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[2008] ZASCA 113
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Ebrahim and Another v Airports Cold Storage (Pty) Ltd (485/2007) [2008] ZASCA 113; 2008 (6) SA 585 (SCA) ; [2009] 1 All SA 330 (SCA) (25 September 2008)
Links to summary
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case number: 485/2007
In the matter between:
NIZAAR EBRAHIM
First appellant
ABBAS EBRAHIM
Second appellant
and
AIRPORTS COLD STORAGE (PTY) LTD
Respondent
Neutral citation:
Ebrahim v
Airports Cold Storage (Pty) Ltd
(485/2007)
[2008] ZASCA 113
(25 September 2008)
BEFORE : Harms ADP, Cameron JA, Ponnan JA, Mlambo JA
and Mhlantla AJA
HEARD : Tuesday 26 August 2008
DELIVERED : Thursday 25 September 2008
SUMMARY
: Corporation –
Close Corporations Act 69 of 1984
,
s 64(1)
– reckless carrying
on of business – liability for debts – member of
corporation and father – corporation
run without books or
documentation – debt of another corporation transferred to it
without consideration – reckless
trading established
______________________________________________
ORDER
______________________________________________
On appeal
from the High Court, Cape Town (Griesel J sitting as a judge of first
instance):
The appeal is dismissed with costs.
______________________________________________
JUDGMENT
______________________________________________
CAMERON JA
(Harms ADP, Ponnan JA, Mlambo JA and Mhlantla AJA concurring):
The appellants, Mr Nizaar Ebrahim and Mr Abbas Ebrahim, son and
father, appeal with leave granted by Griesel J against a judgment
in
the High Court in Cape Town in which he declared them personally
liable for a debt a close corporation incurred during its
short
operational life in 2005.
1
For three months from March of that year the respondent (plaintiff)
supplied Sunset Beach Trading 232 CC (trading as ‘Global
Foods’) (the CC) with frozen meat, poultry and other
comestibles. Payments initially flowed, but slowed to a trickle and
eventually dried up in June, when invoices totalling R278 377,19
were still outstanding. In response, the plaintiff moved to
liquidate the CC. It obtained a final winding-up order in
September. But the cupboard was bare: despite recorded deliveries
invoiced at over R1,8 million, the cash in hand totalled only
R254,99. The CC had no other assets.
The plaintiff then brought this action to recover the debt from
Nizaar (Ebrahim junior), who was the CC’s sole member,
and his
father Abbas (Ebrahim senior). (The CC’s liquidator was
joined formally as third defendant, but takes no part
in the
appeal.) The plaintiff targeted Ebrahim senior on two and Ebrahim
junior on three alternative bases:
(a) That both were personally liable under s 64(1) of the Close
Corporations Act 69 of 1984 (the Act) because during the period
March
to August 2005 the CC’s business was conducted recklessly or
for fraudulent purposes or with intent to defraud its
creditors.
Section 64 of the Act reads:
(1) If it at any time appears
that any business of a corporation was or is being carried on
recklessly, with gross negligence or
with intent to defraud any
person or for any fraudulent purpose, a Court may on the application
of the Master, or any creditor,
member or liquidator of the
corporation, declare that any person who was knowingly a party to the
carrying on of the business in
any such manner, shall be personally
liable for all or any of such debts or other liabilities of the
corporation as the Court may
direct, and the Court may give such
further orders as it considers proper for the purpose of giving
effect to the declaration and
enforcing that liability.
(2) Without prejudice to any
other criminal liability incurred where any business of a corporation
is carried on in any manner contemplated
in subsection (1), every
person who is knowingly a party to the carrying on of the business in
any such manner, shall be guilty
of an offence.
(b) That both were personally liable under s 65 because their
incorporation and use of the CC constituted a gross abuse of the
juristic personality of the CC as a separate entity.
2
(c) That as a member Ebrahim junior was in addition liable under s
63(h) of the Act because he allowed the office of accounting
officer
of the CC to remain vacant for more than six months.
