Brief Summary

Exceptions — Pleadings — Exceptions to counterclaims — Plaintiffs' exceptions to counterclaims by third and fifth defendants alleging personal liability under Companies Act — Plaintiffs contending counterclaims fail to sustain a cause of action and do not comply with rule 18(4) — Court finding that counterclaims sufficiently plead personal liability of directors for reckless conduct under sections 22 and 218(2) of Companies Act — Exceptions dismissed.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerned two identical exceptions raised by the plaintiffs, David Heygi and Helen Heygi, against counterclaims delivered in two related actions heard in the Gauteng Division, Pretoria. The proceedings were interlocutory in nature and were confined to determining whether the impugned counterclaims were excipiable on the basis that they failed to disclose a cause of action and failed to comply with the pleading requirements of Uniform Rule 18(4).

The plaintiffs (husband and wife) were the claimants in the main actions, instituted against six defendants. The defendants included the Minister of Police (first defendant) and an arresting police officer (second defendant), as well as four private individuals (third to sixth defendants) who had laid criminal charges against the plaintiffs. The exceptions determined in this judgment related only to counterclaims advanced by the third defendant (Joanna Grace Elliott) and the fifth defendant (Grant Stanton).

Procedurally, the plaintiffs had instituted actions claiming substantial damages (approximately R58 million) arising from alleged unlawful arrest, detention, malicious prosecution, defamation, and injuria. The defendants delivered pleas, and the third and fifth defendants also delivered counterclaims. The plaintiffs excepted to specified paragraphs of those counterclaims, contending that reliance on section 22 read with section 218(2) of the Companies Act 71 of 2008 could not found personal liability for directors or prescribed officers. The court dealt with both exceptions together because they were materially identical and raised the same legal issue.

The general subject-matter of the dispute, as presented for purposes of the exceptions, was whether the pleaded allegations concerning reckless or fraudulent trading by corporate entities, coupled with the plaintiffs’ alleged participation as directors and/or prescribed officers, were sufficient to found a claim for personal liability under the Companies Act and to meet the required standard of pleading.

2. Material Facts

The judgment was decided at exception stage. Accordingly, the court approached the matter on the basis of the facts as pleaded in the counterclaims and assessed whether, on any reasonable interpretation, those pleaded facts could sustain a cause of action. The court did not resolve factual disputes on the merits, and the material facts were those relied upon in the pleadings as necessary to assess excipiability.

In the third defendant’s first counterclaim (repeated against both David and Helen Heygi), it was pleaded that the plaintiffs were prescribed officers of Tshisnyama Trading (Pty) Ltd (“Tshisanyama”) and directors of Fish Boss (Pty) Ltd (“Fish Boss”). It was further pleaded that on or about 29 July 2013, Fish Boss concluded a written sale agreement with Sexy Alien (Pty) Ltd (“Sexy Alien”) in terms of which a fast-food franchise business was sold. On the same date, Fish Boss concluded three franchise agreements with Tshisanyama. The third defendant pleaded that, pursuant to these agreements, she (acting on behalf of Sexy Alien) paid R1.6 million into a bank account under the control of the plaintiff(s) and delivered a delivery vehicle to Fish Boss.

The third defendant further pleaded that, during negotiations leading to the conclusion of those agreements, the plaintiffs made fraudulent misrepresentations intended to induce the conclusion of the agreements, rendering them void ab initio, and that damages were suffered. In addition, and centrally for the exceptions, the counterclaim pleaded that during the period July 2013 to May 2014 the business of Fish Boss and Tshisanyama was carried on recklessly, with gross negligence, with intent to defraud creditors, and/or for a fraudulent purpose, supported by pleaded particulars such as diversion of funds for personal purposes, abandonment of claims, failure to appoint competent staff, lack of intention to comply with contractual obligations, defective performance without remedial steps, continued trading and incurring of debts, and abandonment of the business. It was pleaded that the plaintiff(s), as directors and/or prescribed officers, were knowingly a party to that conduct and were therefore liable in terms of section 22 read with section 218(2) of the Companies Act. The counterclaim also pleaded a cession dated 27 May 2014 in terms of which Sexy Alien ceded its rights against the plaintiffs to the third defendant, and it quantified damages at R2 666 185.00.

