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[2018] ZAKZPHC 37
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Argent Industrial Limited v Gainsford NO and Others (AR473/2015) [2018] ZAKZPHC 37 (27 August 2018)
THE
HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION,
PIETERMARITZBURG
CASE NO: AR 473/2015
In
the matter between:
ARGENT
INDUSTRIAL
LIMITED
APPLICANT
and
GAVIN CECIL GAINSFORD
N.O
FIRST
RESPONDENT
CHETAN KUMAR VENILAL
TANNA N.O
SECOND
RESPONDENT
SENTULA MINING
LIMITED
THIRD
RESPONDENT
MEGACUBE MINING (PTY)
LIMITED
FOURTH
RESPONDENT
ORDER
On
appeal from
:
The High Court of South Africa, Kwazulu-Natal Division,
Pietermaritzburg (Koen J sitting as the court of first instance):
[1]
The
appeal is dismissed with costs, including the costs of two counsel.
JUDGMENT
D.
Pillay J (Jappie JP and Henriques J concurring):
[2]
The
liquidators
[1]
of the Golden
Autumn Trust (the GAT) claimed payment of the sum of R8,8 million
from Argent Industrial Limited (Argent).
[2]
In turn, Argent joined Sentula Mining Limited (Sentula) and Megacube
Mining (Pty) Limited (Megacube) to the action.
[3]
The Sentula Group, a company listed on the Johannesburg Stock
Exchange (JSE) formerly carried on business through several entities
including Scharrighuisen Open Cast Mining (SOC)
[4]
and Scharrighuisen Mining Ltd
[5]
.
[3]
The
circumstances in which Argent came to receive R8,8 million from the
GAT are intriguing. Two friends and business associates,
Cas
Scharrighuisen and Jason Holland, held directorships in Sentula and
Megacube over various periods until 2008. Holland had been
the
financial director of Sentula and a director of SOC. Scharrighuisen
had been the managing director of Sentula and a director
of SOC.
Holland and Scharrighuisen opened a secret account with Nedbank
in the name of SOC, where they deposited money they
stole from SOC.
Holland established the GAT on 27 March 2007. Its trustees were
Holland, Adan Kean Du Plessis and Robert Sun. According
to the trust
deed, Holland and members of his family were the beneficiaries. He
was the only trustee authorised to operate the
GAT’s bank
account.
[4]
Holland
and Scharrighuisen used the so-called BMI (Bavaria Metal Industries
(Pty) Ltd) transactions to steal money from SOC. The
scheme was
structured as follows: SOC purchased and paid for equipment in a
foreign jurisdiction using BMI’s import number.
Then it
invoiced BMI, a subsidiary of Argent for the equipment. SOC could not
invoice the bank because it would then have been
financing its own
asset. So BMI would approach a bank to finance the purchase of
the equipment that SOC had already sold
to BMI. Once the bank was
satisfied that the asset was in the country, it would approach SOC
for authorised signatures to the financing
agreement. BMI resold the
equipment to the bank and the equipment was delivered to the SOC. BMI
paid the money it received from
the bank for the sale of the
equipment to SOC. The net effect of these arrangements was that
theoretically, SOC would have gotten
both the equipment and the
payment for it, a result questionable in itself. In reality, Holland
and Scharrighuisen diverted these
payments to a secret account.
[5]
Remarkably,
Trev Robert Hendry, Argent’s Chief Executive Officer and a
chartered accountant was unperturbed by this convoluted
scheme. He
testified that the banks were aware of what was going on and BMI had
paid over to SOC every cent it had received on
its behalf. However,
he was evasive about whether BMI was dormant, a subsidiary of Argent
Steel Group or merely a financing
vehicle for SOC and Megacube.
Eventually, the cross-examination extracted his response that BMI
existed for purposes of invoicing
the banks for hire purchase
agreements for SOC and Megacube. Notwithstanding, Argent urged the
court to view the BMI transactions
in the context of ‘the close
commercial relationship between SOC and Argent.’ Seemingly,
Argent’s status as a
listed entity accountable to its
shareholders and a slew of regulatory authorities was of no
consequence to the office bearers
of the entities and the banks
involved.
[6]
Whatever
the criticism might be of the BMI financing transactions, there was
no evidence that they constituted theft. The same cannot
be said
about the BMI payments to the SOC. BMI or Argent drew cheques in
favour of SOC. Over a period, Holland and Scharrighuisen
deposited
those cheques totalling R584 372 445.78 into the secret
bank account. Then they drew cheques on the secret
account in favour
of the GAT and deposited them into the GAT bank account. Between 23
April 2007 and 29 January 2008, they paid
an amount of R65 563 556
from the secret account into the GAT’s bank account for their
personal benefit. On 5 March
2008, Scharrighuisen and Holland closed
the secret account.
