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[2012] ZASCA 119
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Fourie v First Rand Bank Ltd (548/2012) [2012] ZASCA 119; 2013 (1) SA 204 (SCA); [2013] 1 All SA 291 (SCA) (18 September 2012)
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THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
REPORTABLE
Case No: 578/2011
In
the matter between:
CONRAD FOURIE
.....................................................................................
APPELLANT
v
FIRSTRAND
BANK LIMITED
......................................................
FIRST
RESPONDENT
JACOBUS SPANGENBERG NO
...........................................
SECOND
RESPONDENT
Neutral citation:
C Fourie v
FirstRand Bank Ltd
(578/2012)
[2012] ZASCA 119
(18 September
2012).
Coram:
Brand, Lewis, Bosielo,
Shongwe and Theron JJA
Heard:
27 August 2012
Delivered: 18 September 2012
Summary: Claim against appellant in
terms of s 424 of the Companies Act 61 of 1973 based on
fraudulent conduct – causal
link between fraudulent conduct and
company’s inability to pay not required – second
respondent held vicariously liable
in delict, jointly and severally
with appellant for the same damages suffered by the first respondent.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
North Gauteng
High Court, Pretoria (Southwood J sitting as court of first
instance):
1 The appeal is dismissed with costs,
including the costs of two counsel.
2 The cross-appeal is upheld with
costs, including the costs of two counsel.
3 Paragraph III of the order of the
court a quo is set aside and replaced with the following:
“
III The
second defendant is ordered to pay to the plaintiff, jointly and
severally with the first defendant, the one paying the
other to be
absolved:
the capital amount of R7 340 229.73;
Interest up to and including 31
October 2010 in the sum of R5 361 200.93, less the sum of
R1 193 595.21;
(iii) on the capital amount of
R7 340 229.73 at the rate of 11,5 per cent per annum from 1
November 2010 to date of payment.’
4 Paragraph IV of the order of the
court a quo is amended to read as follows:
‘
IV The first
and second defendants, jointly and severally, the one paying the
other to be absolved, are ordered to pay the plaintiff’s
costs
of suit, such costs to include the costs consequent upon the
employment of two counsel and the qualifying fees of Messrs
S
Harcourt-Cooke and J Rhoda.'
________________________________________________________________
JUDGMENT
________________________________________________________________
BRAND JA
(LEWIS, BOSIELO,
SHONGWE AND THERON concurring)
:
[1] The appellant, Mr Conrad Fourie,
is an accountant by profession. Throughout the events that gave rise
to these proceedings,
he was employed by an auditor, Mr Francois du
Preez, in Polokwane. The first respondent is FirstRand Bank Limited
that trades under
various names, in this instance as Wesbank.
Proceedings commenced when FirstRand instituted action against Fourie
and Du Preez
in the North Gauteng High Court for payment of about
R10 million, together with interest and costs. The action
against Fourie
was brought in terms of s 424 of the Companies
Act 61 of 1973, alternatively, on the basis of the
actio legis
Aquiliae
. As against Du Preez, FirstRand claimed that he was
liable in delict for the same amount, jointly and severally with
Fourie, on
the basis that he was vicariously responsible for the
wrongdoings of the latter.
[2] During the course of the trial in
the court a quo, Du Preez took his own life. In consequence, the
second respondent, Mr Jacobus
Spangenberg, was appointed as the
executor in his deceased estate and then substituted as a party to
the action in his stead. At
the end of the proceedings in the court a
quo, Southwood J gave judgment in favour of FirstRand against Fourie
on the basis of
the main claim in terms of s 424. The delictual
claim against Spangenberg, as Du Preez’s executor, on the other
hand,
was dismissed with costs. This led to the present appeal by
Fourie against FirstRand and the cross-appeal by FirstRand against
Spangenberg, now cited as the second respondent. Both the appeal and
the cross-appeal are with the leave of the court a quo. I shall
refer
to the first respondent as FirstRand or, depending on the context, as
Wesbank; to the appellant as Fourie; and to the second
respondent as
Du Preez.
The claim against Fourie in terms
of s 424 of the Companies Act
[3] In relevant part s 424
provides:
‘
(1)
When it appears, whether it be in a winding-up, judicial management
or otherwise, that any business of the company was or is
being
carried on recklessly or with intent to defraud creditors of the
company or creditors of any other person or for any fraudulent
purpose, the Court may, on the application of the Master, the
liquidator, the judicial manager, any creditor or member or
contributory
of the company, declare that any person who was
knowingly a party to the carrying on of the business in the manner
aforesaid, shall
be personally responsible, without any limitation of
liability, for all or any of the debts or other liabilities of the
company
as the Court may direct.
