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2023
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[2023] ZAECQBHC 56
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Mason N.O. v Mason and Another (2353/2016; 3039/2016) [2023] ZAECQBHC 56 (14 September 2023)
SAFLII Note:
Certain
personal/private details of parties or witnesses have been
redacted from this document in compliance with the law
and
SAFLII
Policy
IN THE HIGH COURT OF
SOUTH AFRICA
(EASTERN CAPE
DIVISION, GQEBERHA)
CASE
NO: 2353/2016
In
the matter between:
PATRICIA
BRIDGET MASON N.O.
Plaintiff
(In
her capacity as Executrix of the Estate
Late
Ashley Robin Mason)
and
GRAHAM
ANDREW MASON
First
Defendant
(Identity
No.: 6[…])
L
MASON ELECTRICAL CC
Second
Defendant
CASE
NO: 3039/2016
In
the matter between:
L
MASON ELECTRICAL CC
First
Plaintiff
GRAHAM
ANDREW MASON
Second
Plaintiff
(Identity
No.: 6[…])
and
PATRICIA
BRIDGET MASON N.O.
Defendant
(In
her capacity as Executrix of the Estate
Late
Ashley Robin Mason)
REPORTABLE: YES/NO
OF INTEREST TO OTHER
JUDGES: YES/NO
REVISED
JUDGMENT
POTGIETER
J
INTRODUCTION
[1]
This matter is a sequel to an internecine dispute within the Mason
family whose members have been successful entrepreneurs in
Gqeberha,
Eastern Cape Province for a considerable period of time. The
principal family business (until it ceased operations) was
a thriving
electrical contracting enterprise which was founded by the late Mr LC
Mason and conducted as L Mason Electrical CC (“the
CC”).
In due course Mr Mason involved his sons Ashley Robin Mason
(“Ashley”) and Graham Andrew Mason (“Graham”)
in the business. When it became time for him to retire, Mr Mason sold
his member’s interest in the CC to his sons. Ashley,
the elder
brother, obtained a controlling 60% interest and Graham, the younger
brother, a 40% interest in the CC. Graham was more
focused on
hands-on involvement in the operational/technical side of the
business, while Ashley together with his wife Patricia
Bridget Mason
(“Pat”) and to an extent his daughter Talana Evans, were
in charge of the administration and running
of the business. In
everyday language Graham was in charge of the work on site while
Ashley was in charge of the office. Neither
ventured much into the
area of responsibility of the other. Clearly as brothers running a
family business, they acted on trust.
This arrangement worked well
over time and the business continued to thrive. Things appear to have
changed dramatically upon the
untimely death of Ashley on 25 April
2016 so much so that the business has since stopped operating because
it has either collapsed
or was closed down. Although there was not
much reference to it during the trial, the abiding impression one is
left with is that
the real cause for the business having ceased to
operate, was the strained relationship which appears to have
developed between
Graham and Pat after Ashley passed on.
Unsurprisingly this situation eventually led to the present
litigation which was conducted
in the following context.
RELEVANT
BACKGROUND
[2]
Ashley (“the deceased”) and Graham entered into an
agreement on 5 May 1999 to the effect that the member’s
interest in the CC of the first dying of them would be sold to the
survivor. The purchase price would be the proceeds of an insurance
policy which each one of them took out on the life of the other, less
any estate duty that might be payable on the proceeds. The
idea
clearly was to ensure that the business remained within the family
and to secure the consideration due for the acquisition
of the
relevant member’s interest. The value of the insurance policy
as at the date of death of the deceased was the sum
of R4 779 372.00.
This amount was duly paid to Graham and is presently held in trust by
his attorneys in an interest-bearing
account.
[3]
The following provisions of the agreement are particularly relevant
for present purposes:
“
6
PAYMENT
OF THE PURCHASE PRICE
6.1 The Purchase
Price shall be paid from the proceeds of the Policy …
6.1.1 the said
amount shall be deposited by the Survivor at interest with a
registered bank or building society; and
6.1.2 the said
amount together with the said interest shall be paid to the Executor
forthwith on the issue of the said Letters of
Executorship.
6.2 If the deceased
shall have been indebted to the corporation at the date of his death
on any cause whatsoever, the survivor shall
be entitled to withhold
from any payment due to the Executor in terms hereof and to pay to
the corporation an amount equal to the
said indebtedness, and any
such payment shall be deemed to be a payment to the Executor on
account of the purchase price.
7
DELIVERY
Against payment on
account of the price of the first amount paid out of the proceeds of
the Policy, the Executor shall deliver to
the Auditor all documents
duly signed to permit the transfer to the Survivor of the Deceased’s
membership interest.”
THE
RESULTANT LITIGATION
[4]
After the proceeds of the policy were paid over to Graham, the
previous executrix of Ashley’s estate, Ms Elna van der
Walt
(Pat has since replaced her as executrix and was substituted for her
as a party) demanded payment of the proceeds, less any
estate duty,
from Graham in respect of the purchase price of the deceased’s
member’s interest in the CC. Graham resisted
the demand on the
basis that the deceased had misappropriated the funds of the CC. He
contended that this constituted a significant
debt owed by the
deceased to the CC which should be deducted from the proceeds of the
insurance policy pursuant to clause 6.2 of
the relevant agreement.
[5]
As a consequence, the executrix instituted action against Graham on
14 July 2016, under case number 2353/2016, for payment of
the
proceeds of the insurance policy together with interest against the
tender to transfer the member’s interest of the deceased
to
Graham. The latter defended the action and raised a special plea of
non-joinder of the CC (which was subsequently joined as
the second
defendant). He pleaded over that the deceased was obliged to repay an
as yet undetermined sum representing the CC’s
funds which he
unlawfully appropriated. He furthermore averred that the debt due by
the deceased exceeded the proceeds of the insurance
policy and that
he was accordingly excused from paying such proceeds to the
executrix.
