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[2020] ZALMPPHC 11
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Svoboda v Sparrow and Others (7283/2018) [2020] ZALMPPHC 11 (23 January 2020)
REPUBLIC OF SOUTH AFRICA
IN THE HIGH COURT OF SOUTH
AFRICA
(LIMPOPO DIVISION, POLOKWANE)
(1)
REPORTABLE:
YES/
NO
(2)
OF
INTEREST TO OTHER JUDGES: YES/
NO
(3)
REVISED
CASE NO: 7283/2018
23/1/2020
In
the matter between:
DION
SVOBODA
APPLICANT
And
RONALD WALTER SPARROW
FIRST RESPONDENT
DRS THOHOYANDOU (PTY) LTD
SECOND RESPONDENT
THE
COMPANIES AND INTELLECTUAL PROPERTY
THIRD RESPONDENT
COMMISSION
(CIPC)
JUDGMENT
MAKGOBA JP
[1]
The
Applicant brought an application to have the First Respondent
declared a delinquent director in terms of the provisions of
section
162(5)(c)(iv)(aa)
& (bb) of the
Companies Act No. 71 of 2008
and
further that the First Respondent be removed as director of the
Second respondent. The First Respondent opposed the application
and
launched a counter application for the liquidation of the Second
Respondent in terms of
section 81(1)(d)
of the
Companies Act, 2008
on
the basis that it is just and equitable to do so as the Applicant and
First Respondent are deadlocked.
[2]
Each
party prays for a costs order on attorney and client scale against
the other party.
Common
Cause Facts
[3]
On the evidence before me the following facts are common cause or not
in dispute:
3.1.
The Applicant and the First Respondent
are the only two directors of the Second Respondent Company ("the
Company"). The
Second Respondent renders security services in
Thohoyandou, Giyani and Malamulele.
3.2.
The Applicant has provided the lion's
share of the start-up capital in respect of the Company and has a
substantial loan account
with the company in respect of which he is
receiving a monthly repayment from the Company.
3.3.
During July 2018 the Company and the
Kremetart Residential Community in Giyani entered into an agreement
in terms whereof a monthly
fee would be paid to the Company for
monitoring services. The Company also had to install alarm systems in
74 community members'
houses. The Kremetart Residential Community
deposited money due to the Company in terms of the said agreement
into the First Respondent's
personal bank account following a request
to do so by the First Respondent. No invoices were made out by the
Company in respect
of these payments. The clients were instead
informed by the First Respondent via sms to furnish proof of payment
to an Indian Spaza
Shop.
3.4.
The First Respondent has deliberately
kept this information from the Applicant. The First Respondent has in
this regard stated in
his opposing affidavit that "I know if I
were to tell him of the "plan" he would not have agreed to
it" (The
"him" referring to the Applicant).
3.5.
The Applicant found out about this state
of affairs. The First Respondent's said bank account was also used by
him in his personal
capacity. The First Respondent’s monthly
loan and credit card instalments were also deducted by way of debit
order from the
said bank account. This is the personal bank account
of the First Respondent into which the Company's clients were told to
deposit
monies due and payable to the Company.
3.6.
Seventy four (74) alarm systems were in
fact installed by the Second Respondent, that is the Company. However
none of the profit
was paid over to the Second Respondent Company.
3.7.
In his defence the First Respondent
stated that it was his intention that his personal bank account be
used like "some sort
of trust account" for the payment of
deposits by the Company's clients and that it was his intention to
pay any profit into
the Company's bank account. The First Respondent
stated furthermore that he intended to reimburse the clients for the
erroneous
payments of the monthly monitoring fees into his account.
3.8.
It is common cause that profit and
monthly monitoring fees were never paid over to the Company and its
clients despite the First
Respondent’s aforesaid stated
intentions.
Issues to be determined
[4]
In
the light of the factual background set out above the issue to be de
term in ed is whether the pre-requisites for an order declaring
the
First Respondent a delinquent director as requested by the Applicant
have been met. In this regard the following unjustified
conduct of
the First Respondent should be noted:
4.1.
Money due and payable by clients
of the Second Respondent Company was at the request of the First
Respondent paid into his personal
bank account.
4.2.
These clients were not invoiced
by the Second Respondent Company instead they were requested by the
First Respondent to submit proof
of payment at an Indian Spaza Shop.
4.3.
The First Respondent had
deliberately hidden this fact from the Applicant.
4.4.
The money paid into the First
Respondent’s account by the Second Respondent’s clients
commixed with the money in his
account. Some of the money paid into
the First Respondent’s bank account was used by him for
personal gain.
[5]
In an effort to justify his conduct the
First Respondent has these to say:
5.1.
