Standard Bank of South Africa v The Master of the High Court (Eastern Cape Division) [2010] ZASCA 4; 2010 (4) SA 405 (SCA) ; [2010] 3 All SA 135 (SCA) (19 February 2010)

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[2010] ZASCA 4
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Standard Bank of South Africa v The Master of the High Court (Eastern Cape Division) [2010] ZASCA 4; 2010 (4) SA 405 (SCA) ; [2010] 3 All SA 135 (SCA) (19 February 2010)

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THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case no: 103/09
THE
STANDARD BANK OF SOUTH AFRICA
Appellant
and
THE
MASTER OF THE HIGH COURT
First
Respondent
(EASTERN
CAPE DIVISION)
BASIL BRIAN NEL
Second Respondent
MICHAEL LEO DE VILLIERS
Third Respondent
________________________________________________________________
Neutral citation:
Standard
Bank v The Master of the High Court
(103/09)
[2010] ZASCA 4
(19 February 2010)
CORAM:
Navsa,
Ponnan, Maya, Snyders JJA and Griesel AJA
HEARD:
19
November 2009
DELIVERED:
19
February 2010
CORRECTED:
SUMMARY: Liquidators occupying
position of trust towards creditors and companies in liquidation ─
required to be independent and
to regard equally the interest of all
creditors ─ expected to carry out their duties without fear, favour
or prejudice ─ standard
not met ─ liquidators removed and fees
reduced.
________________________________________________________________
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
Eastern
Cape High Court, Grahamstown (Liebenberg and Plasket JJ sitting
as court of first instance).
1.
The
appeal is upheld.
2.
The
second and third respondents are ordered to pay two thirds of the
appellant’s costs, such costs to include those consequent
upon
the employment of two counsel,
to
be paid by the second and third respondents in their personal
capacities jointly and severally.
3. The order of the court below is set
aside and substituted as follows:
‘
1. The third and fourth respondents
are removed as joint liquidators of Intramed (Pty) Ltd (in
liquidation).
2. The decision of the Master not to
disallow or reduce the remuneration of the third and fourth
respondents as joint liquidators
of Intramed (Pty) Ltd (in
liquidation) is reviewed, set aside and replaced with an order in
terms whereof the remuneration of the
second and third respondents is
reduced by five per cent.
3.
The
third and fourth respondents are ordered to pay the costs of the
application including the costs consequent upon the employment
of two
counsel where applicable, such costs to be paid by the third and
fourth respondents in their personal capacities jointly and
severally
.’
________________________________________________________________
JUDGMENT
________________________________________________________________
NAVSA JA (PONNAN, MAYA and SNYDERS JJA
concurring)
Introduction
[1] In the winding-up of companies
liquidators occupy a position of trust, not only towards creditors
but also the companies in liquidation
whose assets vests in them.
Liquidators are required to act in the best interests of creditors. A
liquidator should be wholly independent,
should regard equally the
interests of all creditors, and should carry out his or her duties
without fear, favour or prejudice.
1
The Issue
[2] The central question in this
appeal is whether the second and third respondents, Basil Brian Nel
and Michael Leo De Villiers,
in their capacity as joint liquidators
of Intramed (Pty) Ltd (in liquidation), discharged their duties in
the manner set out above
and, if not, whether they should be removed
as such. Allied questions, include, whether (a) they should, in terms
of s 394(7)(a)
of the Companies Act 61 of 1973 (the CA), be
subject to the payment of a penalty, being double that paid out of
Intramed’s bank
account other than for the sole benefit of
Intramed, and (b) whether, in terms of s 384(2) of the CA, they
should be subject to a
reduction or disallowance of their fee. I
shall, for the sake of convenience, refer to the second and third
respondents as Nel and
De Villiers respectively, to the appellant as
Standard Bank and to Intramed (Pty) Ltd, both in its pre- and
post-liquidation state,
as Intramed.
The order of the Court below and
leave to appeal
[3] Standard Bank is a registered
commercial bank and a proved creditor of Intramed. During April 2005
it launched an application
in the Grahamstown High Court for an order
that Nel and De Villiers be removed as joint liquidators of Intramed
and sought extensive
associated relief, including but not restricted
to that set out in the preceding paragraph. The application was
refused with costs
(Liebenberg and Plasket JJ).
2
The present appeal is before us with leave granted, in part by the
court below and in part by this court. The Master of the High
Court
was cited as the first respondent but took no part in the litigation.
The biggest commercial collapse in
South Africa’s history ─ the winding up of the Macmed group and
the appointment of liquidators.
[4] Before being placed in
liquidation, Intramed was a wholly-owned subsidiary of Macmed
Healthcare Limited (Macmed). The latter conducted
business through a
host of subsidiaries. By all accounts the Macmed group of companies
experienced exponential growth within a relatively
short space of
time. In ‘modern’ language the group was a ‘high flyer’.
During March 1999, shortly before its demise, Macmed
entered into an
agreement with Aspen Healthcare Holdings Limited, to acquire three of
the businesses of South African Druggists Ltd
(an Aspen subsidiary),
one of which was to be housed in Intramed. The businesses were
acquired and Intramed conducted a viable business.
The acquisition of
the Intramed business, particularly how it was funded, and the
relationship between Macmed and Intramed, as will
become apparent,
were central features in prior litigation as they are in the present
case.
[5] Both Macmed and Intramed were
wound-up because they were unable to pay their debts. Macmed’s
failure was, at that time, widely
regarded as the biggest commercial
collapse in the history of South Africa. The winding-up of Macmed and
its 45 subsidiaries and
the associated litigation began slightly more
than a decade ago.
[6] Macmed was placed in provisional
liquidation by the Pretoria High Court on 15 October 1999 and a final
liquidation order issued
on 9 November 1999. In the ensuing
months Nel and five other persons were appointed first, as joint
provisional liquidators
and then, as the final joint liquidators of
Macmed.
[7] Intramed was provisionally
liquidated on 29 November 1999 and finally on 16 February 2000. On 29
November 1999 the Master appointed
De Villiers a provisional
liquidator of Intramed. On 3 December 1999 the Master appointed Nel
as a joint provisional liquidator along
with De Villiers. On the
31 May 2000 Nel and De Villiers were appointed as joint final
liquidators of Intramed.
[8] Nel was not only appointed a joint
liquidator of Macmed and of Intramed but of each of the other
subsidiaries as well. It is safe
to say that he was an influential
figure in the liquidation process.
[9] The liquidations of Macmed and
Intramed have significant financial importance. According to the
first liquidation account Intramed
has assets exceeding R170 m.
According to the amended fourth liquidation account it has
liabilities exceeding R230 m. Standard Bank
is a judgment creditor of
Intramed in the amount of R107 728 463.64. Standard Bank is also a
major creditor of Macmed and a number
of its other subsidiaries.
Standard Bank’s complaints
[10] Standard Bank contends that Nel
and De Villiers, instead of viewing the winding-up of Intramed as a
distinct process, saw it
as part of the winding-up of the entire
group and improperly deferred to Macmed and its creditors. Standard
Bank accuses Nel and
De Villiers of both using, and failing to use,
established mechanisms for ensuring the proper administration of
estates in liquidation.
It alleged that they acted in a manner
favouring Macmed and prejudicing Intramed. This, in the main, relates
to the admission of
a claim by Macmed in Intramed in the amount of
R325m.
[11] Standard bank also accuses Nel
and De Villiers of misappropriating Intramed’s funds. They are
accused of improperly using Intramed’s
monies to pay costs which a
court in prior litigation, in relation to an application to review
the Master’s decision to reduce
their fees, had ordered them to pay
personally.
3
Standard Bank alleged that Nel and De Villiers had only repaid the
monies with interest, after this fact had been uncovered by Standard
Bank, and after it persisted in holding them to account.
[12] Furthermore, Standard Bank
complains that a fee-sharing agreement between the liquidators of
Intramed and the liquidators of
Macmed was such, as to militate
against a proper administration of Intramed’s insolvent estate.
Standard Bank asserts that Nel
faced a conflict between his duty to
Intramed and his duty to Macmed and what ultimately became his
personal interest in both.
[13] It is necessary at this stage to
proceed to consider the material details of Standard Bank’s case,
and to examine the response
by Nel and De Villiers.
The R325m claim
[14] The present litigation arose
principally, because of the differing views taken by Standard Bank on
the one hand, and Nel and
De Villiers on the other, in relation to
the claim of R325m by Macmed in Intramed. That dispute has telescoped
into one concerning
the nature of the acquisition of the three
businesses from South African Druggists (SAD), described above.
[15] As stated, Macmed conducted its
business through subsidiaries, including Intramed. The acquisition of
the three businesses was
structured so as to obtain maximum tax
advantage for the group. This was done by way of more than twenty
interlinked and extremely
complex agreements.
[16] It is common cause that the
agreements, which do not form part of the record of the proceedings,
are extremely voluminous and
complex and involved many parties. The
terms of the agreements were sought to be explained in a letter dated
29 June 1999 from the
company purportedly financing the acquisition,
namely, Peregrine Finance (Pty) Ltd (Peregrine) to Absa Corporate
Bank. I shall, for
convenience, refer to the agreements as the
Peregrine structure. The following, in summary, is what is recorded
in the letter:
(i) The Macmed group is
in the process of finalising the acquisition of certain businesses
from South African Druggists Ltd at an
all in cost of approximately
R400 m. The businesses would be acquired directly by Macmed’s
subsidiary companies, including Intramed.
(ii) The financing
options were either inter-company or external funding. Peregrine
proposed a transaction in terms of which the
purchasers, including
Intramed, would obtain external funding. The proposal entailed
Peregrine providing the purchasers a loan with
a ten-year fixed
interest rate. The loan entitled Peregrine to subscribe for ordinary
shares in each of the purchases, in the loan
amount at maturity
date.
(iii) Peregrine would
cede and assign all its rights and obligations in terms of the loan
agreements to Willridge Investments (Pty)
Ltd (Willridge), a trader
in financial instruments and a subsidiary of Peregrine, for a
purchase consideration of R401 m. At
the inception of the
transaction Willridge would forward sell the ordinary shares arising
on conversion to investors, for delivery
after ten years, for a
consideration of R40 m, payable on signature of the agreement.
Macmed would be offered an investment opportunity
in ten- year fixed
rate compulsory redeemable preference shares to be issued by Leoridge
Investments (Pty) Ltd, a subsidiary of
Peregrine and a preference
share investment company. The preference shares would bear a market
related dividend yield with dividends
payable semi-annually in
arrears.
(iv) Peregrine would
advance conventional loan funding in the amount of R275m to Willridge
for a period of ten years. In terms of
the loan agreement interest
and capital would be repayable in equal instalments over the term
thereof.
(v) Macmed would make a
security deposit with Willridge in the amount of approximately R160m
for a period of ten years. In terms
of the deposit, Macmed would be
entitled, but not obliged, to withdraw funds on a semi-annual basis
in equal tranches over the
term thereof.
(vi) Willridge would
provide the purchasers with an additional loan facility in the amount
of approximately R75m in terms of which
the capital would be drawn
down semi-annually in equal trances over a ten-year period. In terms
of the additional loan facility,
the interest rate would be fixed at
a market related rate and the interest and capital would be
repayable at maturity. The purpose
of the additional loan facility
is to provide purchasers with ongoing working capital for the
performance of its business operations
over the term ie ten years.
The loan facility would be utilised in the production of income.
(ix) Macmed would be
granted a put option by Willridge to put the preference shares issued
by Leoridge to Willridge, in the event
of a default by Leoridge.
(x) Holdings would issue
a guarantee to Macmed in respect of all of the Peregrine companies’
obligations.
[17] It appears from this letter that
what was envisaged, were loans by Peregrine to each of the
subsidiaries. It is equally clear
from the letter that inter-company
funding was rejected as an option. Put simply, if the letter is to be
believed, it means that
a loan by Macmed to the subsidiaries was not
the chosen or preferred option.
[18] That notwithstanding, on 10 May
2000, the liquidators of Macmed proved a claim in Intramed of R325m
on the basis that it was
an amount owed by the latter to the former
in respect of the acquisition of the relevant business from SAD. Nel
and De Villiers were
instrumental in the claim being admitted by the
Master. It is common cause that the purchase price of the business
was in fact R324
880 000. Thus, the claim of R325m lodged on behalf
of Macmed was an amount of R120 000 in excess of the actual
price of the
business so acquired.
[19] To properly appreciate and
address the present dispute, flashbacks and switching between
different time periods are regrettably,
intermittently necessary.
[20] The Peregrine structure took
effect on 18 June 1999 when an amount of R325m was advanced by
Peregrine to Intramed. Peregrine,
in turn, subscribed for shares in
Intramed at a subscription price in the amount of the purchase price.
The capital sum would be
repayable on 18 June 2009 but would be
set-off against Peregrine’s obligation to pay the subscription
price. On the same day that
it received the R325m from Peregrine,
Intramed transferred that amount to Macmed. It is common cause that
before the money was advanced
by Peregrine to Intramed, Macmed
provided the R325m to Willridge, a Peregrine subsidiary.
[21] Standard Bank adopts the position
that, in supporting the claim Nel and De Villiers ignored the
Peregrine structure, the accounting
records of both Macmed and
Intramed prior to the winding-up (which did not reflect a loan by the
former to the latter), and evidence
at the enquiry in relation to the
winding-up of Macmed, where none of the witnesses confirmed the
existence of the loan but rather
where uncertainty was expressed
concerning it.
[22] It was alleged on behalf of
Standard Bank that subsequent to the winding-up of Intramed, and
after the appointment of Nel and
De Villiers as liquidators, an entry
was made in the accounting records of Intramed reflecting a loan of
R325m by Macmed to Intramed
and that this could only have been done
at their instance. The auditors qualified their report by stating
that they were unable to
verify the loan or confirm the amount owing
to Macmed.
[23] It was pointed out that it is
unusual for a claim of the size and nature of Macmed’s claim to be
admitted to proof without
reference to supporting documentation
and/or evidence. On the other hand, one finds supporting
documentation that shows Intramed
receiving R325m from Peregrine and
then transferring it back to Macmed.
[24] It was contended that the
Peregrine structure had the effect that the R324 880 000 required for
the acquisition of the Intramed
business would never have to be
repaid by Intramed other than from the proceeds of its share issue.
[25] An interest payment on the loan
was made by Intramed to Peregrine on 17 September 1999, in the
sum of R30 908 760, ostensibly
in terms of the Peregrine structure.
This is reflected in one of Intramed’s bank statements. This, it is
contended, is proof of
the execution of the Peregrine structure in
respect of which Peregrine is the creditor and Intramed the debtor.
[26] Standard Bank pointed to the fact
that a share certificate was issued to Macmed on 18 June 1999 for
2000 shares in Leoridge Investments
in respect of which stamp duty of
R500 000 was paid as yet another example of the execution of the
Peregrine structure.
4
Nel and De Villiers responded that this was a small price to pay to
perpetuate a sham.
[27] Standard Bank refers to the fact
that the Macmed parties had to pay Peregrine an amount of R3 300 000
every six months for putting
the Peregrine structure in place. This
assertion was, in effect, unchallenged. The first six-monthly
payments appear to have been
made.
[28] It was contended that Macmed has
no legitimate claim against Intramed and that Nel and De Villiers
supported the claim to Intramed’s
detriment and for their personal
benefit.
[29] Nel and De Villiers adopted the
attitude that the Peregrine structure was a simulated transaction and
that the true transaction
was a R325m loan from Macmed to Intramed.