(2)
(a)
Where
the Court makes any such declaration, it may give such further
directions as it thinks proper for the purpose of giving effect
to
the declaration, and in particular may make provision . . .’
[4] FirstRand’s claim under the
section arose out of the conduct of the business of XHRS Investments
71 (Pty) Ltd, t/a Supreme
Car (Supreme Car) during the period 16
August 2001 to 20 April 2004. Supreme Car was a trader in second-hand
motor vehicles, first
in Polokwane and later also in Tzaneen. On 16
November 2001 it entered into an agreement described as a Used Car
Floor Plan Agreement
with FirstRand t/a Wesbank. Pursuant to this
agreement FirstRand advanced substantial sums of money to Supreme Car
for the purchase
of second-hand motor vehicles, which then became the
property of FirstRand and thus constituted its security for the loan.
In consequence
an essential term of the floor plan agreement was that
upon resale of the vehicle by Supreme Car, it was obliged to repay
the sum
advanced by FirstRand for the purchase of that vehicle,
within the following week.
[5] During the first part of 2004
Wesbank discovered, however, that Supreme Car was in breach of this
essential term in that vehicles
financed pursuant to the floor plan
agreement were resold without repayment of the purchase price. On 20
April 2004, FirstRand
therefore cancelled the floor plan agreement.
As at that date there were 136 vehicles subject to the floor plan
agreement which
FirstRand had financed and for which Supreme Car had
not paid. When FirstRand went to Supreme Car’s premises to
repossess
the vehicles, it found only 84 of them. The remaining 52
were missing and could not be accounted for. In the event Supreme Car
was provisionally wound-up on 17 May 2004 and placed under final
liquidation on 15 June 2004. It became clear that at the date of
its
winding-up Supreme Car was hopelessly insolvent. The amount for which
judgment was obtained against Fourie in the court a quo
represented
the agreed quantum of Supreme Car’s outstanding liability to
FirstRand under the floor plan agreement which could
not be recovered
from the company in the liquidation process.
[6] In holding Fourie personally
liable for the debts of Supreme Car pursuant to s 424, the court
a quo found that the requirement
of the section had been established
by FirstRand. In arriving at this conclusion the court essentially
held: (a) that Fourie knowingly
made false representations on behalf
of Supreme Car to FirstRand by preparing false financial statements,
and thus committed fraud;
(b) that the business of Supreme Car was
conducted in a manner that amounted to recklessness and that Fourie
was knowingly a party
to this conduct. With regard to the claim in
delict against Du Preez, on the other hand, the court held, in broad
outline, that
although the false financial statements were prepared
by Fourie in the course and scope of his employment as an employee of
Du
Preez, FirstRand had failed to establish a causal link between the
false statements and the damages that it claimed. Eventually
all
these findings were challenged on appeal. The nature of the
challenges will be better understood against the factual background
that follows.
Background
[7] XHRS Investments 71 (Pty) Ltd
started out life as a shelf company. On 16 August 2001 it became the
corporate vehicle for the
business of Supreme Car. On that date Mrs
Rey Naude became its sole director and shareholder, while Du Preez
was appointed as its
auditor. As it turned out, however, Mrs Rey
Naude lived in Yzerfontein in the Western Cape. She had nothing to do
with the conduct
of Supreme Car’s business. Its
de facto
manager was her son, Danie Naude (Naude). By all accounts Naude
was a very successful salesman of second-hand motor vehicles, but
he
proved to be a disastrous financial administrator. In consequence, Du
Preez instructed his employee, Fourie, to assist Naude
in the
financial administration of Supreme Car. It will be remembered that
Du Preez took his own life during the course of the
trial. As it
happened, however, both Mrs Rey Naude and her son Danie, also passed
away either before or shortly after the commencement
of the
proceedings in the court a quo.
[8] The exact ambit of Fourie’s
role in the conduct of Supreme Car’s business is in dispute.
According to FirstRand,
Fourie was in effect its financial manager.
Fourie’s version, on the other hand, is that his authority
extended to no more
than cash flow management. Eventually, Southwood
J decided this issue against Fourie. But, in the end, very little, if
anything,
turned on the outcome of this dispute. Of greater
significance was the undisputed fact that Fourie prepared certain
documents,
nine in all, on behalf of Supreme Car that were destined
to take centre stage in these proceedings. According to Fourie, these
documents were no more than working papers, prepared with the sole
purpose of facilitating his discussions with management. On the
face
of it, however, the documents had all the trappings of audited
financial statements. Without any intent to prejudge the issue
and
only for lack of a better description, I propose to refer to them as
financial statements.
