG
share was R1 and the
JSE marks the PNG SSF to market at a price of 90 cents per PNG
share, the purchaser of an SSF would
suffer a loss on the day of
10 cents per PNG share and accordingly a loss of R10 per SSF
contract. The purchaser of the
SSF would be required to pay the
amount lost as the variation margin. Such daily adjustment is
automatically done by debit
or credit entries in the client’s
account held by the trading member.
Leaving
aside the question of whether Ukwanda was entitled, as of right, to
payment of amounts standing to the credit of the account
maintained
by Cortex at Absa in relation to Ukwanda and whether or not there
was a valid demand for payment of such amounts (which
is in
dispute), Ukwanda essentially admits all the elements of the
plaintiff’s claim. The contents of annexures “C”,

“E” and “H” attached to the particulars of
claim, in so far as they set out details of the SSF’s
held by
Ukwanda, the initial margin paid by Ukwanda and the amounts standing
to the credit or debit of the account maintained
by Cortex at Absa
in relation to Ukwanda, although initially disputed, are now
admitted.
16
From
these admissions, it emerges that between 17 November 2008 and 25
November 2008, Ukwanda’s account had a credit balance
(some
R82 million on 17 November reducing to R12 480 851 on 25
November). On 26 November 2008, the account went into
debit as a
result of the marking-to-market of the position, and a variation
margin became due by Ukwanda in the sum of R19 516 598

resulting in a debit balance of R7 035 744.42. The account
remained in debit at all times thereafter. Ukwanda was notified
that
the margin was owing on 28 November 2008 and advised that it was in
default. On 4 December 2008 Ukwanda was advised that
in terms of
Rule 12.10, the account was in default and that Cortex would proceed
as prescribed by Rule 12.20.2. The positions
were closed out on 9
December 2008 in accordance with that Rule resulting in a debit
balance of R732 191 068 as set
out in Annexures “C”,
“E” and “H” of the particulars of claim.
DEFENDANT’S
DEFENCE AND COUNTERCLAIM
The
central feature of the defendant’s defence is that, because it
was entitled to payment of the money standing to the
credit of the
account, it requested payment in respect of R5 million on 17
November 2008 orally, and on 21 November 2008 in writing.
Cortex
conveyed the request to Absa, but Absa refused the withdrawal.
Cortex did not pay the amount requested. The defendant
contends that
Cortex’s failure to effect payment constituted a breach of the
agreement between Cortex and Ukwanda.
The
central edifice of the defendant’s defence, and the foundation
of its counterclaim, is that:
Cortex
was therefore “in default” as provided for in DRD
Rule 12 and its membership was automatically terminated
in terms
of Rule 12, read with Rule 3.60.1.6 and the definition of
“default” in terms of section 1 of the Rules;
Absa,
in its capacity as clearing member, automatically and immediately
stepped into the shoes of Cortex;
Ukwanda
became the client of Absa;
17
As
a result, the margin call was unlawful as Cortex was in default
of the Rules, alternatively because of its breach, it
is not
entitled to claim further performance under the contract;
Cortex
defaulted in terms of DRD 8.90.7 and Cortex was, therefore,
automatically suspended as a trading member in accordance
with
DRD 12.30.1 (dealing with the consequences of a trading member’s
default), read with DRD 3.60.1.6, and the definitions
of
“default” in section 1 of the DRD (which merely
states that a default means a default contemplated in Rule
12).
Absa (in its capacity as clearing member) stepped into the shoes
of Cortex, by virtue of the provisions of DRD 12.30.1
by noon on
18 November, alternatively by noon on Monday, 24 November 2008.
18
The
close out of Ukwanda’s positions on 9 December 2008 was
accordingly unlawful, with the following consequences:
6.1 The amounts equalling the
amounts of the shortfall created by the marked-to-market adjustment
on those days and specifically
as on 4 December 2008 in an amount of
R365 748 845, accordingly became loans due to Absa in
accordance with derivative
Rule 11.50;
19
6.2 Such loans were payable on
demand in terms of the Derivative Rules, but Absa never demanded
payment of the loans and they were
accordingly not payable ever
since;
6.3 The initial margin standing
to Ukwanda’s credit as on 3 December, and subsequent days,
amounting to R174 176 355,
was accordingly not capable of
set-off against the loan amount which was due, but not payable, yet
it was applied in the unlawful
closing of the position.
EVALUATION
It
now becomes necessary to evaluate this defence which, in this case,
relies on a legal interpretation of the Rules for its success.
Also,
in terms of the first issue to be decided in terms of exhibit “H”,
it is necessary to determine, as a preliminary
issue, whether the
defendant can raise the alleged default of Cortex and Absa as a
defence and a basis for the counterclaim in
light of the view which
had been previously expressed by the JSE that Cortex was
not
in default. The answer to this question depends upon whether or not
the views expressed by the JSE constituted administrative
action as
defined by the Promotion of Administrative Justice Act 3 of 2000
(“PAJA”).
The
underlying facts relating to this issue is also undisputed and
emanates from the correspondence. On 10 December 2008 Ukwanda
filed
a complaint dated 9 December 2008 through its attorney, Veneziano,
with the JSE (“Ukwanda’s complaint”).
20
Ukwanda alleged
inter
alia
that Cortex and
Absa were in default of the JSE’s Derivative Rules because of
their failure to pay Ukwanda the R5 000 000.00
it requested on 21
November 2008.
21
Ukwanda requested that the JSE “
implement
the procedures as contemplated in Rule 12.40
”
(dealing with the consequences of a clearing member’s
default).
22
For these procedures to be implemented, it logically necessitated
the JSE finding that Cortex and thereafter Absa were indeed
in
default of the Rules.
On
11 December 2008, after having considered Ukwanda’s complaint,
the JSE responded and stated
inter
alia
that: “
[t]he
JSE does not agree with your client’s views as stated in
paragraphs 2, 3, 4 and 5 of your letter under reply
[
i.e.
those paragraphs in Ukwanda’s letter dated 9 December alleging
a default by Cortex and Absa].
”
23
On
12 December 2008 Ukwanda wrote to the JSE and requested “
a
full explanation as to why the non-payment of monies in terms of a
valid written request from our client [Ukwanda, on 21 November

