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[2023] ZAECELLC 38
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Molose N.O and Others v Nonxuba and Others (1440/2023; 1441/2023) [2023] ZAECELLC 38; 2024 (3) SA 145 (ECEL) (5 December 2023)
SAFLII
Note:
Certain
personal/private details of parties or witnesses have been redacted
from this document in compliance with the law and
SAFLII
Policy
FLYNOTES:
INSOLVENCY – Attorneys as directors –
Personal
liability company
–
Ordinary
commercial contractual debts or liability – Mandate to
recover damages from Health Department for medical negligence
–
Established contractual relationship where any damages recovered
should accrue for beneficiaries – Theft of
such damages
awards would amount to breach of contract and would give rise to
contractual claim against firm apart from any
delictual claims –
Case as presented falling within purview of section 19(3) –
No direct evidence of theft –
Factual insolvency of firm not
established – Applications for provisional sequestration
dismissed –
Companies Act 71 of 2008
,
s 19(3).
IN THE HIGH COURT OF
SOUTH AFRICA
(EASTERN CAPE
DIVISION, EAST LONDON LOCAL COURT)
CASE
NO: 1440/2023
1.
REPORTABLE: YES / NO
2.
OF INTEREST TO OTHER JUDGES: YES / NO
3.
REVISED.
In the matter between:
MILLICENT
MOLOSE N.O.
First Applicant
ANDISWA
FITSHANE
N.O.
Second Applicant
THANDISWA
XHANTI
N.O.
Third Applicant
LIHLE
MININYE
Fourth Applicant
MIRRIAM
PIKANI
N.O.
Fifth Applicant
YANDISA
FENI N.O.
Sixth Applicant
NOLUKHO
NKAMPA
N.O.
Seventh Applicant
SIVE
MDENI N.O.
Eight Applicant
NO-OMA
MNYIBASHE
N.O.
Ninth Applicant
ANALO
DOVALA
N.O.
Tenth Applicant
OLWETHU
BALIKHULU
N.O.
Eleventh Applicant
and
ZACK
MACK MICHAEL NONXUBA
First Respondent
THE
LEGAL PRACTICE COUNCIL
Second Respondent
EXECUTIVE COUNCIL FOR
HEALTH,
EASTERN
CAPE
Third Respondent
CASE
NO: 1441/2023
In the matter between:
MILLICENT
MOLOSE N.O.
First Applicant
ANDISWA
FITSHANE
N.O.
Second Applicant
THANDISWA
XHANTI
N.O.
Third Applicant
LIHLE
MININYE
Fourth Applicant
MIRRIAM
PIKANI
N.O.
Fifth Applicant
YANDISA
FENI N.O.
Sixth Applicant
NOLUKHO
NKAMPA
N.O.
Seventh Applicant
SIVE
MDENI N.O.
Eight Applicant
NO-OMA
MNYIBASHE
N.O.
Ninth Applicant
ANALO
DOVALA
N.O.
Tenth Applicant
OLWETHU
BALIKHULU
N.O.
Eleventh Applicant
and
ALICIA
NOVELANO NONXUBA
First Respondent
THE
LEGAL PRACTICE COUNCIL
Second Respondent
EXECUTIVE COUNCIL FOR
HEALTH,
EASTERN
CAPE
Third Respondent
Rabkin-Naicker J
JUDGMENT
POTGIETER
J
Introduction
[1]
These are opposed urgent applications for the provisional
sequestration of the respective estates of spouses who are married
out of community of property. The application in respect of the
husband, Mr Nonxuba, is brought under case number EL 1440/2023
and in
respect of the wife, Ms Nonxuba, under case number 1441/2023. The
issues in both applications are virtually identical and
they were
consequently heard together. This judgement accordingly deals with
both applications.
The
parties
[2]
The spouses are the respective first respondents in each application.
The second and third respondents in both applications
are the Legal
Practice Council (‘LPC’) and the Executive Council for
Health: Eastern Cape (‘the Health Department’)
respectively. The latter respondents have not entered the matters
(save for a report submitted by the LPC in each case) which is
being
opposed by the respective first respondents (‘the respondents’)
in both matters.