It was submitted on their behalf that if that were not so, it would
mean that Intramed
would have received a business from SAD without
giving any value in return. They point to the fact that Macmed
supplied R325m to
a Peregrine subsidiary, which amount was, in turn,
provided by Peregrine to Intramed. They contend that the R325m was
then utilised
by Macmed to pay SAD for the business to be housed in
Intramed. Their response in respect of the accounting records will be
dealt
with in due course.
[30] It is necessary to record that
during May 1999, before the liquidation of Macmed, it took an opinion
from one of the leading
tax experts in South Africa, concerning the
legality (and tax effectiveness) of the Peregrine structure. The
opinion concluded that
the Peregrine structure was not assailable by
the South African Revenue Services. No concern or reservation was
expressed about its
genuineness.
[31] Mr Carel Braam Viljoen, who
represented Peregrine at the time that the Peregrine structure was
put in place, testified during
the enquiry into the affairs of Macmed
in terms of s 417 of the CA. He also testified in the course of a
trial between Intramed and
Standard Bank. At no time did he state
that the transaction was a sham, nor was it ever put to him that it
was a simulated transaction.
In an affidavit in the present case in
support of Standard Bank’s case
Mr Viljoen states:
‘
Had such a proposition
been put to me I would have truthfully answered that it was not a
simulated transaction and that the agreements
constituting the
Peregrine structure correctly reflected the intentions of the parties
thereto.’
[32] Mr Hanson, a director of Macmed,
who signed the Peregrine agreements, both on behalf of Macmed and
Intramed, testified at the
Macmed enquiry that the agreements were
genuine. He provided an affidavit in support of Standard Bank’s
case and repeated that
evidence. Nel’s response to Hanson is that
he was one of the Macmed directors who perpetrated a massive fraud on
Macmed and that
he cannot be believed.
[33] During May 2000 the joint
liquidators of Macmed sought an opinion from two senior advocates on
whether the Peregrine structure
was a simulated transaction and on
the effect of liquidation on it. The following is stated in the
opinion:
‘
The companies intended
to achieve precisely that which the primary purpose of the financing
structure was aimed at. We found nothing
in the contracts to suggest
that the parties had a disguised intention. In this case there is a
complete correspondence between the
“…truth of the matter…”
on the one hand and the writing on the other. Any attempt at the
application of the maxim “
plus
valet quod agitur quam quod simulate concipitur
”
to the facts of this case will be fruitless. The Financial structure
is not simulated.’
[34] This opinion was sought at the
time that the Macmed claim was in the process of being admitted to
proof by the Macmed liquidators.
Either the claim preceded the
opinion or was proved despite the opinion. It was at the very least
persisted in, despite the opinion.
[35] The following conclusion by
counsel in respect of the effect of liquidation is not unimportant:
‘
We are of the opinion
that the liquidators are unlikely to undo the effects of the set-off
or to recover any equity pursuant to any
possible unwinding of the
financial structure in any of the companies in the Peregrine
interests.’
[36] Not content with this opinion,
the Macmed liquidators took another, from two other counsel, which
was supplied at the end of
August 2000. Counsel considered the prior
opinion and concluded that the agreement was a simulated transaction.
The following is
one of the listed bases for concluding that the
agreement was a sham:
‘
Ex facie
Intramed’s
financial records, Macmed made a direct loan to it in an amount of
R325 million’
.
[37] Another listed reason for the
second opinion reads as follows:
‘
The R325 million
apparently advanced by Macmed to Intramed for the acquisition of the
business was reduced by set-off on loan account’.
[38] It is necessary to record that
the second opinion is equivocal about the effect of the liquidation
on the Peregrine structure.
5
Importantly, the material part of the last paragraph of the second
opinion reads as follows:
‘
In the premises we
conclude that Consultant has a better prospect of pursuing the claims
against Intramed based on the direct loan
reflected in the latter’s
books of account.…
’
All of this highlights that the book
entries played a significant role in the conclusion reached in the
second opinion concerning
the legality of the Peregrine structure.
[39] The following extract of the
evidence of Mr Viljoen (from the enquiry into the affairs of Macmed),
which was referred to in the
second opinion obtained by the
liquidators of Macmed, reveals that the money that was supplied by
Peregrine to Macmed emanated from
Macmed. However, Mr Viljoen
continues to explain the transaction as follows:
‘
Its an alternative to
the conventional loan funding. So, in other words, it’s a
back-to-back transaction. They invest in our preference
shares, the
security deposit and the forward sale of shares. We then utilise that
money that they have given us to give a loan to
their subsidiary…’.
[40] This explanation appears to be in
line with what is set out in paragraph (iii) of the Peregrine letter,
(para 16 above), which
contemplates Macmed receiving a dividend
payable semi-annually.
[41] Possessed of two contradictory
opinions, the liquidators of Macmed obtained yet another legal
opinion. The third opinion, which
is approximately four and a half
pages long, refers to Mr Viljoen’s evidence, the material part
of which is set out above,
and then agrees with the view expressed in
the second opinion, namely, that the Peregrine structure was a
simulated transaction.
The second opinion records the following:
‘
Consultants will
obtain no benefit from regarding the structure as a simulated
transaction, cancelling the agreements constituting
the structure or
enforcing the agreements constituting the structure.’
This motivation is significant.
[42] It is clear that Nel was
instrumental in the decision by the liquidators of Macmed to lodge a
claim in Intramed. No opinion on
the Peregrine agreement was sought
by Nel and De Villiers on behalf of Intramed. Standard Bank contends
that neither Nel nor De Villiers
took into account the Intramed
perspective.
[43] Insofar as bookkeeping entries
are concerned, what is set out hereafter is important. Up until the
end of October 1999, almost
three and a half months after the
Peregrine structure took effect, neither the Macmed nor Intramed
financial records, including Intramed’s
balance sheet, reflected a
loan of R325m. Macmed, it will be recalled, was placed under
provisional liquidation on 10 October
1999 and final liquidation
on 9 November 1999. It is therefore clear that, until then, no loan
to Intramed was reflected in its books
of account.
[44] According to a chartered
accountant, Mr Deon Millson, who was employed by Deloitte &
Touche at the time and who had been
engaged by the financial director
of Intramed to examine the Macmed/Intramed inter-company accounts, it
appears that an entry reflecting
the loan was first made in
Intramed’s books of account on 8 December 1999. This was after
Intramed had been placed in provisional
liquidation and after De
Villiers and Nel had been appointed joint provisional liquidators and
had taken charge of the books of account.
According to Nel, neither
he nor De Villiers gave instructions to the auditors, Deloitte &
Touche, to pass entries to reflect
the loan.
[45] The audited financial statements
of Intramed for the nine months ending 28 November 1999 (the day
before Intramed’s liquidation)
disclose Macmed as a creditor of
Intramed in respect of the alleged loan of R325 m. These statements
bear the signature of Nel and
De Villiers and are dated 15 January
2000 but appear, from what is said both by the principal deponent on
behalf of Standard Bank
and Nel, to have been signed a few weeks
later. Deloitte & Touche qualified these financial statements
signed off by Nel and
De Villiers as follows:
‘
We were unable to
confirm the amount owing to Macmed Healthcare Limited as at 28
November 1999 …’
[46] In a letter dated 10 December
1999 Deloitte & Touche state the following:
‘
It appears that R325m
was borrowed from Peregrine Finance to repay Macmed for the purchase
price of the Intramed business … Based
on discussions with Braam
Viljoen of Peregrine Finance and Johan Muller of Macmed, it is our
understanding that the Peregrine loan
was part of a group financing
scheme which was automatically set-off on liquidation of Macmed. The
full R325m would therefore appear
to be payable to Macmed by
Intramed. This matter is yet to be resolved. The R100m raised by the
BoE bond has been offset against
the R325m.’
Essentially, this is repeated in a
letter dated 8 February 2000.
[47] In the review application
referred to in para 11 above Mr Nel stated the following in his
founding affidavit:
‘
20.12.1 The Intramed
books of account were properly kept to reflect the trading assets and
transactions. However the books of account
incorrectly reflected the
acquisition of the Intramed division and the funding thereof.
The books of
account, as at the liquidation date, were correctly written up and
adjusted under the control of the liquidators
to reflect the
audited position of it at date of liquidation. This audit was
finalised during February 2000 under the control
of the
liquidators.
’
(My emphasis.)
[48] In the present case, Nel, in his
answering affidavit states the following:
‘
299.3 It is the duty
of liquidators to take control of all assets and business interests,
including the books and records at date
of liquidation, which De
Villiers and I did on our appointments.
299.4 Therefore, anything
that happens after date of liquidation, happens under our control.
I
admit that the books and records were brought up to date and audited
on our instructions and under our control.
299.5 It does not follow
that we influenced the structure or content of the books and records
of Intramed and the audit thereof. We
deny and take exception to the
reference that we caused the Intramed books to be “corrected”.’
(My emphasis.)
[49] For completeness it is necessary
to record that Mr Pereira one of the joint liquidators of Macmed in
his affidavit filed in support
of proof of Macmed’s claim in
Intramed stated that from evidence and documents at the enquiry, the
joint liquidators of Macmed
established that on 18 June 1999 Macmed
had lent and advanced the sum of R325m to Intramed. There were no
supporting documents or
evidence annexed to the affidavit. There was
no reference to the Peregrine structure at all. This fact was
therefore not brought
to the attention of the presiding officer or
the Master. Mr Pereira supplied a confirmatory affidavit from an
attorney who was
advising both the joint liquidators of Intramed and
of Macmed.
The charge of misappropriation of
Intramed funds
[50] During December 2001 Nel and De
Villiers, purporting to act in their capacity as joint liquidators of
Intramed, launched an application
in the Grahamstown High Court, to
review and set aside the Master’s ruling that they were entitled to
a total remuneration of only
R3 250 000 in respect of the winding-up
of Intramed. They sought an order declaring that they were entitled
to the ‘tariff amount’
of remuneration in the amount of R21 049
941.74.
6
Nel and De Villiers did not seek the leave of the court to have the
costs of the review application paid out of Intramed’s funds.
In
that application five major South African banks were intervening
respondents, all of whom were substantial creditors of Macmed
or
Intramed. They all supported the Master’s ruling. Standard Bank was
one of the intervening respondents.
[51] On 31 October 2002 a full bench
of the Grahamstown High Court (Froneman J, Pillay AJ concurring),
dismissed the application and
ordered that the costs be paid by Nel
and De Villiers personally. By this time an amount of R689 747.91 had
been paid out of Intramed
funds in respect of the review application.
[52] Aggrieved by the decision of the
full bench, Nel and De Villiers appealed to this court. The appeal
was dismissed on 1 April
2004. Van Heerden AJA said the following:
‘
[43] As I have
indicated above, the appellants purported to bring their review
application in their capacity as the duly appointed
joint liquidators
of Intramed, contending that they were duly authorised in such
capacity to institute the review of proceedings.
As correctly pointed
out by the Master in his answering affidavit, the appellants failed
to annex any evidence which supported this
contention.
The
review proceedings were in fact proceedings which should obviously
have been brought by the appellants in their personal capacity
and
not in their capacity as joint liquidators ─ the proceedings relate
to their entitlement to remuneration and not to a matter
falling
within the ambit of their role as liquidators of the Intramed estate.
As contended by counsel for both the Master and the intervening
respondents, the appellants were simply seeking to secure a higher
fee for their services than that fixed by the Master. In so doing,
they were acting in their personal capacities and not in any sense
in
the interests of the creditors of the Intramed estate. Indeed, the
appellants were ─ and still are ─ acting against the interests
of
the creditors, solely for their own benefit. This being so, there is
no reason whatsoever why the costs of the review application
or of
the appeal should be borne by the company in liquidation.’
7
(My emphasis.)
[53] It is admitted by Nel and De
Villiers that, before and pending the appeal to this court against
the decision of the Grahamstown
High Court, Intramed’s funds were
used to pay the costs of the application to review the Master’s
ruling. From the time of the
judgment of the full bench up until the
time of the exchange of heads of argument in this court a further
amount of R114 761.59 was
paid out of the funds of Intramed in
respect of the review application, bringing the total paid from
Intramed’s funds to R804 419.50.
[54] On 6 August 2003, pending the
appeal to this court, the Master wrote to Nel and De Villiers
querying the payment of costs for
which they were personally liable
out of Intramed’s funds. The Master asked why these costs were
reflected in the estate account
and why estate funds were used to pay
them.
[55] On 25 August 2003 De Villiers
replied to the Master’s query. It is necessary to quote the
material parts of the letter:
‘
1 Kindly return to me
all vouchers in respect of legal costs and I will separate legal
costs pertaining to the Joint Liquidators’
remuneration review
proceedings against the Master from other legal costs. To the best of
my recollection, no legal costs relating
thereto incurred subsequent
to the judgment issued on 31 October 2002 have been paid ex the Joint
Liquidator’s banking account.
2. Legal costs paid ex
the Joint Liquidators banking account, which were ordered against the
Joint Liquidators personally, are in
addition to the quantum of the
Joint Liquidators’ remuneration the subject of appeal.
3. Leave to appeal was
granted on 5 December 2002.
4. Should the Appellate
Division rule against the Joint Liquidators in the appeal
proceedings, the Joint Liquidators will then be
obliged to refund to
the estate the costs of the review proceedings.
5. No legal costs
relating to the review proceedings have been paid ex the Joint
Liquidators’ banking account.’
[56] Standard Bank contended, with
some justification, that Nel and De Villiers appear in the letter to
both admit and deny that costs
were paid from the Intramed funds
under their joint control. Furthermore, so Standard Bank submitted,
words such as ‘to the best
of my recollection’ are deliberately
obfuscatory. Given the liquidators’ obvious expertise in the field,
coupled with their duty
in terms of s 393(1) of the CA to keep a cash
book, one would, according to Standard Bank, expect a more considered
and precise response.
[57] On 10 May 2004, eight and a half
months thereafter, and after the judgment of this court, De Villiers
wrote to the Master once
again, this time more emphatically. The
relevant part of the letter reads as follows:
‘
Legal costs paid ex
the Joint Liquidators’ banking account were paid prior to the
Judgment issued on 31 October 2002.’
This we now know to be untrue.
[58] On 20 January 2005, seventeen
months thereafter, De Villiers, in a letter in response to a query by
Standard Bank, wrote the
following:
‘
Legal costs relating
to the review proceedings per the Fourth Liquidation and Distribution
Accounts, which were all incurred prior
to 31 October 2002, were
analysed and have been repaid to the estate by the Joint
Liquidators.’
We now also know that outstanding
monies, including interest, were finally repaid on 25 August 2005.
[59] When, at the outset, the Master
challenged Nel and De Villiers’ authority to bring the review
application in Intramed’s name,
they responded by stating that they
were acting in their official capacity as liquidators and
consequently had authority to do so.
It is equally clear that they
were not specifically authorised to do so but purported to act in
terms of the general authority of
liquidators to litigate on behalf
of the estate being wound-up.
[60] Even after it became clear to
everyone that repayments were due by Nel and De Villiers it took
approximately 16 months after
the dismissal of the appeal by this
court before they repaid the total owing to the Intramed estate.
According to Nel and De Villiers,
this was, inter alia, due to
protracted correspondence with PriceWaterhouseCoopers (PWC) in whose
employ Nel had formerly been. There
appears to have been an
arrangement between Nel and PWC in relation to the fees earned from
the Macmed liquidation. The further complication
was the fee-sharing
arrangement between Macmed’s joint liquidators. It appears that
they had agreed to share both the fruits and
the liabilities that
might ensue from the review application. Their contribution to the
costs in the review application also had
to be recovered. These
aspects will be dealt with further when the fee-sharing arrangement
is discussed later in this judgment.
