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[2016] ZAGPJHC 212
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Cuba N.O and Others v Holoquin Global (Pty) Limited and Others (28613/14) [2016] ZAGPJHC 212; [2016] 4 All SA 77 (GJ) (19 February 2016)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA,
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 28613/14
DATE:
19 FEBRUARY 2016
In
the matter between:
CUBA,
VULINDLELA WILSON
N.O
...........................................................................
First
Applicant
WAINER,
HARVEY ELLIOT
N.O
............................................................................
Second
Applicant
NEVHUTALU,
LUFUNO LESLIE
N.O
......................................................................
Third
Applicant
And
HOLOQUIN
GLOBAL (PTY)
LIMITED
.................................................................
First
Respondent
BEN-ISRAEL,
PAUL
JUSTIN
................................................................................
Second
Respondent
BUTKOW,
CLIVE
......................................................................................................
Third
Respondent
J
U D G M E N T
RUBENS,
AJ
:
[1]
The first, second and third applicants are the trustees of the
Vulindlela Family Trust (“
the
Trust
”). The Trust claims payment
of an amount R2 million from the first, second and third respondents
jointly and severally, the
one paying the others to be absolved.
[2]
For convenience I shall refer to the first applicant as Cuba, to the
second and third applicants as such, to the first respondent
as
Holoquin, to the second respondent as Ben-Israel and to the third
respondent as Butkow.
[3]
Ben-Israel is the sole director of Holoquin. While Butkow
acknowledges that he informed Cuba on 3 February 2014, that he was
a
director and joint CEO of Holoquin, he is in fact not a director of
the company. Whether or not he is a joint CEO of the
company is
unclear but nothing turns on this.
[4]
The claim against Holoquin arises out of a Share Subscription
Agreement between the Trust and Holoquin (“
the
Subscription Agreement
”) which
the Trust alleges was lawfully cancelled by it with the result that
Holoquin “…
has
[
sic
]
obligation to make restitution of what
it has received in terms of the agreement
”.
[5]
The claim against Ben-Israel and Butkow is founded upon an alleged
warranty that all information and documentation provided
by them to
the Trust was true and accurate. They are alleged to be jointly
and severally liable to pay the sum of R2 million
to the Trust
consequent upon their breach of the warranty. In the
alternative, it is alleged that the warranty amounted to
representations which were false to their knowledge and that they are
accordingly delictually liable to pay the Trust’s damages
in
the sum of R2 million. Such liability on their part is also
alleged to be joint and several with that of Holoquin.
[6]
Holoquin, Ben-Israel and Butkow have raised a number of special
defences in answer to the claims advanced by the Trust.
These
are the following:
6.1
The Trust is not properly before the court as there is no evidence
in the founding affidavit that the second and third applicants
have
authorised Cuba to conduct the litigation on behalf of himself and
the second and third applicants in all of their names or
that the
second and third applicants join in the litigation through their own
participation (“
the first
authority defence
”).
6.2
The Subscription Agreement provides for disputes between the parties
in relation to the Subscription Agreement to be referred
to
arbitration (“
the arbitration
defence
”).
6.3
There was no proper resolution or decision of the joint trustees in
accordance with the Trust Deed which authorised Cuba to
address the
letter of demand calling upon Holoquin to perform its obligations
under the Subscription Agreement or the letter of
cancellation of the
Subscription Agreement (“
the
second authority defence
”).
[7]
I will first deal with the first and second authority defences before
I deal with the claims advanced by the Trust.
[8]
It is trite that the general rule is that the trustees of a Trust
must join in suing (Cameron, Honoré’s “
South
African Law of Trusts
” fifth
edition p322, para 197 and the authorities cited in footnote 454 and
para 256 p419). While it may be possible
for a trustee to
execute a power of attorney to a fellow trustee to conduct litigation
if authorised by the Trust Deed, the trustee
so authorised is not
substituted for the trustee granting the power of attorney in suing.
All trustees must still sue and
represent the Trust. All that
the authorisation effects is that one trustee may conduct the
litigation on behalf of himself
and the trustee who has authorised
him to do so, in both their names (see
Lupacchini
N.O. & Another v Minister of Safety & Security
2010 (6) SA 457
(SCA) para [2] at 459 D-E).
[9]
The contention is that there is no evidence in the founding
affidavit that the second and third applicants have authorised
Cuba
to conduct the litigation on behalf of himself and the second and
third applicants in all of their names or that the second
and third
applicants join the litigation through their own participation.
All that is stated in the founding affidavit is
that Cuba is
authorised by the second and third applicants to represent the Trust
in the litigation.
[10]
It is further contended that the attempt to cure this “
defect
”
in the replying affidavit by annexing a resolution passed by the
trustees on 9 May 2014 does not pass muster as the resolution
does
not authorise Cuba to conduct the litigation on behalf of himself and
the remaining trustees against Ben-Israel and Butkow.
[11]
Finally it is contended that in so far as Cuba relies on informal
ratification by the trustees for Cuba to conduct the litigation
against Ben-Israel and Butkow on behalf of himself and the remaining
trustees, the Trust Deed does not permit informal ratification.
Reliance is placed on clauses 10 and 11 of the Trust Deed which it is
submitted require all decisions of the trustees regarding
or arising
from the Trust Deed are required to be made by way of majority vote
taken at a properly constituted and quorate meeting
of the trustees.
This did not occur and, in any event, attempted ratification after
institution of the application is ineffectual
(see
Van
Der Westhuizen v Van Sandwyk
1996 (2)
SA 490
(W) at 494J-495E).
[12]
In my view there is no merit in these contentions:
12.1
Cuba expressly alleges in the founding affidavit that he is duly
authorised by his co-trustees to represent the Trust in the
litigation. This is challenged in the answering affidavit on
the ground that it constitutes hearsay. The challenge
is
misguided. The allegation is not hearsay as Cuba would have
personal knowledge of the authorisation. There is no suggestion
that
Cuba’s allegations are untrue.
