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[2016] ZAGPPHC 586
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Grindrod v Torode and Others (A803/2014) [2016] ZAGPPHC 586 (20 May 2016)
IN
THE
HIGH
COURT
OF
SOUTH AFRICA
GAUTENG DIVISION, PRETORIA
CASE
NO: A803/2014
DATE:
20 MAY 2016
In
the matter between:
GRINDROD
BANK
LIMITED
Appellant
and
JEREMY
ARTHUR
TORODE
NO
First Respondent
CAROLNNE TORODE NO
Second
Respondent
DEE-BRONWYN BEZUIDENHOUT
NO
Third
Respondent
JEREMY
ARTHUR
TORODE
Fourth
Respondent
JUDGMENT
Tuchten
J
:
1.
This
appeal and cross-appeal arise from a loan made by
the appellant (the Bank)
to the Sarnia Trust (the Trust). The first, second and third
respondents were cited as its trustees. The
fourth
respondent (Torode)
in his personal capacity
stood
surety for the Trust's
obligations. It
is
common cause
that
the money
was indeed
advanced
to
the
Trust
but the
Trust
and
Torode
resisted
the
Bank's
claim
for
repayment on a
number
of grounds,
which when
the matter came to trial,
reduced
to
the
proposition
that
the
loan agreement
was
invalid because the
transaction
contravened
s 38 of the Companies Act,
61 of
1973 (the old
Companies Act)
and that
the
loan agreement between
the Bank and the Trust was a simulation, unlawfully designed to
evade
the
provisions
of
s
38.
It was
not
controversial
that
if
the
Trust
is not
liable
on the
loan agreement,
Torode
is
not
liable
in the
present case as surety
because his liability is
accessory to that of the Trust.
In addition,
the
respondents
brought
a
claim
in reconvention,
reclaiming
the
amounts
paid to the
Bank
under
the
allegedly
invalid loan
agreement under
the
condictio
indebiti
and
seeking
to
have
Torode's suretyship
and
the mortgage bond
passed by
the
Trust pursuant to the
loan agreement
declared
invalid.
[1]
2
.
In
the
court
below,
Phatudi
J
found
against
the
Bank
on
the
main claim, on the ground
that the loan agreement
indeed contravened s 38
and against the Trust on the claim in reconvention on the ground that
the Trust knew full well that the
loan agreement
contravened s 38 and was
thus
in
pari delicto.
Both
the Bank
and
the
Trust
were in
a
measure aggrieved by the
judgment
in
the court below. Hence the present
appeal
and
cross-appeal.
3.
The loan,
of R2
million,
was needed
to fund
the commercial activities
of a company called Umoya
Airtime Solutions (Pty)
Ltd. Umoya was desperately
in need of finance.
It owed
substantial
amounts to
i
ts
creditors,
particularly
to
CES,
the
manufacturer
of
i
ts
product,
to
which it
owed in
2009 between R600 000 and
R 800 000. This product was a terminal which enabled vendors to sell
airtime ultimately used by
devices for electronic
communication.
Those with
commercial interests in
and around Umoya
thought
the product had
great commercial
potential
but
had
been unable
to raise
the
capital needed
to
exploit
the opportunity
effectively. An application made
to
Absa for finance had been
rejected and
there
is no
suggestion
that any other financial institution
would lend Umoya money.
4.
At the time relevant to
this case, Umoya's shares were held by two persons: Mr White, who
held 90% and Mr Lambert, who held 10%.
Torode
had
previously lent
White,
the
principal
shareholder in
Umoya
and at
that
time a
good friend of
Torode, R500
000.
White repaid half
of the loan soon
thereafter and Torode took the balance in Umoya's
product.
It
seems
that
White
had
accepted
liability
towards Umoya
for product
supplied
to
Torode, a
liability
which
White had
discharged, or agreed
to discharge by an
adjustment of his loan account in
Umoya. Torode
had appetite
to
increase
his investment
in Umoya by the provision
of
what in
effect
was venture capital. But
Torode needed
to borrow
the money
for his
anticipated investment.
Through the
Trust,
Terode
had
an
asset
in the
form
of
a
property
in
Gauteng
(the
Gauteng property) which
could be put up as security. Torode and White
agreed
in principle that
against
payment
of the
amount
of
R2
million
which
would be
used
for
the
benefit
of
Umoya,
White
would
transfer 45% of the
issued shares in Umoya to
the Trust. This would
make
White
and
Torode,
through the Trust, each
45% shareholders with
Lambert
continuing
to hold
the
remaining 10%.
5.
Torode approached Mr
Olivier,
an
employee of
the
Bank,
and
explained
the transaction
to
him. The
Bank agreed
in principle to
advance
the
loan
to
the
Trust.