[3]
The original applicants in both applications were identical but this
has since changed. They are the parents or guardians of
minor
children who all suffered severe bodily harm due to the negligent
medical treatment administered to them by the employees
or agents of
the Health Department. Five of the original applicants, namely
second, fourth, seventh, ninth and tenth applicants,
have since
terminated the mandate of the applicants’ attorneys of record
on the basis of averred untoward conduct on the
part of the
attorneys. They no longer participate in the proceedings. The 11
th
applicant acted on behalf of her minor child, T[....], who has
unfortunately passed away after the applications were launched.
The
respondents contend, correctly in my view, that the 11
th
applicant no longer enjoys
locus standi
to bring the
applications, currently leaving only five applicants. Furthermore,
with regard to the claims of the sixth and eighth
applicants there
are pending proceedings in the Mthatha High Court instituted by the
Special Investigating Unit to rescind the
awards made in respect of
the respective minor children of the said applicants and to defend
the relevant damages actions. It is
accordingly only the awards in
respect of the first, third and fifth applicants that are presently
enforceable and that are accordingly
relevant for purposes of the
present applications. The total sum of such awards amounts to R
49 691 649.00.
Background
[4]
The relevant background briefly is that the applicants mandated
Nonxuba Inc, a Johannesburg firm of attorneys, to institute
actions
for damages on behalf of the minor children against the Health
Department. Mr Nonxuba is an admitted attorney. At all material
times
he was the managing director of the firm. Ms Nonxuba, who is also an
admitted attorney, was in the employ of the firm between
February
2018 – September 2021. She resigned and started her own firm,
NA Nonxuba Attorneys Inc of which she is the sole
director. Her exact
former position in Nonxuba Inc is not altogether clear. According to
her answering affidavit she was a salaried
and not a profit-sharing
director of that firm. For present purposes, it is accepted that she
was a director of Nonxuba Inc during
the period February 2018 –
September 2021 when she resigned.
[5]
Both respondents have ceased to be practising attorneys. Mr Nonxuba
was suspended from practice pursuant to an order of the
Western Cape
High Court granted on 12 April 2022. The relevant court order makes
provision for the LPC to bring an application
to strike his name from
the roll of attorneys. It does not appear that this has happened as
yet. Ms Nonxuba has ceased to practice
after the LPC refused to
provide her with a fidelity fund certificate due to the difficulties
at Nonxuba Inc that resulted in the
suspension of Mr Nonxuba. She was
in fact cited as a respondent in the suspension application against
Mr Nonxuba. She unsuccessfully
applied in the North Gauteng High
Court for a review of that decision. The matter is presently on
appeal.
[6]
The aforesaid mandate to institute claims against the Health
Department was given to Nonxuba Inc during the period 2016 –
2018. All these claims succeeded, resulting in awards of damages
(which are enforceable in respect of the first, third and fifth
applicants) in the total sum of R49 691 649.00 which was
paid into the trust account of the firm by the Health Department.
In
terms of the relevant court orders, Nonxuba Inc had to register a
trust for each one of the relevant beneficiaries and the proceeds
of
the awards, less the fees and disbursements due to the firm, had to
be paid over to the respective trusts. According to the
applicants
this never happened. Instead, Nonxuba Inc stole the funds and the
respondents were involved in the theft. I proceed
to consider the
applicants’ case.
The
applicants’ case
[7]
The gravamen of the applicants’ case is that Nonxuba Inc is
indebted to them pursuant to the theft of the funds. The amount
stolen is given variously as R198m, more than R180m or more than
R300m. Although it is not entirely clear, it appears that the
case of
the said applicants with enforceable awards is that all their money
was stolen amounting to almost R50m. None of this has,
however, been
established since it appears that there is a credit balance of
approximately R105m in the trust account of Nonxuba
Inc. It is also
unclear what nett amounts are payable to the trusts ie after the
deduction of the fees and disbursements of Nonxuba
Inc from the
awards.
[8]
All the claims were regulated by contingency fee agreements.