[7]
About
the same time, whilst preparing its financial accounts for submission
to the JSC, SOC discovered a shortfall of R60 million.
Holland
told SOC that Argent owed this amount. Consequently, Louw, on behalf
of SOC, demanded payment from Hendry who was representing
Argent.
Hendry denied that Argent owed SOC any money.
[8]
By
June 2008, KPMG was instructed to undertake a forensic investigation
into the financial affairs of Megacube. By September 2008,
KPMG
discovered that Scharrighuisen and Holland had established the secret
bank account with Nedbank in the name of Megacube on
2 March 2007. On
the instructions of Louw to investigate the secret account further,
KPMG discovered that Scharrighuisen and Holland
had been the managing
and financial directors respectively of Sentula when they had opened
the secret account. They were the only
authorised signatories on the
account.
[9]
After
Louw demanded payment from Argent, the latter received the following
amounts totally R45 748 810,79:
a)
27
June 2008, R8,8 million on behalf of Holland;
b)
27
June 2008, R21 150 000 on behalf of Scharrighuisen;
c)
1
July 2008, R4,3 million on behalf of Holland;
d)
1
July 2008, R11 498 810.79 on behalf of Scharrighuisen.
On
3 July 2008, Argent paid SOC the entire sum of R45 748 810.79.
[10]
The
GAT was sequestrated provisionally on 28 November 2008 and finally on
10 February 2009. On 8 September 2010, the liquidators
instituted an
action against Argent for the recovery of the claim of R8,8 million.
On finding that the GAT had title to the R8,8
million, the trial
court granted an order in favour of the liquidators against Argent
for payment of the claim with interest and
costs.
[11]
In
this appeal against the judgment of Koen J, Argent denied liability
to the insolvent GAT on the bases that first, the GAT did
not have
any title to the claim once it had paid the money into Argent’s
bank account; second, the GAT had authorised the
transfer from its
account to Argent; third, if Argent had to pay the claim it would be
duplicating the payment which it had already
included in its lump sum
payment to SOC; accordingly the SOC would be unjustifiably enriched
at the expense of Argent; fourth,
it had acted as an agent for the
SOC, as such it had been indemnified; fifth, the GAT’s payment
to Argent did not amount
to a voidable disposition under s 26(1)(
b
)
of the Insolvency Act 24 of 1936 (the Act). Argent acknowledged that
SOC had been the only creditor of the GAT. Therefore, if
any amounts
were recovered from Argent it would have to be distributed to SOC,
less the trustee’s fees.
[12]
The
liquidators contended that the GAT was entitled to the claim. The GAT
had not stolen the monies deposited into its account.
Holland’s
payments from the GAT’s account to Argent had not been
authorised. Other trustees of the GAT were unaware
that Holland and
Scharrighuisen had deposited money they had stolen into GAT’s
account. Approximately R630 000 was not
stolen money;
commixtio
had occurred between the stolen money and the R630 000 so that
the funds in the GAT’s account were inseparable.
[13]
Having
exhaustively ventilated the issues in a lengthy trial that proceeded
over five days, generating a record in excess of 1 500
pages, the
facts material to my judgment have since become substantially common
cause or not disputed. My approach is to determine
whether the GAT
was entitled to the claim; whether the GAT authorised the payments to
Argent; whether the payment to Argent was
a voidable disposition
prohibited under s 26 of the Act; whether Argent was entitled to the
claim, to receive and transfer it to
SOC; and whether SOC would be
unjustifiably enriched. Findings on these issues will provide the
building blocks for constructing
an appropriate remedy.
[14]
The
source of every deposit into the GAT’s bank account was
unknown. Included in the deposits was one by Argent to settle
a debt
due to Scharrighuisen for the amount of R630 000. A transfer of R8
479 000 from the GAT Money Market account into the GAT’s
bank
account was stolen money laundered through the GAT Money Market
account. Without any better information, the court must accept
Argent’s submission that these deposits enabled the GAT to
transfer R8, 8 million to Argent.
[15]
Structurally
and theoretically, the GAT was an entity distinct from Holland.
However, in mind and management, Holland’s identity
was
indelibly imprinted on the GAT through his control of its bank
account. Although the GAT itself did not steal the money –
or
rather there was evidence that it did – the bulk of the money
in the GAT bank account had been stolen. Consequently, the
stolen
money had to be returned to its ‘owner’ or, more
precisely, the party entitled to it.