The
Bank
required
Torode
in his personal capacity
to guarantee the obligations of the Trust. It also required
Umoya
to
guarantee
the
obligations
of
the
Trust
to
the
Bank. This
was
because
the
Bank
identified
the
Trust
as
the
ultimate
beneficiary
of
the
funds
(correctly
so,
from
a
commercial
perspective) and
the only potential
source of income
from
which
to
repay
the
loan.
6.
A loan agreement was
drawn by the Bank.
I
t
took the form of a letter dated 3 September 2009 in
which a "term loan
facility" was
offered to the Trust. The offer of
the term loan
facility was accepted by
the Trust on 8 September
2009. I
shall
call this document the initial facility.
7.
After reciting that the
term loan facility was for R2 million to be lent to
the Trust, defined as
"the Borrower", the initial facility
recorded the following
under the heading "FACILITY AMOUNT":
The facility
is for an amount of R2 ...
million .. which will be
utilised
for
the
acquisition
of
45%
shareholding
in
Umoya
Solutions
(P
1
y)
Ltd ("the Company").
8.
The
initial facility
proceeded
to
regulate,
similarly
under
headings,
such
matters
as
interest,
the
term
of
the
facility, repayments,
a valuation
and
the
insurance
of
the
Gauteng
property
and
several "SPECIAL
CONDITIONS", which included special condition
AD:
The Bank requires the
Company's Shareholders' Agreement
acknowledging
the Borrower's investment in the Company as
well
as the Bank's facility to the Borrower. The Shareholders
Agreement
should incorporate
that the Company
is
responsible
for
the
monthly repayment of capital and interest
on
the facility.
9.
Paragraph
5,
under
the
heading
"SECURITY"
included
requirements
that
the
Trust
as
Borrower
register
a
first
covering
mortgage
bond
over the Gauteng property
and that Torode personally sign an unlimited
guarantee in
favour of the Bank. It
also provided in
paragraph 5(d):
The Company shall sign an unlimited guarantee in
favour of the Bank.
10.
It
became
common
cause
before
us that
the
initial facility
in fact
contravened s 38 of
the Companies Act, 61
of 1973
(the
old Companies Act), which
was in
force
at
the
time. Section 38 provided at the time as follows, under the heading
"No financial assistance to purchase shares of company
or
holding company":
(1)
No
company shall give,
whether
directly or indirectly, and
whether
by
means
of
a
loan,
guarantee,
the provision of security
or otherwise,
any
financial
assistance for the
purpose of or in connection with a purchase or subscription made or
to be made by any person of or for any shares
of the company, or
where the company is a subsidiary company, of
its holding company.
(2)
The provisions of subsection (1) shall not
be
construed
as prohibiting-
(a)
the
lending
of
money
in
the
ordinary
course
of
its business by a company whose main business
is
the lending of money; or
(b)
the
provision by a company,
in
accordance with any scheme for the time being in force, of money
for the subscription
for
or
purchase
of
shares
of
the
company
or
its holding
company
by trustees
to
be held by or for the benefit of employees
of the company,
including
any
director
holding
a
salaried employment or office in the company;
or
(c)
the making
by a company of loans to persons, other than
directors,
bona
fide
in the
employment
of
the company
with
a view
to
enabling those
persons
to purchase or subscribe for shares of the company or its
holding
company
to
be
held
by
themselves
as
owners; or
(d)
the
provision
of financial
assistance
for the acquisition of shares in a company
by the company or its subsidiary in accordance
with the provisions of section 85 for the acquisition of such shares.
(2A) Subsection (1) does not prohibit a company from
giving financial assistance for the purchase of or subscription for
shares
of that company or its holding company if -
(a)
the company's board is satisfied that -
(i)
subsequent
to
the
transaction
the
consolidated assets of the company fairly valued
will be more than its consolidated liabilities; and
(ii)
subsequent
to providing the assistance,
and
for the duration of the transaction, the company will be able to
pay its debts as they become due in the ordinary course
of
business; and
(iii)
the terms upon which the assistance is
to be given is sanctioned by a special resolution
of its members.
(3)(a)
Any
company
which
contravenes
the
provisions
of
this
section,
and
every
director
or
officer
of
such
company, shall be guilty of an offence.
(b)
For
the
purpose of
this
subsection
'director',
in relation to a company,
includes any
person
who at the
time of
the
alleged
contravention was a
director
of the
company.
(c)
It
shall be a defence
in any
proceedings
under
this section against any director or officer of a company if it is
proved that the accused was not a party to the contravention.
11.