2008], did not, in terms of the JSE (sic), constitute a ‘default’
as defined in Rule 12.10.1 of the Derivative Rules.
”
24
The holiday period descended and the JSE did not reply.
On
19 January 2009 Ukwanda wrote to the JSE again and indicated that it
sought to have its complaint (the alleged default by Cortex
and
Absa) resolved in terms of the dispute resolution procedure
envisaged in Rule 17.
25
On
20 January 2009 the JSE replied to both of Ukwanda’s letters
(of 12 December 2008 and 19 January 2009).
26
The JSE once again dismissed the allegations of default by Cortex
and Absa in terms of the Rules.
27
The JSE also explained how and why, on Ukwanda’s own version,
the dispute did not fall within the jurisdictional limit
of R500
000-00 stipulated in Rule 17 and invited Ukwanda to provide the JSE
with any information that suggested otherwise.
28
No such information was forthcoming.
On
or about 6 April 2009 Ukwanda launched an application (“the
application”) seeking:
Declaratory
relief declaring Cortex and Absa in default of the Rules,
29
and
A
rule nisi calling on the JSE to indicate why the consequences of
default set out in Rules 12.30 and/or 12.40 should not
be
implemented against Absa.
30
The
JSE opposed the application.
31
In its answering affidavit the JSE:
Set
out four reasons justifying the dismissal of the application,
32
including that the application constituted an abuse with an
ulterior purpose in an attempt to embarrass Absa and the JSE;
33
Pertinently
pointed out that the application held no financial consequences
for Ukwanda who on its own version did not dispute:
i) its
default on its account, ii) that it was obliged to meet margin
calls, and iii) that it had an indebtedness in terms
of the Rules
that rose beyond R739 000 000.00 (seven hundred and thirty nine
million rand);
34
and
Significantly,
as one of its reasons for opposing the application, explained in
great detail why Cortex and Absa were not
in default of the Rules
and why they therefore were not being suspended in terms
thereof.
35
Absa
too opposed the application.
36
Absa made common cause with the JSE.
37
Ukwanda
failed to file any replying affidavit. On 28 July 2009 Absa’s
attorneys set the matter down for hearing on Tuesday
22 September
2009.
38
The JSE’s and Absa’s allegations were not challenged.
Instead, two court days before the hearing, on 17 September
2009,
Ukwanda withdrew its application and tendered the wasted costs.
39
Thus, the allegations made by Absa and Cortex under oath, remained
unanswered.
Issue
2.1: Was the view held by the JSE an administrative act?
Before
analysing the legal requirements for a decision and purely based on
the aforesaid common cause facts, it seems to be quite
clear that
the JSE indeed took a decision to the effect that no default in
terms of the Rules was committed by either Cortex
or Absa. By way of
analogy – if the JSE had held that the conduct of Absa and/or
Cortex did indeed constitute a default
under the Rules, no one would
have contended that the JSE, in so holding, did not take a decision
thereon. It follows that the
conclusion reached by the JSE to the
contrary, equally amounts to a decision on the Ukwanda complaint.
For
a decision to be regarded as “administrative action” in
terms of PAJA, the prerequisites set out in the definition
of this
concept in section 1 of PAJA have to be complied with. In this
regard, section 1 defines “administrative action”
as
follows:
“’
administrative
action
’ means
any decision taken, or any failure to take a decision, by –
An
organ of state, when –
exercising
a power in terms of the Constitution or a provincial constitution;
or
exercising
a public power or performing a public function in terms of any
legislation; or
a
natural or juristic person, other than an organ of state, when
exercising a public power or performing a public function in
terms
of an empowering provision,
which adversely affects the
rights of any person and which has a direct, external legal effect…”
In
order to determine whether there has been administrative action in
casu
the facts must be read against the seven requirements gleaned from
the definition of “administrative action” in PAJA,