[16]
Argent
had already returned some of it. The GAT’s transfer of the R8.8
million to Argent included the R8 479 000, money that
had been
stolen. The GAT could not assert title to the stolen money as
against the true owner.
[6]
Conversely, it could validly resist claims from Argent, which also
lacked title to the stolen money but received it anyway. However,
the
GAT had title to Scharrighuisen’s R630 000 which the parties
accepted had not been stolen. In this case, as it
is possible
to distinguish stolen money from the rest,
commixtio
does not arise. Although the GAT had no title to the stolen money,
the findings on the next three issues are nevertheless relevant
to
determining whether the liquidators should succeed in their claim.
[17]
Irrespective
of whether the GAT had title to the stolen money, it had not
authorised the payment to Argent, as the trial court correctly
found.
In terms of the trust deed of the GAT, a majority of trustees had to
agree to the payment.
[7]
Furthermore, the payment was inconsistent with the purposes for which
the GAT was formed, which included providing for estate duty.
Consequently, Holland could not legitimately have paid the money from
the GAT’s bank account to Argent. But he did.
[18]
His
disposition to Argent within two years of the sequestration of the
GAT resulting in the latter’s liabilities exceeding
its assets
was not made for value under s 26 of the Act. With these
jurisdictional prerequisites established, the disposition fell
to be
set aside, as the trial court correctly found. Argent’s
concessions fortify this finding.
[19]
Argent
conceded that it had no title to the payments it received on behalf
of the GAT and that it was a mere conduit for receiving
and
transmitting monies rightfully due to SOC, its alleged principal.
Lacking title itself and having accepted the payment, Argent
could
not validly contest the GAT’s title to the stolen money. Hendry
advanced three facts to support Argent’s offer
to pay any money
it had received:
(a)
SOC
had been in a dire situation with a looming JSE deadline to publish
its financial statements;
(b)
Sentula’s
chairman and other directors, namely Alan Joffe and Sam Jonah had
urged Hendry to assist in getting the payment
of ‘the money’
– its source was a mystery to SOC; and
(c)
SOC
had exhausted Holland as a source to resolve the debit in the
accounting and the auditors had not been able to identify the
source
of the debit.
Argent
alleged, euphemistically in my view, that its role was ‘to
assist and facilitate the transfer of credit’ to SOC.
[20]
Not
only was Hendry emphatic that Argent was not a debtor of SOC but
there was also no commercial substratum for Argent receiving
payment
of the claim. If the GAT was liable to SOC and wanted to pay SOC it
should have done so without Argent having to facilitate
the transfer.
Then the question of the alleged mandate and indemnity arose.
[21]
Argent
relied on a mandate and indemnity from SOC. As a general rule a
principal must indemnify and reimburse an agent who, acting
in good
faith and in the proper service of the principal, suffers loss.
[8]
In this instance,
the
purported mandate had allegedly been established by
an
exchange of emails between Hendry and Louw. The mandate
consisted of a single term, namely, Argent must facilitate the
receipt of money from ‘third parties’ owing to SOC or
Megacube and transfer it to SOC or Megacube by depositing it
into a
bank account details of which Louw provided. The very content of such
a mandate should have been manifestly suspected. Who
the ‘third
parties’ were, was contested when Hendry had to prove what his
beliefs had been about who owed SOC. His
beliefs were relevant to
determining his mandate, the indemnity, enrichment, the propriety of
the payment and his credibility generally.
[22]
Argent
pleaded that it had paid SOC ‘in the reasonable and bona fide
belief that the GAT, Holland and/or Scharrighuisen were
indebted’
to SOC or Megacube. Argent also pleaded that it received the lump sum
of R45 748 810.79 on behalf of Holland
and Scharrighuisen. These
allegations in its pleadings did not square with Hendry’s
evidence. Hendry testified that he believed
that Holland and
Scharrighuisen did not owe SOC or Megacube. As to whether he believed
that the GAT owed money to SOC or Megacube,
Hendry replied ‘no’
but only after the trial judge intervened to get his response. In the
circumstances, the submission
by counsel for Argent that the judge
erred in finding that Hendry did not believe that even the GAT owed
SOC was unfounded.
[23]
Hendry’s
evasiveness persisted under cross-examination about whether he had
asked Scharrighuisen and Holland about them owing
money to Megacube
and Sentula. His evidence was that he had not asked that question.
Instead, he had sought legal advice because
he had emails referring
to money that BMI owed SOC when he knew that was not possible.