[9] As I have said by way of
introduction, the floor plan agreement between Supreme Car and
Wesbank was entered into on 15 November
2001. At that stage the
credit facility afforded in terms of the agreement was limited to
R3 million. But as the business
expanded, Supreme Car applied
for and was granted increases in the facility to R4 million, then R8
million, then R9.3 million and
finally R13 million. With regard to
these increases FirstRand tendered the evidence of, amongst others,
Mr Hentie Pienaar who was
the manager of the Wesbank branch in
Polokwane from May 2003 until September 2004 and Mr Edward Symes, a
credit manager in Wesbank’s
head-office credit control
department.
[10] From their evidence and the
documents they relied on, it emerged that, in broad strokes, Wesbank
observed the following internal
procedure every time an increase in
the credit facility was sought. Supreme Car was required formally to
apply to the branch manager
in Polokwane and provide sufficient
information to justify the increase. In order to meet this
requirement, Supreme Car included
its most recent financial
statement, prepared by Fourie, to every one of its applications.
Though Fourie prepared nine of these,
FirstRand relied on the
information contained in five of them when it increased the facility
available to Supreme Car.
[11] Upon receipt of the application,
the branch manager referred it to Wesbank’s head-office
together with his or her recommendation
that the application be
approved. At head-office it was assessed by one or more managers in
the credit department. What was emphasised
by Symes was that the
application would only succeed if it appeared that the client’s
business was profitable and that it
generated sufficient turnover to
justify the credit limit requested. This was primarily determined, so
Symes testified, with reference
to the financial statements
furnished. It was common cause that according to the financial
statements prepared by Fourie, Supreme
Car’s business was
growing, it was making substantial profits and was financially sound.
Pienaar accordingly testified that
if he knew that the financial
statements provided by Supreme Car misrepresented its financial
position in that its business was
in fact not profitable nor
financially sound, he would not have recommended an increase in the
floor-plan credit facility as and
when he did. In the same vein,
Symes testified that, had the credit department in Wesbank’s
head-office been aware that the
financial statements relied upon
constituted a misrepresentation of Supreme Car’s financial
situation, the recurring increases
in the credit facilities would not
have been approved.
[12] Fourie also gave evidence. His
answer to FirstRand’s allegations of fraudulent
misrepresentation, contained in the financial
statements, typified a
classic illustration of a cover-all defence. The financial
statements, he said, were not, or were at least
not intended, to
communicate any representations to third parties about Supreme Car’s
financial position. In so far as they
did in fact constitute
representations, he denied that his representations were untrue.
Moreover, and in any event, Fourie denied
that Wesbank’s
officials relied on the representations contained in the financial
statements when they approved the increases
of Supreme Car’s
credit facilities. Finally he contended that, even if these increases
were induced by fraudulent misrepresentations
in the financial
statements, FirstRand had failed to establish any causal link between
these fraudulent misrepresentations, on
the one hand, and Supreme
Car’s eventual inability to pay, on the other.
[13] This all-embracing defence
unfortunately resulted in a trial of many days with oral and
documentary evidence covering over
3 000 pages. Its further
negative result, from Fourie’s perspective, was that it often
compelled him, under cross-examination,
to defend positions that
proved to be indefensible. This, in turn, led to a credibility
finding by the court a quo, which was clearly
well-founded, that
Fourie was ‘a most unsatisfactory witness’ about whom
‘[t]here is no doubt that he will say
anything to avoid being
held liable for Supreme Car’s indebtedness to the plaintiff.’
Ultimately, the court a quo decided
all the issues raised by Fourie’s
cover-all defence in favour of FirstRand.
[14] Every one of his factual findings
was fully motivated by Southwood J in a most comprehensive judgment.
Despite the argument
by counsel for Fourie on appeal that some of
these motivations reflected misdirections in the reasoning of the
court a quo, I do
not believe that is so. The time honoured approach
by this court is, in sum, that absent any misdirections on the part
of the trial
court, a court of appeal is not permitted to interfere
with findings of fact (see eg
R v Dhlumayo
1948 (2) SA 677
(A)
705-706). In the event I find it unnecessary to restate the detailed
reasons given by the court a quo for its factual findings
against
Fourie which should, in my view, be endorsed by this court. It is
sufficient to refer to the findings in broad outline
only.
Did the financial statements
constitute fraudulent misrepresentations
?
[15] I first deal with Fourie’s
proposition that, save for the first of the five documents relied
upon by FirstRand, these
documents were prepared as working papers
only and not as financial statements. As to the first document,
Fourie conceded that
he had presented it to FirstRand as the audited
financial statement of Supreme Car for the financial period which
ended on 28 February
2008. His predicament was, however, that the
other four documents were for all intents and purposes in the same
format as the first.