The Bank received legal
advice on the s 38 issue. Its attorney,
Mr Green
of
the
firm
Cox
Yeats,
wrote
the
Bank
a
letter
dated
14 September 2009 in
which he
advised:
If [Umoya] is required to stand guarantee for the
obligations of a shareholder then that act will need to be
authorised by a Special
Resolution passed by
the
shareholders in
[Umoya] by
a
75%
vote
and
registered
with
the
Registrar
of Companies.
Section 38(1) imposed a
general prohibition. Green's reference to a special resolution
related manifestly to the exception to the
general prohibition
created by
s 38(2A).
12.
Olivier had
a number of consultations
with the Bank's legal advisors. The advice of Green was, and was
understood
by
Olivier to be,
that there was a concern that the proposed transaction would fall
foul of s 38 but that this concern could be eliminated
if a special
resolution
were passed
with the requisite majority by the shareholders of Umoya
and
registered.
13.
On
15 September
2009,
Olivier sent
an email to
Torode
and White.
Olivier began the email
by stating that he had "more unpleasant news for all". He
gave
the
text of
s
38(1) and
continued, in
numbered
paragraph
1:
This means that Umoya cannot guarantee the loan to
the ... Trust as we would
be
contravening
the said Act,
albeit the shares are being traded for a nominal par value.
From our side, it
is
imperative that Umoya stand guarantee as
they are the
means
to
the
serviceability of
debt.
Cox
Yeats has agreed that a
Special Resolution be drafted by Gavin Price Attorneys
(i.e.
Gavin
Price Attorneys
are
drafting the
shareholder's
agreement).
I
am not privy to the wording of the said resolution. Cox Yeats has
requested a copy of the Shareholder's agreement
to
ratify
the
'terms'
of
the
shareholder's loan
etc.
14.
In numbered paragraph 2
of the letter, Olivier referred to a further
i
tem
of
unpleasant
news:
I
mentioned to all (Umoya and [the Trust]
&
Gavin Price) that we would be able to pay-out on
signing and lodgment of the said Bond documents,
but this request has been denied by my
Management.
I
was under the impression that this was
the
norm, and I naively committed as much to all. My sincere apologies
for
the
misleading
information.It
is therefore
recommended
that
the
Company
[ie
Umoya] approach
a
bridging
finance
company
for
the
required amount as the
payout, from
our
side will only occur once the following
has transpired:
The
Sarnia Trust Loan Agreement signed.
The
Umoya Guarantee signed.
-
All FICA information is in place & the valuation is
acceptable to the Bank.
- Bond documents
signed.
-
Sight of Shareholder's agreement.
- Resolution
drawn-up regarding Section 38. Bond - lodged and
registered.
15.
But
then Green
was
told by Mr
Price,
the attorney for Umoya,
that
the parties
to
the
Umoya/WhitefTorodefTrust
transaction had
decided
to restructure the
transaction by transferring the shares out of Umoya and paying for
them
before
the loan was made to
the Trust by the Bank.
For whatever
reason,
thus,
they
decided
not to follow
the special resolution
route
proposed
by
Green.
On 16
September
2009 Green
wrote
to Olivier, to tell him of
the restructuring. This
is
the
text of
the letter:
We
have
had
discussions with
Mr
Gavin
Price
concerning
the
agreement
he is preparing. He told us that the shares and
loan
account in
[Umoya]
had
already been
acquired
and
paid
for.
Accordingly, the loan being raised
from the Bank
will not
be
used
to acquire shares but
will be used
to
make a further loan
to
[Umoya]. That would not contravene Section 38.
Regarding payment of the
instalments, we have suggested to the attorney that provision be made
for [Umoya] to repay portion of
the loan account in monthly
instalments equal to the amounts payable to the Bank. The borrower
would instruct [Umoya] to make
payment directly to the Bank. This
again should overcome any difficulties with Section 38. Mr Price
will send us a copy of his
draft agreement so that we can agree on
the format before it is signed. This may necessitate your making an
amendment to the Offer
Letter. We will also make appropriate
adjustments to the Loan Agreement once we have had sight of the
agreement.
Jeremy Torode was going to
come to Durban tomorrow with documents but we have suggested to him
and his attorney agreed that his
trip to Durban should be deferred
until all the legal issues had been resolved and documents were
available for signature.
Perhaps clause 8A(d) of
the Offer Letter should be amended to provide that [Umoya] will pay
instalments in reduction of the loan
account and that the
instalments will be paid directly to the Bank on the borrower's
behalf in order to service the loan.
Furthermore clause 1 of the Offer Letter should be
amended to provide that the loan will be utilized to make a further
loan to
the company and omit any reference to the acquisition of
shareholding.
16.