[6]
Graham in turn instituted a counterclaim for an order for
cancellation of the agreement due to misrepresentations made by the
deceased and a conditional counterclaim,
inter alia
, for the
rendering of an account by the executrix and debatement thereof as
well as an order that he was entitled to withhold payment
of the
proceeds of the insurance policy to the executrix in terms of clause
6.2 of the agreement. The executrix pleaded to the
counterclaim and
the conditional counterclaim basically denying that Graham was
entitled to the relief claimed therein. She furthermore
filed a
replication to the special plea of non-joinder of the CC denying that
it had a sufficient interest in the subject matter
of the litigation
but pleaded that she would nonetheless from an abundance of caution
join the CC as the second defendant, which
was in the event done as
indicated above.
[7]
The CC, acting as the first plaintiff, and Graham, acting as the
second plaintiff (“the plaintiffs”) instituted
a separate
action on 30 August 2016 against the executrix under case number
3039/2016 for the rendering and debatement of an account
in respect
of the business of the CC, alternatively that the executrix provides
the accounting records of the CC that are in her
possession to Graham
to enable a forensic audit thereof to be undertaken and for payment
of any amount due to the CC.
[8]
This action was defended by the executrix who raised a special plea
of prescription of the claim. She pleaded over that while
the
deceased managed and controlled the affairs of the CC, Graham held a
40% member’s interest and was at all material times
directly
involved in the management and control of the CC and owed the CC a
fiduciary duty as recognised by law.
[9]
The plaintiffs replicated that the deceased managed and controlled
the affairs of the CC to the exclusion of Graham; that the
deceased
wilfully prevented Graham from discovering his unlawful actions;
misrepresented the affairs of the CC and created fictitious
book
entries to conceal his actions; and repeatedly assured Graham that
the CC’s affairs were properly managed which gave
Graham no
reason to suspect any untoward conduct on the part of the deceased,
his brother whom he trusted. The plaintiffs averred
that as a result,
Graham only discovered the irregularities after the death of the
deceased and that their claim accordingly only
arose after the date
of death of the deceased in accordance with the provisions of
section
12(3)
of the
Prescription Act, 68 of 1969
, and had not become
prescribed.
[10]
The executrix filed a rejoinder to the effect that in the discharge
of the fiduciary duty owed by Graham to the CC, the knowledge
of all
the facts giving rise to the plaintiffs’ claim could reasonably
have been acquired from the outset by Graham, and
therefore by the CC
on its part through Graham. The executrix averred that the plaintiffs
must thus be deemed in terms of the proviso
to
section 12(3)
of the
Prescription Act to
have had constructive knowledge of such facts at
all relevant times.
[11]
The above brief background set the scene for the trial in respect of
the two actions which have been consolidated by order
of this court
granted on 11 November 2021. Mr Rorke SC appeared on behalf of the
executrix and Mr Jooste on behalf of Graham and
the CC.
THE
ISSUES
[12]
The issues between the parties became increasingly confined in the
lead up to and during the trial. Only one witness, a forensic
accounting expert Mr Derek Pearton who was engaged by Graham and the
CC, testified at the trial. The special plea of prescription
in
fact, became the central issue in the matter.
[13]
It is not in serious contention that the deceased had unlawfully
appropriated the funds of the CC over a considerable period
of time
and that these sums are to be repaid to the CC to the extent that
they have not become prescribed. It is also not in issue
that Graham
is obliged to pay the proceeds of the insurance policy, less any debt
due and payable to the CC by the deceased, to
the executrix and to
utilise the balance of the proceeds to pay the debt to the CC. The
executrix has effectively accepted that
all unlawfully appropriated
amounts during the 3 years immediately preceding the date of death of
the deceased are due to the CC
and must be deducted from the proceeds
of the insurance policy. Her case is that the balance of the debt has
become prescribed.
It is therefore readily apparent that the special
plea of prescription is the principal issue in the matter.
THE
TRIAL
[14]
At the commencement of the trial I ruled, after having heard
argument, that the plaintiffs must begin given that they attracted
the burden of proof in respect of the unlawful appropriation defence.
They called Mr Pearton to testify as indicated above and
then closed
their case. The executrix closed her case without presenting any
evidence.
[15]
The thrust of Mr Pearton’s evidence is not in dispute and can
be briefly set out. He is a registered accountant with
expertise in
the forensic investigation of accounting issues. He was employed,
inter alia
, as a captain in the Commercial Crime Unit of the
South African Police Service. He currently conducts his own
accounting practice
and has been involved in various forensic
accounting investigations and has testified as an expert witness in
various court cases.
His qualifications as an expert have not been
seriously assailed and can be accepted without reservation.
His involvement in the
matter followed a request by Graham’s attorney, who has been
known to him for some time. His instructions
were that Graham was a
member of the CC with his late brother. The latter was suspected of
having unlawfully appropriated funds
of the CC for private purposes.
He was accordingly mandated to conduct a forensic investigation to
determine the details in this
regard.
He consulted with the
attorney and later with Graham but none of them had much details or a
clear idea of what needed to be done.
At his request he was provided
with the available banking and accounting records of the CC for
purposes of his investigation which
spanned a period of just over 17
years between March 1999 and 25 April 2016. The latter being the date
of death of the deceased.
He meticulously worked
through the records of the CC entry-by-entry. The CC kept manual
books of account until May 2009 when it
changed over to the
computerised Pastel accounting system. He had regard to approximately
3500 entries in the bank statements and
reviewed 5082 transactions
reflected in the CC’s records. He prepared a comprehensive
report, supported by 37 lever arch
files of documents, which he
confirmed in his testimony.
[16]
I should interpose that the executrix engaged the services of
PriceWaterhouseCoopers Forensic Accounting Services (“PWC”)
to prepare a forensic report which was produced under the name of one
of their officials, Mr Bruce Killerby. The mandate of PWC
was,
however, limited to only investigate transactions that were more than
R5 000.00 in value. There was accordingly little
correlation
between this report and that of Mr Pearton who investigated every
transaction over the relevant 17-year period that
was covered by his
investigation. The outcomes of the respective reports were
understandably widely different. The PWC report reviewed
a sample
constituting only 9.7% of the total transactions dealt with by Mr
Pearton representing 28% (R4 455 020.16 in
value) of the
total transaction value of R15 724 610.85 investigated by
Mr Pearton. Given the wide divergence between
the two reports,
previous attempts to obtain a joint minute between Mr Pearton and Mr
Killerby, were unsurprisingly not successful.