They also pronounced themselves as financial
statements of Supreme Car for the period mentioned; they also
purported to include,
first, an unqualified opinion by an independent
auditor that the statement fairly represented the financial position
of Supreme
Car; and, second, a director’s report to the same
effect. Lastly, as in the case of the financial statement of 28
February
2008, most of these statements were also signed by either Du
Preez or Fourie. Fourie’s explanation for the format in which
the documents were couched, was essentially that they were the
products of a standard computer programme. But he could suggest
no
reason why these ‘working papers’ were formally signed by
Du Preez or himself. Nor could he account for the fact
that they were
relied upon by Supreme Car in the same way as the first document, in
support of their recurring applications for
increased credit
facilities.
[16] On appeal, counsel for Fourie
argued that, since the documents did not comply with the provisions
of the Companies Act with
reference to financial statements, they
should not be regarded as such. But as I see it, this argument misses
the whole point.
Seen in context, the documents were held out as a
true and fair reflection of the financial position of Supreme Car
which was vouched
for by an independent financial expert; they were
prepared by Fourie for that very purpose; they were relied upon by
Supreme Car
in its recurring applications to FirstRand for an
increase in its credit facility under the floor plan agreement; and
Fourie knew
that they would be used by Supreme Car for that purpose.
[17] In denying that the
representations contained in the financial statements were untrue,
Fourie maintained that during the period
covered by the statements,
Supreme Car’s business was in fact growing; that it was in fact
making a profit and that the business
was indeed financially sound.
In response to these allegations, FirstRand relied on the expert
testimony of a chartered accountant,
Mr Steven Harcourt-Cooke, that
the contents of these documents were indeed misleading. Mr
Harcourt-Cooke, however, experienced
the fundamental difficulty that
most of the source documents, which could notionally form the
underlying basis of the financial
statements, were no longer
available. They disappeared under somewhat mysterious circumstances.
But FirstRand also relied on admissions
that the contents of the
financial statements were misleading which were made by Fourie under
oath on two occasions preceding the
trial. The first of these
occasions was in an affidavit deposed to by Fourie in answer to an
application for the sequestration
of his estate which was launched on
behalf of Supreme Car, represented by Rey Naude, on 13 May 2004. The
application did not proceed
because Supreme Car was placed under
provisional liquidation shortly thereafter. The second occasion was
when Fourie testified
during the inquiry in terms of s 417 of
the Companies Act into the affairs of Supreme Car.
[18] In support of the sequestration
application, Rey Naude alleged that Supreme Car was a creditor of
Fourie because he had stolen
large amounts of money from it. In the
course of motivating these allegations, she also contended that
Fourie misled her and her
son, Danie Naude, about the financial
situation of Supreme Car by the financial statements that he prepared
for the company. These
statements represented, she said, that the
company had a healthy, profitable business which was properly
administered and earning
substantial profits, which representations
all turned out to be untrue. The financial statements she referred to
included those
relied upon by FirstRand in these proceedings. In his
detailed answering affidavit Fourie denied that he had stolen or
misappropriated
money from Supreme Car. He also denied that he misled
the Naudés in any way. In this regard he inter alia stated:
‘
In
fact, by drawing up these statements, I realised that the gross
profit of the business, as calculated from the figures given
to me,
was misstated, which led me to discover that some of the expenses
relating to stock was not correctly accounted for . .
. ‘
And:
‘
I
emphatically deny that I could ever bring [the Naudés] under
the impression that [Supreme Car] had a healthy, profitable
business
which was properly administered and earning substantial profits. On
the contrary, [Danie Naude] was painfully aware of
the financial
predicament of the applicant and assured me repeatedly that he would
see to it that [Supreme Car] trades out of its
financial
difficulties.’
[19] During the s 417 inquiry,
Fourie admitted, for instance, that neither he nor Du Preez ever
audited Supreme Car’s
books. His attempts in his evidence at
the trial to retract or qualify this admission were described by
Southwood J, rightly in
my view, as singularly unconvincing. This
means that Fourie’s covering letter to FirstRand, in which he
described the financial
statement of 28 February 2002 as having been
audited, as well as the contents of the statement itself, were
blatantly untrue. Moreover,
Southwood J held that, to the knowledge
of Fourie, the same misrepresentation, namely that they were audited
financial statements,
was also made, at least by implication, in
respect of the other financial statements relied upon by FirstRand. I
do not believe
this finding can be faulted.
[20] In addition, the evidence showed
that the financial statements were demonstrably misleading in other
material respects. In
this regard one rather blatant example will, in
my view, suffice. It transpired that Du Preez himself had lent
Supreme Car the
sum of R3.5 million at an interest rate of 36 per
cent per annum, ie R105 000 per month. Neither this loan nor the
exorbitant
interest rate payable – and in fact paid – by
Supreme Car, were reflected in any of the financial statements given
to FirstRand. What these statements reflected instead was an interest
free loan by Rey Naude. Fourie’s explanation, that he
thought
this made no difference, was patently untrue. To Fourie, as an
accountant, the reason for the disguise must have been obvious:
it is
of importance to a bank that the shareholder of a company has
committed his or her own funds and is not purely reliant on
outside
loans. Moreover, had the true state of affairs been disclosed, it
would obviously reduce the profitability of the business.