12.2
In response to the challenge regarding Cuba’s authorisation the
second and third applicants deposed to affidavits which
are attached
to the replying affidavit in which they confirm that they reviewed
and approved the founding affidavit before it was
deposed to by
Cuba. None of the trustees has suggested that the authorisation
was not valid because it was not taken at a
properly constituted
quorate meeting of the trustees. It is not disputed that the
applicants are all of the trustees of the
Trust nor is it suggested
that the Trust Deed does not confer a power on the trustees to
resolve to institute the litigation.
12.3
Clauses 10 and 11 of the Trust Deed do not invalidate “
informal
”
resolutions of the trustees. In terms of clause 10.2 all
decisions of the trustees regarding and arising from the
Trust Deed
shall be by way of majority vote. In terms of clause 11 a
quorum for meetings of trustees shall be two trustees
and the
trustees are empowered to regulate their meetings and the manner in
which they are convened as they deem fit. There
is no
requirement of formality regarding how the remaining trustees should
signify their association with the action so long as
adequate proof
is provided that the litigating trustee was properly authorised from
the outset to act on behalf of all the trustees.
(See Cameron, Honoré
“
South African Law of Trusts
”
ibid
and
the authority cited in footnote 457.) The affidavits deposed to by
the second and third applicants constitute adequate proof
that Cuba
was properly authorised from the outset to act on their behalf.
[13]
In my view, the contention that there was no proper resolution of
the trustees in terms of the Trust Deed which authorised
Cuba to
despatch the letter of demand calling upon Holoquin to perform its
obligation under the Subscription Agreement and the
letter of
cancellation of the Subscription Agreement is also without merit:
13.1
Cuba alleges in the founding affidavit that he delivered a notice to
Holoquin on 24 January 2014 calling upon Holoquin to remedy
its
breaches of the Subscription Agreement and that he also hand
delivered the notice to Ben-Israel and Butkow. A copy of
the
letter is annexed to the founding affidavit.
13.2
The submissions in the respondents’ heads of argument prepared
by Mr L N Harris SC, who also appeared for the respondents
at the
hearing of this application, are again that the Trust Deed provides
that all decisions of the trustees regarding or arising
from the
Trust Deed shall be by way of majority vote at a properly constituted
quorate meeting of the trustees and that Cuba does
not allege that
the decision to give notice to remedy the alleged breaches was made
by any trustee other than himself nor is there
any mention of a
resolution of the trustees in the letter itself.
13.3
There is no suggestion that the Trust Deed does not confer the power
on the trustees to resolve to call upon Holoquin to remedy
its
breaches of the Subscription Agreement. This case is for that
reason distinguishable from
Edinburg
v Mercantile Credit (Pvt) Ltd
1980 (1) SA 744
(ZR) which is relied upon by Mr Harris SC. In
that case the court found that the trustee concerned did not have the
power
in terms of the Trust Deed to bind the Trust as a surety in her
own interest. This is consistent with the passage in Cameron,
Honoré “
South African Law
of Trusts
” at paragraph 198 pages
324 to 325 which is also relied upon by Mr Harris SC. All that
is there stated by the learned
authors is that “
The
suggestion that the ambit of the authority conferred by the trust
deed is a matter of ‘internal management’ with
which
outsiders need not concern themselves is contrary to both principle
and authority and must be discountenanced.
”
13.4
The letter calling upon Holoquin to remedy its breaches of the
Subscription Agreement is signed by Cuba “
For
The Vulindlela Family Trust
” and
asserts that:
“
1.
The above agreement was entered into in good faith between The
Vulindlela Family Trust … (Vulindlela) and Holoquin Global
(Pty) Ltd … (Holoquin).
2.
Various clauses of the agreement have been breached by Holoquin in
particular Clauses 4.2, 4.3.10 and 4.3.11.
3.
Mr Vulindlela W Cuba representing Vulindlela has displayed patience
in waiting for the fulfilment of all clauses of the agreement
without
success.
4.
In terms of clause 4.3.12 of the agreement, Vulindlela reserves the
right to cancel this agreement in terms of Clause 6.
5.
In terms of Clause 6 of the agreement Vulindlela hereby gives a
written notice to Holoquin to remedy all the breaches of the
agreement.
6.
If the breaches are not remedied after 14 days, Vulindlela will
regard the agreement as cancelled, and expect the repayment of
the
invested capital in terms of Clause 6.
”
13.5
Ben-Israel responded to the notice in an email addressed to Cuba on
5 February 2014 in which he sought a meeting to discuss
the way
forward. He did not question Cuba’s authority to address
the demand on behalf of the Trust which is precisely
what the letter
of demand indicates that Cuba did. Cuba’s alleged lack of
authority is raised for the first time in
the answering affidavit in
which it is also alleged that Holoquin responded to the demand by
allegedly remedying its breach.
13.6
The allegations in the founding affidavit are sufficient to
constitute prima facie evidence that Cuba was duly authorised
to
address the letter of demand on behalf of the Trust. There is
nothing to suggest that he would have taken an important
step such as
this in the name of the Trust without having been duly authorised by
his co-trustees to do so and I again refer to
the affidavits deposed
to by the second and third applicants.
13.7
In so far as the letter cancelling the Subscription Agreement is
concerned, Cuba expressly alleges in the founding affidavit
that he
prepared the letter after consulting with his fellow trustees.
The opening paragraphs of the letter, a copy of which
was attached to
the founding affidavit, read as follows:
“
1.
On 24 January 2014 The Vulindlela Family Trust (VFT) gave a written
notice to Holoquin Global (Pty) Ltd (HQ) in terms of Clause
6 of the
agreement to remedy all breaches specified in the notice.
2.
On 13 February 2014, the notice period of 14 days expired, and HQ has
failed to remedy the breaches.
3.
In terms of Clause 6 of the agreement VFT hereby cancels the
agreement.