According to Mr Nonxuba the fees and disbursements in medical
negligence cases, such as those applicable in this case, average
between 35% – 40% of the award. He attempted to demonstrate
this by means of summaries of the accounts in respect of the claims
of the fourth and fifth applicants which are annexed to his
supplementary answering affidavit. It should be pointed out that this
accounting is disputed by the applicants. It appears that
this is
only in respect of the account of the fifth applicant, since the
fourth applicant terminated the mandate of the applicants’
attorneys of record and is no longer participating in the
proceedings.
[9]
It is also unclear what amounts may be due to other trust creditors
of Nonxuba Inc. The applicants refer in this regard to an
averment by
an official of the LPC in correspondence dated 31 August 2023 to the
effect that it had been established in collaboration
with the
National Prosecuting Authority (‘NPA’) and the Special
Investigating Unit (‘SIU’) that there was
a substantial
shortfall on the trust account of Nonxuba Inc. No detail was provided
in this regard. However, this has not been
confirmed in these
proceedings by the LPC and is denied by Mr Nonxuba.
[10]
Ms Killian, who appeared on behalf of the respondents together with
Mr McKelvey, submitted that this information amounted to
double
hearsay, in that the applicants are relying on the averment of the
LPC official who in turn rely on information from the
NPA and SIU
about what was allegedly uncovered. She submitted that the LPC has
been unable to confirm any shortfall in the trust
account of Nonxuba
Inc as appears from the report that it submitted in both applications
indicating that it leaves the matter in
the hands of the court. She
also correctly indicated that the allegation in the replying
affidavit is unfounded that the Western
Cape High Court had
determined in the suspension judgement against Mr Nonxuba that
Nonxuba Inc had misappropriated trust funds
and misconducted the
trust account. That court suspended Mr Nonxuba on the basis that it
accepted the case of the LPC that he had
fabricated the trust
reconciliation. The further case of the LPC was not sustained that
the accounting irregularities and the delay
in paying over the
damages awards to the relevant beneficiaries taken together with
certain round figure transfers from the trust
to the business
accounts, gave rise to a suspicion that Mr Nonxuba had stolen trust
monies.
[11]
The applicants further aver in the replying affidavit that was
deposed to by their attorney that according to a media report
the LPC
had apparently determined the total sum of trust monies that were
stolen by Nonxuba Inc amounted to R345m. This was also
not confirmed
by the LPC.
[12]
It is therefore unclear what amount exactly was stolen on the
applicants’ version. At worst, it would be their entire
awards
amounting to R 49 691 649.00. This is, however, far from clear
and it is not supported by any direct evidence. The
applicants rely
on an alleged deficit in the trust account of Nonxuba Inc for the
inference that the funds were stolen. There is
no acceptable evidence
of a deficit in the trust account. In fact, the balance of the trust
account clearly covers the total gross
amount of their claims and by
the same token the nett amounts payable to the relevant trusts.
[13]
There is no indication whether or not Nonxuba Inc has any trust
creditors other than the applicants. This appears to be unlikely.
According to the Western Cape High Court judgement Nonxuba Inc had 12
trust creditors as at 31 July 2021. One of these was the
firm itself.
It is therefore overwhelmingly probable that the remaining 11
creditors were the original 11 applicants in these proceedings.
[14]
Both respondents denied having stolen any funds or that funds were
stolen at all. Ms Nonxuba furthermore indicated that as
an employee,
she had no access to the trust account or any involvement in the
administration of Nonxuba Inc. She also indicated
that most of the
damages claims of the applicants were finalised before her term of
office as a director of Nonxuba Inc.
[15]
No proceedings other than the present provisional sequestration
applications were instituted to recover any of the amounts
that are
said to have been stolen. Although it is alluded to in the
applicants’ papers that steps will be taken to liquidate
Nonxuba Inc, this has not materialised. The indebtedness, if any, of
Nonxuba Inc to the applicants has thus not been established
in any
legal proceedings.
Merits
[16]
The applicants’ case against the respondents in a nutshell, is
that pursuant to the provisions of
section 19(3)
[1]
of the
Companies Act, 71 of 2008
, the respondents are jointly and
severally liable in their capacities as directors with Nonxuba Inc
for the latter’s indebtedness
to the applicants. In effect, the
applicants’ contention is that because Nonxuba Inc is a
personal liability company (which
is common cause) the respondents
have incurred statutory liability in terms of the subsection as
co-debtors with Nonxuba Inc. The
applicants’ case accordingly
turns on the proper interpretation of
section 19(3).