It would
also have shown that Supreme Car was under capitalised in that it had
to rely on funding by an outside party at an exorbitant
interest
rate.
Was the granting of credit induced
by the fraudulent representations
?
[21] This brings me to Fourie’s
challenge to the court a quo’s finding that the recurring
increases in Supreme Car’s
credit facilities under the floor
plan agreement had been induced by the misleading financial
statements. From the court a quo’s
judgment it is apparent that
this finding was squarely based on the direct evidence of Pienaar and
Symes that the increases were
indeed so induced. As I understand
Fourie’s criticism of this finding, it amounts to this. Despite
the rosy picture painted
of Supreme Car’s financial position in
the misleading financial statements, so Fourie contended, the
officials of Wesbank
knew that Supreme Car at times experienced cash
flow problems. Yet the applications for increased credit were
consistently approved.
I do not believe this argument warrants a
detailed analysis. I say this because, as I understand the evidence
in this regard, it
supports the contrary position, namely that
because the misleading financial statements painted such a rosy
picture of Supreme
Car’s overall financial position, the
Wesbank officials were prepared to overlook the cash flow problems
that it experienced
from time to time. This means, of course, that
but for the misleading financial statements, the cash flow problems
would have made
Wesbank reconsider increasing Supreme Car‘s
credit.
[22] Moreover, as I see it, it hardly
lies in the mouth of Fourie – who knowingly set out to enable
and assist Supreme Car
to mislead FirstRand – to argue that if
the bank’s officials had been more careful he would not have
succeeded in misleading
them. It is therefore not surprising that
this kind of argument, albeit in slightly different context, received
short shrift in
the following statement which was endorsed by this
court in
Oranje Benefit Society v Central Merchant Bank Ltd
1976
(4) SA 659
(A) at 673H:
‘
But
it appears to me that when once it is established that there has been
any fraudulent misrepresentation or wilful concealment
by which a
person has been induced to enter into a contract it is no answer to
his claim to be relieved from it to tell him that
he might have known
the truth by proper enquiry.’
(See also
Central Merchant Bank Ltd
v Oranje Benefit Society
1975 (4) SA 588
(C) 594E-H; J C de Wet
and A H van Wyk
Die Suid-Afrikaanse Kontraktereg & Handelsreg
5 ed vol 1 at 47.)
The requirement of a causal link
between the fraudulent conduct and Supreme Car’s inability to
pay
[23] The final leg of Fourie’s
argument relied on the proposition that s 424 of the Companies
Act requires a causal link
between the fraudulent or reckless conduct
of the company’s business and its inability to pay. Since
FirstRand had failed
to establish this causal link between his
fraudulent conduct relied upon and Supreme Car’s inability to
pay, so Fourie’s
argument went, the court a quo had erred in
holding him liable under the section. For the proposition of law
underlying the argument,
Fourie sought to find authority in the
decisions of this court in
L & P Plant Hire BK v Bosch
2002
(2) SA 662
(SCA) and
Saincic v Industro-Clean (Pty) Ltd
2009
(1) SA 538
(SCA).
[24] As its factual basis this
argument relied on Fourie’s own evidence, which in this respect
stood uncontroverted, that
during the period June 2003 to April 2004,
Rey Naude and her son Danie used Supreme Car’s funds to
speculate in seaside properties
in Yzerfontein which was experiencing
a boom. So, for example, they spent R2.9 million of Supreme Car’s
money on completing
a house which they expected to sell for between
R5 million and R7 million, but which prospect never materialised.
During the same
period Danie Naude also used about R2.7 million of
Supreme Car’s funds to pay for personal expenses. According to
Fourie,
this gave rise to a cash flow crisis which ultimately led to
Supreme Car’s financial demise.
[25] Southwood J accepted, for the
sake of argument, that the decisions of this court relied upon
constituted authority for the
proposition on which Fourie’s
argument was founded. He also accepted that, as a matter of fact,
Supreme Car’s inability
to pay had in the final instance been
brought about by the reckless spending of the Naudés. His
further conclusion was,
however, that all this was of no avail to
Fourie. The reason, so Southwood J held, was that Fourie was in any
event involved in
the Naudés’ property speculation at
Yzerfontein. In support of this finding he referred to Fourie’s
own evidence
that he had travelled to Yzerfontein to view the
properties and to advise the Naudés on the financial viability
of some
of these transactions. The same held true, so Southwood J
found, of the use of Supreme Car’s fund for the Naudés’
personal debts. Though Fourie obviously knew what Naude was doing,
there is no suggestion in his evidence that he took any further
steps
to stop him from using Supreme Car‘s funds or that he ever
threatened to resign if Naude did not desist. What Southwood
J
therefore held, in sum, was that, apart from Fourie’s
fraudulent misrepresentation in the financial statements, the
business
of Supreme Car was in any event conducted recklessly and
that Fourie was knowingly a party to the conduct of the business in
this
way. This finding in itself, so he concluded, constituted
sufficient reason for Fourie to be held liable in terms of s 424.