That the First Respondent never had any
control of the Company's finances, which are run by the Applicant to
the exclusion of the
First Respondent. That the First Respondent was
only doing ground work of the Company.
5.2.
The First Respondent has on numerous
occasions in the past approached the Applicant to buy inter alia
vehicles, motorbikes and firearms
for certain projects and to
accommodate growth in the company but it fell on deaf ears.
5.3.
The Company struggled to make ends meet
and could not always pay its monthly commitments.
5.4.
The Company could not provide equipment
to clients who had already paid for it.
5.5.
The Applicant unilaterally drew more and
more monies from the Company contrary to the agreement between the
parties which placed
the Company under financial constraints.
5.6.
That it was never the First Respondent's
intention to take the monies for his personal gain and he did not do
so, the only reason
why he allowed the clients to pay their money
into his personal bank account is because the Company was having
serious cash flow
problems and he made sure the Company would comply
with its contractual obligations.
5.7.
The First Respondent did not inform the
Applicant of his plan because the Applicant was simply not
approachable in this regard.
5.8.
The First Respondent therefore denies
any willful negligence or willful misconduct or a breach of his
fiduciary duties towards the
Company.
5.9.
According to the First Respondent the
trust relationship between him and the Applicant had broken down and
that the two are at loggerheads
with each other. The Applicant and
the First Respondent will not be able to work together now or in the
near future.
Legal Framework
[6]
Section
162(5)(c)
of the
Companies Act 71 of 2008
read with
sections
76(2)
,
76
(3) and
77
(3) of the Act provides for the pre-requisites that
have to be met for declaring a director of a Company a delinquent.
What follows
are the provisions of the appropriate sections of the
Companies Act, 2008
.
[7]
Section
76(2)(a)
of the
Companies Act, 2008
deals with, inter alia, standards
of conduct and liabilities of directors.
Section 76(2)
reads as follows:
"(2)
A director of
a
company must.-
(a)
not use the position of director,
or any information obtained while acting in the capacity of
a
director--
(i)
to gain an advantage for the
director, or for another person other than the company or
a
wholly-owned subsidiary of the
company; or
(ii)
to knowingly cause harm to the
company or
a
subsidiary
of the company; and
(b)
communicate to the board at the
earliest practicable opportunity any information that comes to the
directors attention, unless the
director-
(i)
reasonably believes that the
information is-
(aa) immaterial to the company;
or
(bb) generally available to the
public, or known to the other directors; or
(ii)
is bound not to disclose that
information by
a
legal
or ethical obligation of confidentiality.
(3)
Subject to subsections (4)
and (5),
a
director
of
a
company,
when acting in that capacity, must exercise the powers and perform
the functions of director--
(a)
in good faith and for
a
proper purpose;
(b)
in the best interests of
the company; and
(c)
with the degree of care,
skill and diligence that may reasonably be expected of
a
person-
(i)
carrying out the
same
functions in relation to the company
as those carried out by that director; and
(ii)
having the general
knowledge, skill and experience of that director".
[9]
Section 77(3)
reads:
"(3) A director of
a
company
is
liable for any
loss,
damages
or
costs
sustained by the
company
as
a
direct or indirect consequence of the director having
(a)
acted in the name of the company,
signed anything on behalf of the company, or purported to bind the
company or authorise the taking
of
any
action by or on behalf of the company, despite knowing that the
director lacked the authority to do
so;
(b)
acquiesced in the carrying on of
the company's business despite knowing that it
was
being conducted in
a
manner prohibited by section
22(1)
;
(c)
been
a
party to an act or omission by the
company despite knowing that the act or omission
was
calculated to defraud
a
creditor, employee or shareholder of
the company, or had another fraudulent purpose"
[10]
Section 162(5)(c)
provides:
"(5) A court must make an
order declaring
a
person to be
a
delinquent
director if the person-
(c)while
a
director--
(i)
grossly abused the position of
director;
(ii)
took personal advantage of
information or an opportunity, contrary to
section 76(2)(a)
;
(iii)
intentionally, or by gross
negligence, inflicted harm upon the company or a subsidiary of the
company, contrary to
section 76(2)(a)
;
(iv)
acted in
a
manner--
(aa) that amounted to gross
negligence, wilful misconduct or breach of trust in relation to the
performance of the director's functions
within, and duties to, the
company; or
(bb) contemplated in
section
77(3)(a)
, (b) or (c);".
Applicant's
Submissions
[11]
The Applicant submits that in the light
of the undisputed and / or common facts outlined herein, a proper
case for an order declaring
the First Respondent a delinquent
director has been made out and for the following reasons:
11.1.
