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[2007] ZASCA 19
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Smith v Porritt and Others (536/05) [2007] ZASCA 19; [2007] SCA 19 (RSA); 2008 (6) SA 303 (SCA); (23 March 2007)
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THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case no: 536/05
In the matter
between:
D H S SMITH
......................
APPELLANT
and
G P
PORRITT
......................
1
st
RESPONDENT
SYNERGY MANAGEMENT
(PTY) LTD
......................
2
nd
RESPONDENT
L F PERREIRA, NO;
B PIETERSEN, NO
......................
3
rd
RESPONDENT
The Liquidators in
EBN Trading (Pty) Ltd
(In Liquidation)
L F PERREIRA, NO;
B PIETERSEN NO
......................
4
th
RESPONDENT
The Trustees in the
Awethu Trust
(In sequestration)
THE MASTER OF THE
HIGH COURT
PIETERMARITZBURG
......................
5
th
RESPONDENT
_____________________________________________________________________________
CORAM
: SCOTT,
STREICHER, BRAND, PONNAN
et
COMBRINCK JJA
DATE OF HEARING
: 8
MARCH 2007
DATE
OF DELIVERY
: 23 MARCH 2007
Summary
: Insolvency – application to
set aside subpoena to attend creditors meeting – defence of
res
judicata
not available to
sequestrating creditor whose claim is challenged by the trustee.
Neutral
citation:
This judgment may be
referred to as
Smith v Porritt and
others
[2007] SCA 19 (RSA)
_____________________________________________________________________________
JUDGMENT
SCOTT JA/…..
SCOTT JA:
[1] The appellant, a superintendent in the SAPS, was subpoenaed to
attend a meeting of creditors in EBN Trading (Pty) Ltd (in
liquidation)
and, on a different day, a meeting of creditors in
Awethu Trust (in sequestration). The subpoena to attend the former
was issued
by the Master in terms of the provisions of s 414 (2) read
with s 415 (2) of the Companies Act 61 of 1973. The subpoena to
attend
the latter was issued by the Master by virtue of his powers in
terms of s 64 of the Insolvency Act 24 of 1936. (The subpoena refers
incorrectly to s 414(2) of the Companies Act but no issue was made of
this.) The appellant applied to the High Court, Pietermaritzburg,
for
an order setting aside the subpoenas. The application was heard by
Msimang J who dismissed it with costs but granted the appellant
leave
to appeal.
[2] The first respondent is Mr Gary Porritt. I shall refer to him by
name. The second respondent is Synergy Management (Pty) Ltd
(‘Synergy’). Porritt is one of its directors. The third
and fourth respondents are the liquidators and trustees respectively
of EBN Trading (Pty) Ltd (in liquidation) and Awethu Trust (in
sequestration). I shall refer to the former as EBN and to the latter
as Awethu. The fifth respondent is the Master. No relief was sought
against the third, fourth and fifth respondents in the court
below.
[3] Final orders of liquidation and sequestration were granted by
Theron J against EBN and Awethu respectively on 4 February 2004.
The
applicant in those proceedings was PSC Guaranteed Growth Ltd (in
liquidation). I shall refer to it as PSC. The applications were
strenuously opposed by both EBN and Awethu. Both denied indebtedness
to PSC. After hearing oral evidence the court found that the
respondents were indebted to PSC and that the latter accordingly had
locus standi
to seek the orders in question. Porritt is a
former director of EBN and a former trustee of Awethu.
[4] Porritt is a creditor of EBN. Synergy is a creditor of Awethu.
The subpoena in the EBN matter was issued at the instance of Porritt
and the subpoena in the Awethu matter at the instance of Synergy. In
terms of the former the appellant was required to produce at
the
meeting ‘the books, records and documents’ or copies
thereof, relating to the claim proved by PSC in his possession
or
under his control. They were further identified by reference to the
persons or entities from whom the appellant would have received
them.
The subpoena in the Awethu matter was in similar but not identical
form. The documents sought were those ‘relating to
Awethu and
the claim proved by PSC against Awethu’. Both subpoenas
required the presence of the appellant ‘in order that
[he] may
be examined’.