”
13.8
In my view this again affords prima facie proof of Cuba’s due
authorisation to address the letter of cancellation on
behalf of the
Trust. It also constitutes additional prima facie evidence that
Cuba was duly authorised to address the letter
of demand on behalf of
the Trust. Cuba would hardly have discussed addressing the
letter of cancellation with his co-trustees
without mentioning the
letter of demand and the fact that, as the letter of cancelation
records, the 14 day notice period had expired.
There is nothing in
the answering affidavit, apart from unsubstantiated denials, which
displaces the
prima facie
case established in the founding affidavit. The affidavits
deposed to by the second and third applicants are also decisive
in
this regard.
[14]
Turning now to the claim of the Trust against Holoquin for repayment
of the sum of R2 million, the Subscription Agreement,
in relevant
part, provides as follows:
“
1.
RECORDAL
1.1
Holoquin has an authorised share
capital of 400 000 (four hundred thousand) ordinary shares
of R1
(one Rand) each (sic) of which 280 000 (two hundred and eighty
thousand) have been issued.
1.2
Vulindlela has agreed to subscribe for
31 112 ordinary shares in Holoquin at the price of
R64.28 (sixty
four Rand and twenty eight cents) per share, the total consideration
payable to Holoquin being R2 million (two million
Rand). These
shares will constitute 10% (ten per cent) of Holoquin’s issued
share capital. This transaction is
(sic) recorded in clause 4
hereunder, is binding on Vulindlela and Holoquin and is unaffected by
clause 1.3 and clause 5 …
4.
SUBSCRIPTION FOR SHARES
4.1
Vulindlela hereby subscribes for 31 112 (thirty one thousand one
hundred and twelve shares) ordinary shares in Holoquin
at the price
of R64.28 (sixty four Rand and twenty eight cents) per share, the
total consideration payable to Holoquin being R2
million (two million
Rand).
4.2
Payment shall be made by electronic transfer of the said R2 million
(two million Rand) in to Holoquin’s bank account
…
simultaneously with signature hereof against delivery of a share
certificate reflecting Vulindlela as the registered owner
of the
shares referred to in this sub clause.
4.3
Holoquin warrants to Vulindlela that at the date of signature hereof
and the giving effect to the transaction in this clause
4 …
4.3.2
The authorised share capital of the company will
be R400 000 (four hundred thousand Rand) divided
into 400 000
(four hundred thousand) ordinary shares of R1 (one Rand) each, and
280 000 (two hundred and eighty thousand)
have been issued and
fully paid up, and that all such shares rank pari passu in all
respects;
4.3.3
The effect of the transaction set out in clause
4.2 is the issued share capital of Holoquin will be 311 112
(three hundred and eleven thousand one hundred and twelve shares) and
Vulindlela will be the registered and beneficial owner of
10% (ten
per cent) of Holoquin’s issued share capital…
4.3.10
Vulindlela and Holoquin agree that a formal shareholder agreement
will be concluded within 30 (thirty) days of
the signing of this
agreement;
4.3.11
Holoquin warrants that within 30 (thirty) days, an
amended Memorandum of Incorporation (MOI) will be drafted
for
acceptance by all;
4.3.12
Subject to clause (sic) 4.3.10 and 4.3.11, if for whatever reason,
the shareholder agreement or the MOI is not
concluded within the
stated period, Vulindlela reserves the right to either claim specific
performance or to cancel the agreement
in terms of clause 6;
4.4
All the information and documentation provided to Vulindlela by Mr
Clive Butkow and Mr Paul Ben-Israel, are warranted by them
as well as
all the other beneficial shareholders and directors, as being true
and accurate. Vulindlela relied upon such warranties
in
entering into this agreement. No warranties other than those
set out in clause 4.3 are given …
6.
BREACH
6.1
Should any of the parties commit a breach of a material term of this
agreement and remain in breach for a period of 14 (fourteen)
days
after despatch by the aggrieved party to the defaulting party of a
written notice calling upon the defaulting party to remedy
the said
breach the aggrieved party shall have the right to either claim
specific performance or to cancel this agreement.
In the event
of this agreement being cancelled the aggrieved party shall be
entitled to exercise all rights conferred upon him
in terms of this
agreement and at common law.
6.2
The costs of the successful party in protecting and/or enforcing any
of his rights in terms of this agreement including all
litigation and
arbitration costs shall be paid by the other party on the scale as
between attorney and own client.
7.
ARBITRATION
7.1
In the event of a dispute arising between the parties in relation to
this agreement its interpretation, the enforcement or protection
of
rights in terms hereof, its amendment or cancellation such dispute
shall be referred to arbitration …
9.
GENERAL
The
parties acknowledge and agree that:
9.1
This agreement constitutes the entire agreement between them and
save as is herein set forth there are no terms and conditions,
rights
and liabilities between them and no warranties or representations
have been made by any of them or on behalf of them which
may have had
the effect of inducing any of the parties to conclude this agreement
or at all; the parties hereby expressly waive
any rights which they
may have had as a result of any such terms, conditions, warranties
and representations …
”
[15]
It is common cause that notwithstanding the provisions of clause 4.2
of the Subscription Agreement, the Trust effected payment
of R2
million to Holoquin on 13 June 2013 in advance of the receipt of a
share certificate.
[16]
It is also not in dispute that at the time when the Subscription
Agreement was concluded:
16.1
Holoquin had an authorised share capital of 400 000 ordinary
shares all of which had been issued. Two hundred thousand
shares were held by and registered in the name of Jar Cafe CC (“
Jar
”)
the members of which were one Aubrey Pieterse (“
Pieterse
”)
and one Jurgen Alan (“
Alan
”)
and two hundred thousand shares were held by and registered in the
name of Acquinity CC (“
Acquinity
”)
the members of which were Ben-Israel, his brother Dylan and Butkow;
16.2
The recordal in the Subscription Agreement that only 280 000
shares in Holoquin had been issued was false;
16.3
It was not possible for the Trust to subscribe for and for Holoquin
to issue 31 112 shares to the Trust;
16.4
The representation that only 280 000 of the 400 000
authorised shares in Holoquin had been issued was material.