The First Respondent acted without
authority when he proposed to the Kremetart Residential Community to
deposit money destined for
the Second Respondent Company into his
personal bank account. The First Respondent furthermore acted as such
knowingly that he
lacked the authority to do so.
11.2.
The First Respondent's conduct as such
(allowing clients of the Second Respondent to pay money destined for
the Second Respondent
into his personal bank account) amounts to
wilful misconduct on his part as well as a breach of trust as
envisaged in
Section 162(5)(c)(iv)(aa)
and (bb) of the Act.
11.3.
Having acted in the name of the Second
Respondent Company despite knowing that he lacked necessary authority
to do so furthermore
constituted a clear breach of the provisions of
Section 77(3)(a)
of the Act.
11.4.
The First Respondent utilised money
destined for the Second Respondent for his own benefit. The conduct
of the First Respondent
in his dealings with the affairs of the
Second Respondent did not measure up to standard required and
expected of a director and
was in breach of his fiduciary duties to
the Second Respondent.
11.5.
The First Respondent furthermore did not
communicate this information to the Applicant.
Section 76(2)(b)
creates a duty on the part of a director to communicate at the
earliest practicable opportunity any information that comes to his
attention to his Board of Directors. The First Respondent stated that
"the Applicant was simply not approachable in this regard".
11.6.
Even if the relationship between the
First Respondent and the Applicant was strained he was nevertheless
bound by his legal duty
as a director to discharge his duties in the
same manner had the relationship between them been normal.
Furthermore even if the
Applicant also acted in dereliction of his
duties to the Second Respondent as alleged by the First Respondent
(which is denied
by the Applicant) that did not absolve the First
Respondent from failing to carry out his duties to the Second
Respondent.
11.7.
It has been unequivocally conceded by
the First Respondent that he had acted behind the Applicant's back as
the Applicant would
have never agreed to clients paying money into
the First Respondents personal bank account but nevertheless embarked
on such in
reckless disregard of his duties as director to the Second
Respondent.
11.8.
The First Respondent has been guilty of
wilful misconduct and breach of trust in relation of the performance
of his duties and functions
as a director and acted in breach of
Section 77(3)(a)
in that he acted in the name of the Second
Respondent despite knowing that he lacked the authority to do so. The
First Respondent
has also acted in breach of his fiduciary duties to
the Second Respondent. A person in a fiduciary position is obliged in
dealing
with the money of the beneficiary to observe due care and
diligence and not to expose it in any way to any business risks.
11.9.
The Respondent has proven himself to be
unable to manage the business of the Second Respondent or have fail
in or is in neglect
of his duties and obligations as a director of
the Second Respondent.
[12]
I agree with the above submissions made
by the Applicant's Counsel that the First Respondent's conduct would
justify for an order
that she be declared a delinquent director.
The Law
[13]
The effect of a declaration of a person
as a delinquent director is that he is thereupon disqualified, for so
long as the declaration
remains in force, from being a director of
any company. In the declaration of a person as a delinquent director
what is required
to be established is conduct intended to harm the
company, alternatively an attitude of recklessness by the director in
the face
of an appreciation that this conduct could cause the company
harm. The relevant causes of delinquency entail either dishonesty,
wilful misconduct or gross negligence. The applicant in such
proceedings must allege that the respondent conducted himself or
herself with the intention of harming the company.
See
Lewis Group Ltd v Woolman
and Others (1)
[2017] 1 All SA 192
(WCC).
[14]
The bar is set too high to justify an
order of delinquency. In
Gihwala and
Others v Graney Property Ltd and Others
[2016] 2 All SA 649
(SCA)
it
was held that delinquency was justified where it is found that the
directors have been guilty of gross abuses of their positions
in
circumstances where they owed a fiduciary duty to ensure that the
company complied with terms of an investment agreement. This
entails
a breach of trust in relation to the performance of one's duty as a
director.
In essence the Supreme Court of Appeal held in
Gihwala
that for an application to succeed
in terms of
section 162(5)(c)
of the
Companies Act a
delinquency
order can only be made in consequences of serious misconduct on the
part of a director,.
[15]
Section 162(5)
makes it peremptory for a Court to declare a person a
delinquent director if such a person has conducted himself in a
manner set
out in
section 162(5)(a)
to (f). In
Kruger
v Kruger and Others (96886/2015) ZAGPPHC 1277 (8 December 2017)
Pretorius J made
a finding that the first respondent was not only guilty of negligence
but of wilful misconduct in respect of the
performance of her
function of director. The learned Judge stated at paragraph 38:
"Accordingly, I have no choice, but to
declare her as a
delinquent director''.
Section 162(5)(c)
does not give a Court
discretion to refuse to make a delinquency order if the requirements
of
section 162(5)(c)
are satisfied.