namely:
A
decision;
By
an organ of state or a natural or juristic person (this point is
not in issue);
Exercising
a public power or performing a public function;
In
terms of any legislation (or in terms of an empowering
provision);
That
adversely affects rights;
That
has a direct, external legal effect; and
That
does not fall under any of the listed exclusions.
A
Decision
For
the purposes of PAJA “decision” means:
“
any decision of an
administrative nature made
,
proposed to be made, or required to be made, as the case may be,
under an empowering
provision, including a decision
relating to -
making
,
suspending, revoking or
refusing
to make
an order,
award or
determination
;
giving,
suspending, revoking or refusing to give a certificate, direction,
approval, consent or permission;
issuing,
suspending, revoking or refusing to issue a licence, authority or
other instrument;
imposing
a condition or restriction;
making
a declaration
,
demand or requirement;
retaining,
or refusing to deliver up, an article; or
doing
or refusing to do any other act or thing of an administrative
nature
, and a
reference to a failure to taken a decision must be construed
accordingly;” (Emphasis added)
Three
requirements flow from this definition before it can be found that
the JSE’s decision was a “decision”
as
contemplated in PAJA:
First,
it must have been a decision with finality, as opposed to, for
example, a suggestion or a preliminary statement;
Secondly,
it must have been a decision of “an administrative nature”;
and
Thirdly,
the JSE’s decision must have been “made under an
empowering provision”.
First,
the JSE’s refusal to find that Cortex and Absa were in default
constituted a refusal to do something (para (g) of
the definition of
“decision”) and/or a refusal to make a determination
(para (a) of the definition of “decision”).
The JSE’s
decision was final. It was not a suggestion. Nor was it a
preliminary statement.
In
Bhugwan v JSE
Ltd
2010 (3) SA 335
(GSJ) at par [10], [11] and [12] I had occasion to
state guidelines to determine whether a “decision” that
was capable
of review, existed:
“
[10] Having
regard to the aforesaid definitions and authorities, it would seem to
me correct, as submitted by Mr.
Marcus
that for a decision to have been taken which is capable of review,
all or at least some of the following steps must have been completed

in the decision-making process:
Save where
an authority legitimately acts coercively or of its own accord,
a
final application, request or claim
must have been addressed by a subject to an authority which
exercises statutory or public powers to exercise those powers in

relation to a set of factual circumstances applicable to the
subject.
All relevant
information, either presented by the subject or otherwise reasonably
available
must
have been gathered
(which may require an investigative process)
and
placed before the authority
which is to make the decision.
There must
have been an
evaluative
process
where the authority considers all of the information before him or
her, identifies which components of such information are relevant

and which are irrelevant and in which the authority assigns, through
a process of value judgments, a degree of significance to
each
component of the relevant information, regard being had to the
relevant statute or other empowering provision in terms of
which the
authority acts.
A
conclusion
must have been reached by the authority, pursuant to the evaluative
process, as to how his or her statutory or public power should
be
exercised in the circumstances.
There must
have been an
exercise
of the statutory or public power
based on the conclusion so reached.
[11] Ultimately
the facts in each circumstance will have to be evaluated to determine
whether or not the processes referred to above
have been complied
with or to what degree these processes exist, for purposes of
deciding whether an administrative decision had
been taken. When
applied to a set of facts it will be a matter of degree to determine
whether an issue is ripe for review adjudication
on the basis that
the decisional process had been completed. In Baxter
Administrative
Law
1984 page 720 the following is said in regard to the process of
determining whether or not a decision had been taken:
‘
It is
submitted that the appropriate criterion by which the ripeness of the
action in question is to be measured is whether prejudice
has already
resulted or is inevitable, irrespective of whether the action is
complete or not. Once unlawfulness is manifest in
a form which
cannot be corrected no matter how the public authority continues to
act, there is no point in insisting that the complainant
should
continue to go through the motions before bringing the matter to
court.’
[12] Of
importance is for the adjudicator to evaluate the decision-making
process in the context in which it is alleged a decision
was taken.
In
Aktiebolaget
Hässle and Another v Triomed (Pty) Ltd
2003
1 SA 155
(SCA) at para[1] Nugent JA quoted with approval the remark
made by Lord Steyn in
R
v Secretary of State for the Home Department
,
Ex
parte Daly
‘context is everything’. Nugent JA continued:
‘
And so
it is when it comes to construing the language used in documents,
whether the document be a statute, or a contract, or, as
in this
case, a patent specification.’”
The
context in which the action by the JSE in the
Bhugwan
case was decided is, however, substantially different to that which
prevails in the present case. In the present instance there
was
indeed a decision taken whereas in the
Bhugwan
case there was correspondence indicating only that certain
information was “held” by the JSE. Mr du Toit’s

reliance on my judgment in the
Bhugwan
case is therefore misplaced and not apposite to a proper resolution
of the context in which the JSE’s action in the present

instance is to be adjudicated.
Secondly,
the JSE’s decision was “
of
an administrative nature
”:
There
appears to be little judicial content given to the requirement
that the decision concerned must be “of an administrative

nature”. However, in
Sokhela
and Others
v MEC for Agriculture and Environmental Affairs (Kwazulu-Natal)
and Others
2010
(5) SA 574
(KZP) at para 61 Wallis J (as he then was) suggested
that the phrase “of an administrative nature” serves
two
related purposes: i) first, it emphasises that the
identification of administrative action requires a positive
finding
to that effect by the court; and ii) secondly, it ensures
that the diagnosis of administrative action involves a considered

process.
In
the present matter, the JSE made a ruling. There can be no merit
in a suggestion that it was not of an administrative
nature. This
is particularly so if one has regard to the other elements of
“administrative action” dealt with
below.
Thirdly,
it is similarly uncontroversial that the JSE’s decision was
“
made
under an empowering provision
”:
The
definition of “empowering provision” in PAJA is a
very broad one. It means “
a
law, a rule of common law, customary law, or an agreement,
instrument or other document in terms of which an administrative

action was purportedly taken
”.
The
Derivative Rules made in accordance with the Act are the
empowering provision in this instance. It is trite that the