[26] On appeal Fourie supported the
finding that the business of Supreme Car was conducted in a manner
that came down to recklessness.
What he took issue with was the
finding that he was a party to the conduct of the business in that
way. But there is an enquiry
that logically precedes the
consideration of that issue. It concerns the correctness of the
interpretation of this court’s
judgment in
L & P Plant
Hire BK v Bosch
2002 (2) SA 662
(SCA) contended for by Fourie.
According to that interpretation, paras 39 and 40 of the
L & P
Plant Hire
judgment, in particular, constitute authority for the
proposition that in order to sustain a claim by a creditor in terms
of s 424,
there must be a causal link between the reckless or
fraudulent conduct relied upon and the company’s inability to
pay.
[27]
L & P Plant Hire
concerned
s 64
of the
Close Corporations Act 69 of 1984
. But the slight
difference between that section and s 424 of the Companies Act
is of no consequence for present purposes.
Fourie was therefore
correct in arguing that the interpretation afforded to s 64 must
also hold true for s 424. My difficulty
lies with the meaning
that Fourie ascribed to that judgment, namely that it imported a
requirement of causation into s 64
and, by the same token, into
s 424. My further difficulty is that it is clear from the
judgments of both Harms JA and Farlam
JA in
Saincic v Indo-Clean
(Pty) Ltd
2009 (1) SA 538
(SCA) that they both understood paras
39 and 40 of
L & P
Plant Hire
in the same way as
did Fourie. That much appears, for instance, from the following
statement by Harms JA (para 29):
‘
These
statements [in paras 39 and 40 of
L
& P Plant Hire
]
imply at least that as far as creditors are concerned there must be
some or other causal link between the fraudulent conduct and
the
inability to pay the debt. In other words, it must be due to the
fraudulent conduct that a particular creditor's debt cannot
be
repaid. In this regard the statements appear to be in conflict with
some generalised earlier dicta that the section applies
irrespective
of causation. These conflicting approaches should be seen in context.
Take the example of company A that incurs a
liability towards
creditor B for debt C while the business of A was conducted in a
fraudulent manner. The fraud did not affect
the solvency of the
company and debt C was paid. Thereafter A incurs debt D at a time
when the business was properly conducted.
Due to other circumstances
A cannot pay this amount to B. There can be little doubt that B would
not be entitled to rely on s 424(1)
in these circumstances. This
example illustrates that the provision could not have intended that
causation does not play any role
at least as far as creditors are
concerned. Whether the matter should rather be considered as part of
the general discretion (as
Farlam JA has done) or as a prerequisite
(as
L
& P Plant Hire
has
done), makes no difference to the outcome of this case.’
[28] Why I have difficulty with this
understanding of paras 39 and 40 of
L & P Plant Hire
, is
that they were never intended to bear that meaning at all. As the
scribe of those paragraphs I must confess that I find the
need to
explain them a somewhat humbling experience. But perhaps I should be
grateful for the opportunity to avoid further confusion.
The context
of
L & P Plant Hire
was that there was no evidence that
the close corporation concerned was unable to pay its debts. Read in
that context, the judgment
is rightly understood by Meskin (P M
Meskin, B Galgut, J A Kunst, P Delport and Q Vorster
Henochsberg
on the Companies Act
5 ed vol 1 at 913) as saying no more than
this: if, despite the reckless conduct of the company’s
business, it is nevertheless
able to pay its debt to a particular
creditor, that creditor has no cause of action under s 64 –
or s 424 –
against those responsible for the reckless
conduct. This is so, the judgment in
L & P Plant Hire
explained, because s 424 was not intended to create a joint
and several liability between the company and those responsible
for
the reckless conduct of its business, but rather to protect creditors
against the prejudice they may suffer as a result of
the business of
the company being carried on in that way. Logic dictates that unless
the company is unable to pay, no such prejudice
would follow. That
does not mean that the plaintiff-creditor has to liquidate or excuss
the company, but only that there must be
evidence of the company’s
inability to pay (see also
Saincic
para 27).