[17]
Section 19(3)
is substantially similarly worded to its predecessor,
section 53(b)
[2]
of the
Companies Act, 1973. The former Appellate Division dealt with the
proper construction of the latter subsection in
Fundstrust
[3]
where it concluded that the subsection applies to contractual debts
of the company arising from its ordinary financial or commercial
commitments ie ordinary business debts.
[4]
[18]
In my view, the above interpretation would apply with equal force to
section 19(3).
[5]
It follows
that the subsection provides for personal liability of directors for
the ordinary commercial contractual debts or liability
that are
incurred by a personal liability company during the term of office of
the director in question.
[19]
On the applicants’ version the debt of Nonxuba Inc arose from
the theft of the trust funds. The respondents contend that
this does
not amount to a consensual, contractual debt incurred in the ordinary
course of business but is a claim based in delict.
The debt relied
upon by the applicants accordingly does not fall within the
provisions of section 19(3) of the Companies Act. It
follows that the
respondents did not incur joint and several liability together with
Nonxuba Inc for the payment of such debt.
In the respondents’
view the applicants have accordingly failed to establish the basis
for the relief which they seek against
the respondents and the
applications cannot succeed.
[20]
While this argument appears to be attractive, it strikes me as being
fallacious in that it fails to have due regard to the
relationship
between Nonxuba Inc and the applicants. The mandate granted to
Nonxuba Inc to recover damages from the Health Department,
clearly
established a contractual relationship between the parties one of the
terms whereof was that any damages recovered should
accrue to the
benefit of the beneficiaries. Theft of such damages awards would
amount to a breach of the contract and would give
rise to a
contractual claim against Nonxuba Inc apart from any delictual claims
that are available.
[6]
The case
as presented is accordingly wide enough to cover contractual claims
for any loss suffered as a result of theft thus falling
within the
purview of section 19(3).
[21]
The respondents further argued (if I understood it correctly) that
section 19(3)
per se
does not authorise a creditor to obtain
the sequestration of the directors without having first instituted
legal proceedings to
recover the debt from the directors and the debt
remains unsatisfied. They indicated that the statutory mechanism
created by section
19(3) relates to the recovery of the relevant
debt. The corporation remains the principal debtor, while the
subsection creates
an additional right of recourse against the
directors. The separate legal identity of the corporation and the
principle that a
director is not personally liable for the debts of
the corporation, continue to apply. The subsection does not alter or
affect
the status of the directors nor does it render the directors
without more debtors for the purposes of sections 9 and 10 of the
Insolvency Act (‘the Act’). For the purposes of this
argument, Nonxuba Inc would remain the debtor for the purposes
of
those sections. The directors do not become the debtor in their
personal capacities thus vesting the creditor with
locus standi
,
by reliance solely on section 19(3), to move for their provisional
sequestration in terms of sections 9 and 10. The liability
of the
directors is accessory to that of the corporation, being the
principal debtor, and is not such as to empower the creditor
through
direct reliance only on section 19(3), to seek the sequestration of
the directors independently from the corporation. The
creditor is
required first to establish the liability in terms of section 19(3)
of the directors by means of legal proceedings
instituted for that
purpose against the directors thus rendering the latter debtors for
the purposes of sections 9 and 10, before
being able to move for
their sequestration. The respondents therefore do not fall within the
definition of ‘
debtor’
in the Act. Ms Killian
indicated that she has been unable to find authority supporting the
present scenario where a sequestration
is sought without having acted
against the corporation or having established the liability of the
director through proceedings
instituted for that purpose against the
latter. She therefore submitted that the applicants’ reliance
on section 19(3) is
not competent in the present circumstances.
[22]
While this argument is persuasive on the face of it, I prefer not to
make a determination with regard thereto given the undermentioned
conclusion to which I have come on the merits of the applications.
For the same reason I do not regard it necessary to determine
the
points
in limine
raised by the respondents with regard to
service of the application on the Master and the provision of
security which in any event
appear to be without merit.