3
At the trial, the plaintiff’s managing director, Mr Patrick
Gaertner, testified, as well as an accountant, Mr Derek John
Hanslo,
who gave expert testimony on business practice and bookkeeping
requirements, and an employee from the firm of liquidators
managing
the liquidation, Mr JJ Theron. For the defendants the only witness
was Mr Nasief Price, an accountant. Neither of
the Ebrahims gave
evidence. Plaintiff’s counsel had however examined them under
sub-poena at the statutory inquiry
4
held in the wake of the CC’s liquidation, and the transcript
was admitted at the trial.
5
Griesel J found that despite denials by both Ebrahims, it was clear
that Ebrahim senior had actively assisted his son in running
the CC,
as well as in various other family businesses. Going back to 1997,
he found, the father and the rest of the family had
used ‘a
host of entities and trading names at different stages’ to
pursue their business interests, and that in doing
so they had
‘scant regard’ for the entities’ separate
corporate identities. Griesel J upheld the action on
all three
bases of complaint. He found that the causes of action formed part
‘of one composite complaint of abuse of the
separate juristic
personality’ of the CC. The CC had no accounting officer; it
was started for a fraudulent reason; and
the Ebrahims had traded
recklessly through it, in insolvent circumstances, without the
requisite belief that it would be able
to pay its debts as they fell
due. Although they attempted to obtain the advantages of separate
identity, he found that they
operated its business as if it were
their own and without due regard for or compliance with statutory
and bookkeeping requirements.
He dismissed the Ebrahims’
belated challenge to the quantification of the debt the CC owed, and
gave judgment against
them for the full amount claimed.
On appeal, the Ebrahims put in issue these findings, disputing that
there was abuse of corporate form or that, if there was,
it had any
causal impact on the plaintiff’s claim. They contend moreover
that the plaintiff was aware of the CC’s
‘normal’
trading practices – yet continued to trade with it until the
plaintiff was itself unable to supply
further stock to the CC: this
they say precipitated the CC’s cash flow crisis, which in turn
led to its inability to repay
the plaintiff.
To take the proper measure of the defendants’ argument, it is
necessary to sketch the background to the parties’
dealings.
Gaertner testified that he had done business with the Ebrahims since
about 1997 (Ebrahim senior dated their connection
back to
considerably earlier). Though he dealt with the defendants through
various entities, the business was the same: the
sale of bulk
imported frozen comestibles and other goods. The transactions were
always concluded with Ebrahim senior –
each Monday he would
meet with him to finalise orders. It was he who had to confirm the
price, and who would thereafter return
the signed confirmation of
sale to the plaintiff.
During late 2004, Gaertner explained, the plaintiff required a VAT
number for the entity the plaintiff was then supplying, Zaki
Meat
Market CC (Zaki). The number Ebrahim senior gave to Gaertner was
invalid, but he volunteered that a different entity, the
CC, had a
valid number. Hence, Gaertner testified, the plaintiff agreed to
start channelling the Ebrahims’ orders through
the CC from
March 2005.
A considerable volume of business was transacted through the CC from
late March until, after payments faltered, the last sale
took place
on 24 June 2005. However, the evidence the plaintiff presented
revealed that the CC’s affairs were anything
but tightly run.
Hanslo testified that the sole business records of the CC consisted
in Croxley invoice books. Although the CC had charged its
customers
value-added tax (VAT), no VAT returns were submitted to the South
African Revenue Services (SARS), and no VAT payments
were made.
Hanslo calculated that some R200 543,59 was due to SARS. The CC’s
defence, ineffectually advanced during Hanslo’s
cross-examination and in the evidence of Price, was that since VAT
returns were required to be submitted only every two months,
and VAT
paid only once a year, the short operational life of the CC rendered
the omissions insignificant. This ignores the fact
that not only
did the CC fail to submit VAT returns, but it failed to record
anywhere that it was collecting VAT from its customers.
The
suggestive (if not compelling) inference is that there was never any
intention to pay VAT.