[16]
The First Respondent tried to justify
his conduct on the ground that his relationship with the Applicant
had become strained and
that the Applicant had himself neglected the
affairs of the company and thus acted in dereliction of his duties to
the company
too. There is no merit in the First Respondent's so
called grounds of justification. In the case of
Kukama
v Lobelo and Others (38587/2011) South Gauteng High Court,
delivered
on 12 April 2012 it was said:
"[20]
Notwithstanding the strained relationship between the applicant and
the first respondent as both directors
and the shareholders of the
second and third respondents, the legal obligations of
a
director bound
the first respondent to discharge his duties in the
same
manner that it
should, had the relationship between the two been normal."
Furthermore in the case of
Msimang
NO and Another v Katuliiba and Others
[2013] 1 All SA 580
(GSJ)
at
paragraph 64 it was held that:
"However that Mavuso Msimang
also
acted in dereliction of his duties to the company, during
the period between 2004
-
July 2009, does not absolve
Katuliiba and Mdwaba from failing to carry out their duties to the
company."
[17]
Of importance in the case of
Msimang
NO and Another v Katuliiba and Others, supra,
Kathree
- Setiloane J found:
"
Section 162
of the new
Companies Act provides
that directors can be declared "delinquent"
or "under probation" on various grounds, and on application
by
certain categories of applicant. This provision is directed at
protecting companies and corporate stakeholders against company
directors, who have proven themselves to be unable to manage the
business of the company or have failed in. or are in neglect of,
their duties and obligations as directors of a company."
In my view the conduct of the
First Respondent in his dealings with the affairs of the Second
Respondent Company in the present
case did not measure up to the
standard required and expected of a director and was in breach of his
fiduciary duties to the company.
The First Respondent's conduct fall
short of the standard expected of a director of the Second Respondent
Company to such an extent
that it amounts to wilful misconduct,
breach of trust and a gross abuse of his position as a director.
[18]
It is trite that the defences open to a
fiduciary who breaches his trust are very limited. Only the free
consent of the principal
after full disclosure will suffice.
See
Phillips v Fieldstone
Africa (Pty) Ltd and Another
2004 (3) SA 465
(SCA) at paragraph 31.
[19]
The First Respondent has launched a
counter application for the liquidation of the Second Respondent
Company on the basis that a
deadlock has been reached and that it is
just and equitable that the company be liquidated. I am of the view
that on the facts
of the present case the First Respondent has not
made out a case for the relief sought. In
Emphy
and Another v Pacer Properties (Pty) Ltd
1979 (3) SA 363
(D)
it
was held that an applicant for such an order must not be wrongfully
responsible for the situation that has arisen and that a
deadlock
does not per se entitle an applicant to a winding up under the just
and equitable provision. In
Mouw v
lmanu - Shalom Congregation and Another
1994 (2) SA 240(W)
it
was held that a winding up order is not usually appropriate where
there is an effective remedy against individual wrongdoers
- the
sharp instrument was preferred.
[20]
In the present case the situation that
has arisen and gave rise to the present proceedings was due to the
undesirable conduct of
the First Respondent. The effective remedy in
the circumstances is therefore a delinquency order and not a winding
up order.
Conclusion
[21]
The First Respondent’s conduct not
only amounts to a serious breach of his fiduciary duty as a director
of the Second Respondent
but also to a breach of trust in relation to
the continued performance of his director's functions within the
Second respondent.
He grossly abused his position as a director of
the Second Respondent. There can be no justification for the First
Respondent's
aforesaid conduct. The relief sought in the Notice of
Motion is warranted as an absolute necessity to protect the Second
Respondent,
its clients and creditors as well as the Applicant from
the First Respondent unlawful conduct.
[22]
In view of the effect of an order
declaring a director delinquent, it is in my view, not necessary to
also order the First Respondent's
removal as a director of the
company due to the automatic inherent effect of such a declaration.
[23]
I accordingly grant the following order:
23.1.
The First Respondent is declared
a delinquent director in terms of the provisions of
section 162(5)
of
the
Companies Act 71 of 2008
.
23.2.
The counter application for
winding up or liquidation of the Second Respondent is dismissed.
23.3.
The First Respondent is ordered
to pay the costs of this application and counter application on the
scale as between attorney and
client.
EM MAKGOBA
JUDGE PRESIDENT OF THE
HIGH COURT, LIMPOPO
DIVISION, POLOKWANE
APPEARANCES
Heard
on
: 28 November 2019
Judgment
delivered on
: 23 January 2020
For
the Applicant
: Ms M C De
Klerk
DDKK Attorneys Inc
For
the First Respondent
: Adv J P Morton
Instructed
by
: Charles Pieterse Attorneys
c/o Thomas Grobler Attorneys