I have quoted so
extensively from Green's
l
etter
because the insights in
Green's letter are
important. They show that Green appreciated and communicated
to Olivier that
in order to eliminate the
s 38
problem,
action was required on two levels: firstly, the
nature
of the transaction
had
to
be
changed and, secondly,
the
documentation
had
to
be changed to reflect the
new nature of the transaction.
Green's insights were
shared within the Bank by at least four officers including Olivier
within the Bank,
to whom Green's letter or
an in house communication
within
the
Bank
conveying the
gist
of
Green's
letter,
or
both,
were sent.
17. It is
perhaps useful to
summarise at this stage what Olivier and all the other
persons
involved
in the
transaction
knew
at
this
stage.
They knew that
Umoya was desperately
short
of money.
It could not even service
its existing
short term debt
obligations
to
i
ts
supplier without a capital injection. They
knew that
if Umoya were to take
advantage
of
the perceived
opportunity
provided
by its business,
capital had to
be provided urgently.
They knew that the existing shareholders either could not or were not
prepared to provide this capital. They
knew that no financial
institution was
prepared
further to fund Umoya. The only way this could be done was through
the Trust, which
because
of the Gauteng
property
had
access
to
finance.
They
knew that
the Trust could only be
induced to procure the finance
and make it available to
Umoya if White
transferred
45%
of the equity
in
Umoya to Torode.
18.
And
yet,
no more than
one day
after
Olivier
had told Torode
and White of
the s 38
problem and
the Bank's refusal
to proceed
with the transaction
in
the
form
that
had
been
agreed
between
the
participants,
Umoya
told
the Bank
that
the
shares
had
in
fact
been
transferred and paid
for.
To
put
it
at
its
lowest,
this
assertion
of
fact
required verification and
could not be
acted
upon without evidence that what
Price had told Green had
some basis in truth. This was implied in
Green's
l
etter
to
the Bank
dated 16
September 2009.
19.
The reason Price's
assertion required verification was that the very
foundation
of the transaction
as originally
contemplated
was that Umoya, White and
the others who up
to
then had
invested in
Umoya were unable or
unwilling further to fund Umoya's activities unless a further
injection
through
Torode
was
forthcoming.
Why
did
this suddenly change
after a legal
difficulty
arose? And most
importantly of all, where
was the money going to come from to fund the share transfer if it did
not come from Torode through the
Trust with money
borrowed
from
the Bank?
20.
I
am
simply not
prepared
to
accept, in
favour of Olivier,
that
he
did
not
appreciate that this was
so. Any responsible bank officer in
Olivier's position
would
have
realised
that
i
t
was.
And
Olivier,
moreover,
did
not act
without advice. He
had
the services of Cox
Yeats at
his
disposal. In
his
letter, Green, backed up
by Price, made plain
that
the
transaction
should
be
deferred
and
that
Torode
should
not
even
travel to
Durban
until,
in effect,
answers
to the
questions
I have
posed emerged.
The
following passage
from Green's letter
dated 16 September
2009
bears
repeating:
Jeremy Torode was going to come to Durban
tomorrow with documents but we have suggested to
him and his attorney agreed
that
his trip to Durban should be
deferred
until all
the legal issues
had been
resolved
and documents
were available
for
signature.
21.
On the same
day that
he wrote
the
unpleasant
news email, ie 15
September
2009,
Olivier
wrote
to
Torode
to
say
that
he
had
managed to
negotiate
bridging
finance
of
R800
000
to
fund
the
transaction. This
was yet another
indication that
those
involved
in
the
transaction were
pressed
for
money
and,
more
particularly,
that
Torode had
no available source of
finance for the transaction other than that to be
loaned by
the Bank.
22.
On
16
September
2009,
Ms
Dustigar,
the
Bank's
internal
l
egal
counsel, wrote to a Bank official, Ms
Msomi, copying to her
the
l
etter
from Green of the same date from which
I
have quoted above and
instructing
her
to
"pend
the
loan
agreement
because
of
the
proposed
amendments."
In a further
email to
Msomi later the
same
day,
she instructed
Msomi to ensure that
... the
Offer
letter
is
amended to
remove
all reference to funding
for
the
purpose
of
purchasing
shares
in the
Guarantor
[ie
Umoya] - as this will fall foul to S38(1)
and
thereafter require us
to
obtain a
special resolution
as
set out
in
S38(2A)
of
the Act.
23.
On 18
September 2009, Olivier
submitted a revised motivation for the
loan
to
the
Bank's
management
for
approval.
Consistent
with
the advice of both
Green and Dustigar, the
revised motivation omitted any reference to the link between the loan
and the transfer
of
the shares
in
Umoya. The loan, in its revised form, was approved.
24.
On 22 September
2009, Green sent Price an
email to say:
The
Bank
still
requires
sight
of
the
shareholders
agreement. There is no point
in
Mr
Torode
coming down until
all
documents
are
ready.