The CC’s business appears to have been conducted with blithe
disregard of statutory requirements. There were no conventional
books of account. Apart from its payments to the plaintiff and to a
cold storage facility, there was not a single record of
any expense
recorded in any documents provided after liquidation. Even though
the employee complement numbered between ten and
twenty, there were
neither payslips nor pay-as-you-earn (PAYE) returns. In violation
of s 56 of the Act, no proper ‘accounting
records’ were
kept; nor was there an accounting officer.
Payments to creditors totalled just over R1,4 million, against
income in excess of R1,8 million. The latter figure –
reflecting Hanslo’s detailed examination of invoices against
which payment had been received – gave rise to two signal
conclusions set out in Hanslo’s evidence:
The first was that only a small portion (less than 10%) of the CC’s
cash takings and other receipts was deposited into
any bank account.
(The portion that was, found its way into another of the Ebrahims’
CCs.) The reason the Ebrahims advanced
– avoidance of bank
charges and cash deposit fees – Hanslo treated with reserve,
since, he pointed out, the sheer
volume of money received over the
period in question rendered the bank-free approach ‘most
unusual’.
The second conclusion to which Hanslo deposed was that the CC’s
vouched receipts and expenditures indicated that when trading
ended
there should have been a positive balance of some R300 000 ‘in
a bank account or on hand’. Instead, there
was only R254,99.
This meant that some R300 000 was missing. Hanslo dryly suggested
that ‘it’s sitting in a drawer
somewhere’. Of
course no one could establish which drawer. Taxed with this during
his examination at the inquiry, Ebrahim
junior ingenuously
protested, ‘I mean, I don’t understand, are you trying
to accuse me of hiding cash?’ That
was indeed the accusation,
and in the absence of any other explanation it sticks.
To Hanslo’s exposition Theron added that while the fact that
the CC had no financial statements was explicable in view
of its
short operational span, the sole record of trading activity was the
invoice books: there were no other management records
or reports of
daily sales, itemised expenses, a trial balance or balance sheet.
On this foundation, the plaintiff contended it had established that
the business of the CC was ‘carried on recklessly’
within the meaning of s 64 of the Act, and indeed that it had made
out a case of fraudulent trading. Section 64 is for all intents
and
purposes identical to s 424 of the Companies Act 61 of 1973,
6
‘at least as far as the underlying philosophy is concerned’.
7
The case law on one provision therefore illuminates the other.
8
The Act adds ‘gross negligence’ to the Companies Act’s
list of impugned business methods. Whether there is
a meaningful
difference between recklessness and gross negligence in this context
need not be decided now.
9
Acting ‘recklessly’
10
consists in ‘an entire failure to give consideration to the
consequences of one’s actions, in other words, an attitude
of
reckless disregard of such consequences’.
11
In applying the recklessness test to the running of a closed
corporation, the Court should have regard to amongst other things
the corporation’s scope of operations, the members’
roles, functions and powers, the amount of the debts, the extent
of
the financial difficulties and the prospects of recovery, plus the
particular circumstances of the claim ‘and the extent
to which
the [member] has departed from the standards of a reasonable man in
regard thereto’.
12
It need hardly be added that the function of the statutory provision
also shapes its application. Although juristic persons
are
recognised by the Bill of Rights – they may be bound by its
provisions,
13
and may even receive its benefits
14
– it is an apposite truism that close corporations and
companies are imbued with identity only by virtue of statute. In
this sense their separate existence remains a figment of law, liable
to be curtailed or withdrawn when the objects of their creation
are
abused or thwarted. The section retracts the fundamental attribute
of corporate personality,
15
namely separate legal existence, with its corollary of autonomous
and independent liability for debts, when the level of mismanagement
of the corporation’s affairs exceeds the merely inept or
incompetent and becomes heedlessly gross or dishonest. The
provision in effect exacts a quid pro quo: for the benefit of
immunity from liability for its debts, those running the corporation
may not use its formal identity to incur obligations recklessly,
grossly negligently or fraudulently. If they do, they risk
being
made personally liable.