[17]
Notwithstanding the payment of the subscription price of R2 million
by the Trust to Holoquin, no shares in Holoquin were issued
to the
Trust, no shareholders’ agreement was concluded and no amended
MOI was drafted.
[18]
Consequently, on 24 January 2014, a notice calling upon Holoquin to
remedy its breaches of clauses 4.2, 4.3.10 and 4.3.11
(to which I
have already made reference) was delivered to Holoquin (“
the
breach letter
”).
[19]
The first meaningful response to the breach letter was contained in
a letter addressed by Ben-Israel on behalf of Holoquin
to the Trust
on 5 February 2014, the effect of which was that Holoquin denied that
the breach letter had been addressed on behalf
of the Trust and
contended that the Subscription Agreement had not come into being as
Cuba has not been authorised by the Trust
to conclude it. (The
contention that no valid Subscription Agreement had been concluded
was subsequently abandoned by Holoquin.)
[20]
On 17 February 2014, Cuba on behalf of the Trust, addressed a letter
to Holoquin for the attention of Ben-Israel and Butkow
reading as
follows:
“
1.
On 24 January 2014 The Vulindlela Family Trust (VFT) gave a written
notice to Holoquin Global (Pty) Ltd (HQ) in terms of Clause
6 of the
agreement to remedy all the breaches specified in the notice.
2.
On 13 February 2014, the notice period of 14 days expired, and HQ has
failed to remedy the breaches.
3.
In terms of Clause 6 of the agreement VFT hereby cancels the
agreement.
4.
In terms of Clause 6, upon cancelation of the agreement, VFT is
entitled to exercise all rights conferred upon him (sic) in terms
of
the agreement and at common law.
5.
During the notice period, it has come to the attention of VFT that:
a)
Messrs Clive Butkow (Clive) and Paul Justin Ben-Israel (Paul) were
not duly authorised by the HQ shareholders to enter into
the
agreement on behalf of HQ.
b)
During the negotiations and
signing of the agreement, there were HQ material developments between
shareholders which had the effect
of making HQ unable to fulfil the
agreement. Clive and Paul were aware of these developments,
failed to disclose them and
proceeded to sign the agreement
.
c)
In good faith VFT paid an amount of R2 million to a bank account
specified by Clive and Paul which happened to be HQ’s
bank
account.
d)
In Clause 4.4 of the agreement Clive and Paul warranted that all
information and documentation provided to VFT, and presented
(sic)
that HQ had more than one director when in fact it had one director.
6.
The state of affairs of HQ at the time the agreement was signed,
considered with the terms of the agreement make Clive and Paul
personally liable for the repayment of R2m plus interest …
7.
VFT demands (sic) Clive and Paul to refund VFT the R2 million plus
interest by end of business day of 19 February 2014 into the
following bank account …
8.
In the event that Clive and Paul fail to refund VFT in terms of point
7 above VFT will consider all options to recover the outstanding
amount without further notice.
”
(emphasis
supplied) (“
the
cancellation letter
”).
[21]
Ben-Israel alleges in the answering affidavit that the first time
that any of the respondents had sight of the cancellation
letter was
on receipt of the founding affidavit in this matter. On this
basis Ben-Israel alleges that the Subscription Agreement
was not
cancelled. He also pointed out that the 14 day notice period
referred to in the breach letter expired on 7 February
2014 and not
on 13 February 2014. Ben-Israel’s denial that the
cancellation letter was received by Holoquin cannot
be accepted.
[22]
Butkow responded to the cancelation letter as follows on 28 February
2014 in an email which he addressed to Cuba:
“
Vuli
I want to re-itterate my commitment to the resolution of the Holoquin
matter. I will be in a position by tomorrow or
Tuesday to pay
you the R2 million. On payment of this money, I require a
letter from yourself closing out this matter …
”
[23]
Cuba responded to Butkow’s letter by email on the same day in
which he stated that:
“
1.
There is no impasse with Holoquin as that agreement was cancelled
after VFT followed the due process.
2.
The matter will be automatically closed if the terms of the
cancellation letter are met. Therefore, the letter you request
is in your hands.
3.
I do not agree that there is a matter to be facilitated outside the
cancellation letter. No one outside facilitated the
VFT
defective investment. Reversing that needs no facilitation
after VFT followed the due process contained in the unfortunate
former agreement …
”
(emphasis
supplied)
[24]
Neither Ben-Israel nor Butkow nor Holoquin denied the receipt of
Cuba’s 23 February 2014 email or seeks to reconcile
the emails
exchanged on that day with Ben-Israel’s
ex
post facto
denial in the answering
affidavit that the cancellation letter was received by Holoquin.
[25]
The “
letter
”
which Butkow required from Cuba as set out in his email of 23
February 2014 was a document entitled “
Deed
Of Release
” which the Trust was
not prepared to sign.
[26]
The parties then handed the matter over to their respective
attorneys and on 20 March 2014 the Trust’s attorneys addressed
a letter of demand to Holoquin for the attention of Ben-Israel
requiring payment of the sum of R2 million together with interest
at
the mora rate from date of cancellation of the Subscription
Agreement.
[27]
Holoquin’s attorneys responded in a letter dated 31 March 2014
in the following terms:
“
Your
letter dated 21 March 2014 addressed to our client
[Holoquin]
refers.
Contrary
to what you state, the payment of R2 million by your client to our
client, was not in terms of the agreement which you
partially set out
in your letter. The reason for this is that, as your client is
aware, your client did not sign the agreement
and, accordingly, no
transaction in terms thereof came into being. As a result none
of the terms of the document on which
your client seeks to rely are
[
sic
]
enforceable, including but not limited
to the 14 day mora period therein. This was stated in our
client’s letter to
you dated 5 February 2014. Therefore,
your client’s demands in its letter dated 24 January 2014 are
of no legal consequence,
and the purported cancellation falls into
the same category.