[29] What the
L & P Plant Hire
judgment did dissent from was the notion thus expressed in
Harri
& others NNO v On-Line Management
2001 (4) SA 1097
(T) 1099F:
‘
Like
s 424 of the Companies Act [s 64 of the
Close Corporations
Act] is
aimed at discouraging fraudulent, dishonest and reckless
persons from abusing the protection which is provided by a corporate
entity.
The impact thereof should not be limited to instances where
the corporate entity has been mismanaged to the extent that it is
unable
to meet the resultant financial obligations.’
[30] Thus understood,
L & P
Plant Hire
finds no application in a case such as the present
where the company proved to be hopelessly insolvent and was clearly
unable to
pay the debt which the plaintiff-creditor seeks to recover
from the miscreant conductor of the company’s business in a
fraudulent
or reckless way, under
s 424.
Hence it is no
authority for the proposition that in these circumstances the
plaintiff-creditor is required to establish a causal
link between the
fraudulent or reckless conduct relied upon and the company’s
inability to pay its debt. On the contrary,
L & P Plant Hire
was never intended to deviate from those decisions of this court
(such as
Howard v Herrigel
[1991] ZASCA 7
;
1991 (2) SA 660
(A) 672C-E and
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 142G-I)
which expressly laid down the general principle that
s 424
does
not require proof of a causal link between the relevant conduct and
the company’s inability to pay the debt.
[31]
Saincic
recognised an
exception to this general principle where the converse had been
positively established, namely, that there was plainly
no causal
connection between the relevant conduct and the debt, as in the
example given by Harms JA (para 29). But on the facts
of this case,
it is clear to me that it falls way outside the ambit of the
envisaged exception. Even on the basis that Supreme
Car’s
eventual financial downfall resulted from the extravagant reckless
spending by the Naudés, it is apparent that
the reckless
spending was facilitated by funds obtained on credit from FirstRand.
But for the ever increasing credit facilities
extended to Supreme
Car, its cash flow would simply not have allowed the Naudés’
extravagant spending. These credit
facilities, as we know, were in
turn afforded on the basis of Fourie’s fraudulent statements.
In the circumstances the link
between the fraudulent statements and
the debt for which FirstRand seeks to hold Fourie liable cannot be
denied. In this light
it is strictly speaking unnecessary to consider
whether or not the court a quo was right in finding that Fourie was
party to the
reckless spending by the Naudés. But, in any
event, I am yet again unpersuaded that this factual finding resulted
from any
misdirection on the part of the court a quo. It follows
that, in my view, that finding must also be confirmed.
[32]
Finally and
rather belatedly Fourie contended that, in the exercise of its
discretion under
s 424
, the court a quo should have reduced the
amount for which he was held liable by R3 million, on the basis that
credit for that amount
had already been extended to Supreme Car
before his misrepresentations. I do not agree with this contention.
Firstly, there is
no indication that the court a quo had been asked
to exercise its discretion in this way. On the contrary, the quantum
of FirstRand’s
claim was agreed upon. Secondly, it must be
remembered that the amount for which Fourie was held liable
represented the balance
that FirstRand was unable to recover from
Supreme Car. In this light, there is no reason to think that if the
credit facilities
under the floor plan agreement were never raised
beyond R3 million, FirstRand would not be able to recover its claim
in full from
the company in liquidation. Thirdly, I can think of no
reason why, in the circumstances of this case, Fourie should be
better off
than if he were to be held liable in delict. Fourthly,
this contention was never raised in Fourie’s grounds of appeal.
[33] For these reasons I believe that
Fourie’s appeal should be dismissed with costs, including the
costs of two counsel.
This brings met to FirstRand’s
cross-appeal against the second respondent as the executor in the
estate of Du Preez.
FirstRand’s cross-appeal
[34] It was not disputed that Fourie
acted in the course and scope of his employment as Du Preez’s
employee when he prepared
the financial statements that were found to
be fraudulent. If Fourie were to be held liable in delict for the
loss resulting from
the statements, Du Preez’s vicarious
responsibility would therefore follow. The court a quo found,
however, that Fourie was
not delictually liable, because FirstRand
had failed to establish a causal link between the fraudulent
statements and the damages
claimed.
[35] In this regard Southwood J
referred to the distinction between the concepts of factual
causation, which is ordinarily determined
by the so-called ‘but-for’
test, and legal causation, which is generally dependent on
considerations of policy (see
eg
International Shipping Co (Pty)
Ltd v Bentley
1990 (1) SA 680
(A) 700E-701C). His factual
findings following upon this distinction are encapsulated in the
following statement:
‘
In
the present case if the misrepresentations factually caused the loss
there can be no doubt that the defendants should have to
answer for
this. The problem lies with the issue of factual causation. There
were multiple misrepresentations but none has been
shown to have
caused any part of the indebtedness as at the termination of the
floor plan agreement. The evidence shows rather
that this
indebtedness and Supreme Car’s inability to meet its
obligations in terms of the floor plan agreement was caused
by the
Naudés’ uncontrolled . . . expenditure of Supreme Car’s
funds in respect of the property speculation
at Yzerfontein which did
not produce the anticipated profits and to pay personal expenses.’