25.
Price then
prepared
a
sale
of
shares
agreement,
which
he sent
to
Olivier in
draft
under
cover of
an
email
of
the
same
date,
ie
22 September 2009. The
draft sale
of
shares agreement provided for the
sale of 45% of the issued
shares in Umoya
to
the Trust.
I
t
was subject to a
suspensive condition regarding the execution of a shareholders'
agreement by
Umoya,
the then shareholders in
Umoya
and
the
Trust.
26.
The draft sale of shares
agreement then proclaimed that as between
the parties to the sale
of shares agreement (when executed), certain events
which
had never taken
place were to
be regarded
between these parties in
fact (or, more
accurately, counterfactually) as having
taken place.
Firstly,
although the
document acknowledged
that
in
truth
at
the
time the
document
was
to
be executed
the
shareholders
in
Umoya were White and
Lambert, the sale of shares to the Trust was to be backdated to the
"effective date" as defined,
ie 1
March 2009.
27.
Secondly, four amounts of
R250 000 each, which were expressed in the draft to have been paid by
the Trust to CES. the
creditor pressing
Umoya,
over
the
period
14
February
to
7
March
2009,
would
be regarded by them.
retrospectively, as the purchase price paid by the
Trust for the acquisition
of the shares. This meant that the purchase
price
for the shares would no
longer be R2 million as originally agreed
between White and Torode
but R1 million.
28.
In
fact, according
to Torode,
payments totalling
the amount of
R1 million
had been paid at the
instance
of Torode
to
CES for
the
purchase by Torode or the
Trust or a company controlled by Torode
called
Crystal
Wave
Properties
3
(Pty)
ltd
of
terminals
over
the
period 3 to 16 March
2009. The draft committed the parties to the draft to
achieve
this
retrospective
adaptation
of
historical
fact
by
causing
the
necessary
entries to be made in the books and records of [Umoya]
to
give
effect
to
the
intention
of
the
parties pursuant
to
the provisions of
this
Agreement.
29.
The
draft sale of shares
agreement obliged White,
on
the
date upon
which
the
draft
was
actually
signed
by
the
last
of
the
parties,
to
deliver
to the auditors of Umoya
share transfer forms completed by him in negotiable
form and
other documents, all
of
which, where appropriate,
the Trust was then obliged to sign, thus completing the formalities
attendant upon
the
transfer of
the sale
shares to
the
Trust.
30.
Price
also
prepared a
draft
shareholders' agreement
to
regulate
the new
relationship
between
Umoya,
White,
Lambert
and
the
Trust.
The effective
date
of
the
draft
shareholders' agreement
also
proclaimed,
counterfactually, that on its signature, its effective date would be
1 March 2009.
31.
The sale of shares
agreement was drawn subject to the suspensive condition,
which
under
clause
2
could
not
be
waived,
that
the
shareholders' agreement
be executed simultaneously or within 48
hours of the signature
of the sale of shares agreement by the last party to sign it.
32 The shareholders' agreement, if it had been concluded as
drafted, would have reflected White and the Trust as holders of 45%
each of the equity in Umoya and Lambert as the holder of the
remaining 10%. The draft committed Umoya to procuring a loan to the
maximum of R2 million from a bank with the Trust as the actual
borrower and to standing surety for the obligations of the Trust
to
the lender. It also committed Umoya (between the parties to the
shareholders' agreement) to be primarily responsible for the
repayment of the loan.
33. In fact, the draft sale of shares and shareholders' agreements
were never signed. But for reasons not explained in the evidence,
Olivier wrote in an email to Green, with copies to other bank
officers, on 22 September 2009:
The said [ie
sale of
shares] agreement
effectively means
that
the
initial
amounts
paid
in Feb
&
March were for the
purchase
of
the
shares,
and
it
stands
to
reason
that
the current
R 2.0
million is a loan to the
shareholder,
thus
not contravening the
relevant section of the Act.
34. By letter dated 23 September 2009, Price wrote to Green
regarding the execution of the documents required to achieve the
advance
of the R2 million by the Bank to the Trust. The letter made
no reference to the execution of the draft sale of shares and
shareholders'
agreements. In a letter of the same date to Olivier,
Price again copied to Olivier the "draft" sale of shares
and shareholders'
agreement.