Our
client does admit that an amount of R2 million was paid to it for 10%
of its issued share capital, and a share certificate evidencing
that
is enclosed.
Your
client’s rights are limited to those of a shareholder of 10% of
the ordinary shares of a company, and are subject to
the Memorandum
of Incorporation of the company and the
Companies Act 71 of 2008
.
”
[28]
The enclosed share certificate was a copy and not an original which
purported to reflect that the applicants’ in their
capacities
as trustees of the Trust were the registered proprietors of 40 000
shares in Holoquin. The share certificate
purports to have been
signed by a director of Holoquin on 3 February 2014.
[29]
Quite apart from the fact that the share certificate was not
tendered as performance by Holoquin of its obligations in terms
of
the Subscription Agreement but on some other undisclosed basis there
are contradictory allegations in the respondents’
answering
affidavit. At one place in the answering affidavit Ben-Israel
alleges that “
9.1 First, Holoquin
has materially performed its obligations under the contract. It
has issued 10% of Holoquin’s issued
share capital to the Trust
in return for the payment of R2 million
…
In
his letter of 24 January (VWC 13, P97) Mr Cuba informed Holoquin that
the contract had been breached and that Holoquin had 14
days to
remedy the breach. Holoquin responded by issuing 40 000
shares in the name of the Trust on 3 February 2014.
The shares
were issued within the 14 day period and as a result, the breach was
cured.
” (emphasis supplied)
There is no attempt to reconcile the allegation that the issue by
Holoquin of the 40 000
shares constituted performance by
Holoquin of its obligations under the Subscription Agreement with the
allegation in Holoquin’s
attorneys’ letter of 31 March
2014 that the Subscription Agreement had not come into being.
[30]
At another place in the answering affidavit Ben-Israel admits that
“…
it was not possible to
issue the shares to
[the Trust]
as
the agreement stated. In order to ensure there was compliance with
the obligation that the Trust was the owner of 10% of the
issued
share capital of [Holoquin], 10% of the said issued share capital was
transferred to the three respondents NNO.
”
(emphasis supplied). That admission was correctly made. A
purported issue of shares in excess of those authorised
is void in
terms of
section 38(3)
of the
Companies Act 71 of 2008
.
[31]
Not only does the Subscription Agreement not provide for a transfer
of shares but the identity of the transferor is not disclosed
nor is
it explained how R2 million was due to Holoquin against a “
transfer
”
as opposed to an “
issue
”
of shares. Further, as explained in
Inland
Property Development Corp (Pty) Ltd v Cilliers
1973 (3) SA 245
(A) at 251C per Rumpff JA “
In
regard to shares, the word ‘transfer’, in its full and
technical sense, is not a single act but consists of a series
of
steps, namely an agreement to transfer, the execution of a deed of
transfer and, finally, the registration of the transfer.
”
Apart from tendering a copy of a share certificate coupled with an
assertion that the Subscription Agreement did not
come into being,
Holoquin does not allege that it executed a requisite deed of
transfer or that the transfer was registered.
[32]
The tender of the copy of the share certificate was rejected by the
Trust in its attorneys’ letter of 10 April 2014
in which it was
pointed out that the Subscription Agreement had already been
cancelled. The letter continued “
6.
The issue of the share certificate is an after-thought. We note
that this purports to be share certificate number 3.
Certificate number 1 records that Jar Cafe owns 200 000 ordinary
shares in your client. Certificate number 2 records
that Aquimm
(sic) owns 200 000 ordinary shares in your client. The
authorised share capital in your client is 400 000
ordinary
shares. 7. Accordingly, there are no more ordinary shares that
can simply be issued to our client without shareholder
approval.
8. Moreover, in the disputed agreement (signed by Mr Paul Justin
Ben-Israel), your client warrants that the issued
share capital is
280 000 shares. Clearly, this is not so. This is one
of a number of intentional misrepresentations
made by Mr Ben-Israel
and Mr Clive Butkow (the latter holding himself out to be a director
although he is not a director) purporting
to act on your client’s
behalf. These individuals are liable to our client in their
personal capacity.
” (emphasis
supplied). There was no response to this email.
[33]
In the circumstances it is clear that Holoquin was and remains in
flagrant breach of the Subscription Agreement, that the
Subscription
Agreement was lawfully cancelled by the Trust and that Holoquin has
not advanced any legitimate defence for repayment
of the sum of R2
million, apart from the alleged arbitration defence to the claim
which I will deal with below.
[34]
As I have indicated, the Trust’s claim against Ben-Israel and
Butkow is, in the first instance, based on a warranty
allegedly
provided by them to the Trust. Reference was made in the
founding affidavit to a series of emails dated 9 and 10
June 2013 (to
which I will return), which led to the wording of clause 4.4 of the
Subscription Agreement followed by an allegation
that “
It
is accordingly clear that each of [Ben-Israel] and [Butkow] were
[
sic
]
aware of the warranty contained in
clause 4.3
[
sic
]
and agreed to this warranty prior to the
final conclusion of the [Subscription Agreement]
.”
[35]
Ben-Israel and Butkow are not parties to the Subscription Agreement
and the warranty contained in clause 4.4 would, notwithstanding
its
wording, not apply to them. In order to overcome this
difficulty Mr S C Vivian who appeared on behalf of the applicants,
submitted that Ben-Israel and Butkow gave a warranty separately from
the Subscription Agreement in their personal capacities.
When I
enquired of him whether the separate warranty was oral or written he
referred me to the series of emails dated 9 and 10
June 2013.
If I understood him correctly, the contention is that the mere
despatch of these emails constituted the provision
by Ben-Israel and
Butkow of a separate or stand-alone warranty in their personal
capacities.
[36]
On 9 June 2013, Ben-Israel enclosed an amended “
MOU
”
under cover of an email which he addressed to Cuba and one Farrel
Wainer. On 10 June 2013 Cuba addressed an email
to Ben-Israel
recording that he had reviewed the “
MOU
”
and that “
Clause 4.4. I
think it is important to record that the [Trust] relied on
information presented by Clive Butkow and that all
the current
shareholders warrant the contents of that information.