[61] Perhaps, because of what is set
out at the end of the preceding paragraph and because of Standard
Bank’s persistent efforts
to extract every cent, including interest
due to the Intramed estate, the repayment took place in drips and
drabs over the period
7 June 2004 to 25 August 2005.
[62] The following is noteworthy.
Standard Bank initially proved a claim in Intramed at the first
meeting of its creditors held in
Port Elizabeth on 10 May 2000 in an
amount of R107 728 463.64. Almost six months later, on 2 November
2000, Nel and De Villiers lodged
a report with the Master in
accordance with the provisions of s 45 of the Insolvency Act, in
terms whereof they requested him to
expunge the applicant’s claim.
The challenge by the liquidators to the validity of the claim,
ironically, was based on a lack of
authority, namely that the
agreements on which Standard Bank relied had not been executed in
accordance with the terms of Intramed’s
articles of association and
that those who signed the agreements lacked authority. On 12 January
2001 the Master expunged Standard
Bank’s claim in Intramed. This
led to litigation. Standard Bank was successful in the trial that
ensued ─ on 20 August 2004 the
Johannesburg High Court delivered
judgment in its favour. This led to Standard Bank being reinstated as
a creditor. From 12 January
2001 to 20 August 2004 Standard Bank
had lost its status as a proved creditor in Intramed and consequently
lost the right to
vote at or call meetings of creditors. Costly and
protracted litigation also ensued between BoE bank and Nel and De
Villiers, acting
in their capacities as liquidators of Intramed in
relation to the expungment of BoE’s claim of R100 m. Similarly, the
question
in that case was whether the loan agreements and the
underlying securities, in respect of which Intramed was ostensibly a
party,
were duly authorised. BoE bank was successful in the Port
Elizabeth High Court and on appeal to this court.
8
[63] Standard Bank submits that in
dealing with the two claims referred to in the preceding paragraph
Nel and De Villiers were intent
on careful scrutiny of existing valid
documents, because of the unstructured relationship between Macmed
and Intramed prior to liquidation,
whereas they admitted Macmed’s
claim of R325m without any substantiating documents and in the face
of controverting evidence.
[64] In responding to Standard Bank’s
objection to the fourth account, inter alia, on the basis of what
Standard Bank alleged was
the misappropriation of funds in relation
to the review application, De Villiers in a letter dated 10 May 2004,
wrote the following:
‘
Before doing so I
reiterate that Standard Corporate and Merchant Bank (SCMB) are not a
proved creditor in the above estate. You have
disallowed their claim
pursuant to the provisions of section 45(3) of the Insolvency Act and
Regulation 3 of the Regulations framed
under the Insolvency Act …
SCMB are consequently not a proved creditor and therefore do not have
locus
standi
to lodge objection to the account.’
9
Here, instead of simply dealing with
the merits of the objection, which involved an important matter of
principle, Nel and De Villiers
dealt with Standard Bank’s
locus
standi
.
[65] Nel and De Villiers, in dealing
with the charge that they had improperly used Intramed’s funds in
the review application, state
that they believed that they were
acting on authority and furthermore that they had done so on legal
advice that they were entitled
to bring the application in Intramed’s
name.
[66] Nel states further, that the
advice he received, subsequent to the judgment of the full bench, was
to the effect that since the
whole of the judgment and cost order was
on appeal to this court there was no reason to repay the amount in
respect of the review
application at that stage.
[67] Revealingly, in dealing with the
issues raised in the review application, Nel states the following:
‘
In bringing the review
application, we were assisted and advised by Tabacks Attorneys and
senior and junior counsel. They advised
us that the application ought
to be brought in our official capacity. We are not lawyers, and had
no reason not to accept their advice.
After the judgment in the First
Court had been delivered, we again sought advice. We separately
obtained advice from three eminent
silks.
The
weight of advice
,
which we received, was that an appeal ought to be lodged and that it
had good prospects of success.
It
was implicit in the advice
that it was not wrong for us to have brought the review in our
official capacities. Again, we had no reason not to accept it. …’
10
(My emphasis.)
[68] We were informed by counsel
representing Nel and De Villiers that one of ‘the eminent silks’
had advised against the appeal.
This must mean that they had been
advised by at least one eminent senior counsel that the prior and
continuing use of Intramed funds
was improper.
[69] Notwithstanding that fact and
what this court had said concerning the review application as set out
in para 52 above Nel states
adamantly and unrepentantly that Standard
Bank and the intervening creditors were, ‘at all times aware of the
fact that De Villiers
and I launched the application in our official
capacities’.
[70] In the present case Nel submitted
that the Grahamstown High Court and Macmed did not make a specific
ruling in relation to the
application being brought in their official
capacities, but merely held that the Master’s view in this regard
could be addressed
by way of an appropriate cost order.
[71] Tellingly, Nel states the
following in his answering affidavit:
‘
De Villiers and I were
led to believe that this was a landmark case and the outcome was in
the best interest of the insolvency profession,
the Master and
creditors and more particularly financial institution creditors and
therefore the costs would be costs in the liquidation.’
I shall deal with the implications of
this statement in due course.
[72] Insofar as interest on the
Intramed monies is concerned, the following statement by Nel in his
answering affidavit is significant:
‘
I accept that the
repayment could have been made sooner after the outcome of the appeal
and it is for this reason that De Villiers
and I have decided to pay
interest on the amount paid in respect of the costs of the fees
review, although we have not been called
upon to do so by the Master.
Initially I was of the view that, as we had not been called to pay
interest at the time by the Master,
no interest should be payable.
However, this view has changed on the advice of our legal advisors
and interest has now also been
repaid.’
[73] It is worth noting that despite
the negative outcomes in the review litigation and the criticisms of
this court, Nel and De Villiers
nonetheless, in resisting the
application for their removal in the court below, initially did so in
the name of Intramed. Thankfully
they did not persist in doing so.
The fee-sharing arrangement
[74] It is necessary to deal briefly
with this aspect of Standard Bank’s case. According to Nel, the
fee-sharing arrangement between
himself and De Villiers in regard to
the Intramed estate was a 42.5/57.5 per cent split in favour of the
latter, who was responsible
for the day-to-day administration of the
Intramed estate. Nel states that there was a fee-sharing arrangement
between the joint liquidators
of Macmed and those of all of the 45
subsidiary companies. It is these fee-sharing arrangements that
Standard Bank contends were
improper and predictably gave rise to the
conflict that Nel and De Villiers could and should have foreseen and
avoided.
[75] In its founding affidavit the
bank articulated its concern about the ‘conclusion of fee-sharing
or other financial arrangements
with persons who are not liquidators
of Intramed but who are liquidators of Macmed, a proved creditor of
Intramed, but whose claim
is disputed by the applicant’.
[76] At that stage the bank was not
aware of the nature or terms of the fee-sharing arrangements. It was
uncertain about its very
existence.
[77] For present purposes it is
necessary to record in some detail what is said by Nel at various
places in his answering affidavit
in relation to the fee-sharing
arrangement. First:
‘
The joint liquidators
of Macmed, because of their direct and indirect involvement in the
investigation, interrogation and administration
of the Macmed
Healthcare Ltd group entered into a fee sharing agreement amongst
them. This agreement took place in the first week
of taking control
of Macmed and its group of subsidiary and associated companies. It
did not include any other joint liquidators
appointed with anyone of
them in any of the subsidiary liquidated companies and therefore had
no bearing on the carrying out of their
duties as joint liquidators
in each of the liquidated companies in which they were appointed. The
fee sharing agreement took place
before the liquidation of the
subsidiary group companies, including Intramed.’
[78] At another juncture, the
following is stated:
‘
It is common practice
in group estates for liquidators to agree to share fees. The
association of Insolvency Practitioners of SA,
the professional body
regulating the affairs of the insolvency practitioners, recognises
the sharing of fees amongst liquidators.’
Particulars about what is sanctioned
by the Insolvency Practitioners of SA are not provided.
[79] Later, the following appears, in
relation to the review application:
‘
166.1 De Villiers
repaid 57,5% of the funds, because he would have received 57,5% of
the fees had the application to Court been successful.
166.2 PWC repaid 42,5% of
the funds because PWC would have received 42,5% had the Court
application been successful.
166.3 PWC repaid the
funds as a result of the relationship between myself and PWC as
explained herein above.
166.4 PWC had to recover
the funds from the joint liquidators of Macmed because of the fact
that the said joint liquidators would
have shared in the fees in the
proportion of one sixth of 42,5% each, had the application to Court
been successful. This was done
pursuant to the fees agreement between
the joint liquidators of Macmed as explained in the above
paragraphs.’
[80] For reasons that will become
apparent there is no need to deal with every complaint by Standard
Bank concerning the fee-sharing
arrangement.
The rejection of a request for a
meeting
[81] This complaint by Standard Bank
relates to the admission of the claim of R325m by Macmed in Intramed.
On 14 October 2004 Standard
Bank requested that a meeting of
creditors be convened by Nel and De Villiers with a view to
interrogating the validity of the claim.
If the Macmed claim were to
be discounted then Standard bank would, in terms of the size of its
claim of R107 728 463.64, overwhelmingly
have represented the greater
part of the total value of all claims proved against the estate. Even
if the Macmed claim were taken
into account the Bank’s claim would
exceed one-fourth in value of the total of the proved claims.
[82] On 27 October 2004 the request
was rejected by Nel and De Villiers as follows:
‘
No purpose will be
served by either debating the issue by way of correspondence or by
calling a meeting of the Intramed creditors.’
[83] In a letter to the Master dated
22 November 2004 Nel and De Villiers said the following:
‘
Standard Bank is of
the view that the joint liquidators of Intramed should call a meeting
of proved creditors of Intramed to debate
the issues raised in their
letter dated 14 October 2004. The joint liquidators of Intramed, in
their letter dated 27 October 2004,
advised Standard Bank that they
are of the view that no purpose will be served by calling a meeting
of the Intramed creditors. We
are still of same view, not only that
it will serve no purpose by calling a meeting of Intramed creditors,
but because, if we accept
that Macmed, as proved creditor, can vote
at the said meeting, that the creditors in value will vote against
the joint liquidators
of Intramed bringing an application to set
aside the Macmed claim. In addition, the minority concurrent
creditors, because of the
complexity of the Peregrine agreements, (26
agreements in all) would not understand nor interpret the legal
issues raised therein
or as presented by Macmed and/or Standard Bank.
The costs of such expungement application would be prohibitive and
would, as a result
of the protracted Court case without any clear
indication of success, absorb most of the benefits which the
concurrent creditors
may expect in the event the Macmed claim is not
expunged by the Courts. There are various other scenarios that would
be introduced
to the equation in the event of Macmed claim is
expunged one of which is the introduction of a new creditor Willridge
(Peregrine)
claim for an amount of R325m.’
[84] With reference to s 41 of the
Insolvency Act
11
24 of 1936 (the IA), the Court below held that Nel and De Villiers
were mistaken in not recognising that they were obliged to call
the
meeting at the request of a creditor representing one-fourth of the
of the value of all claims proved. The Court below held further,
that
Nel and De Villiers were mistaken about Macmed being able to outvote
Standard Bank. Section 52(6) of the IA provides:
‘
[A] creditor may not
vote on the question as to whether steps should be taken to contest
his claim or preference.’
It went further, stating that the fact
that the issue had been debated before was no basis for refusing to
convene a meeting to decide
it. Finally, the Court below was critical
of the attitude adopted by Nel and De Villiers that the minority
concurrent creditors would
not understand the complexities of the
Peregrine structure, stating that it was irrelevant to the decision
whether to convene a meeting
or not.
[85] However, the Court below did not
consider the failure to call a meeting a sufficient basis for the
removal of Nel and De Villiers.
The court concluded that Standard
Bank’s complaint concerning the R325m claim was without foundation
as the two liquidators acted
on legal advice as they did in respect
of the use of Intramed funds in the review application. Furthermore,
the court below held
that no prejudice had been suffered by the
estate as all the monies had been repaid. However, the court below
erred in stating (at
para 7) that the capital amount owing had been
repaid by August 2004. It was in fact only repaid a year later. The
court below concluded
that the fee-sharing arrangement was
unobjectionable. The present appeal is directed against all these
conclusions.
Failure to prove an Intramed claim
of R100m in Macmed
[86] This relates to three loans made
by BoE bank to Intramed totalling R100 m, which Intramed, in
turn, lent Macmed. This complaint,
as will become evident, is
inextricably linked to the disputed claim.
[87] As indicated in para 62 above,
BoE bank initially proved its claim in the amount referred to in
Intramed but this claim was later
expunged by the Master at the
instance of Nel and De Villiers. This led BoE to institute an action
in the Port Elizabeth High Court
in which it succeeded in
establishing its claim. Nel and De Villiers appealed that decision
but this court dismissed the appeal.
12
[88] After the judgment of this court
the result was that Intramed owed BoE R100m while Macmed contended
that it was owed R325m by
Intramed. Nel and De Villiers took the view
that set-off applied and that Macmed’s claim in Intramed stood to
be reduced to R225m.
This, of course, assumes the validity of the
Macmed claim. Consequently, Nel and De Villiers refused to prove
Intramed’s claim
of R100m in the Macmed estate. Once again, the
court below considered that Nel and De Villiers, acting on legal
advice, did not behave
improperly.
Other material facts
[89] In dealing with Standard Bank’s
complaint that the amount of R325m was R120 000 more than the actual
purchase price of the
business which was R324 880 000, Nel and
De Villiers merely state that the amount was an approximation and has
been reduced
to R225 m. This is a reference to the R100m set-off
referred to in the preceding paragraph. There is therefore, in
effect, no explanation
for the excessive claim. The claim of R225m,
it should be added, even allowing for the set-off still exceeds what
can legitimately
be claimed by approximately R120 000.
[90] In respect of the Macmed claim in
Intramed it is necessary to record the following. The Macmed claim
was proved at the first
meeting of creditors of Intramed on 10 May
2000. It was reflected in the first and second account in Intramed.
These accounts were
subsequently confirmed by the Master in 2001.
Pursuant thereto and on behalf of Intramed, Nel and De Villiers paid
dividends of R15
647 916.13 and R6 706 249.77 ─ a total of R22 354
165.90 ─ to Macmed. In the court below, Standard Bank, wisely, did
not seek
to interfere with the payment of these dividends under the
first two accounts. The most recent liquidation and distribution
account
in Intramed is the amended fourth account. It was lodged with
the Master by Nel and De Villiers in accordance with s 403 of the CA
and lay for inspection from 10 to 24 December 2000. It reflects an
amount of slightly less than R36m as part of the free residue
account. These are monies available for distribution to proved
creditors. If, on proper examination of the Macmed claim, it emerges
to be invalid the destination of the free residue will change
significantly. It is that end which in part motivates the present
litigation
exercise.
[91] In dealing with the review
application in relation to their fees in the winding-up of Intramed
Nel and De Villiers are on record
as stating that the application was
considered a landmark case by professional liquidators and that they
were supported in the application
by their professional association.
Conclusions
[92] I shall deal first with the
claim of R325m. Section 45 of the IA provides:
‘
(1) After a meeting of
creditors the officer who presided thereat shall deliver to the
trustee every claim proved against the insolvent
estate at that
meeting and every document submitted in support of the claim.
(2) The trustee shall
examine all available books and documents relating to the insolvent
estate for the purpose of ascertaining whether
the estate in fact
owes the claimant the amount claimed.