I accordingly directed
at the commencement of the trial that the two of them meet and
prepare a joint minute of the areas of agreement
and disagreement
between them. The minute was prepared on 8 May 2023 and presented to
the court. The outcome of the meeting, relevant
for present purposes,
was that Mr Pearton adjusted his report to include six transactions
with a net value of R75 513.78 and
re-allocated portions of
transaction values which he previously ascribed to the deceased in
his report, more properly as having
benefited Graham. They could not
reach consensus on the classification (business or personal) of
R4 293 241.79 of the
said total transaction value of
R4 455 020.16 that was reviewed by PWC. Appropriate
adjustments were made to the respective
loan account balances of,
inter alia
, the deceased and Graham in Mr Pearton’s
report which in the result reflected the adjusted total amount
misappropriated by
the deceased as R7 406 139.37.
[17]
As indicated, Mr Killerby was not called to testify and the executrix
had closed her case without presenting any evidence.
The material
aspects of the testimony of Mr Pearton were accordingly not
controverted. At the end of the trial, it was clear that
the fact
that the deceased had misappropriated the funds of the CC and the
figure of R7 406 139.37 determined in this
regard by Mr
Pearton, were not in dispute. The issue is whether the CC’s
claim in respect thereof was enforceable or had
largely become
prescribed.
THE
CASE OF THE EXECUTRIX
[18]
The gravamen of the executrix’s case was that any amounts
misappropriated up to 3 years immediately prior to the date
of death
of the deceased, had become prescribed. According to the executrix,
the only relief that the plaintiffs were entitled
to at best was to
recover the sum of R669 305.83 which was determined in Mr
Pearton’s report to have been misappropriated
by the deceased
during the 3 years immediately preceding his death. The total nett
amount of R7 406 139.37 which was
determined by Mr Pearton
to have been misappropriated by the deceased over the 17- year time
span of his investigation, is not
in dispute as indicated above. The
executrix, however, contends that the bulk thereof had become
prescribed and that Graham was
obliged to pay the proceeds of the
insurance policy, less the said sum of R669 305.83, to the
estate in respect of the purchase
price of the deceased’s
member’s interest in the CC. By the same token, if the claim
had not prescribed, it is not
in serious contention that the deceased
would have owed the amount of R7 406 139.37 to the CC in
which event the estate
would not be entitled to payment of the
proceeds of the insurance policy. It is therefore clear as alluded to
above that the central
issue is the matter of prescription to which I
now turn.
PRESCRIPTION
[19]
Mr Rorke submitted with regard to the special plea of prescription,
that the executrix had established constructive knowledge
on the part
of Graham (as envisaged in
section 12(3)
of the
Prescription Act) of
the
debt owed by the deceased pursuant to the latter’s
misappropriation of the CC’s funds. According to this argument,
if Graham had fulfilled his fiduciary obligations towards the CC, he
would have been vigilant and would have seen the red flags.
He should
have investigated these and would have easily ascertained that the
deceased was misappropriating the funds of the CC.
Thus, so the
argument ran, by exercising reasonable care and acting diligently in
terms of the law, Graham could have acquired
knowledge of the
identity of the debtor and of the facts from which the debt arose. As
a matter of law, he is therefore deemed
in terms of
section 12(3)
to
have had such knowledge at any time prior to the last 3 years
immediately preceding the date of death of the deceased, presumably
as from 1999 being the starting period of Mr Pearson’s
investigation.
[20]
Mr Rorke furthermore submitted that the constructive knowledge of
Graham must in turn be attributed to the CC. All potential
claims of
the CC up to 3 years immediately preceding the date of death of the
deceased would accordingly have prescribed. I revert
to the
attribution argument below.
[21]
In respect of the issue of prescription, it was argued on behalf of
the executrix that Graham was not entitled, given the onerous
fiduciary duty he owed to the CC, to sit back and by supine inaction
at will postpone the commencement of prescription. The executrix
relied on an inference to be drawn from 3 factors as support for the
contention that Graham had constructive knowledge of the
misappropriation.
[22]
First, the following averments contained in Graham’s affidavit
filed in opposition to the application by the executrix
for summary
judgement: that while he and the deceased received modest earnings
from the CC, the deceased ‘
acquired significant assets’
over a period of 15 years and that he failed to understand how
this happened. Furthermore, that he obtained records of the CC for
the first time after the deceased passed away and it ‘
immediately
became apparent’
that the deceased had made large scale
withdrawals from the bank accounts of the CC. His preliminary
investigation revealed that
millions of rands would have been
diverted from the CC to the deceased.
[23]
It was submitted on behalf of the executrix that, in view of these
averments in Graham’s said affidavit, a reasonable
member of a
close corporation in Graham’s position given his concerns,
would have exercised the rights conferred on him by
the law to enable
him to discharge his fiduciary obligations towards the CC. Given the
ease with which he could establish that
the deceased misappropriated
the CC’s funds, he would have been in a position to intervene
timeously before any claim prescribed.
[24]
Secondly, according to the report of Mr Pearton, Graham had no
involvement with the financial affairs of the CC. The previous
bookkeeper of the CC confirmed to Mr Pearton that she had had no
dealings with Graham regarding the financial affairs of the CC.
According to the report, Graham was not involved in the financial
transactions of the CC and that it cannot be deemed that he
misappropriated any funds. Mr Pearton reported that he was informed
from the outset by Graham that the latter did not understand
why his
loan account was always in debit and that he made numerous fruitless
enquiries in this regard with the bookkeeper or accountant/auditor.
This was also confirmed by the bookkeeper. Mr Rorke submitted that
despite this further material concern, Graham adopted an
impermissibly,
supine attitude and failed to resolve the matter
pursuant to the powers conferred on him by the Close Corporations
Act. This was
not the conduct expected from a reasonable member of a
close corporation.
[25]
The last factor relied upon by the executrix was that according to Mr
Pearton’s report and his evidence, Graham had also
received
undue benefits from the CC. It was submitted that this should have
prompted Graham to look into the matter which in turn
could and would
have enabled him to acquire knowledge of the misappropriations by the
deceased.