”
On 10 June 2013 Ben-Israel advised in an email which he addressed to
Cuba and copied to Farrel Wainer and Butkow that
he had “…
amended clause 4.4 to add the following:
All the warranties in clause 4.3 where
(sic) provided to [the Trust] by Mr Clive Butkow and Mr Paul
Ben-Israel and that all the
current shareholders warrant the contents
of this information being a true and accurate reflection of the
company.
” On the same day
Farrel Wainer addressed an email to Cuba and Ben-Israel which he
copied to Butkow reading as follows
“
Please
amend as below. All the information and documentation provided
to
[the Trust]
by
Mr Clive Butkow and Mr Paul Ben-Israel, are warranted by them as well
as the other beneficial shareholders and directors, as
being a
[
sic
]
true and accurate.
[The
Trust]
relied upon such warranties in
entering into this agreement.
”
These emails are the genesis of clause 4.4 of the Subscription
Agreement.
[37]
I do not agree with Mr Vivian that these emails constitute a
separate or stand-alone warranty provided by Ben-Israel and Butkow
in
their personal capacities. If the contention is that the emails
constitute a separate or stand-alone written warranty,
Ben-Israel was
the only author of one of the emails. None of Butkow, or the
other beneficial shareholders, or the other directors
is the author
of any of the emails. What the emails evidence is an attempt to
draft and incorporate a warranty provision
in a Subscription
Agreement to be concluded between the Trust and Holoquin. The
emails do not evidence an intention on the
part of Ben-Israel,
Butkow, the other beneficial shareholders and the other directors to
provide any warranty separate from the
Subscription Agreement.
It is clear that the parties intended that the Subscription Agreement
would govern their relationship.
I agree with Mr Harris SC that
the warranty claim is simply an unfounded attempt to bind parties who
are not parties to the Subscription
Agreement.
[38]
In the circumstances the Trust’s claim against Ben-Israel and
Butkow based on the alleged separate or stand-alone warranty
must
fail.
[39]
As set out above, the Trust advances an alternative claim against
Ben-Israel and Butkow based on allegations that they misrepresented
the matters recorded in clauses 1.1, 4.3, 4.3.2 and 4.3.3 of the
Subscription Agreement with the fraudulent intention of inducing
the
Trust to conclude the Subscription Agreement and effect payment of R2
million to Holoquin when they well knew that the entire
authorised
share capital had been issued and that Holoquin was not in a position
to issue the 31 112 shares subscribed for
by the Trust.
[40]
The approach to applications in which relief is sought based on
allegations of fraud is set out in
NM
Prinsloo NO v Goldex 15 (Pty) Ltd
2014
(5) SA 297
(SCA) per Brand JA as follows:
“
[19]
I therefore agree with the appellants’ contention that Webster
J should not have made a finding of
fraud against Prinsloo on the
basis of untested allegations against him on motion papers that were
denied on grounds that could
not be described as farfetched or
untenable. The reasons why he should not have done so, derive
not only from common sense,
but from many years of collective
judicial experience. They were thus formulated in Sewmungal and
another NNO v Regent Cinema
1977 (1) SA 814
(N) at 819 A-C:
‘
In
approaching this particular type of problem [of factual disputes
arising on affidavit] it is not wrong for a court at the outset
to
have some regard to the realities of litigation. What appears
to be a good case on paper may become less impressive after
the
deponents to the affidavits have been cross-examined.
Conversely, what appears to be an improbable case on the affidavits,
may turn out to be less improbable or even probable in relation to a
particular witness after he had been seen and heard by a court.
An incautious answer in cross-examination may change the whole
complexion of the case
.’
”
[41]
Mr Vivian, in a forceful argument, sought to persuade me that
Ben-Israel’s and Butkow’s denials of any fraudulent
intent on their part were untenable and should accordingly be
rejected on paper. I cannot agree.
[42]
In order to assert a delictual claim of this nature, the Trust would
need to prove:
42.1
A false representation;
42.2
That the false representation was made:
42.2.1
wrongfully or unlawfully (the criterion of unlawfulness);
42.2.2
intentionally or negligently;
42.3
That the act or omission caused the Trust to sustain
loss; and
42.4
That a damages claim by the Trust represents
compensation for such loss.
(See
Siman
& Co v Barclays National Bank
1984 (2) SA 888
(A);
Standard
Chartered Bank of Canada v NedPerm Bank Limited
[1994] ZASCA 146
;
1994 (4) SA 747
(A);
International
Shipping Co (Pty) Ltd v Bentley
1990 (1) SA 860
(A).)
[43]
As I have indicated, I am of the view that the representations which
were made by Ben-Israel and Butkow which constituted the
basis for
the recordals in clauses 1.1, 4.3, 4.3.2 and 4.3.3 of the
Subscription Agreement were false.
[44]
However Ben-Israel refers in the answering affidavit to an agreement
which he alleges was concluded between Acquinity and Jar
Cafe, prior
to the conclusion of the Subscription Agreement, regarding the
restructure of Holoquin. He alleges that Pieterse
and Alan, the
members of Jar Cafe, were fully aware of the proposed Subscription
Agreement and agreed to the transaction on 4 June
2014. The
structure which Ben-Israel proposed which was accepted by Pieterse
and Alan was that each of himself, his brother
Dylan, Butkow,
Pieterse and Alan would hold 14% of the issued share capital in
Holoquin aggregating 70% of the issued shares, leaving
30% of the
issued shares available for issue to outside investors including the
Trust. The restructuring agreement was concluded
on 4 and 5
June 2013. Unbeknown to Ben-Israel, Pieterse and Alan had, on
14 May 2013, caused Jar Cafe to cede and pledge
to an entity ZAH all
of the former’s shares in Holoquin as security for a loan of
R500 000. This was not disclosed
by Pieterse and Alan to
Ben-Israel when the restructuring agreement was concluded and the
result was that Jar Cafe was unable to
comply with such agreement.