Rules give rise to both a public (administrative law)
40
dimension and a private (contract law) dimension.
41
In
my view and
in
the face of Uwkanda’s request
to
declare Cortex and Absa in default and have them suspended in terms
of the Rules,
the JSE’s repeated, final and unequivocal refusal to do so,
constituted a
decision as contemplated in PAJA.
The
JSE was exercising a public power performing a public function
As
demonstrated above, with reference to
Dawnlaan
Beleggings (Edms) Bpk v Johannesburg Stock Exchange
1983
(3) SA 344
(W) at 364H–365A (approved by the then Appellate
Division in
Johannesburg
Stock Exchange v Witwatersrand Nigel Ltd
1988 (3) SA 132
(A)
at 152E–I), the JSE as a statutory body exercises public power
or performs a public function because it is under a statutory
duty
to act in the public interest.
A
key purpose of the JSE in overseeing and implementing the Rules is
to ensure the integrity of the market. In doing so, it acts
for the
public good and in the public interest. Therefore, in considering
Ukwanda’s complaint by evaluating it in terms
of the Rules,
and responding thereto, the JSE was classically exercising a public
power and/or exercising a public function.
The
JSE’s decision was taken in terms of an empowering provision
As
demonstrated above, in meeting the definition of “decision”
in PAJA, the JSE acted “under an empowering provision”.

The reference to an ‘empowering provision’ is repeated
in the definition of ‘administrative action’.
This
element of the definition of ‘administrative action’ has
accordingly already been established.
The
JSE’s decision adversely affects rights and has a direct,
external legal effect
In
Grey’s
Marine Hout Bay
(Pty)
Ltd
v Minister of Public Works
[2005] ZASCA 43
;
2005 (6) SA 313
(SCA) at par
[23]
Nugent JA held as follows:
“
While
PAJA’s definition purports to restrict administrative action
to decisions that, as a fact, ‘adversely affect
the rights of
any person’, I do not think that literal meaning could have
been intended. For administrative action to be
characterised by its
effect in particular cases (either beneficial or adverse) seems to
me to be paradoxical and also finds no
support from the construction
that has until now been placed on s 33 of the Constitution.
Moreover, that literal construction
would be inconsonant with s
3(1), which envisages that administrative action might or might not
affect rights adversely. The
qualification, particularly when seen
in conjunction with the requirement that it must have a ‘direct
and external legal
effect’, was probably intended rather to
convey that administrative action is action that has the capacity to
affect legal
rights, the two qualifications in tandem serving to
emphasise that administrative action impacts directly and
immediately on
individuals.”
This
dictum and the broad approach it entails, was subsequently referred
to with approval by the Constitutional Court.
42
On
the present facts, the JSE’s refusal to find that Cortex and
Absa were in default and suspend them, had the capacity
to affect
Ukwanda’s legal rights and thus impacted on Ukwanda as
contemplated in PAJA.
Conclusion
The
JSE’s decision did not fall under any of the listed exclusions
in the definition of “administrative action”.
Therefore,
I am satisfied that the JSE’s decision on the facts of this
case meets all the elements for classifying it as
“
administrative
action
” as
defined in PAJA.
Issue
2.2: If the JSE’s decision constitutes “administrative
action”, can Ukwanda challenge such administrative
action in
these proceedings?
In
light of my finding that JSE’s conduct constituted
administrative action, I
now
consider the manner in which Ukwanda seeks to attack such
administrative action.
It
is common cause that Ukwanda and its controller/s chose not to –
review
the JSE’s administrative action in terms of rule 53 of the
Uniform Rules of Court and thereby seek to have
it declared
invalid and set aside;
pursue
any of its/their statutory remedies in terms of
inter
alia
section 93
of the then applicable Security Services Act 36 of 2004; and
proceed
with Ukwanda’s application seeking, i) declaratory relief
that Cortex and Absa were in default of the Rules,
and ii) the
issue of a rule nisi calling on the JSE to show cause why the
consequences of default set out in Rules 12.30
and/or 12.40
should not be implemented against Absa.
Instead,
Ukwanda and its controller/s have sought to challenge the JSE’s
administrative action in an indirect manner. They
seek to have this
court, in a dispute purely between two private parties and where the
JSE is not a party to this litigation,
overturn the JSE’s
administrative action. In my view, they are precluded from doing so
by law. It is settled law that administrative
decisions stand until
they are set aside by a court, and outside of direct review
proceedings the circumstances in which a party
may indirectly or
collaterally challenge the validity of administrative action are
narrow.
43
In
Oudekraal Estates
(Pty) Ltd v City of Cape Town and Others
2004 (6) SA 222
(SCA) at par [35] it was held that
“…a
collateral challenge to the validity of the administrative act will
be available, in other words, only ‘if
the right remedy is
sought by the right person in the right proceedings’”.
Generally, this is where an administrative authority seeks to
coercively enforce an invalid act against the party challenging
the
validity of that act.
In
V
&
A
Waterfront Properties (Pty) Ltd and Another v Helicopter &
Marine Services (Pty) Ltd and Others
2006
(1) SA 252
(SCA) at 255F (para 10), the Supreme Court of Appeal per
Howie P was faced with the applicability of a
“collateral
challenge”
in circumstances where in a contractual dispute between two private
parties, one of the parties sought as part of its defence
to
collaterally challenge an administrative decision issued by a
regulator who was not before the court. The SCA refused to permit