[24]
As
the CEO and a chartered accountant Hendry had received payment in
Euros, but he had
‘
no
idea’ about this payment.
Despite
the deposit of R8.8 million being annotated as ‘TRF from Golden
Autumn Trust’, that name simply ‘didn’t
ring any
bell’ for Hendry. And subsequently, when he received the two
payments referenced to Holland, on instructions from
Mr Davis of
Webber Wentzel, he confirmed with Scharrighuisen that he could
transfer the entire amount of R45,7 million to SOC.
[25]
The
opaqueness of the transactions and the lack of an adequate
explanation for them leads the court inevitably to infer that Argent
knew or ought to have known much more about the GAT’s payments
to SOC. ‘Plugging the holes’ in SOC’s accounting
so
that they did not show up in the financial statements due for
publication was reason enough to believe, in the absence of an
explanation for both the ‘holes’ and the reasons for the
GAT ‘plugging’ them, that something subversive
was
underway.
[26]
In
these circumstances, Hendry’s evidence about his beliefs must
be rejected as false. Hendry was a single witness for Argent.
The
chairmen of Argent and BMI who had urged Hendry to assist SOC did not
testify. Considering the close intersecting directorships
and
personal relationships amongst those involved in these companies,
Argent’s disclaimers are unconvincing.
[27]
Counsel’s
bald submission that Hendry’s belief was that ‘the money
was due to the SOC’ compounded the obfuscation.
He failed to
identify the debtors and also denied that Holland, Scharrighuisen
and the GAT were
the debtors. The clearest evidence that Hendry did not act as
agent for SOC but under pressure from within
Argent and BMI, emerged
from the following extract from his testimony:
‘
.
. . why were you phoning Cas Scharrighuisen? . . . everyone’s
phoning me to help and to assist.
Who is everybody . . .
Sorry, and [Sir] Jonah and Alan Joffe, I think Jonathan Best and our
chairman.
Koen J: Who is your
chairman? . . . Tony Scharrighuisen’
[28]
Tony
Scharrighuisen was the brother of Cas Scharrighuisen and the chairman
of Argent when Hendry was its chief executive officer.
The chairman
had asked Hendry to assist SOC. Sir Jonah was the chairman of BMI.
Eventually, Hendry accounted to Sir Jonah, Richard
Jonah and Alan
Joffe of Sentula about the transfer of all the money paid out of
Argents accounts to SOC.
[29]
Hendry’s
mandate came from within Argent and BMI and not from SOC. Contrary to
submissions for Argent, Hendry tried to avoid
communicating with Louw
who pursued him via emails for payment. Having failed to prove a
mandate from SOC, no indemnity arises.
[30]
These
findings necessarily implicated Argent’s claim against SOC
based on enrichment. Argent paid over all the money it received
from
the GAT to the SOC, including the claim of R8.8 million. With
enrichment as its cause of action, Argent had to prove on a
balance
of probabilities that Hendry believed in good faith that the payment
was due to SOC. Argent was trapped in a catch 22 situation.
To
succeed in its defence against the liquidators, Argent had to prove
that it was unaware of who owed the money and the reason
for the GAT
paying the SOC. To succeed in its enrichment action, Argent had to
prove that its transfer to SOC had been made in
the bona fide and
reasonable but mistaken belief that it had been owing. Without Argent
proving what reasonable enquiries it had
made to avoid mistakes, it
cannot overcome the bona fide and reasonableness threshold.
[31]
Its
belief would have been genuine, even if mistaken, if it had been
accompanied by a cogent explanation for the circuitous transaction
from the GAT to Argent and then to SOC. Argent had to know who owed
the money and what authority Scharrighuisen had to instruct
him to
pay SOC.
Argent’s
disclaimers were disingenuous. It could not prove on a balance of
probabilities that it genuinely believed that the
GAT owed money to
SOC, without undermining its primary defence, namely that Hendry
believed that neither Scharrighuisen and Holland
nor the GAT owed the
money. That SOC subsequently successfully proved a claim against the
GAT is irrelevant.
[32]
In
this sea of corporate malfeasance, the rule of law offers refuge. Any
remedy devised must seek to reinforce a return to the rule
of law.
The basic principles of banking law and insolvency law apply.
[33]
Fungible
money deposited in a bank loses its identity as it commixes with
other funds.
[9]
A bank is the
owner of monies deposited into its customers’ accounts.
Customers, as account holders, were entitled to the
credit created by
their deposits. Contractually, the bank (debtor) is obliged to repay
its customer (creditor) and honour its cheques.
The bank would have
obligations to a third party against a customer’s account if
the latter authorises the bank.