[26]
In my view none of the above contentions, which I will deal with in
turn, supports either the conclusion that the executrix
had satisfied
the burden of establishing constructive knowledge on the part of
Graham in terms of
section 12(3)
of the
Prescription Act or
that the
CC’s claim against the deceased had become prescribed.
[27]
First, the summary judgement affidavit by its very nature does not
contain Graham’s full evidence. It would have been
aimed at
averting the summary judgement application. In the absence of any
testimony at the trial confirming and elucidating the
averments in
the affidavit, it cannot be concluded without more on the strength of
these averments that by exercising reasonable
care, Graham could have
acquired knowledge prior to the death of the deceased, that the
latter misappropriated the funds of the
CC. There is furthermore no
basis for concluding that Graham suspected the deceased of having
engaged in any untoward conduct with
regard to the affairs of the CC.
He explicitly indicated in the affidavit that he trusted the deceased
who was his elder brother.
[28]
He furthermore averred in his replication in case number 3039/2016
that the deceased managed the affairs of the CC to his exclusion,
wilfully prevented him from acquiring knowledge of the existence of
the claim, and misrepresented the state of affairs of the CC
with
regard to his unlawful conduct by creating fictitious book entries
designed to conceal the true unlawful nature of the instances
of
misappropriation. This militates against the contention that
Graham could have acquired knowledge of the unlawful conduct
of the
deceased prior to his death.
[29]
In any event, it took Mr Pearton who is a seasoned forensic
accountant just over 2 years to investigate the matter and uncover
the nature and extent of the misappropriations. Furthermore, the
investigation was facilitated only after Graham fortuitously
discovered a code book which made it easier to identify the true
nature of the transactions in issue.
[30]
These grounds relied upon for the submission that Graham must be
deemed to have had constructive knowledge of the deceased’s
wrongdoing are, to say the least, fanciful. It is therefore not
reasonable or realistic to conclude that Graham ought to have exposed
the irregularities before the death of the deceased and that the CC’s
claim had prescribed because Graham therefore had constructive
knowledge of the CC’s claim against the deceased as envisaged
in the proviso to
section 12(3)
of the
Prescription Act.
[31
]
Secondly, Mr Pearton’s report does not assist the executrix.
Far from establishing a supine approach to the affairs of the
CC, it
simply confirms that Graham was not involved in the day-to-day
management of the CC or in the running of its financial affairs.
It
is quite apparent that he was centrally involved in and concentrated
on his area of responsibility being the operations of the
electrical
contracting business and left the administration to the deceased whom
he trusted. This obviously created the opportunity
for the
misappropriations to occur without Graham knowing about or suspecting
it.
[32]
Lastly, the fact that Graham received some benefits over the years
which he was not strictly entitled to cannot, in my view,
be regarded
as a red flag which should have alerted Graham to the unlawful
actions of the deceased. This conclusion is a
non sequitur
in
the circumstances.
[33]
In any event and even if Graham ought to have been aware of the
misappropriations and must be deemed to have had constructive
knowledge thereof, the important fact is that the claim lies in
favour of the CC and not Graham. On the available evidence, I am
not
satisfied that the executrix had made out a case, as Mr Rorke
submitted, for the averred constructive knowledge of Graham to
be
attributed to the CC or for the conclusion that the CC’s claim
had therefore become prescribed. This directly engages
the issue of
corporate attribution referred to earlier to which I now turn.
CORPORATE
ATTRIBUTION
[34]
Apart from referring to the trite principle that corporations, as
artificial persons, act only through the medium of their
directors
and officers being natural persons (which is an incident of agency),
Mr Rorke referred to no specific authority in support
of his
submission that in the present matter the rules of attribution should
be applied to bar the CC’s claim. No indigenous
authority that
is directly in point has come to my attention dealing with the
present situation. To recap,
in
casu
the executrix contends that the averred constructive knowledge on the
part of the sole surviving member of the close corporation
that his
deceased co-member during his lifetime misappropriated the
corporation’s funds must be attributed to the close corporation
and constitutes a complete defence to the corporation’s claim
against the perpetrator, on the basis that the claim has become
prescribed by virtue of the proviso to
section 12(3)
of the
Prescription Act
[1]
.
[35]
Such obliquely relevant authority that is available to me deals with
the somewhat less complex situation where the perpetrator
is a third
party and the complicity or the knowledge of a director or officer of
the wrongdoing is attributed to the corporation
and is relied upon to
defeat the corporation’s claim against the perpetrator. In
these situations, involving third parties,
as opposed to matters
where the perpetrator is a director or officer, the knowledge of
directors or agents is perhaps understandably
almost invariably
attributed to the corporation largely on the basis of agency or
pursuant to the provisions of the corporation’s
founding
documents.
[36]
The above situation obtained in
National
Potato Co-operative
[2]
where the Co-operative (NPC) instituted a claim for damages against
its auditors on the basis of the latter’s professional
negligence. A special plea of prescription was upheld on appeal to
the Supreme Court of Appeal (SCA) on the ground that the Board
of the
NPC could have acquired knowledge of the facts necessary to found a
claim, prior to the expiry of 3 years from the date
on which the
claim arose, by exercising reasonable care. The SCA confirmed that
the constructive knowledge of the Board is to be
attributed to the
NPC in the circumstances in the light of the provisions of
section
12(3)
of the
Prescription Act.
[37
]
In
Northview
Shopping Centre
[3]
the SCA dealt with what has become known as the
rules
of attribution
concerning corporations with reference to the illuminating judgment
in
Meridian
Global Funds Management Asia Ltd v Securities Commission
[4]
where Lord Hoffmann explained that companies are regulated in
accordance with rules which,
inter
alia,
indicate
which acts are those of the company and went on to say that:
“
It is therefore
a necessary part of corporate personality that there should be rules
by which acts
are
attributed to the company. These may be called the ‘rules of
attribution’.
[5]
Lord Hoffmann continued:
“
The company’s
primary rules of attribution will generally be found in its
constitution, typically the articles of association
… There
are also primary rules of attribution which are not expressly stated
in the articles but implied by company law.