[5] In his founding papers the appellant sought to have the subpoenas
set aside essentially on two grounds. The one was that the
documents
were privileged. The other was that the issuing of the subpoenas
amounted to an abuse of the process in that they were
issued with the
ulterior motive of prematurely obtaining information relevant to
ongoing criminal investigations involving Porritt
and others.
Porritt, it appeared, had been arrested but released on bail as long
ago as 14 December 2002.
[6] The appellant in his founding affidavit referred at some length
to the allegations of criminal conduct involving Porritt and
others
which he was in the process of investigating. Much of this evidence
was irrelevant. What was relevant related to Porritt’s
alleged
conduct in relation to PSC. Shortly stated, it was this. In April
2000 Porritt and others established PSC, an investment
company, which
was to compete in the unit trust industry. Contrary to
representations contained in the prospectus, funds received
by it
from investors were channelled to entities controlled by Porritt,
including EBN and Awethu. The claims subsequently relied
upon by PSC
(then under provisional liquidation) in its application for the
liquidation and sequestration of EBN and Awethu respectively,
were
for the repayment of the amounts so paid to EBN and Awethu which were
said to have been loans. The claim against EBN was for
some R104m and
against Awethu for R51m.
[7] In his answering affidavit, Porritt denied that the documents
sought were privileged and that the subpoenas amounted to an abuse
of
the process. He said that by virtue of his involvement in the
transactions he knew that the true position was that PSC’s
debtor was Synergy, not EBN and Awethu, and that Synergy had
subsequently ‘settled its debt to PSC by the acquisition of
shares
for and on behalf of PSC’. He said that the books and
records of PSC that would establish the truth of his assertion had
been
removed by the appellant from the custody of the provisional
liquidators (who were not the same as the liquidators who were
finally
appointed) and their attorney, Mr Alec Brooks, as well as
from PSC’s auditors and its former chairman, Mr Jack Milne.
Porritt
contended that these books and records included monthly loan
statements sent by Synergy to PSC as well as the auditors’
working
papers and other documents, all of which reflected that
Synergy, not EBN and Awethu, was PSC’s true debtor. He said he
needed
the documents to persuade the third, fourth and fifth
respondents to reject PSC’s claim against EBN and Awethu or,
failing
that, to substantiate an objection in due course to third and
fourth respondents’ distribution accounts. In letters dated 3
March and 10 March 2005 (copies of which were annexed) Porritt
requested the Master to issue the subpoenas in question to enable
PSC’s claim to be properly examined. In the same letter he
recorded that the head liquidator of PSC, Mr Ivor Van Diggelen,
had
similarly been unable to obtain the records and books of PSC and
accordingly unable to proceed with the business of winding-up
the
affairs of PSC. Van Diggelen, himself had earlier written a letter to
the Master (a copy of which was similarly annexed to Porritt’s
affidavit) in which he had expressed doubts as to the validity of
PSC’s claim against EBN and Awethu and indicated that there
was
evidence to suggest that the assets of PSC may be elsewhere.
[8] Whether Porritt’s contentions regarding PSC’s claims
will ultimately prevail need not and cannot be decided on the
papers.
He does, however, present an obvious case for the production of the
documents specified in the subpoenas. Counsel for the
appellant,
nonetheless, argued that Porritt’s true motive was to obtain
information relating to the criminal investigation
against him
prematurely. The reason for this inference, he said, was that the
documents could not assist Porritt in his contention
that PSC’s
claims against EBN and Awethu were invalid because this issue had
already been decided by Theron J in the liquidation
and sequestration
proceedings and in the absence of an appeal the judgment was binding
on the third and fourth respondents.
[9] In
Swadif (Pty) Ltd v Dyke NO
1978 (1) SA 928
(AD) at 945B
Trengove AJA said:
‘
A
trustee or liquidator is not privy to the insolvent or the company in
liquidation. He is not bound by any judgment against the insolvent
or
the company to which he was not a party, and a plea of
res
judicata
cannot be
raised against him in respect of such a judgment because he does not
derive his authority from the insolvent or the company;
he has an
independent right of action under the Act.’