(3) If the trustee
disputes a claim after it has been proved against the estate at a
meeting of creditors, he shall report the fact
in writing to the
Master and shall state in his report his reasons for disputing the
claim. Thereupon the Master may confirm the
claim, or he may, after
having afforded the claimant an opportunity to substantiate his
claim, reduce or disallow the claim, and
if he has done so, he shall
forthwith notify the claimant in writing: Provided that such
reduction or disallowance shall not debar
the claimant from
establishing his claim by an action at law, but subject to the
provisions of section
seventy-five
.’
13
[93] It is clear that once a claim is
proved a liquidator is under an obligation to examine all available
books and documents. The
mere admission of a claim does not ratify it
or make it
res judicata
.
14
The importance of corroborating documents is clear. The presiding
officer is obliged to deliver every document in support of the
claim
to the trustee. In the scheme of things, liquidators are required to
examine all available books and documents for corroboration
or
comparison. In
Estate
Friedman v Katzeff
1924 WLD
298
the court, in dealing with a similar section in the previous
Insolvency Act 32 of 1916, said the following at 304:
‘
In my view there can
be no doubt that the word “shall” where used in sec. 43 of the
Act is peremptory and not directory, and it
is therefore the duty of
the Court to see that the provisions of the Statute are complied
with.’
The liquidator’s duties in this
regard are therefore peremptory.
[94] In
The
Law of Insolvency
Catherine
Smith suggests that in addition to books and documents ‘…clearly
the trustee may also have regard to any evidence given
by the
insolvent and other witnesses’.
15
This suggestion is apt. It accords with the duties and obligations of
a trustee referred to in para 1 above.
[95] In
Estate
Wilson v Estate Giddy, Giddy & White & Others
1937 AD 239
at 245 De Wet JA stated the following:
‘
By virtue of section
43 of the Insolvency Act it is the duty of the trustee to examine
every claim proved against the estate and to
satisfy himself that the
estate is indebted to the creditor in the amount of the claim. It
seems to me that for this purpose the
trustee is entitled to a clear
and unambiguous statement of the
causa
debiti
and in this case the trustees were justified in objecting to the
contradictory statements in the proofs of debt.’
[96] In
Commentary
on the Companies Act
16
the learned authors, under
the title
Duty thoroughly to
acquaint himself with the affairs of the company and to act openly
,
state the following concerning a liquidator:
‘
He owes a duty to the
whole body of members and the whole body of creditors, and to the
court, to make himself thoroughly acquainted
with the affairs of the
company, and to suppress nothing and conceal nothing, which has come
to his knowledge in the course of the
investigation, which is
material to ascertain the exact truth.’
17
[97] Furthermore, a liquidator must
act with care and diligence. In
Commentary
on the Companies Act
the
learned authors state the following:
‘
A liquidator must act
with care and skill in the performance of his duties. He has a duty
to exercise particular professional skill,
care and diligence in the
performance of his duties, and will incur liability if he fails to
display that degree of care and skill
which, by accepting office, he
holds himself out as possessing. Thus a high standard of care and
diligence is required of a liquidator.
He must act reasonably in the
circumstances. The test as to what is or is not reasonable in any
given circumstances is not whether
the conclusion arrived at is
reasonable, but is that of a reasonable man “applying his mind to
the conditions of affairs”, which
means “considering the matter
as a reasonable man normally would and then deciding as a reasonable
man normally would decide”.
Relevant here is the fact
that in cases of uncertainty or doubt, the liquidator has the
opportunity of safeguarding himself either
by obtaining the
directions of the Master or the court or by obtaining the directions
of the creditors or members. Where, in such
circumstances, the
liquidator, for example takes upon himself the burden of deciding on
the validity of a claim, he also takes upon
himself the risk of its
turning out that the payment constituted a misapplication of the
funds under his control.’
18
[98] I have a deep sense of disquiet
about the manner in which Nel and De Villiers treated the claim of
R325m. The parties were agreed
that this court cannot reach a
definitive conclusion concerning the Peregrine structure and its
effect or its validity. Standard
Bank submitted that the claim was
not properly assessed or interrogated.
[99] The evidence of Viljoen, the
pre-liquidation accounting records of Macmed and Intramed, the
concerns expressed by Deloitte &
Touche, the interest payment of
approximately R30m, the subscription for shares by Macmed and
Leoridge Investments, the stamp duties
paid, the six monthly payments
for putting the Peregrine structure in place, of which R3 300 000 had
already apparently been paid,
the subscription by Peregrine for
shares in Intramed at a subscription price equal to the purchase
price, which meant that Peregrine
would, upon maturity date be an
equity holder in Intramed, were all matters deserving earnest
consideration. It is clear that these
issues were not given the
attention they deserved. Such consideration as given was perfunctory
and dismissive.
[100] In
Commentary
on the Companies Act
the
learned authors state the following:
‘
Where a group of
companies is placed in liquidation, the conflicts of interest
involved in acting as the liquidator for more than
one of those
company may, in the circumstances, result in the court refusing to
appoint the liquidator of one of the companies as
the liquidator of
another or, where that appointment has already been made, in removing
him from office as liquidator of another
or other companies within
the group.’
19
[101] What is distressing is that Nel
did not appreciate the conflict situation he found himself in. As the
liquidator of Macmed seeking
to prove a contentious claim in Intramed
he was motivated by the interests of a creditor. As liquidator of
Intramed, together with
De Villiers, he was obliged to consider the
interests of the debtor.
[102] In weighing up the genuineness
of the claim of R325m the Intramed perspective was improperly
ignored. The conflict should have
been recognised and guidance sought
on the position Nel and De Villiers found themselves in.
[103] The reliance by Nel and De
Villiers on legal advice is too glib. Nel and De Villiers informed
the second and third opinions
they received. The accounting records,
quite clearly, played an important role in the conclusions arrived
at. Nel is a chartered
accountant and must, together with De
Villiers, have been aware of the importance of the qualification of
the financial records of
Intramed by Deloitte & Touche. It was
admitted that the financial statements were finalised after Intramed
and Macmed had been
placed in liquidation, under the control of Nel
and De Villiers. It could not be otherwise. It does not appear from
either the second
or third opinions that this fact was brought to the
attention of counsel. Nor does it appear that they were informed
about the historical
financial records up until the end of November
1999.
[104] As rightly pointed out in the
first opinion obtained by Nel and De Villiers, a party alleging that
the transaction was a simulated
one bears the onus of proving it.
20
There is some force in Standard Bank’s contention that on the
documentary and other information available to Nel and De Villiers
the scales were tipped the other way.
[105] Furthermore, the opinion from
the leading tax expert, which did not interrogate the genuineness of
the transaction, appears
not to have received sufficient, or any,
consideration. A further question arises: Why was a second opinion
sought by the Macmed
liquidators, with Nel and De Villiers being the
driving force? In addition, it could rightly be asked, why, whilst in
the process
of seeking the opinion or after obtaining it, they
nonetheless persisted with the claim. Despite the existence of the
opinion, Nel
and De Villiers as joint liquidators of Intramed failed
to dispute the claim. This was done in the face of controverting
documentary
evidence and the qualification by Deloitte & Touche.
This clearly demonstrates the conflict that Nel found himself in and
should
have been more attuned to.
[106] Whereas accountants are not
required to have legal knowledge in general they ought to know the
importance of substantiating
documents. So too, must liquidators. The
latter must at the very least have knowledge of the relevant legal
principles relating to
their duties and functions. But, even if they
did not in this particular instance, their conduct was lacking in
simple common sense
and devoid of logic to the extent that it is
difficult to resist the conclusion that they were improperly
motivated.
[107] It is not insignificant that in
the second and third opinions the prospect of recovery from sources
other than Intramed was
rated as minimal. The third opinion, which is
four and a half pages long, built on the second. The reliance on
legal advice must
be viewed against what is set out in the preceding
paragraphs. In my view, in respect of the claim of R325m, Nel and De
Villiers
did not comply with their duties as liquidators in
accordance with the standards referred to by the authorities set out
earlier in
this judgment.
[108] Standard Bank’s complaint
concerning the failure by Nel and De Villiers to prove the Intramed
claim of R100m in Macmed is
subsumed by the complaint concerning the
R325m. If the latter claim is valid there might be justification for
set-off. But set-off
only arises if the Macmed claim of R325m is
valid.
[109] The failure to call the meeting
of creditors relates to and impacts on the claim of R325m. Standard
Bank, having been ousted
for a long time as a participating creditor
in the Intramed estate because of the expungment of its claim, was
intent on having the
Macmed claim discussed and its validity debated.
The court below was correct in its conclusion concerning the decision
by Nel and
De Villiers not to accede to the request for a meeting. It
did not regard that fact on its own as a basis for their removal as
liquidators.
In my view, the failure to call the meeting has to be
seen against the totality of the circumstances set out above.
[110] I turn to deal with the charge
of misappropriation of monies. It must be stated at the outset that
counsel on behalf of Nel
and De Villiers was rightly constrained to
concede that, insofar as the use of monies for the review application
is concerned, their
conduct was not beyond reproach. He submitted
that it should however be seen in context and that we should be
cautious and alive
to the fact that we are now judging their conduct
with the benefit of hindsight.
[111] In 4(3)
Lawsa
para 236 Blackman states:
‘
[A] liquidator stands
in a ‘fiduciary relationship towards the company and its members
and creditors. As such, he occupies a position
in some ways analogous
to that of a trustee.’
[112] In
Commentary
on the Companies Act
21
the following appears:
‘
The liquidator stands
in a fiduciary relationship to the company of which he is the
liquidator, to the body of its creditors as a
whole, and to the body
of its members as a whole.
As a fiduciary, the
liquidator must at all times act openly and in good faith, and must
exercise his powers for the benefit of the
company and the creditors
as a whole, and not for his own benefit or the benefit of a third
party or for any other collateral purpose.
He must act in the
interests of the company and all the creditors, both as individuals
and as a group. He must not make a decision
which would prejudice one
creditor and be of no advantage to any of the other creditors or to
the company.
He may not act in any
matter in which he has a personal interest or a duty which conflicts,
or which might possible conflict, with
his duties as liquidator of
the company.’
[113] It is self-evident that monies
in the estate of the company being wound-up cannot be put to private
use by the liquidators.
For a liquidator to act in that fashion is
the very antithesis of what should rightly be expected of a
liquidator. It is equally
clear that litigation undertaken has to be
in the best interest and for the benefit of the company being
wound-up.
[114] My first concern is the
suggestion that the review application was seen as a landmark case
for the benefit of liquidators. The
extract from Nel’s affidavit
referred to in para 71 above is instructive. It confuses or seeks to
run together the interests of
the ‘insolvency profession’, the
Master and creditors. Intramed’s funds were not available for the
personal benefit of Nel
and De Villiers. Neither could such monies be
used to fund a test case for the liquidation industry generally.
[115] Second, there was no specific
authorisation by the creditors of Intramed in relation to the review
application and it faced
opposition from the Master. As stated by
this court in relation to the review application: ‘[T]hey were
acting in their personal
capacities and not in any sense in the
interests of the Intramed estate. Indeed, the appellants were ─ and
still are ─ acting
against the interests of the creditors, solely
for their own benefit’.
22
[116] Third, despite the judgment of
the Grahamstown High Court in terms of which Nel and De Villiers were
ordered to pay the costs
personally, they nevertheless continued to
use Intramed funds to pay their legal costs including those of an
appeal to this court.
This was done despite the Master’s
protestations.
[117] Fourth, despite the emphatic
critical comments by this court concerning their conduct, they failed
to promptly repay the amounts
they had used to fund their personal
litigation. Throughout, they demonstrated an obstinate resistance to
being held to account.
At one stage, instead of dealing with Standard
Bank’s objection in principle, they sought rather to challenge its
locus standi
.
It took approximately 16 months after the decision of this court
before all the monies utilised were paid back.
[118] Having rightly made the
concession that their conduct was not beyond reproach counsel
representing Nel and De Villiers was hard-pressed
to justify or
explain their extreme tardiness in repaying the monies improperly
utilised.
[119] Once again, the reliance on
legal advice does not excuse the behaviour of Nel and De Villiers. At
the outset the warning lights
ought to have flashed. Their expertise
and experience in matters financial ought to have made them
particularly aware that personal
costs and motivations should be kept
strictly distinct from professional obligations and responsibilities
and should not intrude
to contaminate the winding-up process. When
two courts in succession pronounced on their liability and
responsibility they ought
to have responded with due promptitude and
demonstrated appropriate contrition. The opposite occurred. Even
accepting that they had
dispatched supporting vouchers to the
Master’s office the conclusion is inescapable that they
demonstrated a reckless disregard
concerning the use of Intramed’s
funds. Having undertaken to the Master, when faced with his protests,
to repay the legal costs
if held personally liable, one would have
thought that they would have kept a separate record of those
payments, yet it appears that
they did not. The question might
rightly be asked why they did not have recourse to books of account
in which legal costs would necessarily
have been recorded.
[120] Months after they had been
challenged on the issue they stated unequivocally that the costs had
been repaid. Years later, without
the excuse of absent vouchers, the
matter remained unresolved. Had they been ordinary litigants this
would have been unacceptable.
Given the high standards required of
liquidators in the winding-up of companies it is unconscionable and
wholly deplorable.
[121] We have not been supplied with
the details of the policy of the Association of Insolvency
Practitioners of SA concerning fee-sharing
arrangements. In his
affidavit Nel states that arrangements between liquidators, such as
the one in relation to the Macmed winding-up
process, are common
place.
[122] For reasons that are apparent it
is not necessary to deal with every one of Standard Bank’s
complaints concerning the fee-sharing
arrangements.
[123] In the present case I have a
difficulty in understanding why the Macmed liquidators had an
interest in the application by Nel
and De Villiers in reviewing the
Master’s ruling on their fees and why they were expected to and in
fact did contribute to the
costs of that litigation. The Macmed
liquidators appear to have paid that contribution personally. That
does not, however, excuse
their participation in Intramed’s
affairs. The inflated fees of approximately R21m which Nel and De
Villiers consider themselves
entitled to in relation to their
winding-up of Intramed would have had a serious impact on the estate.
This was a matter on which
the views of the creditors ought to have
been specifically sought and in respect of which they ought to have
had a say. The conflict
inherent in the situation described above was
regrettably lost on Nel and De Villiers and on the other joint
liquidators of Macmed.
It would be surprising if this kind of conduct
was sanctioned by their professional association.
[124] Standard Bank prays for the
removal of Nel and De Villiers as liquidators in Intramed. Section
379(2) of the Companies Act 61
of 1973 provides:
‘
The Court may, on
application by the Master or any interested person, remove a
liquidator from office if the Master fails to do so
in any of the
circumstances mentioned in subsection (1) or for any other good
cause.’
The relevant circumstances mentioned
in subsec (1) are as follows:
‘
(b)
that
he has failed to perform satisfactorily any duty imposed upon him by
this Act or to comply with a lawful demand of the Master
or a
commissioner appointed by the Court under this Act; or
…
(e)
that
in his opinion the liquidator is no longer suitable to be the
liquidator of the company concerned.’
[125] In
Hudson
and others NNO v Wilkins NO and others
2003 (6) SA 234
(T) (at para 13) the following appears:
‘
[13] A liquidator
may
be
removed from office if there is sufficient suspicion of partiality or
conflict of interest, since a liquidator must be and appear
to be
independent and impartial. He or she must be seen to be independent
since his duties as liquidator may require him or her to
investigate.