This is a good case in point. The CC was lifted from its shelf
existence in early 2005 for the expedient but legitimate purpose
of
providing the Ebrahims’ creditors with a valid VAT number. As
Gaertner testified, it made no difference to him through
which
entity his enterprise was credited for the comestibles the Ebrahims
ordered; he merely wished to supply a valid VAT number
when claiming
his own input tax credits. Thus far, the change of corporate
vehicle was contrived but permissible. But the Ebrahims
then
over-stepped the bounds. They transferred to the CC the entire debt
owed to the plaintiff by the entity with which the
plaintiff had
till then been trading, Zaki. This was an amount in excess of R600
000. The CC received no consideration for
taking over Zaki’s
debt. The Ebrahims just did it.
With commendable candour, Ebrahim junior avowed that he regarded the
transfer of Zaki’s debt to the CC as ‘just a
formality’.
This was plainly truthful. For him the CC was simply a shell and a
shape, for ad hoc use at the convenience
of the Ebrahims’
trading circumstances. The transcription of the debt was merely a
book entry made against one book entity
rather than another. But
what this showed equally plainly is that he had no conception of,
nor respect for, the fact that the
CC was a distinct legal entity
with a separate legal existence; that to sustain its separateness
the law exacts compliances and
formalities; and that it could not be
used at will as the receptacle of another entity’s accumulated
debts.
The statutory provision targets just such heedlessness of corporate
autonomy and form. The transfer of Zaki’s debt without
any
quid pro quo showed reckless disregard for the CC’s solvency,
for its ability to repay the debts it incurred, and for
its capacity
as a legal entity to accumulate and preserve assets of its own. (It
is no doubt with an eye to the importance of
a corporate entity’s
independent asset-accumulating capacity that Henochsberg says that
‘recklessly’ means
carrying business on ‘by
conduct which evinces a lack of any genuine concern for its
prosperity’.)
16
Having started by fecklessly encumbering the CC with a massive debt,
everything else the Ebrahims did in relation to it manifested
more
of the same. Their stewardship failed to pay heed to the
consequences of their actions for the CC’s independent
well-being. Its entire existence was, in Ebrahim junior’s
telling words, ‘just a formality’. This explains
the
failure to keep any records or accounts or to keep track of cash and
other receipts. The consistent disregard of the independent
well-being of the CC as a separate entity constituted reckless
carrying on of its business as contemplated by s 64. And it is
clear that this manner of doing business is what left the plaintiff
out of pocket.
17
The Ebrahims’ defence on the Zaki debt transfer – that
Gaertner and the plaintiff were party to the re-invoicing
of the
amount owing – finds no purchase. Gaertner was not running
the CC. More pertinently, he was not privy to the arrangements
the
Ebrahims might properly have made for securing the CC’s
legitimate interests when the debt was transferred. His interest,
as a creditor, was in getting paid. No more was expected from him.
There was no suggestion that he participated in a scheme
to defraud
the CC or colluded in the Ebrahims’ management of the
enterprise. In the absence of such evidence his knowledge
of the
transfer cannot diminish the plaintiff’s entitlement to be
repaid.
It is equally ineffectual in response to the invocation of s 64 to
say that the plaintiff and Gaertner could have safeguarded
their
risk by exacting suretyships from the Ebrahims for the CC’s
debts. That may have saved the plaintiff a lot of trouble,
as well
as the expense of a protracted trial. But it is no answer to a
creditor’s legitimate reliance on s 64 to say that
it could
have chosen a shorter or wiser route. The provision’s
objectives, which are both compensatory
18
and punitive,
19
play an important role in reminding those who run corporations, and
those knowingly party to their business methods, that the
shadow of
personal liability can fall across their dealings.
In contrast with the United Kingdom, where it seems the equivalent
provisions have in recent years ‘been very rarely used’
to fasten directors with personal liability,
20
the jurisprudence of this Court evidences claimants’ spirited
reliance on the provision. Though courts will never ‘lightly
disregard’ a corporation’s separate identity,
21
nor lightly find recklessness,
22
such conclusions when merited can only help in keeping corporate
governance true. They are certainly fitting here.