…
These primary rules of
attribution are obviously not enough to enable the company to go out
into the world and do business. …
The company therefore builds
upon the primary rules of attribution by using general rules of
attribution which are equally available
to natural persons, namely,
the principles of agency. …
The company’s
primary rules of attribution together with the general principles of
agency, vicarious liability and so forth
are usually sufficient to
enable one to determine its rights and obligations. In exceptional
cases, however, they will not provide
an answer. This will be the
case when the rule of law, either expressly or by implication,
excludes attribution on the basis of
the general principles of agency
or vicarious liability. … How is such a rule to be applied to
a company?
One possibility is
that the court may come to the conclusion that the rule was not
intended to apply to companies at all; for example,
a law which
created an offence for which the only penalty was community service.
Another possibility is that the court might interpret
the law as
meaning that it could apply to a company only on the basis of its
primary rules of attribution, i.e. if the act giving
rise to
liability was specifically authorised by a resolution of the board or
an unanimous agreement of the shareholders. But there
will be many
cases in which neither of these solutions is satisfactory; in which
the court considers that the law is intended to
apply to companies
and that, although it excludes ordinary vicarious liability,
insistence on the primary rules of attribution
would in practice
defeat that intention.
In
such a case the court must fashion a special rule of attribution for
the particular substantive rule.
This is always a matter of interpretation: given that it was intended
to apply to a company, how was it intended to apply?
Whose
act (or
knowledge
,
or state of mind) was
for
this purpose
intended to count as the act etc of the company? One finds the answer
to this question by applying the usual canons of interpretation,
taking into account the language of the rule (if it is a statute),
and its content and policy.”
[6]
(emphasis supplied)
[38]
To revert to
Northview
Shopping Centre
[7]
,
the SCA there dealt with the rules of attribution in the context of
authority to sign a deed of sale on behalf of a corporation
in
respect of the alienation of land. In response to an argument
advanced on behalf of the appellant that the rules of attribution
expressed in
Meridian
[8]
were not part of South African law, Lewis JA (writing on behalf of
the court) expressed approval of the rules in the following
terms
[9]
:
“
It seems to me,
however, that they are simply rules of logic. And in any event, I
consider that they are expressed (although more
concisely) by
Bristowe J in Potchefstroom Dairies
[10]
.”
[39]
As indicated above, the issue in the present matter is whether or not
the averred constructive knowledge of Graham must be
attributed to
the CC in the context of
section 12(3)
of the
Prescription Act where
the corporation’s claim lies not against a third party, but
against the deceased managing member who misappropriated its
funds.
Section 12(3)
is clearly intended to apply to corporations. As it was
put in
Meridian,
the pertinent question is
whose knowledge
was for the purposes of the section intended to count as the
knowledge of the CC in the present matter. In my view this must be
determined in the light of the nature and particular circumstances
and factual context of the claim which issues I need to consider
next.
[40]
I have found a great deal of assistance and guidance in the decision
of the Supreme Court of the United Kingdom in
Jetivia
SA & Another v Bilta (UK) Ltd & Others
[11]
which I perforce would be referring to rather extensively given the
paucity of comparable indigenous authority. I should add at
the
outset that in my view the fact that the company in question in that
matter was in liquidation and the CC in the present matter
is not,
does not render that decision either distinguishable or inappropriate
on the issue of attribution. In that matter the liquidators
lodged a
claim for damages in tort,
inter
alia,
against the two former directors of Bilta (UK) Ltd (a United Kingdom
company in liquidation) on the basis that they breached their
fiduciary duties by having been parties to a conspiracy to injure
Bilta by means of a fraudulent scheme entailing so-called ‘carousel
or missing trader frauds’ relating to European Emissions
Trading Scheme Allowances, commonly referred to as ‘carbon
credits’. The allegation was that Bilta had been deliberately
formed to perpetrate VAT fraud on the fiscus pertaining to
fraudulent
trading in ‘carbon credits’
[12]
recorded on the Danish Emission Trading Registry. The scheme caused
substantial losses to Bilta.
[41]
The defendants applied to strike out the claim on the ground of
illegality or
ex turpi causa non oritur actio
(effectively
that the company should be precluded from claiming due to its own
illegal actions) arguing in this regard that the
culpable knowledge
of the former directors should be attributed to Bilta. The matter
eventually came before the Court of Appeal.
The attribution argument
of the defendants was rejected by that court in light of the
particular circumstances of the matter. The
court held that this
conclusion should apply irrespective of whether or not there was a
‘
sole actor
’ in control of the company (which was
not the case with Bilta) and that earlier authorities had moved away
from the position
where the concept of the ‘
directing mind
and will
’ was fundamentally significant in determining the
question of attribution. It further found that the issue of
ex
turpi causa
was irrelevant to the matter.
[42]
A further appeal to the Supreme Court was dismissed and the earlier
finding of the Court of Appeal was confirmed that in an
action by a
company against its directors it would be inappropriate to attribute
the wrongdoing of the directors to the company,
as a defence against
a claim instituted by the company against the directors in respect of
such wrongdoing. The court held that
whether or not the knowledge and
state of mind of a director or agent can be attributed to a company
depends on the
purpose
for which the attribution is sought to
be made and the
context
in which the question arises. The
common
ratio decidendi
of the four different judgements
produced by the panel of seven Justices, relevant to the present
issue, has been aptly summarised
as follows by Lord Neuberger
(President):
‘
Where a company
has been the victim of wrong-doing by its directors, or of which its
directors had notice, then the wrong-doing,
or knowledge, of the
directors cannot be attributed to the company as a defence to a claim
brought against the directors by the
company’s liquidator, in
the name of the company and on behalf of its creditors, for the loss
suffered by the company as
a result of the wrong-doing, even where
the directors were the only directors and shareholders of the
company, and even though
the wrong-doing or knowledge of the
directors may be attributed to the company in many other types of
proceedings.’
[13]
[43]
The Supreme Court effectively re-affirmed these principles in its
later decision in
Daiwa
Capital Markets Europe Ltd v Singularis Holdings Ltd
[14]
.
[44]
In my view, the applicable legal position has been accurately set out
by a Full Court of the Western Cape High Court in
Eclipse
Systems
[15]
with
which I align myself, namely:
‘
Generally, it
can be said that in instances involving actions by innocent third
parties against a company, or by a company against
such parties, the
acts and knowledge of its agents will ordinarily be attributed to it.