such an attack on the administrative decision and
held
as follows:
“
[10]
The defence which the respondents sought to raise in this respect has
sometimes been called '
collateral
challenge
'.
Its applicability was examined and explained by this court in
Oudekraal
Estates (Pty) Ltd v City of Cape Town and Others
.
In brief, it
is
applicable in proceedings where a public authority seeks to coerce a
subject into compliance with an unlawful administrative
act.
If these proceedings are not of that nature then the grounding order
[the administrative decision sought to be challenged
collaterally]
will have legal effect until set aside by a reviewing Court
”
(Emphasis added).
The
decision in
V
&
A
Waterfront Properties
was
taken on appeal to the Constitutional Court, specifically on the
point that the SCA had stated the scope of collateral challenge
too
narrowly by insisting that it arise only where a public authority
seeks to coerce a subject into compliance with an unlawful

administrative act. The Constitutional Court upheld the SCA’s
decision and dismissed the application for leave to appeal,
holding
that it was unnecessary to decide the question of whether the scope
of collateral challenge set out by the SCA was too
narrow.
44
Significantly, the Constitutional Court held that even if the
doctrine of collateral challenge was more widely framed as sought
by
the applicants in that case, this would not assist them because they
had the alternative remedy of reviewing and setting aside
the
decision of the regulator, which they chose not to use.
45
The
SCA decisions in
Oudekraal
and in
V
&
A
Waterfront Properties
have been followed in numerous decisions.
46
More
importantly,
the
facts
and the circumstances in
V
&
A
Waterfront Properties
are in principle identical to the present matter. Ukwanda seeks to
collaterally challenge the JSE’s administrative action
in a
dispute between two private parties, which dispute the JSE is not
even privy to, and where there is no coercion by any public

authority (no matter how widely one conceives of that concept)
against Ukwanda or anyone else for that matter. The circumscribed

concept of collateral review does not, therefore, apply in the
present circumstances.
Furthermore,
even if I was inclined to consider broadening the concept of
collateral review, that would not assist Ukwanda. As
demonstrated
above, Ukwanda had several remedies at its disposal to vindicate its
rights, including judicial review. It elected
to withdraw its review
application on the eve of the hearing thereof, and not to proceed
with its other remedies. In these circumstances,
as illustrated
above by the Constitutional Court decision in
V
&
A
Waterfront Properties
,
47
any widening of the concept of collateral review cannot assist
Ukwanda.
Therefore,
the JSE’s decision which constitutes “administrative
action” under PAJA cannot be indirectly challenged
by Ukwanda
in these proceedings. In other words, this court must accept that
Cortex and Absa were not in default and were not
suspended in terms
of the Rules.
I
conclude that Ukwanda’s allegations and assertions to the
contrary are dismissed. For these reasons Ukwanda’s
counterclaim must fail and Absa’s claim must succeed.
If,
however, I am incorrect in the aforesaid conclusion, I was
specifically asked by counsel to decide the next issue mentioned
in
item 2.3 of the stated case.
Issue
2.3: If the JSE’s decision does not constitute “administrative
action”, was Cortex in default as provided
for in Derivative
Rule 12?
Section
2 of the Rules defines ‘default’ to mean a default by a
client or member, as contemplated in DRD12. DRD12.10.1
provides that
a member shall default if he fails to fulfil any of his obligations
in terms of a
“trade
or a position
”.
48
Upon
a proper construction of DR 12.10.1, read with the definition of
‘trade’ and ‘position’, any obligation
which
a trading member (Cortex in this case) may have towards its client
(Ukwanda in this case), such as to pay any amount standing
to the
credit of the account maintained by the member at a bank in relation
to such client, is not an obligation in terms of
a trade or a
position. An obligation in terms of a trade or a position is an
obligation owed by the client to the counterparty,
i.e. the seller,
where the client has bought securities or taken a long position, or
to the buyer, if the buyer has sold securities
or taken a short
position.
49
An obligation in terms of a trade or position does not arise in
relation to a member unless the member himself has, for his own

account, a trade or position.
50
In fact, Cortex was never suspended from trading. This is admitted.
In
any event, the suspension of a trading member from trading does not
occur automatically, but is required to be effected by
the JSE
Executive Committee.
51
Absa never in its capacity as clearing member stepped into the shoes
of Cortex, and Ukwanda never became a client of Absa.
52
As
indicated earlier, paragraphs 48, 49 and 50 of the opening address
by Mr Harris has been admitted as factually correct. This
means that
the requirements for a default have to be seen in the light of those
practices and the applicable Rules. I cannot
fault the practical
implementation by the JSE of these Rules as explained in the opening
address of Mr Harris.
Rule
12.10.1 provides that a member (which includes a trading member and
a clearing member) shall be in default
inter
alia
if “
he
fails to fulfil any of
his
obligations
in
terms of a trade or position
”
(emphasis added). In
section 2:
a
“
trade
”
is defined as meaning “
to
buy or to sell securities...
”;
a
“
position
”
is defined as meaning “
either
a long or a short position
”;
a
“
long
position
”
is defined as meaning –
“
a number of exchange
contracts registered by the clearing house in the name of a member or
client in terms of which –
in
relation to futures contracts, the member or client is obliged to
take delivery of the underlying instrument from the seller
at the
agreed price on a future date; or to pay an amount of money to the
seller if, on the future date, the price or value of
the underlying
instrument is less than the agreed price; or
…
;”
and
A
“
short
position
”
is defined as meaning –
“
a number of derivatives
exchange contracts registered by the clearing house in the name of a
member or client in terms of which
–
In
relation to futures contracts, the member or client is obligated to
make delivery of the underlying instrument at the agreed
price on a
future date or to pay an amount of money if, on the future date, the
price or value of the underlying instrument is
greater than the
agreed price; or
…”
(The
references to a “member” are to a member who has taken a
proprietary position for his own account, as appears from
the words
“
registered by
the clearing house in the name of a member…
”)
As
appears from above, it is clear that the concept of a default in the
Act and the Rules has a specified and defined meaning
which is
divorced from the normal meaning of default in contractual and legal
terminology. The obligations incurred by a client
who trades or
opens a position, are obligations towards the counterparty, i.e. to
the seller where the client has bought securities
or taken a long
position, and to the buyer if the client has sold securities or
taken a short position. As between the client
and the trading member
to whom he has given a mandate to trade or open a position on his
behalf, there is no “
trade
”
and no opening of a “
position
”.
Hence, if there is, as between the trading member and his own
client, any failure of either the trading member or the
client to
fulfil his obligation towards the other, such failure may constitute
a contractual breach in terms of their agency
contract, but it
cannot be a failure to fulfil his obligations “
in
terms of a trade or position
”
as envisaged in DRD12.
The
obligation to render performance on the future date under a “
trade
”
or “
position
”
as set out above is not the only obligation of the client who trades
or takes a position, towards the counterparty. Because
of the high
risks involved in the derivative market, as set out above, a client
is also required to make margin payments (initial
margin, variation
margin and (possibly) additional margin) which are designed to
ensure that he meets his obligations towards
the counterparty. These
obligations, being obligations of a client towards a counterparty,
are obligations “
in
terms of a trade or position
”,
as envisaged in DRD 12.10 and DRD 12.10A.
In
the absence of any failure to fulfil any obligations towards a
counter party by Cortex (the trading member) or by Absa (the