(See
Re
Giant Resources Ltd
[1991]
1 Qd R 107
at 117;
Re
National Safety Council of Australia (Vic Division)
[1990]
VR 29
([1989]
15 ACLR 355
(SC Vic);
City
of Suburban Ltd v Smith
[1998]
28 ACSR 328
(FC of A) at 336.) A Court will exercise its discretion
to remove a liquidator if it appears that he or she, through some
relationship,
direct or indirect, with the company or its management
or any particular person concerned in its affairs, is in a position
of actual
or apparent conflict of interest. In exercising that
discretion Bowen LJ in
Re
Adam: Eyton Ltd: Ex parte Charlesworth
(1887)
36 Ch D 299
at 306 said:
“
Of course fair play to
the liquidator himself is not to be left out of sight, but the
measure of course is the substantial and real
interest of
liquidation.” ‘
[126] In
Ma-Afrika
Groepbelange (Pty) Ltd v Millman and Powell NNO
1997
(1) SA 547
(C) at 561H-J the following is stated:
‘
Good cause for the
removal of a liquidator has also been held to have been shown where a
liquidator has not been independent. This
was the
ratio
of the
judgment in
Re
Sir John Moore Gold Mining Co
(1879)
12 ChD 325
(CA) at 332, where a liquidator was removed because his
“interests may conflict with his duty”. See also
Re
P Turner (Wilsden) Ltd
(1986)
2 BCC 99
, 567 (CA) at 99, 570 and
Re
London Flats Ltd
[1969]
2 All ER 744
(Ch) at 752E-F, where it was held that a liquidator
should be “wholly independent” and that the removal of a
liquidator should
be “in the interests of every one concerned in
the liquidation.” ‘
[127] In 4(3)
Lawsa
under the titles
Companies
and
Winding-up
M S Blackman at para 281 states the following:
‘
The court will remove
a liquidator if some unfitness, in the wide sense of that term, is
shown in the liquidator, whether it be from
personal character or
from his connection with other parties or from circumstances in which
he is involved. Thus, even though no
bad faith was alleged, the court
removed a liquidator where he had become so engrossed in his own view
that he was unable to see
the reasonableness of the proposals of
those interested in the liquidation and threw obstacles in their way;
… where it was prima
facie established that the liquidator and two
directors were liable to account to the company for certain sums and
the liquidator
refused to take proceedings against the directors; …’
Further on, the following appears:
‘
Although there may be
no individual characteristic in itself sufficient on which to base a
conclusion that a liquidator is unfit,
there may be a number of
circumstances which combined might force the court to that
conclusion. Also, the court might take into account
some unfitness on
the part of the liquidator together with what might be in the
interests of those persons interested in the liquidation.
A relevant
factor is also the costs that would be incurred if another liquidator
has to come in and complete the work that the present
liquidator has
already done. Thus, in the circumstances, the court will be less
likely to discharge a liquidator towards the end
of the winding-up,
after he has become acquainted with the affairs of the company, than
it would early in the winding-up. Although
each one of these
considerations taken singly might not be sufficient to justify the
removal of the liquidator, taken together they
might be.’
[128] It is clear that in respect of
the claim of R325m Nel and De Villiers have lost all objectivity and
improperly preferred the
Macmed claim without properly interrogating
and verifying it. The comments by Van Heerden AJA set out in para 52
above are apposite.
It does not appear that in that case this court
was made aware of the fee-sharing arrangement which would have
significantly ameliorated
the impact of the cost order on Nel and De
Villiers personally.
[129] As stated above, counsel
representing Nel and De Villiers, rightly conceded that their
behaviour in relation to the cost of
the review application was from
the outset not beyond reproach. Chronologically, their behaviour in
relation to the use of Intramed’s
funds became progressively worse.
In addition they were obstructive, evasive and unrepentant to the
end.
[130] In relation to that aspect of
the fee-sharing arrangement referred to above Nel and De Villiers
failed to appreciate the conflict
in which they found themselves and
its effect on them.
[131] A precursor to the decision by
the Grahamstown High Court on the application to have Nel and De
Villiers removed was a challenge
by them to Standard Bank’s
locus
standi
. The challenge on
that issue culminated in an appeal to this court in which Standard
Bank was successful. This court recorded that
Nel and De Villiers
were not ‘litigation shy’.
23
[132] It is a cause for concern that
so much time has passed since the Macmed group was placed in
liquidation. We have been informed
that much work in relation to the
Intramed estate has been done and is nearing completion. Against that
consideration is the fact
that Nel and De Villiers have played a
major part in the delay by way of costly, protracted and unnecessary
litigation. If the Macmed
claim is disregarded Standard Bank
overwhelmingly represents the majority of value of creditors in the
Intramed estate. That it is
willing to put up with a further delay in
the winding-up of the estate is not insignificant. The R325m claim is
clearly the remaining
major issue and one in respect of which Nel and
De Villiers cannot bring objectivity to bear. The totality of
circumstances set out
above compellingly leads to the conclusion that
it is not in the best interests of the liquidation that they continue
to serve as
joint liquidators of Intramed.
[133] Liquidators must realise that
they perform important functions. The Master, creditors and
importantly courts rely on them. In
the liquidation process they are
expected to act impeccably. The profession must be under no illusion
that courts, in appropriate
circumstances, when called upon to do so
will act to ensure the integrity of the winding-up process.
[134] Standard Bank contends that in
terms of s 384(2)
24
of the CA, Nel and De Villiers’ fee in the winding-up of Intramed
should be disallowed or reduced. Furthermore, Standard Bank submitted
that Nel and De Villiers should be liable to pay a penalty in terms
of s 394(7)
25
of the CA in an amount of R1 608 839, being double the amount they
used from Intramed funds to pay the costs of the review application.
[135] Removal of a liquidator is an
extreme step. It certainly impacts on his or her reputation. It was
submitted on behalf of Nel
and De Villiers that we give consideration
to the fact that they are nearing the end of their careers. Moreover,
so it was submitted,
they have expended effort and much hard work to
the benefit of Intramed and creditors by, for example, continuing to
trade in Intramed
despite objections by BoE bank, which resulted in a
significant increase in its value, which ultimately redounded to the
benefit
of creditors.
[136] Bearing in mind what is set out
in the preceding paragraph I am not of the mind to impose a penalty
in terms of s 394(7) of
the CA. However, having regard to the nature
and gravity of the misconduct, considering the protracted, costly and
unnecessary litigation
engaged in by Nel and De Villiers, and taking
into account what can rightly be demanded of liquidators, it is my
view that they should
be deprived of 5 per cent of their fee. The
Master was requested to disallow or reduce their remuneration and
refused to do so.
[137] Finally, there is the question
of the costs of Standard Bank. Counsel representing the bank
correctly accepted that the founding
affidavit was prolix. It made
trawling through the record extremely difficult. It had the unhappy
consequence of a lengthy response.
Oftentimes less is more. Recently
both in respect of the record and heads of argument legal
representatives have acted to the contrary.
Mindful of the
unnecessary time and resources expended in the present case I am of
the view that the bank should be deprived of a
third of its costs.
[138] The following order is made:
1.
The
appeal is upheld.
2.
The
second and third respondents are ordered to pay two thirds of the
appellant’s costs, such costs to include those consequent
upon
the employment of two counsel,
to
be paid by the second and third respondents in their personal
capacities jointly and severally.
3. The order of the court below is set
aside and substituted as follows:
‘
1. The third and fourth respondents
are removed as joint liquidators of Intramed (Pty) Ltd (in
liquidation).
2. The decision of the Master not to
disallow or reduce the remuneration of the third and fourth
respondents as joint liquidators
of Intramed (Pty) Ltd (in
liquidation) is reviewed, set aside and replaced with an order in
terms whereof the remuneration of the
second and third respondents is
reduced by five per cent.
3.
The
third and fourth respondents are ordered to pay the costs of the
application including the costs consequent upon the employment
of two
counsel where applicable, such costs to be paid by the third and
fourth respondents in their personal capacities jointly and
severally
.’
_________________
M S NAVSA
JUDGE OF APPEAL
GRIESEL
AJA dissenting
[139] I have read the judgment of
Navsa JA, but respectfully disagree with his conclusion that the
appeal should succeed. The relevant
facts have been fully summarised
in my colleague’s judgment as well as in the judgment of the court
below. It is accordingly not
necessary to repeat the factual
background herein, save to the extent necessary to explain my
reasoning in respect of particular
aspects.
[140] With regard to the application
for removal of the joint liquid­ators, which forms the backbone
of the present appeal, Standard
Bank relies on five main grounds.
Before dealing
seriatim
with the individual grounds of complaint, I wish to make some general
remarks which, in my view, militate against the removal of
the
liquidators at this stage of the winding-up process.
[141] First, my colleague rightly
points out
26
that removal of a liquidator is ‘an extreme step’. From the
authorities cited by him,
27
it further appears that removal of a liquidator is ‘a radical form
of relief which will not be granted unless the Court is satisfied
that a proper case is made out therefor’.
28
For the reasons set out below, I am not persuaded that the bank has
made out a proper case for such radical relief.
[142] Second, a court will be less
inclined to remove a liquidator at a late stage in the winding-up
process than it would be to replace
him or her at an early stage.
29
In the present case, the liquidators were appointed more than ten
years ago. By the time Nel deposed to his answering affidavit in
these proceedings, on 30 August 2005, the process of winding up was
at ‘a very
advanced stage’
. Thus
Nel stated:
‘
Save
for the dispute over the Macmed claims, the remaining steps are to
prepare a final liquidation and distribution account, report
to the
Master and pay out the remaining dividends. No purpose would be
served in replacing De Villiers and me now as liquidators,
as the
administration of the Intramed estate is, for all practical purposes,
almost complete. The appointment of other liquidators
would only
result in incurring additional costs for the Intramed estate to the
prejudice of the other creditors.’
Since
the aforesaid date the court below, during the first round of the
current proceedings, refused to expunge the Macmed claim,
30
with the result that the issue relating to that claim can no longer
be said to be outstanding. It can be accepted, therefore, that
the
process of winding up is by now – more than four years later –
virtually complete. To remove the liquidators at this very
late stage
will, in my view, amount to a
brutum
fulmen
.
[143] Third, a court must be satisfied
that removal of the liquidator(s) will be to the general advantage
and benefit of
all
persons concerned or otherwise interested in the winding-up of the
company in liquidation.
31
In the present instance, 91 claims totalling R667 million
(subsequently reduced to R567 million) were proved against
Intramed
at the first meeting of creditors, back in May 2000. As
observed by Mr Nel, ‘(i)t is noteworthy that the applicant is not
supported
in this application by any of the other proved creditors in
Intramed . . .’ Not only is the application not supported
by any of the other creditors, but the bank has not adduced any
evidence – and accordingly has not discharged the onus of proving
–
that removal of the joint liquidators will be to the general
advantage and benefit of all persons interested in the winding-up
of
Intramed.
[144] Fourth, in refusing to order
removal of the liquidators, the court below exercised a judicial
discretion. Leaving aside the
question whether this was a ‘narrow’
or a ‘wide’ discretion,
32
I have not been persuaded that any grounds exist which would entitle
this court on appeal to interfere with the exercise of the high
court’s discretion.
[145] Finally, in terms of s 381
of the Companies Act, the Master has wide-ranging powers of control
over liquidators. The fact
that the Master, who has not been
criticised for undue partiality towards the Intramed liquidators, has
not seen fit – with knowledge
of Standard Bank’s complaints –
to exercise any of his powers in terms of s 381, is a factor
entitled to considerable weight
in considering the present
application.
[146] With that prelude, I now turn to
deal with the merits of the individual grounds for removal advanced
on behalf of Standard Bank
and do so in the same sequence as did my
colleague.
The Macmed claim
[147] Much time and paper was spent on
the question of the validity of the Macmed claim. Indeed, this was
described by Standard Bank
as one of the main issues to be decided in
the litigation and one of the prayers (para 1.6) contained in the
notice of motion was
specifically aimed at expungement of the Macmed
claim as contained in the amended fourth liquidation and distribution
account. As
mentioned earlier, Standard Bank’s claim in this regard
was duly dismissed by the court below during the first round,
33
hence the court’s observation, during the second round, that ‘(w)e
do not have to consider the validity of the Macmed claim’.
34
Instead, the focus shifted to the question whether Nel and De
Villiers acted inappropriately by not disputing the Macmed claim. But
therein lies the rub because, without a thorough examination of the
validity of that claim (including the intricate ‘Peregrine
structure’ which underlies it), it is virtually impossible to pass
any judgment on the conduct of the liquidators in their treatment
of
the claim. Yet this is precisely what Standard Bank’s complaint
demands of the court: as pointed out in
its
heads of argument,
the
bank’s
central
contention is a simple one: ‘the proof of the Macmed claim ignores
the Peregrine structure and in these circumstances the
Intramed
liquidators (who knew the true and full facts) ought to have
recommended to the Master that he expunge it’.
[148]
Without
the benefit of full evidence – including cross-examination – on
this aspect, it is impossible to find, in my view, that
the
liquidators’ conduct in relation to the Macmed claim fell short of
the required standard and that it justifies their removal.
A careful
reading of the evidence shows, in any event, that the Intramed
liquidators did not blithely accept the claim. S
hortly
after
Macmed’s claim was
proved at the first meeting of creditors, during May 2000, Nel
forwarded a copy of the claim (together with certain
other claims) to
Intramed’s attorney, Brooks, with the request, on behalf of
Intramed: ‘Please
review
in terms of the evidence given at the enquiry and opinions received’.
[149]
A
month or so later, in their report to the second meeting of creditors
of Intramed, Nel and De Villiers reported as follows:
‘
The claims of the
ultimate holding company Macmed Healthcare Limited and BOE Bank
Limited require investigation. There is an obvious
duplication of
approximately R100 million. Claims proved at the first meeting of
creditors should total approximately R567 million
and not R667
million.’
[150] The record shows that Nel and De
Villiers did indeed investigate the two claims mentioned in the
report and decided i
n
due course not to challenge the Macmed claim. This was done on the
basis of legal advice received from their attorney,
Brooks,
to the effect that the claim was in order. His advice, in turn, was
supported by counsel’s opinion obtained by the Macmed
liquidators.
[151] The one aspect on which all
parties agreed was that the Peregrine structure was one of some
complexity. In the judgment of the
court below during the first
round, the court gave a brief summary of what the Peregrine structure
entailed, the correctness of which
was apparently accepted by counsel
on both sides and was repeated in the second judgment.
35
It was precisely because of the complexity of the series of
transactions comprising the Peregrine structure that the Macmed
liquidators
found it necessary to seek counsel’s opinion.
Subsequently, a second and a third opinion was obtained. In this
context, my colleague
poses the question: ‘Why was a second opinion
sought by the Macmed liquidators, with Nel and De Villiers being the
driving force?’
36
With respect, the way I read the evidence, it was the Macmed
liquidators, at the behest of the bank creditors of Macmed, who
obtained
all three opinions. Nel pointed out in this regard that,
having obtained the first opinion, the Macmed liquidators were
instructed
by the bank creditors of Macmed – including Standard
Bank – to obtain the second and third opinions from counsel:
‘
The
Macmed liquidators obtained the second Peregrine opinion late in
August 2000 which second opinion was also debated with the Macmed
banks, including [Standard Bank].
.