Relying on a passage in Meskin
Insolvency Law
para 4.20 in
which the learned author comments on the above statement, counsel for
the appellant submitted that a trustee or liquidator
was privy to the
insolvent or company in liquidation (and hence bound by any judgment)
save only in relation to rights afforded to
the trustee or liquidator
by virtue of his or her office whether under the
Insolvency Act or
the common law. This understanding of the learned judge’s
statement, I think, is undoubtedly correct. An example of a right
under the Act would be the right to attack a transaction as being an
undue preference; an example of a right at common law would
be the
right to attack a judgment procured collusively and in fraud of
creditors. (See eg
Shokkos v Lampert
NO
1963 (3) SA 421
(W).)
Counsel argued that the third and fourth respondents had no such
rights in the present case and accordingly could not set aside
PSC’s
claim. But the judgment which it is contemplated would be binding on
the trustee or liquidator is a judgment in respect
of which a plea of
res judicata
could be raised. What must be decided is whether
the judgment of Theron J is such a judgment in relation to PSC’s
claims against
EBN and Awethu.
[10] Following the decision in
Boshoff v Union Government
1932
TPD 345
the ambit of the
exceptio rei judicata
has over the
years been extended by the relaxation in appropriate cases of the
common law requirements that the relief claimed and
the cause of
action be the same (
eadem
res
and
eadem petendi
causa
) in both the case in question and the earlier judgment.
Where the circumstances justify the relaxation of these requirements
those
that remain are that the parties must be the same (
idem
actor
) and that the same issue (
eadem quaestio
) must
arise. Broadly stated, the latter involves an inquiry whether an
issue of fact or law was an essential element of the judgment
on
which reliance is placed. Where the plea of
res judicata
is
raised in the absence of a commonality of cause of action and relief
claimed it has become commonplace to adopt the terminology
of English
law and to speak of issue estoppel. But, as was stressed by Botha JA
in
Kommissaris van Binnelandse Inkomste v Absa Bank BPK
1995
(1) SA 653
(A) at 669D, 670J-671B, this is not to be construed as
implying an abandonment of the principles of the common law in favour
of those
of English law; the defence remains one of
res judicata
.
The recognition of the defence in such cases will however require
careful scrutiny. Each case will depend on its own facts and any
extension of the defence will be on a case by case basis. (
KBI v
Absa Bank
supra
at 670E-F.) Relevant considerations will
include questions of equity and fairness not only to the parties
themselves but also to others.
As pointed out by De Villiers CJ as
long ago as 1893 in
Bertram v Wood
10 SC 177
at 180, ‘unless
carefully circumscribed, [the defence of
res judicata
] is
capable of producing great hardship and even positive injustice to
individuals’.
[11] In seeking a final order of liquidation and sequestration
against EBN and Awethu respectively, PSC was obliged to establish
on
a balance of probabilities that it had the necessary
locus standi.
That in turn involved establishing that it was a creditor of both.
(In the case of the Awethu application, it would have had to
establish
no more than that it had a liquidated claim of not less
than ‘fifty pounds’.) Theron J found in favour of PSC on
this
issue and granted final orders. But the determination of this
issue, ie the issue of
locus standi
, did not require a final
determination of the extent of PSC’s claims. To this extent, at
least, it did not, therefore, amount
to a final determination of
PSC’s claims as would have been the case had the judgment been
one in pursuance of claims sounding
in money. But there is, in my
view, another sound reason for not holding a liquidator or trustee
bound by the court’s acceptance
of the applicant creditor’s
claims in liquidation or sequestration proceedings for the purpose of
establishing
locus standi
. Were the liquidator or trustee to
be so bound he would be precluded from challenging the claim
regardless of any information that
may come to light in the course of
winding-up the affairs of the company or estate. He could not appeal
the judgment, nor could he
seek to have it set aside; his
locus
standi
is dependent on it. He could, as a consequence, be
compelled to prepare a distribution account which he knew wrongly
favoured the
applicant creditor and prejudiced the other creditors.