clearing member), there can be no default as contemplated in the
Rules by either of them. This is so because there had been
no
failure by any member “
to
fulfil any of his obligations in terms of a trade or position
”
as envisaged in DR12.10.1. In other words, any failure by Cortex to
pay the defendant the R5 million requested (even
if it were a valid
obligation) does not involve Cortex or Absa’s failure to
fulfil any obligation to any counterparty to
any trade with Ukwanda.
Furthermore, it does not involve any contraventions of obligations
incurred by Cortex in relation to
a “
trade
or position
”
of Cortex’s
counterparty i.e. in relation to Cortex’s
own
trades
(i.e. trades
by Cortex for its own account). Therefore, the alleged failure by
Cortex to pay the defendant the R5 million could
not constitute a
default as envisaged by DR 12.10.1 and could not provide any ground
for suspension of Cortex as alleged by Ukwanda.
Thus, if Cortex
could not be suspended, Absa could also not be suspended for the
same alleged failure.
I
agree with Mr Harris’ argument that Ukwanda’s version of
what constitutes default in terms of DRD 12.10.1 is commercially
and
practically unviable. It is not adopted or applied by the JSE. It
would lead to absurdity and undermine, rather than promote,
the
integrity of the market for the following reasons:
Ukwanda’s
contention assumes that every breach of the Rules constitutes a
default. In other words, on such a construction,
if Cortex’s
failure to pay Ukwanda the requested R5 million constituted a
breach of the Rules then this was a default
in terms of
DRD12.10.1. This construction is incorrect. This is because
default in terms of DRD12.10.1 is limited
to contraventions of
obligations incurred by a member: i)
in relation
to a counterparty
(which arises from a “
trade
or position
”)
and ii)
in respect
of that member’s own proprietary position
(i.e. the member’s own trade or position), neither of which
occurred.
Further
and in any event, Ukwanda’s construction is that the
default occurs and that the consequences therefrom flow