. . The Macmed liquidators were then instructed by the bank creditors
to obtain a third opinion relating to the Peregrine Structure
which
opinion the Macmed liquidators obtained in November 2000. The third
opinion, after it had been obtained, was also debated with
the Macmed
banks at an informal meeting of creditors. The Macmed banks
instructed the Macmed liquidators not to proceed with any
action
against Peregrine in regard to the Peregrine Structure and accepted
the effect of the unwinding of the Peregrine Structure
and
consequently the validity of the Macmed claim against Intramed of
R325 million.’
[152] Both the second and third
opinions reaffirmed the simulated nature of the Peregrine structure.
This construction was thereupon
accepted, not only by the liquidators
of Macmed and the relevant creditors (including Standard Bank), but
also by Nel and De Villiers
on behalf of Intramed. It was on this
basis that the Macmed claim was reflected in the successive
liquidation and distribution accounts
of Intramed, all of
which
were in due course confirmed by the Master.
The first
three accounts went unchallenged, whereas Standard Bank’s challenge
of the fourth account was unsuccessful, as noted earlier.
In terms of
s 407(4)(a) of the Companies Act, Standard Bank had the
opportunity to take the Master’s decisions on review within
fourteen days from the date on which the decisions were made. This
was not done. Moreover, p
ursuant
to confirmation of the first
account, and on 9 March
2001, the liquidators paid a dividend of R15,6 million to Macmed
based on its claim of R225 million.
Pursuant to confirmation of the
second
account, and on or about
4 October 2001, the liquidators paid a further dividend to Macmed in
the amount of R6,7 million. Standard
Bank did not apply to have
either the first
or the second
liquidation and
distribution account re-opened in terms of s 408. Instead, it
launched various abortive attempts to have the
Macmed claim expunged:
thus, at a general meeting of creditors of Macmed, the bank attempted
to persuade the creditors to abandon
the Macmed claim against
Intramed. Not surprisingly, the bank failed to obtain any support for
its proposal. It then attempted to
persuade Nel and De Villiers to
convene a meeting of the Intramed creditors to discuss expungement of
the Macmed claim, but this
request was turned down. The bank did not
pursue their efforts to convene a meeting of Intramed creditors, but
instead applied unsuccessfully
to the court below, in the first part
of the present proceedings, to have the Macmed claim expunged. Having
been turned away at the
front door, as it were, the bank now comes to
the back door, relying on the same facts and seeking a different –
and far more drastic
– remedy. In my view, they should again be
turned away.
[153] In the circumstances as outlined
above, the Intramed liquidators were fully entitled, in my view, to
regard the said structure
as a simulation which had ‘unwound’
upon the winding up of Macmed. As Nel summed up the position in his
answering affidavit:
‘We always believed the transaction to have
unwound, as is borne out by the subsequent conduct of all parties
concerned’.
[154] Nel’s reliance on the
subsequent conduct of the parties and their understanding of the
effect of the series of agreements
finds support in the judgment of
this court in
Aussenkehr
Farms (Pty) Ltd v Trio Transport CC
,
37
where the question for decision was posed as follows:
‘
Where
the parties to a contract are agreed on its meaning, is it open to a
third party to contend for a different meaning even if
that does
accord with the apparent meaning of the written document reflecting
the agreement?’
38
Lewis AJA answered the question as
follows:
‘
Where
the parties dispute the meaning of a term then a court must
necessarily look to the wording of the provision itself to determine
its correct construction. But where they agree on its meaning, even
though the provision appears objectively to reflect a different
understanding, it would be absurd to insist on binding them to a term
upon which neither agrees only because of a third party’s
insistence on reliance on the apparent meaning of the provision.’
39
[155] Applied to the facts of the
present case, it appears from the evidence that the parties to the
Peregrine structure regarded
the agreements to have ‘unwound’
upon liquidation of Macmed and its subsidiaries. This is borne out by
the fact that Peregrine
never proved a claim against Intramed
because, as Nel put it, ‘(i)t clearly never was the intention that
Peregrine would ever have
a claim against Intramed’. In these
circumstances, it would indeed be ‘absurd’, as suggested in
Aussenkehr, supra
,
to disregard the understanding and attitude of the parties and to
look, instead, through a magnifying glass at the abstract meaning
to
be gleaned from the battery of 21 agreements comprising the elaborate
Peregrine structure in order to attribute a different meaning
to
those agreements as the one accepted by the parties.
[156] In
Caldeira v The Master
40
the duties of a trustee (or liquidator) in terms of s 45(3) of the
Insolvency Act were stated as follows by
Levinsohn
J:
‘
This
section enjoins the trustee, if he disputes the claim, to report to
the Master his reasons for doing so. It seems to me that
if a trustee
disputes the claim he must have a reasonable belief based on facts
ascertained by him that the insolvent estate is not
in fact indebted
to the creditor concerned. Mere suspicion about the claim would not
be sufficient. This belief would, I think, generally
arise after the
examination of the Company’s records and the conclusion derived
from the records that the indebtedness does not
exist or has been
extinguished. Of course, the facts giving rise to the belief may not
necessarily be derived from the company’s
records, they could
arise, for example, from the records of an interrogation conducted at
the meeting of creditors.’
[157] Having regard to this test and
to the evidence of Nel and De Villiers, it is clear to me that they
did not have a reasonable
belief that Intramed is not in fact
indebted to Macmed.
[158] However, as far as Nel and De
Villiers are concerned, the matter did not end there. As explained by
Nel:
‘
After we came under
pressure from the applicant to expunge the Macmed claim we again
obtained advice. We were again advised that our
approach was proper
and appropriate and that we ought not to succumb to the pressure
being exerted by the applicant.’
[159] I do not regard it necessary to
go into greater detail regarding either the validity of the Macmed
claim or the Peregrine structure.
Suffice it to state that I am
unable to fault the liquidators for having decided, on legal advice,
to disregard as a simulation the
convoluted series of transactions
between Macmed, the Peregrine Group and Intramed and to accept,
instead, the simple commercial
reality of the transaction as an
inter-company loan from Macmed to Intramed in an amount of
R325 million. That amount was reduced
by R100 million as a
result of recognition of BOE’s claim in that amount for which
Intramed was held liable.
41
[160] For these reasons, I am, with
respect, unable to share my colleague’s conclusion
42
that in relation to the Macmed claim Nel and De Villiers did not
properly comply with their duties as liquidators; far less that
their
conduct justifies the ultimate penalty of removal.
‘
Misappropriation’ of Intramed’s funds
[161] With regard to this complaint,
Standard Bank in its affidavits and in argument before us
persistently likened the liquidators’
position with that of an
attorney misappropriating trust money for his or her own purposes.
Reliance was placed in this context,
by way of example, on
Law
Society of the Cape of Good Hope v Budricks
.
43
In my opinion, however, this analogy is wholly inapposite. In
that
case it was held that Budricks had ‘
misappropriated
trust money and administered trust funds in a reckless and cavalier
manner without any regard for his duties as an
attorney’.
44
It was
further found that
Budricks
had
methodically misappropriated large sums of money over a substantial
period of time.
45
[162] This differs totally from the
present situation, where Nel and De Villiers acted on responsible
legal advice to the effect that
the application for review of the
Master’s decision regarding their fees
ought
to be brought in their official capacity as part of the
administration of the estate. Nel explains:
‘
In
bringing the review application, we were assisted and advised by
Tabacks Attorneys (Mr Brooks) and senior and junior counsel (J
Eksteen SC and P Daniels). They advised us that the application ought
to be brought in our official capacity. We are not lawyers,
and had
no
reason
not to accept their advice. After the judgment in the First Court had
been delivered, we again sought advice. We separately
obtained advice
from three eminent silks (Slomowitz SC, Terblanche SC and Trengove
SC). The weight of advice, which we received,
was that an appeal
ought to be lodged and that it had good prospects of success.
It
was implicit in the advice that it was not wrong for us to have
brought the review in our official capacities. Again, we had no
reason not to accept it.’
[163] With the benefit of hindsight,
Nel added:
‘
.
. . (W)e respectfully point out that where our advice initially
received from our attorneys and counsel could have been wrong, such
advice was sought and received on a
bona
fide
basis
by us and whilst our advice has proved to have been wrong, we
respectfully point out that such advice could have been given
reasonably in the light of the judgment in
Collie
NO v The Master
1972
(3) SA 623
(A).’
[164] In response, Faul on behalf of
Standard Bank stated that ‘no reasonable lawyer could
bona
fide
have given the advice
to which Mr Nel testifies; and no reasonable person could have
accepted and acted upon it’. I find this an
astonishing
proposition: not only did Nel and De Villiers choose to consult
several experienced and eminent legal practitioners;
but two
experienced and learned judges in the court below did not uphold the
bank’s criticism of the liquidators’ conduct in
this regard.
[165] Be that as it may, the complaint
regarding the alleged ‘misappropriation’ of Intramed’s funds
has been fully dealt with
and rejected by the court below.
46
I associate myself with its reasoning as well as the conclusion
reached and do not find it necessary to add anything further in that
regard.
The fee-sharing arrangement
[166] The essential features of the
fee-sharing arrangement have been alluded to above.
47
It is important to note that it is only the fee-sharing arrangement
between the six Macmed liquidators that is being frowned upon
by
Standard Bank. Its deponent, Faul, stated unequivocally in his
replying affidavit that he has no quibble with the fee-sharing
between Nel and De Villiers in their capacities as joint liquidators
of Intramed, nor does he object to Nel’s fee-sharing arrangement
with his erstwhile employer, PriceWaterhouseCoopers. What he objects
to is the fee-sharing arrangement that prevails among the six
Macmed
liquidators, ie ‘cross-company fee-sharing’, as he calls it. It
is clear, therefore, that this particular complaint cannot
support an
application for De Villiers’ removal as he was not a party to that
arrangement.
[167] As for Nel, he answers this
complaint in the passage quoted by my colleague.
48
Mr Brian Cooper, one of the other Macmed liquidators and a practising
attorney with 47 years experience of insolvency matters, testified
to
the same effect, describing the fee-sharing arrangement as ‘a
standard practice amongst liquidators’ where a group of companies
are being wound up.
[168] In these circumstances, I am
unable to find, as contended for by Standard Bank, that the
fee-sharing agreement
per se
is improper to the extent
that it justifies the removal of a liquidator. Not only is the basis
of the bank’s complaint questionable;
the bank’s attitude also
appears to be highly selective: if the bank is correct that Nel acted
improperly by entering into the
fee-sharing arrangement with his
co-liquidators in Macmed, then it must necessarily follow that each
of the other five Macmed liquidators
is equally guilty of
impropriety; yet the bank has not sought the removal of any of those
co-liquidators. Similarly, on the bank’s
reasoning, Nel’s conduct
is equally improper in each of the 45 other Macmed subsidiaries in
which he has been appointed as liquidator,
where the same fee-sharing
arrangement prevails; yet his removal has not been sought in any of
those companies. The inference is
irresistible that this complaint by
the bank, far from being a substantive ground for removal, is a mere
makeweight in an effort
to bolster the bank’s case against Nel.
This tends to lend credence to Nel’s assertion that the bank
‘appears to be motivated
by a personal vendetta against the
liquidators of Intramed’.
[169] With regard to the fourth and
fifth complaints, namely the failure by the liquidators to prove a
claim for R100 million
against Macmed and their failure to
convene a meeting of Intramed creditors at the request of the bank
these complaints, as rightly
pointed out by Navsa JA,
49
are intimately interlinked with the validity of the Macmed claim. In
the light of my conclusion regarding the Macmed claim, it follows
that these two grounds of complaint likewise cannot sustain an
application for removal of the liquidators.
50
[170] To sum up, for the reasons set
out above, I am of the view that the bank has failed to make out a
sufficient case for the removal
of Nel and De Villiers as liquidators
of Intramed.
Reduction of the fees
[171] One of the further forms of
relief claimed (and granted by my colleague),
51
was the claim for a reduction of the fees of the liquidators in terms
of s 384(2) of the Companies Act.
[172] Again, I find myself in
agreement with the high court’s reasoning regarding this claim.
52
I am accordingly of the view that this claim was likewise rightly
dismissed by the high court.
[173] In all the circumstances, I
would have dismissed the appeal with costs, including the costs of
two counsel.
___________________
B
M Griesel
Acting
Judge of Appeal
PONNAN JA
[174] I have had the benefit of
reading the judgments of my colleagues Navsa and Griesel. At the
outset I should perhaps state that
I take a dimmer view of the
liquidators’ conduct than my learned colleagues. I accordingly am
unable to agree with the conclusion
reached by Griesel AJA that the
appeal ought to fail. In my view, like Caesar’s wife, liquidators
should be beyond reproach. In
this case their counsel conceded before
us that their conduct was not. It ought to have been, given the
fiduciary position occupied
by them. What remains therefore is to
determine whether they have conducted themselves such as to warrant
their removal from office.
Navsa JA has concluded that they have and
should be removed as liquidators. I agree. The cumulative effect of
the various factors
alluded to by Navsa JA, in my view, compel that
conclusion. I nonetheless deem it necessary, because my criticism of
the conduct
of the liquidators is more strident, to write a separate
judgment. In doing so I shall not cover terrain already traversed by
my
learned colleagues, but shall restrict myself to a consideration
of those aspects that point irresistibly to the conclusion that
the
joint liquidators are unsuitable to continue to occupy that office in
the Intramed estate in liquidation.
[175] It is so that more than 10 years
have elapsed since the liquidators were first appointed. But that
hardly counts in the liquidators
favour. If anything that protracted
period redounds to their discredit. Much of the blame for the delay
in finalizing the process
must be laid squarely at the door of the
liquidators themselves. After all they embarked upon litigation on a
scale that I can only
describe as unprecedented for liquidators. I
accept that the length of time is an important consideration. As is
the stage that the
liquidation process has reached. But that can
hardly trump the necessity for a court to ensure that the standard of
performance
of officers such as liquidators shall be as high as is
practicably possible. It may well be that the liquidation process has
reached
a fairly advanced stage. But that no doubt is only on the
supposition that the Macmed claim of R325m is a good one. If that
claim
is revisitedthen the current liquidation and distribution
account may well become obsolete. In that event the liquidators’
removal
from office, with the consequence that those who succeed them
may in due course consider afresh a fairly substantial claim in the
estate in liquidation, in and of itself, puts paid to the notion that
their removal would amount to a
brutum
fulmen
. If on the
other hand, after proper scrutiny the Macmed claim is allowed, there
ought to be no tangible disruption to the liquidation
process by the
introduction of new liquidators – the new liquidators could simply
continue from where their predecessors left off.
It would be
unpalatable to countenance the notion that liquidators who have made
themselves guilty of serious misconduct should not
be removed from
office simply because it is late in the liquidation process.
[176] Standard Bank is a substantial
creditor of Macmed and many of its subsidiaries including Intramed.
Very early in the administration
of Intramed, claims of inter alia
R190m, R100m and R325m were proved against it by Standard Bank, Boe
Bank and Macmed, respectively.
Shortly thereafter the liquidators
recommended to the Master that the claims by the banks should be
expunged. A far more charitable
stance was adopted by the liquidators
in respect of the Macmed claim. After protracted and expensive
litigation, the banks’ claims,
albeit in a lesser amount in the sum
of R107m in the case of Standard Bank, were restored. From the time
of expungement until restoration
of their claims, the banks lost
their status as proved creditors in Intramed. They thus lost their
right to vote at meetings of creditors.
Standard Bank, not without
some justification, has formed the view that the liquidators have
unreasonably become so engrossed in
their own view as to the validity
of the Macmed claim in the Intramed estate, that they are incapable
of subjecting that claim to
the scrutiny that it reasonably requires.