This will also be the case where a company
is charged with a criminal
offence. On the other hand, as was held in Jetivia SA where a company
sues its agents or directors for
loss caused to it by their conduct,
such as in matters involving a breach of fiduciary duty, or fraud, it
would be obviously inappropriate
for them to seek to avoid liability
on the basis that their knowledge and state of mind, and their acts
should be attributed to
it.’
[45]
It needs to be emphasised, as amply stated in
Meridian
and
Jetivia supra,
that the key to any question of attribution is
ultimately to be found in paying attention to the important
considerations of the
context in and the purpose for which
attribution is invoked or disclaimed. Where the context relates to
the breach of fiduciary
duties owed by a director or officer to the
company (as in the instant case), the knowledge and state of mind of
the former must
necessarily be separated from those of the company.
The purpose of the rule establishing such duties itself requires that
the company
cannot be identified with its director or officer. As
correctly stated in
Jetivia
(at para 42): “
It is
self-evidently impossible that the officer should be able to argue
that the company either committed or knew about the breach
of duty,
simply because the officer committed or knew about it. … Any
other conclusion would ignore the separate legal identity
of the
company, empty the concept of duty of content and enable the
company’s affairs to be conducted in fraud of creditors.”
[46]
I respectfully agree with the lucid summary of Lord Neuberger in
Jetivia
(at para 9) indicating that the issue of attribution
entails a general rule and that “
the question is simply an
open one: whether or not it is appropriate to attribute an action by,
or a state of mind of, a company
director … to the company …
in relation to a particular claim … must depend on the nature
and factual context
of the claim in question”.
The issue of
attribution (like many other aspects of the law) is undoubtedly
highly context specific. Considerations of injustice
and absurdity
also have a role in determining questions of attribution. As
correctly indicated in
Jetivia
(at para 38) “…
it
is certainly unjust and absurd to suggest that the answer to a claim
for breach of a director’s (or any employee’s)
duty could
lie in attributing to the company the very misconduct by which the
director or employee has damaged it”.
The injustice and
absurdity of allowing such a defence is obvious.
[47]
In dealing with the issue of attributing specifically the knowledge
of a director to the company the following dicta of Lord
Mance in
Jetivia
(at para 44) are particularly instructive:
“
It follows that
I would, like Lords Toulson and Hodge (para 191), endorse the
observations of Professors Peter Watts and Frances
Reynolds QC as
editors of Bowstead & Reynolds on Agency 19
th
ed, (2010) para 8-213, in relation to the argument that a principal
should be attributed with the state of mind of his agent who
has
defrauded him, so as to relief either the agent or a third party who
had knowingly assisted in the fraud:
‘
Such arguments
by defendants, though hazarded from time to time, are plainly without
merit. However, in such situations, imputation
has no reason to
operate. The rules of imputation do not exist in a state of nature,
such that some reason has to be found to disapply
them. Whether
knowledge is imputed in law turns on the question to be addressed.’
The same point is made
in rephrased terms in their 20
th
ed (2014), para 8-213:
‘
The simple
point is that, were the principal deemed to possess the agent’s
knowledge of his own breaches of duty, and thereby
to have condoned
them, the principal could never successfully vindicate his rights. …
[T]here is no need for an exception
as such. The putative defence
that the exception is used to rebut is premised on the fallacy that
the principal is prima facie
deemed to know at all times and for all
purposes that which his agents know. As observed already, imputation
never operated in
such a way. Before imputation occurs, there needs
to be some purpose for deeming the principal to know what the agent
knows.’
“
[48]
Put simply, a director is not entitled to attribute his own
dishonesty to the company for the purpose of giving himself immunity
from the ordinary legal consequences of his breach of duty where the
company brings a claim against the director based on such
dishonesty.
This accords with common sense, rationality and justice.
DISCUSSION
[49]
In applying the above principles (which in my view correctly reflect
the applicable law) to the facts of the present matter,
it is readily
apparent in my view that the rules of attribution find no application
in the context and circumstances of this matter.
First, in the
present context the corporation is generally not attributed with the
knowledge of a director or member. In
my view, the CC should
not be so attributed with the knowledge of Graham. The context
of the present claim requires closer
attention. This matter concerns
a claim by the CC against a member for misappropriating in excess of
R7m of its funds over a considerable
period of time. It is not in
contention that the perpetrator was in charge of the administration
of the CC’s business and
that the sole co-member had no actual
knowledge of such malfeasance until after the death of the
perpetrator. The nature and details
of the wrongdoing were only
exposed after an extensive investigation by a forensic expert that
took just over two years to complete.
The relevant claim was
instituted within three years of finalisation of the investigation.
It is also not really in issue that
the amount in question was in
fact misappropriated by the deceased and would ordinarily have been
due and payable to the CC. While
accepting liability for just over
R600 000.00 that was misappropriated during the three-year
period immediately preceding
the demise of the perpetrator, his
executrix disputed liability in respect of the balance (that was
misappropriated earlier) on
the basis that the claim in respect
thereof has prescribed as averred in her special plea in case number
3039/2016. The executrix
relied on the averred constructive knowledge
of the wrongdoing by the surviving member in support of her special
plea, more particularly
to resist the averment in the plaintiffs’
replication in the same case that the claim had not prescribed
because knowledge
of the misappropriation only came to light after
the death of the perpetrator and that the action was instituted
within three years
of the date of death. She contended that such
constructive knowledge should be attributed to the CC. It should
therefore be regarded
as having been aware of the misappropriation
all along and that its claim for the balance has accordingly become
prescribed by
virtue of the proviso to
section 12(3)
of the
Prescription Act. According
to the argument, the CC should have been
aware earlier of the misappropriations and should have taken steps to
intervene earlier,
which failure now precluded it from recovering the
bulk of the misappropriated amount. So much for the context.
[50]
The purpose for which attribution is being invoked in this matter
must be sought in the provisions of
section 12(3)
of the
Prescription
Act which
are being relied upon by the executrix. The purpose of the
proviso to
section 12(3)
has been aptly stated as requiring the
creditor “…
not
to be content to play a purely passive role. If she could have
acquired this knowledge by acting diligently her inertia, inaptitude
or indifference will not excuse the delay. The creditor who fails to
exercise the reasonable care prescribed by the Act must pay
the
penalty…”
[16]
and also that a “…
creditor
cannot simply sit back and by supine inaction arbitrarily and at will
postpone the commencement of prescription”.