[36] The statement appears to embrace
two separate considerations. First, that FirstRand had to establish a
causal link between
each of the five individual misrepresentations
relied upon and the damages it eventually suffered. Secondly, that,
in any event,
FirstRand had failed to establish that the damages it
had suffered were caused by Fourie’s misrepresentations,
because on
the evidence it resulted from the reckless spending of the
Naudés. I shall deal with these two considerations in turn.
[37] The ‘but-for’ or
‘
causa sine qua non
’ test, which is the accepted
yardstick for determining factual causation, requires a hypothetical
enquiry as to what probably
would have happened, but-for the wrongful
conduct of the defendant. If one applies this test to every one of
the five misrepresentations
relied upon by FirstRand individually,
one may well arrive at the conclusion that its elimination would make
no difference, because
the consequences of the remaining
misrepresentations would remain the same. But that, in my view, would
be a wrong application
of the test. It would mean that A, who
committed a series of frauds, is in a better position than B, who
committed only one.
[38] Properly analysed, FirstRand’s
case relied on a course of fraudulent conduct consisting of five
misrepresentations, which
gave rise to a globular loss. The factual
finding of the court a quo – which should, in my view, be
endorsed – showed
that, but for the misrepresentations of the
financial position of Supreme Car, the incremental credit facility,
climbing from R3
million to R13 million, would not have been granted
to Supreme Car. It follows, in my view, that but for this series of
misrepresentations,
the total facility of R13 million would not have
been granted. Thus understood, Supreme Car’s indebtedness at
the time of
the termination of the floor plan agreement, was directly
caused by Fourie’s misrepresentations.
[39] I do not believe that the fact of
the Naudés’ uncontrolled spending detracts from this
conclusion in any way.
In a sense, it is true to say that Supreme
Car’s inability to meet its obligations to FirstRand was caused
by this uncontrolled
spending. But on the evidence the various
elements cannot be divorced from each other. Fourie’s
misrepresentations served
two purposes; to cover up the uncontrolled
spending; and, at the same time, to induce the increased credit
facilities by FirstRand.
The increased facilities in turn served to
facilitate the uncontrolled spending. But for Fourie’s
misrepresentations, FirstRand
would therefore not have been exposed
to the risk of a claim that proved to be irrecoverable upon the
liquidation of Supreme Car.
Or, put differently, it would not have
suffered the agreed amount of damages claimed.
[40] In this light I do not agree with
the court a quo’s finding that the delictual element of factual
causation had not been
established by FirstRand. This leads me to
three further conclusions. First, Fourie is liable not only in terms
of
s 424
, but also in delict for the agreed amount of damages
claimed by FirstRand. Second, the second respondent, as executor in
the deceased
estate of Du Preez, is also liable, jointly and
severally with Fourie, for these damages. Third, that the
cross-appeal should be
upheld with costs, including the costs of two
counsel.
[41] In the result it is ordered:
1 The appeal is dismissed with costs,
including the costs of two counsel.
2 The cross-appeal is upheld with
costs, including the costs of two counsel.
3 Paragraph III of the order of the
court a quo is set aside and replaced with the following:
‘
III The
second defendant is ordered to pay to the plaintiff, jointly and
severally with the first defendant, the one paying the
other to be
absolved:
the capital amount of R7 340 229.73;
Interest up to and including 31
October 2010 in the sum of R5 361 200.93, less the sum of
R1 193 595.21;
Interest on the capital amount of
R7 340 229.73 at the rate of 11,5 per cent per annum from
1 November 2010 to date
of payment.’
4 Paragraph IV of the order of the
court a quo is amended to read as follows:
‘
IV The first
and second defendants, jointly and severally, the one paying the
other to be absolved, are ordered to pay the plaintiff’s
costs
of suit, such costs to include the costs consequent upon the
employment of two counsel and the qualifying fees of Messrs
S
Harcourt-Cooke and J Rhoda.'
_________________________
F D J BRAND
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: C DA SILVA SC
J
S KLOPPER
Instructed
by: CORRIE NEL INC
POLOKWANE
Correspondents:
CHRISTO DIPPENAAR ATTORNEYS
BLOEMFONTEIN
For
First Respondent: A R GAUTSCHI SC
S
G GOUWS
Instructed
by: LANHAM-LOVE ATTORNEYS
JOHANNESBURG
Correspondents:
McINTYRE & VAN DER POST
BLOEMFONTEIN