immediately and automatically with effect from the time of such
breach of the rules (assuming this to constitute a default).
This
is not the case. In the event of a default of DRD12.10.1, the
consequences of such default is set out in DRD 12.30
(i.e.
whereby the clearing member steps into the shoes of the member
and takes over all its positions and trades) can only
commence
once the relevant practical steps required to be taken have been
taken as described above.
In
addition, Ukwanda’s assertions assume that in the event of
a default under DRD12.10.1 the consequences of
DRD12.30 flow
(essentially that the clearing member steps into the shoes of the
member) only in relation to a particular
position. However, this
is incorrect. The consequences of such default set out in
DRD 12.30 are far more severe with
wide ranging practical
ramifications – the clearing member steps into the shoes of
the member and takes over all
of its positions and trades i.e.
its entire book. In the present instance, because Cortex had in
excess of a 1000 clients,
had there been a default by Cortex this
process would have taken a considerable period of time in excess
of several days,
if not lasting weeks to unravel.
CONCLUSION
For
the reasons set out above I am also of the view that issue 2.3 must
be answered in favour of the Absa.
Having
come to the conclusions that question
2.2
and
2.3
of
the stated case are answered in favour of Absa, it became
unnecessary to answer the remaining questions
2.4
and
2.5
.
I therefore make the following order:
The
defendant’s counterclaim is dismissed with costs, including
the costs occasioned by the employment of two counsel.
The
defendant is ordered to pay the plaintiff the sum of
R732 191 068.00.
Interest
on the aforesaid amount at the rate of 15.5% per annum
a
tempore morae
from
10 December 2008 to date of final payment.
Costs
of suit, including the costs occasioned by the employment of two
counsel.
DATED
THE 9
th
DAY OF September 2013 AT JOHANNESBURG
__________________
C.
J. CLAASSEN
JUDGE
OF THE HIGH COURT
Counsel
for the Plaintiff: Adv L. N. Harris SC
Adv
F. Ismail
Counsel
for the Defendant: Adv J. du Toit SC
Attorney
for the Plaintiff: Webber Wentzel
Attorneys
for the Defendant: Veneziano Inc
The
trial commenced on 21 August 2013 to 22 August 2013 and 26 August
2013
1
PM
Johnson & TL Hazen,
Commodities
Regulation
(2nd ed, Little Brown and Company, 1989) Volume III at p. 155. As a
matter of interest, the Enron scandal in America occurred
as a
result of Enron trading energy futures.
2
In terms of the definitions
section 1
of the
Securities Services Act
36 of 2004
derivative instruments means any (a) financial
instrument; or (b) contract, that creates rights and obligations and
that derives
its value from the price or value, or the value of
which may vary depending on a change in the price or value, of some
other
particular product or thing.
3
In paragraph (a)(3) of the definition of “securities”,
derivative instruments are also included as a security.
4
In the
United Kingdom similar rules were made by “
The
International Swaps and Derivatives Association”
(ISDA).
5
Pleadings Bundle pp. 31 – 135
6
The term “close out” is defined in section 2 of the DRD
Rules as meaning: “
The
cancellation of a position in one direction with an equal and
opposite position (e.g. a long position in an exchange contract
is
cancelled by a short position in the same exchange contract
.”
The term “
position
”
is defined as meaning, “
either
a long position or a short position
.”
The terms “
long
position
” and “
short
position
” are
defined in section 2 of the Rules as follows:
“
Long
position means a number of exchange contracts registered by the
clearing house in the name of a member or client in terms
of which –
in
relation to futures contracts, the member of the client is obliged
to take delivery of the underlying instrument from the
seller at
the agreed price on the future date; or to pay an amount of money
to the seller if on the future date, the price
or value of the
underlying instrument is less than the agreed price; or
in
relation to option contracts, the member or client has the right to
buy or sell the underlying instrument of the option contract
at the
agreed price on or before the future date.
”
“
Short
position means a number of derivatives exchange contracts registered
by the clearing house in the name of a member or client
in terms of
which –
in
relation to futures contracts, the member or client is obliged to
make delivery of the underlying instrument at the agreed
price on a
future date or to pay an amount of money if on the future date, the
price or value of the underlying instrument
is greater than the
agreed price; or
in
relation to option contracts, the member or client has granted the
right to another person to buy or sell the underlying
instrument of
the option contract at the agreed price on or before the future
date
.”
7
See DRD rule 8.60.1 in the Pleadings Bundle p. 96 where “
initial
margin
” is defined
as: “
Initial margin
shall be paid to or by a member or client whenever the risk of loss,
as determined by the JSE, changes with respect
to the aggregate
position of such member or client.
”
8
See DRD rule 8.60.3 where “
additional
margin
” is defined
as:
“
8.60.3.1 A clearing member
may require a trading member with whom he has entered into a
clearing agreement to deposit with him,
with respect to the
propriety position of the trading member or the position of any of
the clients of the trading member, an
amount of additional margin
equal to a factor of the initial margin kept by the clearing house
with respect to such position
as agreed to in writing between the
clearing member and trading member.
8.60.3.2 A member may require a
resident client to deposit with him, with respect to the resident
client’s position, an
amount of additional margin equal to a
factor of the initial margin kept by the clearing house, with
respect to the said positions,
as agreed to in writing between the
member and the client.”
See Pleadings Bundle, p. 96-7
9
Valuing a
transaction according to fluctuations in the market is known as
“
marking
to market”.
Margin usually has to be provided on very short notice, and
sometimes several times in the day if prices are falling rapidly.
10
See also a
similar explanation of the system in
First
Financial Futures
supra
paragraphs (a) to (m) at pages 2 to 5
11
Pleadings Bundle p. 96
12
Pleadings Bundle p. 96
13
Pleadings Bundle p. 96
14
Rules 8.90.1 – 8.90.7; Pleadings Bundle p. 98
15
Rule 8.50; Pleadings Bundle p. 96
16
Annexure “C” in Pleadings Bundle p. 136; Annexure “E”
in Pleadings Bundle p. 140; Annexure “H”
in Pleadings
Bundle p. 143
17
Ukwanda’s Counterclaim, Pleadings Bundle pp. 213 – 213.1
par 33 and 34; pp. 214 – 214.1 par 37 – 39.5
18
Ukwanda’s Counterclaim, Pleadings Bundle pp. 217.2 –
217.3 par 52.1 – 52.4
19
Pleadings Bundle p. 110. Rule 11.50 states: “
A
member who gives any relaxation or indulgence to a client regarding
the payment of margin, whether initial margin, variation
margin or
additional margin, shall be deemed to have granted the client a loan
repayable on demand in the amount of the shortfall
for the period of
the relaxation or indulgence at a rate of interest specified in the
client agreement between them…and
the member shall, if such
loan is for a period exceeding two business days, immediately inform
the client thereof in writing.”
20
Core Bundle
p. 1190
21
Core Bundle
p. 1190 par 2 - 5 – there was an additional complaint
contained in the letter relating to allegations of market