The undesirability of such a result need hardly be stressed. In
practice so-called
‘friendly’ sequestrations and
liquidations are common place. The motive of the creditor instituting
proceedings in such
cases is more often than not simply to assist the
insolvent or company. To preclude a liquidator or trustee from
reassessing the
claim of a creditor who had obtained the liquidation
or sequestration order would inevitably result in unfair
distributions and prejudice
to the other creditors. Such a result
would clearly be contrary to the interests of justice. While it is
undoubtedly so that the
requirements of
eadem res
and
eadem
petendi causa
are not immutable requirements of the
exceptio
rei judicata
and may be relaxed in appropriate circumstances, no
such relaxation would be appropriate in circumstances such as the
present. In
other words, a creditor such as PSC, in my judgment, is
not entitled to rely on the defence of
res judicata
based on a
judgment granting a final order of liquidation or sequestration in
the event of the liquidator or trustee subsequently
challenging the
validity or extent of the creditor’s claim.
[12] It follows that if the third and fourth respondents were to be
persuaded that PSC’s claims are without merit they would
not be
precluded from seeking to have them rejected. I should add that even
if they were not so persuaded, Porritt and Synergy would
still be
free to object to their final distribution accounts in terms of
s 111
of the
Insolvency Act. Porritt
and Synergy were not parties to the
liquidation and sequestration proceedings in their capacity as
creditors. Should they object
to the accounts in that capacity the
defence of
res judicata
could
a fortiori
not be
successfully raised against them.
[13] As previously indicated, Porritt succeeded in making out a case
on the papers that the documents which the appellant is required
to
produce in terms of the subpoenas could assist him in showing that
PSC’s claims are ill-founded. There is accordingly no
basis for
setting aside the subpoenas on the grounds that the documents would
serve no purpose; nor is there anything in the papers
to justify the
inference that Porritt’s true motive was to obtain access to
the documents prematurely.
[14] A further ground advanced in support of the contention that the
subpoenas should be set aside as constituting an abuse of the
process
of the court was that they required the personal attendance of the
appellant at the meetings ‘in order that [he] may
be examined
in terms of the provisions of
s 415(1)
of the [Companies] Act’.
(In the Awethu matter the reference should have been to
s 65
of the
Insolvency Act.) The
appellant’s case was that he had no
knowledge that could have assisted Porritt and Synergy in persuading
the third and fourth
respondents to take steps to have the claims of
PSC expunged and that the real object of having him examined was to
obtain information
regarding the police investigation. Once again, I
do not think the inference the appellant seeks to draw can be
justified. The appellant
could presumably be of assistance regarding
such matters, for example, as the completeness of the books and
records in his possession
and the possible whereabouts of other
relevant documents. In any event, should questions be put to him
relevant only to the criminal
investigation he would be free to
object on the grounds of privilege or irrelevancy and seek a ruling
of the presiding officer to
that effect. It follows that in my
judgment the appellant failed to establish that the issuing of the
subpoena’s constituted
an abuse of the process.
[15] With regard to the objection based on privilege, it will be re-
called that the documents in question were limited to ‘books,
records and documents’ relating to PSC’s claims against
EBN and Awethu. The reference in the subpoenas to their origin
made
it clear that they were either the books and records of PSC or the
working documents of PSC’s auditors. The only ground
upon which
it was suggested that they were privileged was that the appellant had
taken possession of them in the course of his investigation
into
Porritt’s alleged criminal conduct and that they therefore
‘formed part of the police docket’. Having regard
to the
nature of the documents, that fact alone cannot, in my view, render
them privileged. Indeed, counsel was constrained to concede
that they
could not be withheld from the liquidators of PSC and EBN or the
trustees of Awethu who required them to complete their
task of
winding-up the affairs of those entities. In my view the concession
was well made and the reliance on privilege must fail.
The position
would have been otherwise had the documents comprised witnesses’
statements or other documents directly concerned
with the criminal
investigation.
[16] The appeal is accordingly dismissed with costs.
__________
D G SCOTT JUDGE OF APPEAL
CONCUR:
STREICHER JA
BRAND JA
PONNAN JA
COMBRINCK JA