35. Olivier prepared an amended offer letter (the revised
facility). Clause 1was amended to read: "The facility is for an
amount
of R2 ... million
... which will be utilised to lend to Umoya ... ." Clause
8A(d) was excised. He also prepared a formal loan agreement, which
forms the Bank's cause of action in the present case and was
ultimately signed on behalf of the Trust on 25 September 2009 and
on
behalf of the Bank on 7 October 2009. The revised facility was also
signed by both the Bank and by Torode, on behalf of the
Trust on 24
or 25 September 2009. The R2 million was paid over to the order of
the Trust. I cannot find in the record the precise
date on which the
R2 million was paid but on the probabilities it was after the formal
loan agreement was signed by the bank, ie
7 October 2009, and before
a meeting took place at Price's office on 12 October 2009 in relation
to Umoya's affairs.
36.The meeting was attended by White, Torode, Lambert, Price,
Rosana
(sic)
Hunter (Umoya's financial manager) and Boshoff (a
representative of CES). An agenda was prepared for the meeting. The
first item
on the agenda was the shareholders' agreement. Because of
the interlock between the sale of shares and shareholders'
agreements,
it seems likely that both documents were to be dealt
with. Torode was elected to chair the meeting. But it appears from
the minutes,
which Price drafted, that the business proper of the
meeting began with a discussion of item 10, the status of CES and
then progressed
to a discussion of matters concerning Eskom, possibly
agenda item 15.
37. At some stage during the meeting, although there is no
reference to it in the minutes, an argument broke out between White
and
Lambert. The cause of the argument was, according to Torode,
whether Lambert's mother would receive some part of the R2 million
injected pursuant to the loan from the Bank. White refused to agree
to this. The argument became violent. A chair was apparently
thrown
by one of the disputing parties at the other. The meeting, which had
lasted according to the minutes five minutes short
of three hours was
then adjourned without date.
38. But Umoya did not prosper and some four months later it ceased
trading. In the interim, the money advanced to the Trust had been
used to pay Umoya's creditors. During this period, Torode was treated
for discussion purposes as a shareholder of Umoya. But in
fact no
shares in Umoya were ever transferred to him, even informally. No
written sale agreement or shareholders' agreement was
ever concluded.
No oral sale agreement or real
("
saaklike")
agreement pursuant to which the 45% shareholding could
have been transferred (ceded to) Torode or the Trust was suggested in
the
evidence. White remained throughout the period relevant to this
case the holder of 90% of the issued shares in Umoya.
39. I think, because of certain arguments advanced by counsel for
the defendants, I should say something about the pleadings. In
its
declaration, the Bank pleaded as its cause of action the formal loan
agreement, to which the revised offer letter formed an
annexure, the
mortgage bond under which the Trust put up the property as security
and the guarantee executed by Torode.
40. The defendants' plea asserted that the "form and
substance" of the initial offer letter formed the basis of the
agreement
concluded between the parties and that the later variations
were never authorised by the Trust.
[2]
The plea proceeded to allege that the later amendments, which
resulted in the revised offer letter and the formal loan agreement,
were effected to disguise their true purpose, which was to simulate
the transaction identified in the later agreements and conceal
their
true purpose: to provide financial assistance to the Trust to acquire
45% of the issued shares in Umoya in contravention
of s 38. By reason
of the simulation and the contravention of s 38, the formal loan
agreement is, so runs paragraph 2 of the plea,
unlawful, void and
unenforceable.
41. The Bank replicated. The replication alleged knowledge of all
concerned prior to the execution of the formal loan agreement that
the initial offer letter "may" constitute a contravention
of s 38. The replication then proceeds in paragraph 3 to plead
that
the draft sale agreement was prepared by Price. Paragraph 5 of the
replication then asserts that if the facts
constituting
the sale of
the
shares by .. [the
Trust]
pleaded in paragraph 3 above are proved in
the course of the trial,
then
the
loan
agreement
cannot
amount
to
a
contravention
of
[s
38].
42. On these pleadings, counsel for the defendants submitted that
the Bank had admitted the conclusion of the agreement envisaged
in
the terms of the draft sale agreement. I may mention that the only
witnesses to give evidence in relation to the execution of
the draft
sale agreement, Price and Torode himself, both said it was not ever
executed. And it is clear from my analysis of the
pleadings that the
Bank did not admit that the draft sale agreement was executed or
formed the basis of an agreement between its
purported parties. For
one thing, the defendants never pleaded that it did, so no admission
could have been made. The true import
of the replication, in my view,
is the assertion that
if
the draft became proved to have
progressed from being merely a draft to an agreement between its
recited parties, then the agreement
so concluded would not give rise
to a contravention of s 38.
43. Counsel for the defendants further submitted that in fact the
provisions of the initial offer letter prevailed throughout, despite
the terms of the revised offer letter and the formal loan agreement
and that the true purpose of the guarantee by Umoya was to
provide
financial assistance as I have set out.