[23]
The more fundamental question on the merits is whether there is a
debt due by Nonxuba Inc to the applicants such as to justify
the
provisional sequestration of the respondents as debtors at the
instance of the applicants. This is closely linked to the issue
whether or not the applicants have established that Nonxuba Inc stole
the awards. I proceed to deal with this aspect.
[24]
As indicated, there is no direct evidence of theft. Moreover, it has
not been established (
prima facie
or otherwise) that there is
a shortfall in the trust account of Nonxuba Inc from which theft of
the trust funds could be inferred.
The applicants rely in this regard
on the aforesaid email from the LPC official to the effect that there
was a substantial shortfall
on the trust account. This allegation is
not supported by an affidavit from the official in question or in any
other manner by
the LPC itself which has filed a report in these
proceedings indicating that it left the decision with regard to the
applications
in the hands of the court. It should be pointed out that
there is merit in the respondents’ contention that sufficient
time
has elapsed since the beginning of September 2023 when the
applications were launched, for the applicants to have obtained the
necessary affidavits supporting the allegation of a shortfall which
is disputed by Mr Nonxuba. Furthermore, section 9(3) of the
Act
requires that the facts relied upon for the sequestration application
be confirmed by affidavit.
[25]
I am accordingly not satisfied, even on the lower threshold
applicable to these proceedings in terms of section 10 of the Act,
that the applicants have established that there is a shortfall on the
trust account of Nonxuba Inc. The indications are in fact
to the
contrary. The gross amount of the applicants’ claims of
approximately R50m is amply covered by the credit balance
in the
trust account. The main strut of the applicants’ case, namely
the theft of the trust funds, has not been established
(either
prima
facie
or otherwise) nor in the result that the applicants have a
claim as envisaged in section 9(1) of the Act.
[26]
It is furthermore common cause that, for the purposes of section
10(b) of the Act, the applicants are relying on the factual
insolvency of Nonxuba Inc and consequently of the respondents
themselves, for the relief that they are seeking. It is clear from
what is set out above, that the evidence does not warrant this
conclusion. According to the applicants the shortfall in the trust
account shows that Nonxuba Inc was unable to pay its creditors. This
in turn justifies the inference that it was factually insolvent
and
unable to pay the nett amounts of their damages awards. For the same
reason the respondents, who have insufficient assets to
satisfy the
claim, can be inferred to be factually insolvent. However, as things
stand Nonxuba Inc is well able to pay the gross
amount of the
applicants’claims of approximately R 50m from the available
trust funds. This puts paid to a finding of factual
insolvency or by
the same token any possible claim against the respondents.
[27]
Insofar as the remaining requirement contained in section 10(c) of
the Act is concerned, suffice it to say that at least as
far as Ms
Nonxuba is concerned there is no indication or reason to believe that
it will be to the advantage of creditors if her
estate, which is
bereft of any noteworthy assets, is sequestrated.
Conclusion
[28]
It follows that the applicants have failed to make out a case for the
provisional sequestration of the estates of the respondents.
[29]
For the sake of completeness, it should be indicated that even
assuming that the basis for liability in terms of section 19(3)
has
been established, the applicants’ case against Ms Nonxuba is
most tenuous. As indicated, she can only be held liable
for debts
incurred during her term of office as a director of Nonxuba Inc where
her employment commenced in February 2018. There
is no evidence at
all that any theft occurred during her tenure. There is accordingly
no basis to pursue her for any debts of Nonxuba
Inc even assuming
that the funds were indeed stolen. For this further reason, the
application against Ms Nonxuba cannot succeed.
[30]
I am constrained to refer in passing to the following striking
features of this matter. The stated purpose of these proceedings
is
to expedite payment of the proceeds of the claims for the benefit of
the affected children who are in dire need of assistance
as Mr
Cassim, who appeared on behalf of the applicants together with Mr
Desai, repeatedly (and I should add correctly) impressed
upon me.