The restructuring agreement formed the basis of the transaction being
discussed with Holoquin.
[45]
In
Commissioner
for the South African Revenue Service v Sassin
2015 JDR 2293 (KZD):
“
[45]
It is well-established that motion
proceedings are by their very nature generally inappropriate for the
purpose of making findings
of fraud. Fraud is a serious
allegation that carries serious consequences. It is an offence
that affects a person’s
good name and reputation and could have
serious consequences for him/her, particularly in the business
world. In matters
in which charges of criminal or immoral
conduct are made, it is a requirement that such charges must be
proved by the ‘clearest’
evidence, or ‘clear and
satisfactory’ evidence or some similar phrase. Moreover,
fraud will not be lightly inferred
because as explained in Gates v
Gates, supra:
‘…
There
is not, however, in truth any variation in the standard of proof
required in such cases. The requirement is still proof
sufficient to carry a conviction to a reasonable mind, but the
reasonable mind is not so easily convinced in such cases because
in a
civilised community there are moral and legal sanctions against
immoral and criminal conduct and consequently probabilities
against
such conduct are stronger than they are against conduct which is not
immoral or criminal.’
[46]
The approach that application proceedings are inappropriate for the
resolution of matters where fraud is alleged, is in my
view, correct
since it is undesirable to resolve disputed issues on paper which are
largely dependent on considerations not only
of probability but also
of credibility.
[47]
Our courts have consistently held that it would be unwise to decide a
disputed issue of whether fraud was committed on motion
proceedings
without the benefits inherent in the hearing of oral evidence,
including discovery of documents, cross-examination
of witnesses, and
so forth. The logic behind this is to be found in the reasoning
of Brand JA in Prinsloo NO and others v
Goldex (Pty) Ltd …
[48]
Fraud cannot be inferred, particularly in motion proceedings, from a
mere error, a misunderstanding or an oversight, however
unreasonable
such might be. Where the basis of an allegation of fraud is the
knowledge of a particular fact, our courts tend
to distinguish
between knowledge and belief of that fact. Although knowledge
of a fact can generally be inferred from evidence,
a belief of that
fact only leads to an inference of knowledge where the party would
have some justification for that belief, and
the means of
establishing it.
”
[46]
Mr Harris SC submitted that what I am asked to do is find by
inference that Ben-Israel and Butkow must have intended to
fraudulently
induce Holoquin to enter into the Subscription Agreement
absent any statement that they had an intention to defraud. The
intention to defraud is simply to be inferred from the fact that it
was not possible for Holoquin to issue any shares to the Trust.
[47]
Mr Harris SC also submitted that I cannot exclude the possibility of
an error or a misunderstanding or an innocent belief
on the part of
Ben-Israel and Butkow. He referred me in this regard to an
email addressed by Ben-Israel on 4 June 2013 reading
as follows:
“
Gents
In
terms of Vuli as an investor, there are some complications regarding
the share structure. Aquinity (sic) owns 50% of Holoquin
and
Jar Cafe owns 50%, this leaves 0% to allocate to other shareholders.
Therefore, for the money to be transferred to Holoquin
(i.e. the
Seller must be the beneficiary), we will need to change the
structure.
What
I propose is as follows, both Aquinity and Jar Cafe will sell their
50% stake to Holoquin for R2.50 (a token and nominal amount
to comply
with the law). This will create a situation whereby there are
400 000 authorised shares but no shareholders.
Thereafter,
Holoquin will sell 70% of its shares to five people, being Paul,
Jurgen, Aubrey, Clive and Dylan – this gives
each of us 14% of
the company, for R1 each (this will balance the books). This
leaves 30% of the company to be issued to
other shareholders.
10% of this will be sold to Vuli for R2m, where the money will be
made available immediately. If
we conclude a transaction with
Ori and Alan, we will issue another 10% of the shares to them for
R2m, leaving 10% unallocated shares.
Let
me deal with the Clive issue upfront. I have discussed with
Clive this structure and he had agreed that if this is implemented
he
will forego the R600 000 paid, in other words, there will not be
a debt between Jar Cafe and Clive. The alternative
is that we
cannot agree on this and we will lose Vuli, which at this critical
time is not an option for me. We need the money
to ensure that
all can be focused on delivering Woolworths and Truworths.
”
[48]
Seventy percent of 400 000 is 280 000. Thus if the
restructure had been implemented, it would have been possible
for 10%
of the shares in Holoquin to be issued to the Trust. As I have
pointed out, according to Ben-Israel, Jar Cafe agreed
to the proposed
restructure without disclosing to him that it has ceded and pledged
it shares in Holoquin to ZAH which rendered
the proposed restructure
unworkable. In the circumstances I am not in a position to find
by inference that Ben-Israel and
Butkow must have fraudulently
intended to induce the Trust to conclude the Subscription Agreement
and I cannot exclude the possibility
of an innocent even if misguided
belief on their part that the Subscription Agreement would be
implemented in accordance with its
terms. As a result I cannot
find that the version proffered by Ben-Israel and Butkow is
untenable.
[49]
Mr Harris SC submitted that in those circumstances I should dismiss
the application of the Trust against Ben-Israel and Butkow
as there
are disputes of fact on the papers which the trustees ought
reasonably to have foreseen when the application was launched.
I do not agree. The email addressed by the attorneys of the
Trust to which I have referred, rejecting the tender of the share
certificate, contained allegations amounting to allegations of fraud
on the part of Ben-Israel and Butkow. This email was
not
responded to and I cannot find in those circumstances that the
trustees should have anticipated any material dispute of fact.
There is also no dispute of fact concerning the claim of the Trust
against Holoquin arising from the latter’s breach of the
Subscription Agreement.