The finding by Griesel J that Ebrahim senior was deeply involved in
the running of the CC entails ineluctably that he had knowledge
of
the relevant facts
23
and thus that he was ‘knowingly a party to the carrying on of
the business’ in the statutorily offensive manner.
The
evidence fully warranted the trial judge’s conclusion that the
CC was ‘essentially a family business or a conglomerate
of
associated family businesses’. So too was the corollary, that
reckless disregard of corporate form and requirements
and
accountability pervaded the management of the family business.
There can be no doubt that both Ebrahims were knowingly a party to
this style of business: each was independently and both were
jointly
responsible for it. They worked in close association with each
other in running the CC’s affairs. Ebrahim senior
was the
mastermind and guiding hand behind the group of entities. But
Ebrahim junior was more than merely a cipher. He was
the sole
member of the CC, signed the plaintiff’s credit application,
and remained involved in the practical arrangement
of the CC’s
business. He, too, was knowingly a party to the reckless trading.
This conclusion makes it unnecessary to go further and make a
finding as to whether the Ebrahims’ conduct also amounted
to
fraud. It is likewise unnecessary to consider the application of s
65 (abuse of separate juristic personality) and s 63(h)
(no
accounting officer).
On the facts he rightly found, s 64(1) entrusted the trial judge
with a discretion (‘a Court may’) to make the order
sought. No basis has been advanced to suggest that Griesel J’s
exercise of this discretion can be impugned. In my view
his order
was fully warranted.
The challenge to Griesel J’s fair-mindedness
It is necessary to note in conclusion that the Ebrahims’
attorney clouded the aftermath of the trial by launching a spurious
attack on the trial judge’s impartiality. In applying for
leave to appeal on behalf of the Ebrahims, he claimed that Griesel
J
‘was biased against them, and [that] they did not have a fair
trial’. These submissions were purportedly made
‘respectfully
and regrettably’, but they were as devoid of respect or regret
as they were of substance. No portion
of the record offers any
warrant for them.
In granting leave to appeal, Griesel J gave full and careful
consideration to the claims. He found, correctly, that they were
without any merit. Yet the Ebrahims’ attorney persisted in
advancing them in the notice of appeal. When invited during
argument to vouch for this, he purported for the first time to
disavow the allegations. This shows an insufficient appreciation
of
the elements of professional conduct. The claims should never have
been made.
Indeed, one may respectfully wonder whether they did not contribute
to the decision of the trial judge, erring on the side of
accommodation, to grant leave to appeal.
If so, the trial
judge’s self-effacement was unwarranted. There is no merit in
the appeal, and it must be dismissed with
costs.
E CAMERON
JUDGE OF APPEAL
APPEARANCES:
For appellants: MR Khan of MR Khan & Associates, Cape Town (the
written argument having been prepared by BG Atkins)
Coetzee’s Attorneys, Bloemfontein
For
respondent: R van Helden (advocate)
Mallinicks
Inc, Cape Town
Lovius
Block Attorneys, Bloemfontein
1
Airport Cold Storage (Pty) Ltd v Ebrahim and
others
2008 (2) SA 303 (C).
2
Close Corporations Act 69 of 1984
s 65:
‘
Powers of Court
in case of abuse of separate juristic personality of corporation
Whenever a Court on
application by an interested person, or in any proceedings in which
a corporation is involved, finds that
the incorporation of, or any
act by or on behalf of, or any use of, that corporation, constitutes
a gross abuse of the juristic
personality of the corporation as a
separate entity, the Court may declare that the corporation is to be
deemed not to be a juristic
person in respect of such rights,
obligations or liabilities of the corporation, or of such member or
members thereof, or of
such other person or persons, as are
specified in the declaration, and the Court may give such further
order or orders as it
may deem fit in order to give effect to such
declaration.’
3
Close Corporations Act 69 of 1984
s 63:
‘
Joint liability
for debts of corporation
Notwithstanding anything
to the contrary contained in any provision of this Act, the
following persons shall in the following
circumstances together with
a corporation be jointly and severally liable for the specified
debts of the corporation: …
(h) where the office of
accounting officer of the corporation is vacant for a period of six
months, any person who at any time
during that period was a member
and aware of the vacancy, and who at the expiration of that period
is still a member, shall be
so liable for every debt of the
corporation incurred during such existence of the vacancy and for
every such debt thereafter
incurred while the vacancy continues and
he or she still is a member.’