[17]
The purpose is accordingly to require the creditor to act reasonably
and pursue the claim timeously. In my view, this purpose does
not
necessarily require that the rules of attribution should apply in
this case, since non-attribution in this matter would not
frustrate
or undermine the achievement of this purpose. In the circumstances of
the present matter, the CC can hardly be described
as a creditor who
failed to exercise reasonable care or sat back and by supine inaction
arbitrarily and at will postponed the commencement
of prescription.
Once the details of the misappropriation came to hand, the CC acted
timeously to pursue its claim. Considerations
of fairness and justice
dictate that the CC should not be non-suited on the basis suggested
by the executrix.
[51]
It would undoubtedly not have been open to the deceased to attribute
his own knowledge of the misappropriation to the CC as
the basis for
a successful special plea that the CC’s claim against him, has
become prescribed. The absurdity and injustice
of allowing such a
defence are manifest. It is not feasible in the present situation
where the corporation is recovering its loss
from a delinquent member
who acted in flagrant breach of his fiduciary duties.
[52]
It occurs to me that there is equally no reason in principle, policy
or logic to allow the very same assumed knowledge (constructive
and
not even actual) of Graham to bar the legitimate, duly established
claim of the CC. This is especially so where Graham’s
failure
to have acquired actual knowledge of the wrongdoing and to intervene
earlier is itself being ascribed to (and assumed for
purposes of
determining the issue of attribution to be due to) a breach of his
own fiduciary duties. It would be as absurd and
unjust as in the case
of the deceased, to prejudice the CC as a result of a breach of his
fiduciary duties by Graham, and to allow
the perpetrator to escape
liability in such circumstances. I accordingly decline in the
circumstances of this case to attribute
any knowledge on the part of
Graham to the CC and treat such knowledge as a basis for defeating
the CC’s claim against the
deceased for misappropriation on the
ground that the claim had become prescribed.
[53]
It follows in my considered view that even assuming that Graham had
constructive knowledge at all material times of the misappropriation
by the deceased, the executrix has failed to establish that the CC’s
claim against the deceased had become prescribed pursuant
to the
provisions of
section 12(3)
of the
Prescription Act on
the basis of
attributing such knowledge to the CC. The special plea of
prescription therefore cannot be sustained.
CONCLUSION
[54]
The plaintiffs under case number 3039/16 (the CC and Graham) had duly
established that the total sum misappropriated by the
deceased
amounted to R 7 406 139.37 which amount is due and payable to
the CC. The deceased was accordingly indebted in this
amount to the
CC as at the date of his death for the purposes of clause 6.2 of the
agreement dated 5 May 1999 concluded by the
deceased and Graham. The
latter is therefore entitled in terms of clause 6.2 to withhold
payment of the proceeds of the Old Mutual
insurance policy to the
executrix and to pay the same to the CC in liquidation of the
indebtedness of the deceased and in lieu
of the purchase price of the
deceased’s member’s interest in the CC. To this extent,
the claim under case number 3039/16
must succeed.
[55]
It follows that the claim of the executrix under case number 2353/16
for payment of the proceeds of the insurance policy in
the sum of R
4 779 372.00 cannot succeed given the fact that the indebtedness
of the deceased to the CC exceeds such proceeds.
By the same token,
the estate remains liable to pay the outstanding balance of the
misappropriated amount to the CC, while the
executrix is obliged to
facilitate transfer of the member’s interest to Graham.
RELIEF
[56]
Although the evidence indicated that the CC had ceased its
operations, there is no indication that it has been wound up. Effect
can thus still be given to the provisions of clause 6.2 of the
agreement by effecting payment of the amounts due to the CC and
to
transfer the deceased’s member’s interest to Graham in
accordance with clause 7 of the agreement.
[57]
As indicated, the proceeds of the insurance policy have been paid
over to Graham’s attorneys and are being kept in an
interest-bearing account presumably pursuant to the provisions of
clause 6.1.1 of the agreement. In terms of clause 6.1.2 of the
agreement the interest would ordinarily have accrued for the benefit
of the deceased estate and it must therefore be applied towards
liquidating the deceased’s debt to the CC.
[58]
The report and evidence of Mr Pearton indicated that the amounts
misappropriated were calculated for each financial year commencing
in
1999 and the totals so determined are separately reflected as such in
the report. Mr Jooste has provided a convenient schedule
in this
regard which was not objected to by Mr Rorke and which will be
utilised for present purposes. Furthermore, interest
a tempore
morae
is payable at the legal rate on such amounts calculated as
having been misappropriated for each financial year determined from
the first day of the immediately succeeding financial year until the
date of payment thereof.
[59]
Mr Jooste has also handed in a draft order reflecting the relief that
his clients, the CC and Graham, are seeking. It includes
an indemnity
with regard to potential penalties or interest arising from the
misappropriation that might be payable to the South
African Revenue
Services and provides that the executrix should personally pay costs
on a punitive scale jointly and severally
with the deceased estate.
This relief was opposed by Mr Rorke. Having considered the matter and
the relevant arguments, I am not
persuaded that it would be
appropriate in the circumstances of the case that such indemnity be
provided or such costs be awarded.
I accordingly decline to accede to
Mr Jooste’s submissions in this regard.
[60]
The CC and Graham have been substantially successful and it is proper
in the circumstances for the executrix (in her representative
capacity) to pay the costs of the consolidated action on the party
and party scale.