In those circumstances, so it contends, the only remedy available to
it is to seek the
removal of the liquidators. It is so that they are
not supported by other creditors, but given the value of its claim in
the Intramed
estate, that is of little moment. After all, s 379(2) of
the CA entitles it to approach the court for the removal of the
liquidators.
[177] Section 45 of the IA casts a
duty upon the liquidators to examine every claim and to satisfy
themselves that the estate is indeed
indebted to the creditor. Given
the contradictory statements advanced in support of the claim, it
would appear that the liquidators
failed in the discharge of that
duty. It is thus, on the view that I take of the matter, against the
interests of the liquidation
that they remain in office. On behalf of
the liquidators it was submitted that the debate as to the validity
of the Macmed claim
is a difficult one, and turns in part on the
correct legal treatment of the Peregrine structure – which the
parties were agreed
was a transaction of some complexity. That being
so, one would expect a natural reticence on the part of the
liquidators to admit
the Macmed claim as readily as they have done.
Somewhat surprisingly the liquidators have been far less vigilant in
their scrutiny
of the Macmed claim than they were in respect of the
Standard Bank and BoE claims. In respect of the former they had
greater cause
for scepticism. That lack of consistency evokes strong
feelings of disquiet. It is so that the threshold for the admission
of claims
at a meeting of creditors is relatively low. All that is
required is that prima facie proof of a claim should be produced.
That is
understandable in the context of an insolvent estate. The
claim admitted to proof at the meeting of creditors is a provisional
one.
Only thereafter does the liquidator acquire the duty set forth
in s 45 of the IA to examine ‘all available books and documents’
to ensure that the claim in fact exists.
[178] The claim for R325m (although in
fact R 324 880 000) was proved by Macmed as one for moneys lent and
advanced. Nel admits that
‘there is no reference to the Peregrine
structure in the affidavit in support of the Macmed claim’. In
fact, Pereira, one of
the joint liquidators of Macmed, who deposed to
an affidavit in support of its claim, stated:
‘
On 18 June 1999 Macmed
lent and advanced the sum of R325 million to Intramed to enable
Intramed to pay the purchase consideration
of R325 million to Aspen
for the Intramed division as referred to above’.
That clearly contemplates a payment by
Macmed to Intramed. Such a claim one would imagine would be easy
enough to formulate and equally
simple to prove. But that is not the
case here. Nel in his answering affidavit states:
‘
I admit that, as the
books had not been completely written up to record all transactions
as at date of liquidation , the books of
Intramed, prior to its
winding up, do not disclose . . . the existence of the loan of R325
million owing by Intramed to Macmed prior
to liquidation on 29
November 1999.’
And yet in response to the criticism
that they had not properly examined the Macmed claim in terms of s 45
of the Act, Nel states:
‘
As I have already
explained we examined the claim and satisfied ourselves as to the
validity of Macmed’s claim and decided not to
dispute the claim,
particularly in that it agreed with the books and records of Intramed
as at date of liquidation i.e. 29 November
1999 as audited by
Deloitte & Touche. . . .’
[179] But as Navsa JA makes plain, up
until the end of October 1999, some three-and-a-half months after the
Peregrine structure came
into effect, the financial records of
neither Macmed nor Intramed reflected a loan of R325m. It was only
after the provisional liquidation
of Intramed and the liquidators had
taken charge of Intramed’s books of account that an entry
reflecting a loan was made for the
first time in Intramed’s books.
In a note to the financial statement the loan is described as a ‘long
term loan that arose on
the acquisition of the net assets, trade
marks and goodwill as at 1 March 1999. The loan is unsecured and
interest free. The terms
of repayment have not been specified’. As
is once again evident from the judgment of Navsa JA, Deloitte and
Touche stated that
they ‘were unable to confirm the amount owing to
Macmed as at 28 November 1999’. In fact on 24 November 1999,
Millison of Deloitte
and Touche wrote in reference to the Macmed
loan: ‘this matter is yet to be resolved’. Dealing with the
Deloitte and Touche
qualification, Nel states:
‘
However, it appears
that the only reason the auditors qualified their report is because
of them not receiving any supporting documentation
i.e. the Peregrine
Agreements, to confirm their conclusion that there was a loan of R225
million owing to Macmed by Intramed’.
If that is indeed so, the obvious
question that it prompts is: What information did the auditors rely
upon in concluding that there
was in fact a loan owing by Intramed to
Macmed? Nel suggests in answer to that question:
‘
This [the existence of
the loan] appears to have been based on the information received
during their discussions with Viljoen and
Muller, resulting in the
entries they instructed Intramed to pass in its books’.
[180] In sum therefore to once again
borrow from Nel:
‘
Deloitte &
Touche’s interpretation of the information and discussions with
Viljoen and Muller resulted in the raising of a Macmed
loan account
in Intramed’s books in the amount of R325 million’
.
If what Nel says is to be taken at
face value, the auditors had not had sight of the Peregrine
Agreements. No other documents in support
of the existence of a loan
are to be found in the record of some 1400 pages. It is unclear what
other information – none in the
fairly voluminous record has been
specified – had to be interpreted. The high water mark therefore
appears to be the rather speculative
hypothesis that discussions with
Viljoen and Muller yielded sufficient proof in support of the
existence of a loan. Although details
of those discussions have not
been divulged and whilst whatever was said did not appear to
satisfactorily resolve the issue for the
auditors, particularly
Millison, it somewhat surprisingly appears to have persuaded the
liquidators.
[181] To use, as the liquidators do,
the ex post facto entry that had been generated in the books of
Intramed after its provisional
liquidation and whilst the books were
already in their custody as proof of the existence of the loan is
nothing short of disingenuous.
To say under oath as Nel does that
they had decided not to dispute the claim because it agreed with the
books and records of Intramed
as at the date of liquidation may well
be patently dishonest. But it may not be necessary to go that far.
That attitude is also difficult
to reconcile with Nel asserting:
‘
It is surprising that
[Standard Bank] would place reliance on the accounting records of
Intramed or Macmed or any of the companies
in the Macmed group’.
And yet, it would seem, that is
precisely what Nel himself purports to do.
[182] It, to my mind, is difficult to
discern precisely why in the face of the Peregrine Agreements, the
liquidators have admitted
the Macmed claim as blithely as they did.
The reason appears to be that the liquidators dispute the validity of
the Peregrine Agreement.
In that regard Nel states:
‘
The whole dispute
between the parties relating to [the Peregrine] agreement stems from
the fact that the applicant, and more particularly
the deponent to
[Standard Bank’s] founding affidavit, . . . persistently refuses to
accept that the Peregrine Structure was a simulated
transaction and
that a Court will give effect to the real intention, which differs
from the simulated transaction and that, even
if the Peregrine
Structure was not a simulated transaction, the whole structure
unwound on the default by either party which occurred
with the
liquidation of Macmed’.
Nel further states:
‘
I deny that the
Peregrine structure was fully implemented and confirm that it unwound
on the liquidation of Macmed on 15 October 1999.
This is confirmed
and accepted by Viljoen of Peregrine, the liquidators of Macmed and
De Villiers and myself in our capacity as liquidators
of Intramed.
Proof of acceptance of the Macmed claim confirms this’.
It is difficult to reconcile
those emphatic
assertions with the evidence of Hanson, a Macmed director, or
Viljoen, who represented Peregrine at the time that the
Peregrine
structure was put in place and that it was not a simulated
transaction. As is evident from the judgment of Navsa JA, both
Hanson
and Viljoen stated under oath that the agreements were genuine. It
needs be added that when Viljoen testified at the Macmed
enquiry, it
was never put to him that the Peregrine structure was a sham.
Moreover, Nel’s statements disregard the legal opinions
to the
contrary that the transaction was not simulated and that ‘the
companies intended to achieve precisely that which the primary
purpose of the financing structure was aimed at’. Whether the
Peregrine structure was fully implemented or unwound on the
liquidation
of Macmed are matters that the liquidators of Macmed and
Intramed could not possibly have personal knowledge about. That being
so,
Nel must know that his confirmation of that state of affairs,
without divulging the source of his information, is of little value.
It also stretches credulity that Nel could invoke their acceptance of
the Macmed claim as a factor in support of the suggestion that
the
Peregrine agreement was not fully implemented or unwound.
[183] Standard Bank contends that
there is no evidence of payment of a loan by Macmed to Intramed.
Nel’s response is:
‘
I admit that the
amount of R325 million was received by Intramed on 18 June 1999 from
Pregrine Finance, a subsidiary of the Peregrine
Group, which received
the funds from Macmed and round-tripped it back to Macmed through
Intramed, in the course of the implementation
of the Peregrine
Structure’.
This is reiterated by Nel when he
states:
‘
I admit that Intramed
received R325 million from Peregrine Finance on 18 June 1999 and on
the same day transmitted the sum of R325
million to Macmed’.
But Nel himself later puts it somewhat
differently, when he states:
‘
There was no need for
Intramed to finance the acquisition of its business from Macmed by
way of a loan from Peregrine Finance in terms
of the Peregrine
Structure. Macmed had already acquired and funded the acquisitions
and placed the business in Intramed with effect
from 1 March 1999,
culminating in an inter-company loan for R325 million.’
All of that being so, to simply
characterise the Macmed claim as a loan - more so a loan by it to
Intramed - as the liquidators have
done, is untenable, more
especially as Nel’s description is not only in itself contradictory
but also at odds with Pereira’s,
particularly with reference to the
date of the alleged loan. Nel seeks to explain these apparent
contradictions as follows:
‘
The Peregrine
structure was no more than a simulated transaction for tax efficiency
purposes. The loan of Macmed to Intramed of R
325 million arose on
the acquisition of the Pharmacare Intramed business and assets by
Macmed and transferred to Intramed with effect
from 1 March 1999. The
flow of funds and the date, 18 June 1999, thereof do not indicate the
date of acquisition and corresponding
debt. The intended transaction
was the placing of the Intramed business into Intramed (Pty) Ltd
culminating in a loan of R325 million
owing by Intramed to Macmed at
1 March 1999’.
[184] Nel dismisses Standard Bank’s
concerns in these terms:
‘
[Standard Bank]
completely disregards the true nature of the transaction and the real
intention of the parties thereto. It appears
that [Standard Bank] has
become bogged down by irrelevant detail and that it cannot “see the
wood for the trees”’.
Far from allaying Standard Banks’s
fears, it regrettably is precisely that attitude on the part of the
liquidators that has contributed
to the prevailing atmosphere of
distrust. On the one hand Nel is quite adamant in asserting that a
valid loan was advanced by Macmed
to its subsidiary Intramed. On the
other he states: ‘
The
Macmed group during the years 1998 and 1999 was no more than “an
empire of smoke and mirrors”. . . ’.
In those circumstances, Standard
Bank’s central contention is simple, namely that, admitting the
Macmed claim not only ignores the
Peregrine Agreement, but also the
reality that the Macmed group was in fact an empire of smoke and
mirrors. Accordingly, so the contention
proceeds, the Intramed
liquidators, who were alive to the true facts, ought to have
recommended to the Master that he expunge it.
[185] Like Navsa JA, I too am of the
view that the reliance by the liquidators on legal advice as a
justification for their conduct
is glib. At no stage, as Navsa JA
points out, was a legal opinion sought and obtained on behalf
Intramed in respect of the Macmed
claim. Furthermore, it is not
without significance that the attorney concerned, after some 6 years
of advising the liquidators to
the group of companies, withdrew as
attorney in the matter because of a conflict of interest. Why it took
that long for the realization
to dawn that it is wholly improper for
an attorney to dispense legal advice to both debtor and creditor in
respect of the same claim
has not been explained. It can hardly be
justified on the basis that both the debtor and creditor were
companies in liquidation from
the same stable, especially since the
claim in question was from the outset a contentious one, whose
validity was in dispute. The
withdrawal of the attorney because of a
conflict appears not to have provoked any anxiety in the liquidators
about their own position
and the potential conflict that they found
themselves in. Nor did it prompt them to solicit an opinion on behalf
of Intramed as to
the validity of the Macmed loan.
[186] As Navsa JA records, the parties
were agreed that we cannot reach any definitive conclusions about the
Peregrine agreement or
the effect of liquidation on it. Nor is it
necessary at this stage do to so. It suffices for present purposes to
record, as Navsa
JA has done (para 99) that there is much in the
evidence that points to a genuine intent on the part of the parties
to conclude a
binding agreement and a serious endeavour on their part
to implement its terms. Indeed as Navsa JA demonstrates all of the
parties
to the contract went some way in implementing its terms. In
those circumstances it hardly seems appropriate for the liquidators
ex
post facto and in the absence of all of the parties to the
contract to adopt a contrary stance in respect of its enforceability.
It follows that the assertion of a loan by Macmed is deserving of
scrupulous interrogation by the liquidators. That, the liquidators
have steadfastly refused to do. In that, they have failed in their
duty. I have set out what Nel himself says about the Macmed claim
in
greater detail than is absolutely necessary because it illustrates, I
daresay, that on the face of it the Macmed claim appears
to be a
dubious one. On the view that I take of the matter, a reasonable
liquidator in the diligent discharge of his duty would have
subjected
that claim to a more thoroughgoing and searching scrutiny. Moreover,
they would not simply have ignored or disregarded
the many contrary
indicators alluded to by Navsa JA. Instead the stance adopted by the
liquidators manifests a closed mindset in
relation to that claim and
a desire either wittingly or unwittingly to advance the interests of
Macmed at the expense of Intramed.
All of those factors, in my view,
may well in the ordinary course be sufficient to disqualify a
liquidator from continuing to act
as such. But here, there is an
additional factor, a telling one – namely the alleged
misappropriation - one that at the same time
tips the scales against
the liquidators and disabuses my mind of the personal anguish and
reticence that it has suffered in supporting
so drastic a step as
their removal from office.
[187] It can hardly be in dispute that
a liquidator must hold the funds under his trusteeship separately
from his own, preserve those
funds with a degree of diligence beyond
that which he applies to his own funds and above all else never use
funds under his trusteeship
for his own personal purposes. The
liquidators repeatedly deny that the use of Intramed’s funds to pay
for the fee review application
amounts to misappropriation. Their
failure, even after the criticism of their conduct by this court, to
acknowledge their wrongdoing
and to show appropriate contrition for
their conduct is in and of itself a matter for grave concern.
[188] When the fee review application
was launched during December 2001 the liquidators did not seek the
leave of the court to have
the costs paid out of Intramed’s funds.
They merely sought an order that the Master pay the costs if he
opposed the application.
The Master contended from the outset that
they were not entitled to approach the court
nomine
officio
but ought to have
done so in their personal capacities. On 31 October 2002 the high
court dismissed the fee review application and
ordered the
liquidators to pay the costs, including those of intervention by 5
banks, personally. By then an amount of R689 747.91
had been paid out
of Intramed’s funds. From then until the exchange of heads of
argument in the SCA, a further R114 761.59 of Intramed’s
funds were
utilized. The total thus stood at R804 419.50. The Master, after
perusal of the first draft of the fourth liquidation
and distribution
lodged during August 2003, enquired why the liquidators were ‘of
the opinion that these costs should be reflected
in the estate
account and secondly why were estate funds used to pay these items’.
In response De Villiers sought return of ‘all
vouchers in respect
of legal costs’ to ‘separate the costs pertaining to the fees
review application from other legal costs’.
He added that to the
best of his recollection no legal costs relating to the fee review
application had been paid out of Intramed’s
bank account subsequent
to the judgment of the high court. That as we well know was untrue.