4
Companies Act 61 of 1973 s 415 ‘
Examination
of directors and others at meetings
’
[which in terms of
s 66
of the
Close Corporations Act 69 of
1984
applies mutatis mutandis
]
provides
that any creditor who has proved a claim against a close corporation
may at a creditors’ meeting interrogate any
person sub-poenaed
‘concerning all matters relating to the company or its
business or affairs’.
5
Section 68(1)
of the
Insolvency Act 24 of 1936
,
read with s 339 of the Companies Act 61 of 1973 and
s 66
of the
Close Corporations Act.
6
Companies
Act 61 of 1973, s 424:
‘
Liability
of directors and others for fraudulent conduct of business
(1) When it appears, whether it be in
a winding-up, judicial management or otherwise, that any business of
the company was or
is being carried on recklessly or with intent to
defraud creditors of the company or creditors of any other person or
for any
fraudulent purpose, the Court may, on the application of the
Master, the liquidator, the judicial manager, any creditor or member
or contributory of the company, declare that any person who was
knowingly a party to the carrying on of the business in the manner
aforesaid, shall be personally responsible, without any limitation
of liability, for all or any of the debts or other liabilities
of
the company as the Court may direct.’
7
Saincic and Others v Industro-Clean (Pty) Ltd
(229/05)
[2006]
ZASCA 83
; [2006] SCA 77 (RSA) (31 May 2006) para 27 per Harms JA.
8
See the approach this Court adopted in
L&P
Plant Hire BK v Bosch
2002 (2) SA 662
(SCA) para 39.
9
See the discussion in
Philotex (Pty) Ltd v
Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA), where
Howie JA noted
that ‘the ordinary meaning of
“recklessly” includes gross negligence’ (at
143F)
,
and that recklessness itself connotes ‘at the very least gross
negligence’ (at 144A)
.
10
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 143F-G.
11
S v Dhlamini
1988 (2) SA 302
(A) 308D-E, applied in the corporate context in
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 143F-G.
12
Fisheries Development Corporation of SA Ltd v
Jorgensen
1980 (4) SA 156
(W) 170B-C, per Margo J,
adopted in part in
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 144B
.
13
Bill of Rights s 8(2): ‘A provision in the Bill of Rights
binds a natural or a juristic person if, and to the extent that,
it
is applicable, taking into account the nature of the right and the
nature of any duty imposed by the right.’
14
Bill of Rights s 8(4): ‘A juristic person
is entitled to the rights in the Bill of Rights to the extent
required by the
nature of the rights and the nature of that juristic
person.’
15
Paul L Davies
Gower
& Davies, Principles of Modern Company Law
8 ed 2008 ch 2 para 2–1, p 33.
16
Henochsberg on the Companies Act
,
edited by JA Kunst and others, service issue 27, June 2008, p 916.
The statement has been judicially approved on more than
one
occasion.
17
Saincic and Others v Industro-Clean (Pty) Ltd
(229/05)
[2006]
ZASCA 83
; [2006] SCA 77 (RSA) (31 May 2006) para 29 per Harms JA,
pointing out that ‘the provision could not have intended that
causation [between the impugned conduct and the unpaid debt] does
not play any role at least as far as creditors are concerned’.
18
MS Blackman and others
Commentary
on the Companies Act
(2002, with
updates) vol 3 14–524
19
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 142H-I.
20
Ad Valorem Factors Ltd v Ricketts
[2003] EWCA Civ 1706
,
[2004] 1 All ER 894
(CA) para 2 per Mummery
LJ.
21
Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd
[1995] ZASCA 53
;
1995 (4) SA 790
(A) at 803H.
22
Philotex (Pty) Ltd v Snyman
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) 143F and 142H-I.
23
Howard v Herrigel NO
[1991] ZASCA 7
;
1991
(2) SA 660
(A) 673I-J.