[10]
For instance, the customer might agree with the bank to warehouse
monies deposited into the customer’s account for the benefit
of
a third party. In that event, the bank would be bound to comply with
the contract for the benefit of a third party.
[11]
In the absence of the customer’s consent, a third party will
have to prove its claim to the deposits, usually through a
quasi-vindicatory action.
[12]
[34]
If
a bank were unaware that its customer settled debts from deposits of
stolen money, the bank’s payments would nevertheless
extinguish
the debts and the bank would not be liable.
[13]
The
payments would be unimpeachable if creditors receive them in good
faith, unaware that the funds had been stolen.
[14]
[35]
Against
these principles, Nedbank was contractually bound to act only on
Holland’s instructions on behalf of the GAT. As there
was no
evidence that the deposits had been stolen, Nedbank could not be held
liable for paying on Holland’s instructions.
It could not pay
SOC as the third party without Holland’s consent or proof that
SOC had been the true former owner of the
money before Holland had
stolen it. SOC has since proven such a claim in liquidating the GAT.
Insolvency law entrusts to the liquidators
the powers and functions
to recover assets and claims in favour of the GAT. Only the
liquidators could lawfully instruct Nedbank
about how it should
dispose of the money in the GAT’s account. Additionally, as
liquidators, their functions include recovering
void, voidable and
unauthorised dispositions of the GAT’s property, considering
and settling the claims of its creditors
and rendering liquidation
and distribution accounts to the Master, who oversees the process.
[36]
Even
if Argent’s payment to SOC had been in good faith but mistaken,
an order against Argent to pay the claim would not result
in unjustly
enriching Sentula, which replaced the SOC after the latter was
liquidated. Having received R65 563 556 from the
secret account,
the GAT had a balance of at least R19 808 745.30 still owing to SOC
after the latter had received R45 784 810.79
via Argent.
Where
there is receipt of what is owed there is no enrichment (
suum
recipit
).
[15]
[37]
In
the circumstances, the appeal is dismissed with costs, including the
costs of two counsel.
D
Pillay J
___________________________
Jappie
JP
__________________________
Henriques
J
APPEARANCES
Counsel
for the applicant/defendant’s: I Green SC
Instructed
by: Shepstone & Wylie (Umhlanga)
c/o
Shepstone & Wylie (Pietermaritzburg)
Ref:
Eleni Karidis
Tel:
(033) 355 1796
Counsel
for the respondent: T Beckerling SC, J.W Steyn
Instructed
by: Baker McKenzie
c/o
ER Browne Inc
Tel:
(033) 394 7525
Date of Hearing: 30 July
2018
Date of Judgment: 27
August 2018
[1]
The first and
second plaintiffs in the trial court and the respondents in this
appeal in the insolvent estate of the GAT.
[2]
The defendant in
the trial court and the appellant in this appeal.
[3]
First
and second
third
parties in the trial court and third and fourth respondents in this
appeal.
[4]
U
ntil
May 2009.
[5]
Until
May 2007
.
[6]
Nissan
South Africa (Pty) Ltd v Marnitz NO & others (Stand 186 Aeroport
(Pty) Ltd Intervening)
2005
(1) SA 441
(SCA) para 23;
ABSA
Bank Ltd v Lombard Insurance Co Ltd
2012 (6) SA 569
(SCA) at 576A-E;
Gainsford
NO, & others v Gulliver’s Travel (Bruma) (Pty) Ltd
[2009] JOL 23787 (W).
[7]
Coetzee
v
Peet
Smith Trust en andere
2003 (5) SA 674
(T) at 681A-B.
[8]
De
Villiers & others
v
The
Beaufort West Municipality
1924 CPD 501
at 507.
[9]
First
National Bank of Southern Africa Ltd v Perry No & others
2001
(3) SA 960
(SCA) para 16.
[10]
Absa
Bank Limited
v
Leech
& others
[2001] 4 All SA 55
(A) para 19.
[11]
Spar
Group Ltd v FirstRand Bank Ltd
&
another
2017
1 SA 449
(GP) para 52.
[12]
Nissan
South Africa (Pty) Ltd v Marnitz NO & others (Stand 186 Aeroport
(Pty) Ltd Intervening)
2005
(1) SA 441
(SCA) para 32.
[13]
ABSA
Bank Ltd v Lombard Insurance Co Ltd
2012
(6) SA 569
(SCA) para 18.
[14]
ABSA
Bank Ltd v Lombard Insurance Co Ltd
para
9, 18 and 19.
[15]
Absa
Bank Limited
v
Lombard
Insurance Co Ltd.