ORDER
[61]
In the result I make the following order:
(a)
The plaintiff’s claim under case number 2353/16 is dismissed;
(b)
The defendant under case number 3039/16 (being the executrix
of the
estate late Ashley Robin Mason) is directed, subject to paragraph (d)
below, forthwith to pay the sum of R 7 406 139.37
misappropriated by the late Ashley Robin Mason to L Mason Electrical
CC (the first plaintiff under case number 3039/16) together
with
interest at the legal rate
a tempore morae
calculated in
accordance with the schedule set out in annexure “A”
hereto;
(c)
Graham Andrew Mason (the second plaintiff under case
number 3039/16)
is directed forthwith to pay the proceeds of the Old Mutual insurance
policy in the amount of R 4 779 372.00
presently being held in
trust by his attorneys together with all the interest accrued thereon
to L Mason Electrical CC;
(d)
The total amount paid in terms of paragraph (c) above shall
be
deducted from the sum payable in terms of paragraph (b) above;
(e)
The executrix of the estate late Ashley Robin Mason shall forthwith
deliver all documents duly signed in accordance with the provisions
of clause 7 of the agreement dated 5 May 1999 concluded by
the late
Ashley Robin Mason and Graham Andrew Mason, to permit transfer to
Graham Andrew Mason of the member’s interest of
the late Ashley
Robin Mason in L Mason Electrical CC;
(f)
The executrix of the estate late Ashley Robin Mason,
in her
representative capacity, shall pay the costs of suit of the
consolidated action on the party and party scale.
D.O. POTGIETER
JUDGE OF THE HIGH
COURT
ANNEXURE
A
Interest
shall be payable as follows:
(i)
On R138 153.92 from 01/03/2000 at the
legal rate to date of payment
R138
153.92
(ii)
On R161 458.60 from 01/03/2001 at the
legal rate to date of payment
R161
458.60
(iii)
On R152 906.88 from 01/03/2002 at the
legal rate to date of payment
R152
906.88
(iv)
On R191 827.90 from 01/03/ 2003 at the
legal rate to date of payment
R191
827.90
(v)
On R374 752.39 from 01/03/2004 at the
legal rate to date of payment
R374
752.39
(vi)
On R515 814.13 from 01/03/2005 at the
legal rate to date of payment
R515
814.13
(vii)
On R491 758.91 from 01/03/2006 at the
legal rate to date of payment
R491
758.91
(viii)
On R839 138.11 from 01/03/2007 at the
legal rate to date of payment
R839
138.11
(ix)
On R988 323.80 from 01/03/2008 at the
legal rate to date of payment
R988
323.80
(x)
On R979 421.05 from 01/03/2009 at the
legal rate to date of payment
R979
421.05
(xi)
On R270 319.40 from 01/03/2010 at the
legal rate to date of payment
R270
319.40
(xii)
On R577 048.44 from 01/03/2011 at the
legal rate to date of payment
R577
048.44
(xiii)
On R618 953.29 (R868 953.29 less
contingency of R250 000.00 conceded by Mr Pearton) from 01/03/2012
to date of payment
R618
953.29
(xiv)
On R632 543.32 from 01/03/2013 at the
legal rate to date of payment
R632
543.32
(xv)
On R336.791.04 from 01/03/2014 at the
legal rate to date of payment
R336
791.04
(xvi)
On R65 019.00 from 01/03/2015 at the
legal rate to date of payment
R
65 019.00
(xvii)
On R210 945.47 from 01/03/2016 at the
legal rate to date of payment
R210
945.47
(xviii)
On R59 550.72 from 26/04/2016 at the
legal rate to date of payment
R
59 550.72
TOTAL
R7
406 139.37
APPEARANCE
For
the plaintiff:
Adv
Rorke SC, instructed by Rushmere Noach Inc., 5 Ascot Office Park,
Conyngham Road, Greenacres, Gqeberha
For
the defendants:
Adv
Jooste SC, Instructed by Friedman Scheckter, 75 Second Avenue,
Newton Park, Gqeberha
Dates
of hearing
:
08 –
11 May 2023 and 05 June 2023
Delivery
of judgment
:
14
September 2023
[1]
Section
12
provides as follows in relevant part:
‘
12.
When prescription begins to run. -
(1)
Subject to the provisions of subsection
… (3), prescription shall commence to run as soon as the debt
is due.
…
(3)
A debt shall not
be deemed to be due until the creditor has knowledge of the identity
of the debtor and of the facts from which
the debt arises:
Provided that a creditor shall be deemed to have such knowledge if
he could have acquired it by exercising reasonable care.
’
(emphasis
supplied)
[2]
PriceWaterhouseCoopers
Inc & Others v National Potato Co-operative Ltd & Another
[2015]
2 All SA 403
(SCA) [‘NPC’]
[3]
Northview
Shopping Centre (Pty) Ltd v Revelas Properties JHB CC & Another
2010(3)
SA 630 (SCA)
[4]
[1995]
2 AC 500 (PC)
[5]
At
506B-D
[6]
At
506C-507F
[7]
Above
fn 2. It is necessary to point out that in the case of
attribution the actions of someone else are treated as the
actions
of the corporation, as opposed to the case of vicarious liability
where the corporation is held liable for the actions
of someone
else.
[8]
Above
fn 3
[9]
At
para [21]
[10]
Potchefstroom
Dairies & Industries Co Ltd v Standard Fresh Milk Supply Co
1913
TPD 506
at 512
[11]
[2015]
2 All ER 1083
(‘
Jetivia’)
[12]
The
scheme briefly involved the purchase of carbon credits free of VAT
by Bilta from Jetivia SA (a Swiss company) followed by
resale of the
credits subject to VAT to UK companies registered for VAT. The
onsale price was artificially set marginally below
the purchase
price paid by Bilta thus enabling the buyer to sell at a small
profit. The proceeds of Bilta’s sales
together with VAT
thereon were remitted to Jetivia. Bilta had no other business or any
assets apart from the cash generated by
the transactions which cash
was alienated to Jetivia. The scheme thus deliberately rendered
Bilta insolvent and unable to pay
the output VAT in excess of £38m
due to Her Majesty’s Revenue & Customs whom as a result
effected Bilta’s
winding up. The liquidators pursued,
inter
alia,
the former directors for the losses suffered by Bilta as a result of
the scheme.
[13]
At
para 7
[14]
[2019]
UKSC 50
[15]
Eclipse
Systems & Another v HE & She Investments (Pty) Ltd
[2020]
JOL 48467
(WCC) at para 51
[16]
Gericke
v Sack
1978(1)
SA 821 (A) at 832B-D
[17]
Macleod
v Kweyaya
2013(6)
SA 1 (SCA) at 6C-E