[3]
44. I cannot agree with this submission. All the parties,
including the Bank, accepted that the form of the transaction as
originally
conceived fell foul of s 38. They were advised, at least
in effect but probably expressly, that if the shares were transferred
away from White to Torode
before
the loan agreement was concluded, they could escape the
strictures of s 38. They wanted to escape these strictures. The
Bank's documentation
was amended to cater for the anticipated new
form of the transaction.
45. Price testified that he held the view that Torode was entitled
to the transfer of the shares by virtue of the stage reached in
the
negotiations between Torode and White. I do not agree and Torode
does not appear ever to have demanded their transfer. But
the
decisive point at this level is that the terms of the formal loan
agreement seen in the context of the revised offer and other
surrounding circumstances left it in no doubt that the guarantee
provided by Umoya under the loan agreement was not linked to any
sale
of shares.
46 From this two things relevant to the present enquiry follow.
Firstly, the parties to the transaction as it was initially
formulated
had all agreed not to proceed with the transaction as so
initially formulated.Secondly, at the date of execution of the formal
loan agreement, there was no obligation on White to transfer the
shares to Torode.
47. The import and reach of s 38, and its predecessor, s
86bis
of the Companies Act, 46 of 1926, have been
authoritatively explained by our courts. The object of the measure is
the protection
of the creditors of a company. Its purpose is to avoid
the company's fund of paid-up capital being used or depleted or
exposed
to possible risk in consequence of transactions concluded for
the purpose of or in connection with the purchase of its shares.
[4]
The purpose to be determined is the purpose of the company performing
the act complained of.
[5]
Although the prohibition is couched in wide and general terms, there
has been a tendency to adopt a much narrower approach to the
section.
[6]
The
prohibition comprises two main elements: the giving of financial
assistance and the purpose for or connection with which it
is
given.
[7]
48. Only the
direct object
and not the
ultimate goal
of
the transaction is relevant. If the direct object is not the
provision of financial assistance by the company for the purchase
of
its shares, then it is irrelevant that the ultimate goal was to
enable a person to purchase those shares.
[8]
If the purpose of the provision of the financial assistance was not,
or would not be, the giving of financial assistance, then
the giving
of assistance is not "in connection with" the purchase of
the company's
shares unless the actual purpose sufficiently resembles the
prohibited purpose.
[9]
49. Counsel for the defendants correctly accepted that the
defendants bore the onus of proving that the transaction was hit by
the
section.
[10]
Torode advanced the money to Umoya in the belief that ultimately
White would agree to transfer the shares to him. But for whatever
reason, after White and Torode agreed no longer to proceed with the
transactions evidenced in the initial offer letter or the draft
sale
of shares agreement or the shareholders' agreement, no agreement was
reached between White and Torode for the purchase by
Torode of shares
in Umoya from White. In fact, the proceeds of the loan from the Bank
were used to pay Umoya's creditors and were
never used or to be used
(there being no agreement in that regard) to procure the transfer of
shares in Umoya to Torode.
50. To that extent, the present case is similar to the situation
in
Johnson v Johnson and Others.
[11]
At p332, the court held that on the facts of that case, neither
of the main protagonists could have contravened s 38
if in fact no
purchase
of shares
took place.
Their intention or belief, the court held, was irrelevant. If
such intention or belief had no basis in fact, then any such
intention
or belief could not alter such facts.
51. In these circumstances, was there a contravention of s 38? The
question is more precisely: did Umoya give the guarantee to the
Bank
for the purpose of or in connection with the purchase by Torode or
the Trust of its shares? Factually, the answer is that
it did not.
Although the initial arrangement was that it would do so, that
arrangement was superceded by no more than a loose promise
to
restructure the transaction so that the transfer of shares would be
unlinked from the provision by Torode or the Trust of loan
capital.
That promise was refined into the draft sale of shares and
shareholders' agreements. But for whatever reason, those draft
agreements were never signed and the anticipated relationships never
materialised. The Trust provided the loan capital to Umoya
against
nothing more than, at best, an implied undertaking by Umoya to repay
it one day. So while even if the
ultimate goal
of the
transaction was to provide in the future for a sale of shares to the
Trust,
[12]
its
direct object
was to generate capital for Umoya. It then follows that
the formal loan agreement was not a simulation but expressed the true
intention
of the parties to that agreement.