The fifth defendant’s counterclaim (also repeated against both plaintiffs) similarly pleaded that the plaintiffs were prescribed officers of Tshisanyama, and that on 24 August 2014 another company, Stanton Marketing (Pty) Ltd (“SM”), concluded a written franchise agreement with Tshisanyama. It was pleaded that SM paid R500 000 into Tshisanyama’s bank account. The counterclaim then pleaded, in terms materially mirroring the third defendant’s formulation, that during July 2013 to May 2014 Tshisanyama’s business was conducted recklessly, with gross negligence, with intent to defraud, and/or for a fraudulent purpose, on the basis of particulars that echoed those in the third defendant’s counterclaim. The fifth defendant pleaded that the plaintiff(s) were knowingly parties to such conduct and were therefore liable to SM in terms of section 22 read with section 218(2). A cession was pleaded, dated 23 June 2016, in terms of which SM ceded its claim against the plaintiffs to the fifth defendant, with the damages claimed quantified at R500 000.00.

The plaintiffs’ exceptions targeted the paragraphs in each counterclaim asserting that, because the plaintiffs were knowingly party to the conduct, they were personally liable under section 22 read with section 218(2). The plaintiffs’ pleaded complaint, as distilled by the court, was that these statutory provisions did not create personal liability for directors or prescribed officers and that the counterclaims therefore lacked averments necessary to sustain a cause of action and were inadequately pleaded under Rule 18(4).

3. Legal Issues

The central legal question was whether the third and fifth defendants’ counterclaims, as pleaded, disclosed a cause of action against the plaintiffs personally by relying on section 22 read with section 218(2) of the Companies Act 71 of 2008, given that section 22 is framed as a prohibition on how a company may conduct its business.

Closely connected to that was whether, on a proper interpretation of the counterclaims read as a whole, the pleadings contained sufficient averments (express or implied) to establish a statutory contravention attributable to the plaintiffs as directors and/or prescribed officers, and whether this met the pleading standard required by Uniform Rule 18(4).

The dispute before the court was predominantly one of law (statutory interpretation and the legal sufficiency of pleaded facts), and of the application of law to pleaded facts (whether the pleaded participation by directors/prescribed officers could, if proved, fall within the reach of section 218(2)). It did not require the court to make factual findings on the truth of the allegations or to exercise a merits-based value judgment concerning the underlying commercial conduct.

4. Court’s Reasoning

The court began by restating the established approach to exceptions. For an exception to succeed, the pleading must be excipiable on every reasonable interpretation, and the excipient bears the burden because the pleader is entitled to a benevolent (charitable) interpretation. The pleading must be read as a whole, and express averments may carry implied allegations; the court may therefore read the pleading in a manner that gives effect to what is reasonably conveyed by its factual allegations.

Against that framework, the court identified the sole permissible basis advanced in the plaintiffs’ exceptions as the contention that sections 22 and 218(2) do not create personal liability for directors or prescribed officers. The court treated the exception as directed at that question, and not at the adequacy of the pleaded factual particulars beyond the statutory-liability issue.

In analysing the Companies Act framework, the court referred to the content of section 22(1), which prohibits a company from carrying on business recklessly, with gross negligence, with intent to defraud, or for a fraudulent purpose. The court then noted other statutory provisions relevant to director conduct, particularly section 76(3) (which sets out directors’ duties to act in good faith and in the best interests of the company, with proper purpose, and with appropriate care, skill and diligence) and section 77(3)(b) (which provides for director liability for loss, damages, or costs sustained by the company as a consequence of the director having acquiesced in the carrying on of the company’s business despite knowing it was being conducted in a manner prohibited by section 22(1)). The court further emphasised section 218(2), which provides that any person who contravenes any provision of the Act is liable to any other person for loss or damage suffered as a result of that contravention.