manipulation which is not relevant to these proceedings and may be
disregarded.
22
Core Bundle
p. 1190 par 5
23
Core Bundle
p. 1212 par 2
24
Core Bundle
p. 1213 par 3
25
Core Bundle
pp. 1215-6
26
Core Bundle
p. 1223 par 1
27
Core Bundle
p. 1223 par 3
28
C
ore Bundle
pp. 1223-4 par 7 – 9
29
Core Bundle p. 1129 par 1 – 2
30
Core Bundle p. 1130 par 3
31
Core Bundle p. 1226
32
(i) Core Bundle p. 1344 par 4 (the application constitutes an
abuse); (ii) Core Bundle p. 1345 par 5 (the powers under Rule 12
are
exercisable solely in the public interest and are not enforceable at
the instance of private parties); (iii) Core Bundle
p. 1346 par 6
et
seq
(Ukwanda has no
locus
standi
), and (iv) Core
Bundle p. 1351 par 7
et seq
(Cortex and Absa were not in default in terms of the Rules)
33
Core Bundle pp. 1344-5 par 4; Core Bundle p. 1348 par 6.3.1
34
Core Bundle
p. 1341 par (g) and (h); Core Bundle p. 1348 par 6.3.1
35
Core Bundle p. 1351 par 7
et
seq
36
Core Bundle
p. 1228
37
Core Bundle
p. 1242 par 42.8
38
Core Bundle
p. 1122.2
39
On the eve
of the previous hearing date of this trial in March 2012 and without
any notice Ukwanda commenced business rescue proceedings,
thus
scuppering the trial. Absa brought an application to have those
business rescue proceedings set aside as an abuse. However,
just a
day before the hearing date of Absa’s application to have the
business rescue proceedings set aside as an abuse,
the business
rescue proceedings were withdrawn. All of this is undisputed.
Moreover, it occurs in circumstances where on Ukwanda’s
own
version it is a shell of a company which is being drip-fed funds by
an entity managed and controlled by Jac De Beer who happens

presently to also be Ukwanda’s sole director.
40
In
Dawnlaan
Beleggings (Edms) Bpk v Johannesburg Stock Exchange
1983
(3) SA 344
(W) at 364H–365A the court was asked to review the
JSE’s failure to comply with its own listing requirements. The
JSE was not a statutory body and there was no contractual
relationship between it and the applicant. However, Goldstone J
decided
that its decision was reviewable because the JSE was under a
statutory duty to act in the public interest. In arriving at this

conclusion Goldstone J took into account the important public
function performed by the exchange. This approach was approved
by
the then Appellate Division in
Johannesburg
Stock Exchange v Witwatersrand Nigel Ltd and Another
1988 (3) SA 132
(A) at 152E–I.
41
In
Herbert
Porter & Co Ltd v JSE
1974 (4) SA 781
(W) at 788C, Coetzee J held that the relationship
between a listed company and the JSE was contractual in nature. He
held further,
with reference to the Stock Exchange Control Act 7 of
1947 that the stock exchange was (at 791E-F) that the JSE was not a
statutory
body even though it must conform to certain standards laid
down in that Act.
The JSE has made
exchange rules in accordance with the then applicable
section 18
of
the
Securities Services Act 36 of 2004
(now repealed) (“the
Act”), which rules relate to transactions in “listed
securities” which include “derivative
instruments”
as defined in section 1 of the Act.
By virtue of section
18(4) of the Act, such exchange rules are binding on an exchange, an
authorized user, an issuer and their
officials and employees and on
clients as defined in section 1 of the Act. A client is defined in
section 1 of the Act to mean
any person who uses the services of an
authorized user or a participant, as the case may be.
On 1 August 2005, the
JSE made rules, in accordance with the Act, relating specifically to
derivative instruments. A copy of these
rules is the named
“Derivatives Rules and Directives”, as amended and
applicable at the time relevant to the present
action, and appearing
as annexure “B” to the Particulars of Claim (“the
rules” or “DR”) (PB
31-135).
42
Joseph
v City of Johannesburg
and
Others
2010 (4) SA 55
(CC)
(2010 (3) BCLR 212)
at par 27, and
Viking
Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems
(Pty) Lt
d
and
Another
2011 (1) SA 327
(CC) at par 37
43
See
Oudekraal
Estates (Pty) Ltd v City of Cape Town and Others
2004 (6) SA 222
(SCA) at para 35;
V
& A Waterfront Properties (Pty) Ltd and Another v Helicopter &
Marine Services (Pty) Ltd and Others
2006 (1) SA 252
(SCA) at 255F
44
Helicopter
& Marine Services (Pty) Ltd and Another v V & A Waterfront
Properties (Pty) Ltd and Others
[2005] ZACC 21
;
2006 (3) BCLR 351
(CC) at para 5
45
Helicopter
& Marine Services (Pty) Ltd and Another v V & A Waterfront
Properties (Pty) Ltd and Others
[2005] ZACC 21
;
2006 (3) BCLR 351
(CC) at par 7
46
Club
Mykonos Langebaan Ltd v Langebaan Country Estate Joint Venture and
Others
2009
(3) SA 546
(C) at par 38,
Offit
Enterprises (Pty) Ltd v Coega Development Corp (Pty) Ltd
2009
(5) SA 661
(SE) at 672G – J
47
Helicopter
& Marine Services (Pty) Ltd and Another v V & A Waterfront
Properties (Pty) Ltd and Others
[2005] ZACC 21
;
2006 (3) BCLR 351
(CC) at par 7.
48
Sub-Rules 12.10.2 and 12.10.3 are not relevant to Ukwanda’s
allegations
49
See again
exhibit “I”
50
Absa’s Replication to Ukwanda’s Plea, Pleadings Bundle
p. 252 par 8A, 8A.2, 8A.3
51
Absa’s Replication to Ukwanda’s Plea, Pleadings Bundle
p. 252 par 8A.4 and 8A.5
52
Pleadings Bundle p. 253 par 8A.6