52. This conclusion renders it unnecessary to determine the
intention or belief of the Bank, White (acting personally and
representing
Umoya and Torode (representing the Trust). But in case I
am wrong in my conclusion that their states of mind are irrelevant, I
shall shortly state my views in this regard. I think that all
concerned did not particularly care whether the Bank advanced money
and took Umoya's guarantee for the purpose of or in connection with
the purchase by Torode or the Trust of Umoya's shares. They
decided
that the transaction as originally formulated ought not to go ahead
because they accepted that the transaction as so originally
formulated fell foul of s 38. No doubt they hoped that as
reformulated, the loan would not contravene the section. But on the
part of the Bank, its officials failed to take the elementary step of
establishing that the juristic acts envisaged in the draft
sale of
shares and shareholders' agreements were ever performed. In
particular, they were indifferent as to whether the transfer
of
shares in respect of which the Bank had been advised should not be
linked to the loan and the guarantee by Umoya were transferred
to the
Trust before the execution of the formal loan agreement. By their
indifference towards the question whether the transaction
had been
reformulated in fact to escape the reach of s 38, they showed that
they were indifferent to whether or not the transaction
in fact
contravened the section. What they were really concerned about was
whether the documents as redrawn
gave the
impression
that s 38 was not implicated and whether the Bank's
securities in the form of the two guarantees and the mortgage bond
were in place.
53. I think that the main purpose of Umoya and White in giving the
guarantee was to raise funds to keep Umoya afloat. If this had
involved transferring shares to the Trust, I think they would have
acquiesced. The Trust, through Torode, was content to allow
the
proceeds of the loan to be used to keep Umoya afloat and to proceed
in the hope that his negotiations with White would come
to fruition
and the shares would be transferred to him.
54. It follows that the appeal must succeed. The parties agreed
that if the Bank was successful in its claim, the amount owed was
R2
517 554,57 together with interest accruing on this amount at the
Bank's variable prime interest rate (8,5% as at 19 April 2013
plus 55
calculated daily and compounded monthly in arrears from 1April 2013
to
date
of
payment,
both days
inclusive.
Both the formal
loan agreement
provided for the
Bank to
recover
costs
as
between attorney
and client.
55.
The cross-appeal against
the decision by the trial court to non-suit the Trust
in
its
counterclaim
was
predicated
on
a
finding
that
the
loan agreement was
invalid. Having
found
that the loan agreement was not shown to be invalid,
I need not say any
more in this
regard.
56.
It
follows
therefore
that
the
appeal must
succeed and
the
cross-appeal
must fail.
I make the following
order:
1
The appeal succeeds
with costs against the defendants jointly and severally.
2
The
cross-appeal
is
dismissed with costs against the defendants jointly
and severally.
3
The order
of the court below is
altered to
read:
There will be
judgment
for the plaintiff
against the defendants, jointly
and severally
for
R2 517
554,57
together
with
interest accruing on
this amount at the plaintiff's variable prime interest rate (8,5%
as
at
19 April
2013)
plus 5% calculated
daily
and compounded monthly
in
arrear
from
1 April
2013
to
date
of payment,
both days
inclusive.
Portion 278 (a portion of portion 228) of the Farm
Horningklip No.178, registration division IQ, Province of Gauteng
in extent
2,0236 hectares, held under deed of transfer no.
T116885/06 is declared specially executable.
3.3 The claims in reconvention are dismissed
3.4 The defendants, jointly and severally, must pay the
plaintiffs costs of suit on the scale as between attorney and client
in relation to the claims both in convention and in reconvention.
NB Tuchtef
Judge of the High Court
18 May 2016
I agree.
RG Tolmay
Judge of the High Court
May
2016
I agree
TAN Makhubele
Acting judge of the High Court
May
2016
GrindrodTorodeAB03.14
[1]
We were told from the bar that there is a further action pending
between the same parties in which the Bank seeks to hold the
Trust
liable for the monies advanced on the basis of unjustified
enrichment and Torode liable on the suretyship. Nothing in this
judgment should be taken as an expression of opinion on the merits
of that action.
[2]
Ultimately, the defence that the latter agreements were not
authorised by the Trust was abandoned.
[3]
Strictly speaking, I think, the defendants pegged their s 38 defence
to the proposition that the operative agreement between
the parties
remained the initial facility. But it was not suggested in argument
that the defence was so limited. Ishall therefore
proceed on the
basis that the defence was intended to apply regardless of the terms
of the operative agreement or agreements.
[4]
Lewis v Oneanate (pty) Ltd
[1992] ZASCA 174
;
1992 4 SA 811
A 818A-C
[5]
Lipschitz NO v UDC Bank Ltd
1979 1 SA 789
A 805
[6]
Lipschitz NO v UDC Bank Ltd
1979 1 SA 789
A 797H-798A
[7]
Lipschitz NO v UDC Bank Ltd
1979 1 SA 789
A 799
[8]
Gardner and another v Margo
[2006] 3 All SA 229
SCA para 47
[9]
Lipschitz NO v UDC Bank Ltd
1979 1 SA 789
A 804-5
[10]
Evrard v Ross
1977 2 SA 311
D 317
[11]
1983 2 SA 324
W
[12]
A question which we need not decide.