Applying these principles to the counterclaims as pleaded, the court held that the third and fifth defendants had pleaded that the relevant entities’ businesses were conducted in a manner prohibited by section 22, that the plaintiffs (as directors and/or prescribed officers) were knowingly parties to such conduct, and that loss was suffered as a result. On that pleaded foundation, the court concluded that the counterclaims relied on the Companies Act provisions concerning the personal liability of directors in circumstances where they were parties to or acquiesced in prohibited conduct. On the court’s reading, a proper interpretation of section 218(2) permitted personal liability where the pleaded conduct constituted a contravention of the Act and caused loss.

The court additionally held that the factual allegations pleaded by the third and fifth defendants implied alleged conduct by the plaintiffs in breach of section 76 of the Companies Act, which (if proved) could also found a claim under section 218(2). In this respect, the court reiterated that it is not necessary for a pleader to refer to specific statutory sections by number, provided the pleading formulates the case clearly; it is sufficient to plead facts from which the applicability of the statutory provisions may be inferred. The court found that the counterclaims met this standard.

The plaintiffs sought, in heads of argument, to broaden the scope of the exceptions by challenging the nature and sufficiency of particular factual allegations (for example, suggesting that a pleaded “diversion of funds” could have been legitimate, such as payment of salaries, and asserting a lack of particularity). The court rejected this approach as impermissible because it went beyond the case the defendants were called upon to meet on exception. The exception, as framed, was confined to the legal proposition that the cited Companies Act provisions could not ground personal liability, and the plaintiffs could not expand that by argument into a different exception directed at factual detail and particularity.

On the court’s evaluation, once the counterclaims were read benevolently and as a whole, they contained sufficient averments to support a statutory basis for personal liability under the Companies Act. The counterclaims were therefore not excipiable on the ground advanced.

5. Outcome and Relief

The court dismissed the plaintiffs’ exceptions to the third defendant’s first counterclaim and to the fifth defendant’s counterclaim in both matters under case numbers 25328/2016 and 25329/2016.

The dismissal of the exceptions was accompanied by an order that the exceptions were dismissed with costs.

Cases Cited

Nel and Others NNO v McArthur and Others 2003 (4) SA 142 (T) at 149F–G.

Rabinowitz v Van Graan and Others 2013 (5) SA 315 (GSJ) at 316I.

First National Bank of Southern Africa Ltd v Perry NO and Others 2001 (3) SA 960 (SCA) at 965D.

Legislation Cited

Companies Act 71 of 2008, sections 22, 76(3), 77(3)(b), and 218(2).

Rules of Court Cited

Uniform Rules of Court, Rule 18(4).

Held

The court held that, when read as a whole and interpreted benevolently as required at exception stage, the counterclaims pleaded sufficient facts to sustain claims premised on contraventions of the Companies Act 71 of 2008 and to invoke section 218(2) as a basis for personal liability where the plaintiffs, as directors and/or prescribed officers, were alleged to have been knowingly party to prohibited conduct.

The court further held that the plaintiffs’ attempt in argument to challenge the adequacy and particularity of the factual allegations went beyond the scope of the exceptions as pleaded, which were confined to the proposition that sections 22 and 218(2) could not found personal liability.

Accordingly, the exceptions were dismissed with costs.

LEGAL PRINCIPLES

A pleading will only be set aside on exception if it is excipiable on every reasonable interpretation; the pleader is entitled to a charitable reading of the pleading, and the pleading must be read as a whole, including reasonable implied allegations arising from express averments.

In assessing whether a cause of action is disclosed, it is sufficient for a party to plead facts from which the applicability of statutory provisions may be inferred; it is not essential to cite specific statutory provisions by number if the pleaded facts clearly formulate the claim.

Where a contravention of the Companies Act is pleaded, and loss is pleaded to have resulted from that contravention, section 218(2) may operate to impose liability on the contravening person, including in circumstances where directors and/or prescribed officers are alleged to have knowingly participated in or acquiesced in conduct prohibited by the Act (including conduct addressed by section 22(1) and conduct impliedly inconsistent with directors’ duties under section 76(3), as discussed in the judgment).

Heygi and Another v Minister of Police NO and Others (25328/2016; 25329/2016) [2018] ZAGPPHC 283 (23 January 2018)