However, there is no explanation why no steps have been taken against
Nonxuba Inc, the perpetrator of the theft on the
applicants’
version, to obtain payment of the proceeds of the claims. There is a
credit balance of at least R105m in its
trust account. The claim for
payment of the awards is liquidated. There is no reason why such a
claim could not be pursued by means
of urgent, or even ordinary,
motion proceedings on an expedited hearings date by arrangement with
the Judge President as often
happens in this Division. Given the
credit balance of the trust account, there is every prospect of
recovering the entire amount
of the relevant awards or at the very
least a substantial portion thereof. I should add that the fact that
a curator was appointed
by the Western Cape High Court to administer
the trust account, is no bar to recovering debts due directly from
Nonxuba Inc which
is not in liquidation. The order of the Western
Cape High Court expressly reserves the right of trust creditors to
approach the
civil courts in paragraph 1.10.5 thereof. Instead of
pursuing Nonxuba Inc the present proceedings (which on established
authority
is ill-suited as a debt recovery procedure or where the
debt is disputed) were instituted against the respondents who are
said
not to have sufficient funds to satisfy any claim. Ms Nonxuba
has stated in terms that she does not possess any assets, that she
is
unemployed and dependent on Mr Nonxuba for maintenance. This is
undisputed. However, it is even more disconcerting that any
continued
failure to act promptly against Nonxuba Inc might very well redound
to the detriment of the children (one of whom has
already passed
away) whose best interests must be the overriding consideration. This
is to be deprecated.
[31]
I should add that there is clearly no basis for the rumours that Mr
Nonxuba has bought a Jet. It is mystifying why this allegation
was
put in the court papers without even the slightest evidence.
[32]
Insofar as the issue of costs is concerned, this is a high-profile
matter that entails very serious consequences for the respondents
who
are both professionals. It furthermore concerned relatively novel
issues relating in particular to the construction of section
19(3) of
the Companies Act. The engagement of senior and junior counsel by
both sides was therefore justified in the circumstances
and such
costs should be allowed.
Order
[33]
In the result I make the following order:
(a)
the applications under case numbers 1440/2023 and 1441/2023 are
dismissed;
(b)
the applicants are ordered to pay the costs of both applications,
including the costs consequent upon the employment
of two counsel,
jointly and severally the one paying the others to be absolved.
D.O. POTGIETER
JUDGE OF THE HIGH
COURT
APPEARANCES
For
the Applicants: Adv. N Cassim SC and Adv. M Desai, instructed
by: Andraos & Hatchett Inc., c/o Gravette Schoeman Inc.,
The Hub,
Bonza Bay Road, Beacon Bay North, East London
For
the First Respondents: Adv. E Killian SC and Adv. C McKelvey,
instructed by: Enzo Meyers Attorneys, 121 Devereux Avenue, Vincent,
East London
Date
of hearing: 23 November 2023
Date
of delivery of judgment:
05 December 2023
[1]
The
subsection provides as follows:
19.
Legal status of companies.
–
(3) If a company is a
personal liability company the directors and past directors are
jointly and severally liable, together with
the company, for any
debts and liabilities of the company as are or were
contracted
during their respective periods of office.’
(Emphasis supplied)
[2]
The
subsection is to the following effect:
‘
The
memorandum of a company may, in addition to the requirements of s 52
–
(a)
…
(b)
in the case of a private company, provide
that the directors and past directors shall be liable jointly and
severally, together
with the company, for such debts and liabilities
of the company as are or were
contracted
during their periods of office, in which case the said directors and
past directors shall be so liable.’
(Emphasis supplied)
[3]
Fundstrust
(Pty) Ltd (in liquidation) v Van Deventer
1997(1)
SA 710 (AD).
[4]
At
734G-H where the following appears: ‘ … I do not think
that the liability arising from the commission of a delict
would
normally be regarded as one of its ordinary business debts. This may
also apply to statutory liabilities which do not form
part of the
company’s regular expenses.’ See also:
Maritz
& Another v Maritz & Pieterse Inc (in liquidation)
2006(3) SA 481 (SCA) para13.
[5]
Cf
Casim
et
al Contemporary Company Law
pp 79-80 para 3.6.4.; Laniyan v Negota Ssh (Gauteng) Inc 2013 JDR
0331 (GSJ).
[6]
Fundstrust
supra
fn3 at 734C