[50]
The only remaining issue is the question of the arbitration
agreement. The claim of the Trust clearly falls within the
terms of the arbitration agreement in clause 7.1 of the Subscription
Agreement. Mr Harris SC submitted that I should not
be drawn
into the merits of the case in deciding whether or not to grant a
stay. He referred in this regard to
Communications
& Allied Industries Pensioners Association v Communications &
Allied Industries Pension Fund
Supreme
Court of Zimbabwe Judgment No. SC29/08 Civil Appeal No.101/07, cited
in Ramsden
The Law of Arbitration South
African & International Arbitration
p98. I cannot see any reason why it is not permissible for a
court to have regard to the merits in order to determine whether
there is any dispute which falls within the ambit of the arbitration
agreement. As there is no dispute regarding the claim
of the
Trust against Holoquin under the Subscription Agreement, there is
nothing to be referred to arbitration and there is no
reason why the
Trust should not be entitled to approach this court for judgment
against Holoquin.
[51]
I would in any event not have ordered a stay of the proceedings
against Holoquin. A court may make an order staying a
referral
to arbitration when it is satisfied that there is sufficient reason
to do so (see
section 6(2)
of the
Arbitration Act 42 of 1965
).
Ben-Israel and Butkow are not parties to the Subscription Agreement.
Referring the claim of the Trust against Holoquin
to arbitration will
therefore result in a multiplicity of proceedings on substantially
the same facts with the same witnesses.
This is undesirable
because of the risk that different tribunals may come to different
conclusions (see
Valkin v Valkin
1953 (4) SA 510
(W);
Universiteit Van
Stellenbosch v J A Louw
1983 (4) SA 321
(A) at 335 H). This renders it desirable for the claims of the
Trust against Holoquin and Ben-Israel and Butkow to be pursued
in a
single proceeding before this Court.
[52]
I do not consider that this is a case in which I should refer the
delictual claim of the Trust against Ben-Israel and Butkow
to trial.
There are a limited number of distinct issues which it is more
appropriate to refer for the hearing of oral evidence.
Mr
Harris SC submitted that if I refer the matter for the hearing of
oral evidence I should order that such proceedings should
be stayed.
The basis for this submission is that the delictual claim of the
Trust is premature because until such time as
it becomes clear that
Holoquin is unable to satisfy the contractual claim of the Trust
arising out of the Subscription Agreement,
the Trust would not have
suffered any damages. Mr Vivian’s answer to this was that
the liability of Ben-Israel and
Butkow is joint and several with
Holoquin and that in those circumstances there is no need for a
stay. He did not cite any
authority for this proposition and I
have been unable to find any. Partners, co-parties to
negotiable instruments and those
on whom the contract clearly by
express words or necessary implication imposes liability
in
solidum
are jointly and severally liable. Joint and several
liability may also be imposed by statute. An example is the
Matrimonial Property Act 88 of 1984
ss 17
(5) and
23
(5). At
common law joint wrongdoers are jointly and severally liable for the
same delict – payment of the damages by
one absolves the other
from liability. Section 2(1) of the Apportionment of Damages
Act 34 of 1956 provides that: “
Where it is alleged that two
or more persons are jointly or severally liable in delict to a third
person…for the same damage,
such persons…may be sued in
the same action.
” However, as the claim of the Trust
against Holoquin is contractual and not delictual, Ben-Israel and
Butkow are not
jointly and severally liable with Holoquin in respect
of such claim.
[53]
In the circumstances:
53.1
Holoquin is ordered to pay the Trust R2 million together with
interest thereon at the rate of 9% per annum from 17 February
2014 to
date of payment, both dates inclusive.
53.2
Holoquin is ordered to pay the costs of the application against it.
53.3
An order is granted referring the claim of the Trust against
Ben-Israel and Butkow for the hearing of oral evidence, on the
following terms:
53.3.1
in relation to the representation as recorded in clause 4.3.2 of the
Subscription Agreement (“
the
representation
”), whether or not
Ben-Israel and/or Butkow knew at the time when the share subscription
agreement was concluded that Holoquin’s
entire authorized share
capital of 400 000 shares had been issued and that it would
accordingly not be possible for Holoquin to
issue the 31 112 shares
to the Applicants in terms of the share subscription agreement.
53.3.2
whether or not Ben-Israel and/or Butkow made the representation with
the intent to defraud the Trust and to induce the Trust
to enter into
the Subscription Agreement.
53.3.3
whether or not the Trust was induced by the representation to enter
into the Subscription Agreement.
53.3.4
whether or not the Trust has suffered any damages caused by the
representation and if so the quantum of such damages.
53.4
The evidence shall be that of any witnesses whom the parties or
either of them may elect to call, subject, however, to what
is
provided in paragraph 53.4.
53.5
No further witness may be called save with leave of the Court and
provided that an affidavit setting out such witness's evidence
shall
have been served on the opposing party not less than 30 days before
the hearing.
53.6
Within 21 days of the making of this order, each of the parties shall
make discovery, on oath, of all documents relating to
the issues
referred to in paragraph 1 hereof, which are or have at any time been
in the possession or under the control of such
party and which
documents are not already attached to the affidavits delivered by
either party.
53.7
Such discovery shall be made in accordance with Rule of Court 35
and the provisions of that Rule with regard to the inspection
and
production of documents discovered shall be operative.
53.8
The incidence of the costs incurred up to now in respect of the claim
of the Trust as against Ben-Israel and Butkow shall be
determined
after the hearing of oral evidence.
53.9
Such referral is stayed for a period of 15 (fifteen) days from the
date of this Order. If Holoquin fails to effect payment
of the
sum of R2 million together with interest in full prior to the
expiration of the 15 (fifteen) day period, the matter may
be
proceeded with.
A
P RUBENS
ACTING
JUDGE OF THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
COUNSEL
FOR APPLICANTS:
SC VIVIAN
INSTRUCTED
BY:
MNCEDISI NDLOVU & SEDUMEDI INC.
COUNSEL
FOR RESPONDENT:
L N HARRIS SC
INSTRUCTED
BY: Eiser & Kantor
DATE
OF HEARING: 11/02/2016
DATE
OF JUDGMENT: 19/02/2016