Some eight and a half months later and
presumably after sufficient
time had elapsed for him to have ascertained what the true position
was, that assertion was repeated
in a further letter to the Master.
Responding to the allegation that De Villiers had misled the Master,
Nel suggests that:
‘This did not purport to be an exhaustive answer to the Master’s
query. . . ’.
That response, in my view, is
disingenuous and lacking in candour.
[189] Section 393 (1) of the Companies
Act provides:
‘
Immediately after his
appointment a liquidator shall open a book or other record wherein he
shall enter from time to time a statement
of all moneys, goods,
books, accounts and other documents received by him on behalf of the
company’.
Had the liquidators complied with the
obligation imposed upon them by the section, it would not have been
necessary for them to have
sought and obtained return of the vouchers
from the Master in order to answer the Master’s query or to resort
to the qualifier
‘to the best of his recollection’. Moreover, it
would seem that the vouchers were sought for the limited purpose of
identifying
and separating the liquidator’s personal costs from
Intramed’s legal costs. That, as well, only in respect of the 4
th
Liquidation and Distribution Account. Tellingly, Standard Bank later
ascertained that further costs had been included in earlier
liquidation and distribution accounts. Of this, Nel states:
‘
At the time, it did
not occur to De Villiers or I that some of the review costs might
already have been expensed in earlier accounts.
… After [Standard
Bank] made that allegation, De Villiers uplifted all the vouchers in
respect of legal costs in the 2
nd
and 3
rd
Accounts from the Master, in order to investigate the matter.
His investigation
showed that legal costs relating to the review application had been
expensed in the 2
nd
Account to the extent of R43,822.49 and in the 3
rd
Account to the extent of R232,424.13’.
[190] The judgment of the SCA was
handed down on 1 April 2004. The SCA held that the application should
obviously have been brought
by the liquidators in their personal
capacity and not in their capacity as joint liquidators. Of the SCA
judgment, Nel states: ‘
We
accept that the Supreme Court of Appeal determined that the
application for review ought not to have been brought in that manner,
and that we ought to bear the costs personally. We have, to the best
of our ability, investigated, reconciled and audited all of
the legal
costs pertaining not only to the review proceedings, but also to our
challenges to the Master with which everything started.
We have
repaid all of the review legal costs to the estate, including
interest’.
Once again one is confronted by a
qualifier. In this instance it is ‘to the best of our ability’.
Elsewhere Nel states:
‘
The reconciliation has
been prepared by De Villiers and audited by me and we verily believe
it to be correct in all respects. We believe
that each and every cent
that was paid by Intramed has been repaid with interest. Should it,
however, appear that we missed any amount
(which we seriously doubt)
we shall immediately attend to the repayment of such amount together
with interest thereon at the applicable
rate. We never intended to
act to the detriment of the estate and we still do not intend to do
so’.
Here too, the language employed is
deliberately coy and cagey. Thus they ‘believe’ the
reconciliation to be correct in all respects.
Similarly, they
‘believe’ that every single cent has been repaid. Not content
with those hollow assertions, they add, should
it ‘appear’ – to
whom is not disclosed (is it expected that someone else should
perform a further auditing function) - that
they ‘missed’ any
amount, and then for good measure a further qualifier ‘which we
seriously doubt’ is added. Syntactically,
it is as if they have
suddenly chosen to talk in tongues. Plainly, such obfuscatory
language is not what a court is entitled to expect
from experienced
chartered accountants, auditors and liquidators such as these.
[191] In response to the allegation
that there was an inordinate delay in effecting repayment, Nel says:
‘
The sum of R507,492.02
was duly refunded in June and August 2004 … I deny that this
constituted an unreasonable delay. We first
had to consider and
obtain advice on the effect of the judgment, and then to make the
appropriate arrangements for the repayment
of the review legal costs.
In my case that required obtaining the money from PWC and arranging
with the other Macmed liquidators
for repayment of their
contributions to the review legal costs. . . . ’
That as we well know is simply untrue.
Repayment in fact occurred at irregular intervals and in varying
amounts over the period 7
June 2004 to 25 August 2005. In all some 16
months were to elapse from the date of dismissal of the appeal by
this court, before
the full amount was repaid. Thus by the time the
application, the subject of the present appeal, was launched in the
court below
an amount of R43 822.49 remained outstanding. The final
payment was only effected on 25 August 2005, three days before the
liquidators
delivered their answering affidavits in the matter.
Standard Bank suggests that such conduct is manifestly cynical and
calculated,
as it enabled the liquidators to proclaim in their
answering affidavit that all moneys had been repaid. It is difficult
not to agree
with that submission.
[192] Notwithstanding the fact that
the liability to repay was the joint and several obligation of the
two of them, Nel endeavours
to explain the delay in effecting
repayment promptly thus:
‘
In fact, the Macmed
Joint liquidators had a group fee sharing agreement, and they in
turn, agreed to share my review legal cost in
the same proportion as
the fee sharing agreement. The collection of these
pro
rata
costs
(for me) from the Macmed Joint liquidators caused the delay and PWC
on receipt of these payments, immediately paid the funds
to
Intramed’.
It is unclear to me why any private
fee sharing arrangement can be invoked as justification for the
delay. Simply put, the liquidators
who were held by this court to be
personally liable for those costs, had an obligation to promptly
repay it to Intramed. If they
had a right of recourse in terms of
some private treaty to others, and there was some delay in
recovering, that delay ought to have
been for their account and not
that of Intramed. Instead, they conducted themselves as if their own
obligation to Intramed extended
no further than the repayment of
their share in terms of their private fee sharing agreement.
[193] Nel illustrates alarmingly poor
judgment and introspection when he states:
‘Intramed,
as a result of interest being paid on the review costs paid by
Intramed, has suffered no loss and therefore any allegation
of
tardiness is irrelevant’.
Later, Nel states:
‘
We are . . .
criticized for our initial failure to pay interest when we refunded
the review legal costs to Intramed. Shortly after
the decision of the
Supreme Court of Appeal, I considered the issue of payment of
interest and formed the view that we ought to pay
the interest when
called upon to do so by the Master, which the master has not done to
date. . . . However, we took advice, firstly
from Brooks, and then
from counsel. After we were advised that interest ought to be paid,
we set about determining the appropriate
amount. We have paid the
review legal costs and the interest thereon. I deny that we acted
improperly in this regard’.
First, it reflects poorly on Nel that
he believed that their obligation to pay interest only arose if
called upon by the Master to
do so. They had used Intramed’s funds
to advance their personal interest as this court had already
emphatically told them. In those
circumstances there ought to have
been no doubt that the highest degree of promptitude was required in
restoring Intramed to the
position it would have been in, but for the
ill advised use of its funds. The unauthorized use of Intramed’s
funds, once frowned
upon by this court, demanded nothing less. Sheer
embarrassment ought to have compelled return of Intramed’s funds
together with
interest, not a demand from the Master. Further, Nel’s
statement is revealing for what it does not divulge. It does not tell
us
when the advice was obtained and more importantly when in relation
to that advice the interest was paid to Intramed. Attorney Brooks
in
his affidavit, states:
‘
. . . I advised the
Intramed liquidators that they should repay to the Intramed estate
all the costs, and interest thereon . . . I
cannot recall the exact
date on which I advised the Intramed liquidators. I am advised that
the Intramed liquidators, within a reasonable
time, repaid the costs
and interest to the Intramed estate’.
What the reconciliation statement does
show, however, is that interest was not paid until after the launch
of the present application
in the high court, suggesting that Brooks
may have been misled by his clients as to when payment was effected
by them.
[194] None of this merited the
consideration of the high court. The high court put it thus
(paragraphs 28 and 29 of its judgment):
‘
The Supreme Court of
Appeal handed down its judgment on 1 April 2004. The capital was
refunded in June and August of that year. Apart
from the delay
occasioned by identifying what had to be repaid, the delay was also
occasioned by Nel and de Villiers taking legal
advice, by the time it
took Nel to collect contributions from the Macmed liquidators as part
of the fee sharing agreement and because
of the time taken to rectify
certain mistakes that had been made. The bank attempts to make much
of this delay but, once Nel and
de Villiers had committed themselves
to pay interest, there was no prejudice caused to Intramed by a delay
of a few months. . . .’
With the greatest respect to the high
court, it appears to have been uncritical in its acceptance of the
version advanced by the liquidators.
It is unclear what legal advice
was sought after the SCA judgment or why that would necessarily have
contributed to the delay. What
is clear is that the liquidators acted
for the most part in flagrant disregard of the judgment of this
court. I have already dealt
with the liquidators awaiting
contributions from the Macmed liquidators and why that ought not to
avail them. I, unlike the high
court, would hesitate to characterize
their conduct as a commitment to pay interest. As I have sought to
show, initially, and for
some time thereafter, they demonstrated a
marked reticence to pay interest. The real and substantive criticism
of the high court
judgment though is its finding that ‘the capital
was refunded in June and August’ 2004. That with respect to the
high court is
wrong in fact. The same can be said of its conclusion
that no prejudice was caused to Intramed ‘by a delay of a few
months’.
These findings are plainly unsustainable. It follows
therefore that the high court ought to have reached a contrary
conclusion to
that reached by it on this aspect of the case.
[195] Ultimately, even Nel was
constrained to concede:
‘De
Villiers and I acknowledge that certain overlapping and technically
incorrect charging has taken place. However, in the context
of the
group, I believe this is acceptable’.
That damning concession, which did not
even merit mention in the judgment of the high court, illustrates
that they failed in the discharge
of a most rudimentary function for
liquidators, namely the keeping of proper books of account. Given the
obligation imposed upon
them to do so, that dereliction should not be
countenanced.
[196] Nel asserts:
‘
I deny that De
Villiers and I placed our own interests above those of Intramed and
point out that we acted on legal advice at all
times.’
The refrain on the part of the
liquidators, namely that they acted on legal advice, does not avail
them in respect of their conduct
in relation to repayment of
Intramed’s funds. After the judgment of this court, there is simply
no evidence of them having acted
on legal advice in taking all of 16
months to repay those moneys. Nor, given the authority of this court,
could I imagine, that such
advice would have been given. If anything,
properly analysed, the evidence suggests that in taking as long as
they did in effecting
payment of all of the capital plus interest,
they may actually have acted contrary to legal advice.
[197] It follows, in my view, that the
appeal must succeed and I accordingly concur in the order proposed by
Navsa JA.
_________________
V M PONNAN
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: J Suttner SC
R
Hutton SC
Instructed
by
Werksmans
Sandton
Symington
& De Kok Bloemfontein
For
Respondent: C E Watt-Pringle SC
G
Girdwood
Instructed
by
Deneys
Reitz Johannesburg
Matsepes
Attorneys Bloemfontein
1
See in this regard, Bertelsman
et
al
Mars:
The Law of Insolvency
9 ed
(2008) pp293-294 and the authorities cited there.
2
The judgment of the court below has been reported as
Standard
Bank of South Africa Ltd v The Master of the High Court and others
2009 (5) SA 13.
3
For the background and litigation history in relation to their fees
see
Nel and another NNO v
The Master (Absa Bank Ltd and others intervening)
2005 (1) SA 276
(SCA).
4
See para (iii) of the Peregrine letter referred to in para 16.
5
This is dealt with under the heading
THE
EFFECT OF THE LIQUIDATION OF THE MACMED GROUP UPON THE STRUCTURE
in paras 56-62 of the second opinion.
6
This application has briefly been alluded to in para 11 above.
7
Op cit
fn
2.
8
See the judgment of this court in
De
Villiers and another NNO v BOE Bank Ltd
2004
(3) SA 1
(SCA).
9
This refers to the expungment of the claim described in para 62.
10
In the reproduction of the quote I have omitted the names of the
legal practitioners referred to.
11
Section 41 provides:
‘The
trustee of an insolvent estate may at any time and shall, whenever
he is so required by the Master or by a creditor or creditors
representing one-fourth of the value of all claims proved against
the estate, convene in the manner prescribed by subsection (3)
of
section
forty
,
a meeting of creditors (hereafter called a general meeting of
creditors) for the purpose of giving him directions concerning any
matter relating to the administration of the estate and shall state
in such notice the matters to be dealt with at that meeting.’
12
See note 6.
13
This section must be read with s 339 of the CA which provides:
‘
In
the winding-up of a company unable to pay its debts the provisions
of the law relating to insolvency shall, in so far as they
are
applicable, be applied
mutatis
mutandis
in respect of any
matter not specially provided for by this Act.’
14
Bank of Lisbon and South
Africa Ltd v The Master
1987 (1) SA 276
(A) at 287G.
15
Third edition 1998 at p 227.
16
M S Blackman, R D Jooste, G K Everlingham, M Larkin, C H Rademeyer,
J L Yeats Vol 3 at 14─376.
17
Ex
Parte Clifford Homes Construction (Pty) Ltd
1989
(4) SA 610
(W) at 614.
18
Op
cit
14─378.
19
Op
cit
14─382.
20
See
Zandberg
v Van Zyl
1910
AD 302
at 314.
21
Op cit
at 14─380–14─381.
22
See para 52 and note 2.
23
Intramed (Pty) Ltd (in
liquidation) v Standard Bank of South Africa Ltd
2008
(2) SA 466
(SCA) at para 20.
24
‘The Master may reduce or increase such remuneration if in his
opinion there is good cause for doing so, and may disallow such
remuneration either wholly or in part on account of any failure or
delay by the liquidator in the discharge of his duties.’
25
Section
394(7)
(a)
provides:
‘
7)
(a)
Any liquidator who without lawful excuse, retains or knowingly
permits his co-liquidator to retain any sum of money exceeding forty
rand belonging to the company concerned longer than the earliest day
after its receipt on which it was possible for him or his
co-liquidator to pay the money into the bank, or uses or knowingly
permits his co-liquidator to use any assets of the company except
for its benefit, shall, in addition to any other penalty to which he
may be liable, be liable to pay to the company an amount not
exceeding double the sum so retained or double the value of the
assets so used.
(b)
The amount which the liquidator is so liable to pay, may be
recovered by action in any competent court at the instance of the
co-liquidator, the Master or any creditor or contributory.’
26
Para 135 above.
27
Paras 124–127 above.
28
Ma-Afrika Groepbelange
(Pty) Ltd v Millman and Powell NNO
,
para 126 above, at 566B–E.
29
Ma-Afrika Groepbelange, loc
cit
;
Hudson NNO v Wilkins NO
,
para 125 above, in para 18 of the judgment.
30
Cf High Court judgment, para 31.
31
Ma-Afrika Groepbelange
(Pty) Ltd v Millman and Powell NNO
,
para 126 above, at 566D.
32
Cf
Naylor v Jansen
2007 (1) SA 16
(SCA) para 14;
Giddey
NO v J C Barnard and Partners
[2006] ZACC 13
;
2007 (5) SA 525
(CC) para 19.
33
High Court judgment para 31.
34
High Court judgment para 36.
35
High Court judgment para 35.
36
Para 105 above.
37
2002 (4) SA 483
(SCA).
38
Para 23.
39
Para 25.
40
1996 (1) SA 868
(N) at 874D–E, quoted with approval in the High
Court judgment, para 37.
41
2004 (3) SA 1
(SCA).
42
Para 107 above.
43
2003 (2) SA 11
(SCA).
44
Para 7.
45
Para 11.
46
High Court judgment, paras 12–30.
47
Paras 77–78 above.
48
Para 78 above.
49
Paras 108–109 above.
50
See also the High Court judgment, paras 63–80.
51
Para 136 above.
52
High Court judgment paras 87–94.