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[2007] ZASCA 43
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Ghersi and Others v Tiber Developments (Pty) Ltd and Others (84/06) [2007] ZASCA 43; [2007] 4 All SA 847 (SCA); 2007 (4) SA 536 (SCA) (29 March 2007)
Links to summary
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case number : 84/06
Reportable
In the matter between :
STEFANO BRUNO GHERSI
......................
1
ST
APPELLANT
MICHELE VITTORIO GHERSI
......................
2
ND
APPELLANT
PHARMTEC SA
......................
3
RD
APPELLANT
and
TIBER DEVELOPMENTS (PTY) LTD
......................
1
ST
RESPONDENT
FRANCESCO RIVERA
......................
2
ND
RESPONDENT
STEVEN DAVID SCOTT
......................
3
RD
RESPONDENT
GASPAR DA
SILVA CARDOSO
......................
4
TH
RESPONDENT
CORAM : HOWIE P,
CLOETE, JAFTA, PONNAN
et
CACHALIA JJA
HEARD : 15 MARCH 2007
DELIVERED : 29 MARCH 2007
Summary: Section 266 of the
Companies Act, 61 of 1973: The mandate of a
provisional
curator
ad
litem
to
investigate the affairs of the company is limited to the grounds
alleged in the shareholder’s application to court; but a
court
may in certain circumstances authorise the institution of legal
proceedings against the company based on wider grounds.
Neutral citation: This
judgment may be referred to as
Ghersi
v Tiber Developments (Pty) Ltd
[2007]
SCA 43 (RSA).
_________________________________________________________________________
JUDGMENT
CLOETE
JA
/
CLOETE JA:
[1] The Ghersi and Rivera families around whom this
litigation primarily revolves have been involved in the construction
industry
in South Africa since Mr Bruno Ghersi and Mr Paolo Rivera
came to this country at the end of the Second World War and built
Tiber
Mansions in Rosebank, Johannesburg. It is unnecessary to set
out all the complex and at times confusing inter-relationships which
existed from time to time between them in the corporate vehicles
which they used to advance their business interests. The following
summary will suffice. The first respondent, Tiber Developments (Pty)
Ltd (‘the Company’), was established in 1976. In
1983 it
was restructured so that 45% of the shares were held by the Ghersi
family and 55% by the Rivera family and the fourth respondent.
The
shareholding of the Ghersi family is held by the appellants. The
second, third and fourth respondents, Messrs Francesco Rivera,
Steven
David Scott and Gaspar da Silva Cardoso, became directors of the
company in 1973, 2000 and 1988 respectively. After the 1983
restructuring of the company, the second, third and fourth
respondents undertook property developments through companies in
which
members of the Ghersi family had no interest. In due course
Tiber Projects (first a closed corporation and later a company) was
formed.
The shareholders of Tiber Properties were effectively the
second and third respondents and Mr Germano Cardoso, the son of the
fourth
respondent, and they were also the directors of that company.
In 1991 Tiber Properties was appointed by the Company to manage its
affairs.
[2] The appellants, as the shareholders of the company,
sought redress against the second to fourth respondents, the
directors of
the Company, in terms of s 266 of the Companies Act, 61
of 1973. That section provides:
‘
(1)
Where a company has suffered damages or loss or has been deprived of
any benefit as a result of any wrong, breach of trust or
breach of
faith committed by any director or officer of that company or by any
past director or officer while he was a director or
officer of that
company and the company has not instituted proceedings for the
recovery of such damages, loss or benefit, any member
of the company
may initiate proceedings on behalf of the company against such
director or officer or past director or officer in
the manner
prescribed by this section notwithstanding that the company has in
any way ratified or condoned any such wrong, breach
of trust or
breach of faith or any act or omission relating thereto.
(2)
(a) Any such member shall serve a written
notice on the company calling on the company to institute such
proceedings within one month
from the date of service of the notice
and stating that if the company fails to do so, an application to the
Court under paragraph
(b) will be made.
(b) If the company fails to institute
such proceedings within the said period of one month, the
member
may make application to the Court for an order appointing a
curator
ad litem
for the company
for the
purpose of instituting and conducting proceedings on behalf of the
company against such director or officer or past director
or officer.
3. The Court on such application, if it
is satisfied ─
(a) that the company has not instituted
such proceedings;
(b) that there are
prima
facie
grounds for such proceedings; and
(c) that an investigation into such
grounds and into the desirability of the institution of such
proceedings is justified,
may appoint a provisional
curator ad litem
and
direct him to conduct such investigation and to report
to the Court on the return day of the
provisional order.
(4) The Court may on the return day
discharge the provisional order referred to in subsection (3)
or confirm the appointment
of the
curator ad litem
for
the company and issue such directions as to the
institution of proceedings in the name of
the company and the conduct of such proceedings on behalf
of the company by the
curator ad litem
, as
it may think necessary and may order that any resolution
ratifying or condoning the wrong, breach
of trust or breach of faith or any act or omission in relation
thereto shall not be of any force or
effect.’
A provisional curator was appointed by the Johannesburg
High Court but the provisional order was discharged on the return day
by Fevrier
AJ. It is against that order which the appellants appeal,
with the leave of this court.
[3] The purpose of s 266 is, briefly stated, to create a
remedy whereby delinquent directors or officers of a company can be
compelled
to compensate the company for a wrong committed by them,
whilst seeking to minimise the risk of unmeritorious claims being
brought
against the company by disaffected shareholders.
1
For present purposes, it is necessary to emphasise that
the section seeks to achieve this latter object by what has aptly
been categorised
as a ‘dual screening procedure’.
2
At the first stage, when the appointment of a
provisional curator
ad litem
is
sought, the court must be ‘satisfied’ inter alia that
there are prima facie grounds for the proceedings that the member
seeks to have instituted against the company. This requirement would
be fulfilled:
‘
.
. . where there is evidence which, if accepted, will show a cause of
action. The mere fact that such evidence is contradicted would
not
disentitle the applicant to the remedy. Even where the probabilities
are against him, the requirement would still be satisfied.
It is only
where is it quite clear that he has no action, or cannot succeed,
that [a remedy] should be refused . . . on the ground
here in
question.’
3
The court also has to be satisfied at the first stage
that an investigation into the grounds alleged by the shareholder and
the desirability
of the institution of the proceedings proposed, is
justified. At the second stage, on the return day, when the court has
to consider
whether to discharge the provisional order or to confirm
the appointment of the curator, the section envisages that it will
have
the advantage of a report by the provisional curator dealing
inter alia with his investigation into the grounds for the
proceedings
proposed by the member. A decision by the court that
proceedings should be instituted by the curator can have serious
implications
for the company concerned, its directors and members. It
therefore goes without saying that a proper report by the provisional
curator
is vital to the exercise by the court of the powers vested in
it by s 266(4).
[4] The provisional curator is not confined in the
investigation to the remedies suggested by the shareholder.
4
The provisional curator is, however, confined in the
investigation to the grounds advanced by the shareholder in the
application (not
the statutory notice, because a shareholder may
decide to jettison some of these grounds in the application to
court). It is the
grounds advanced in the application which
constitute the basis of the finding by the court that a prima facie
case for the appointment
of a curator has been made out and therefore
the ambit of the mandate given to the curator by the court is
confined to those grounds.
Consequently, although a provisional
curator has the powers of an inspector under s 260 of the Act,
5
the order of court appointing the provisional curator
must be interpreted as being limited to this purpose.
6
If a provisional curator seeks to go outside his mandate
the directors or officers of the company could refuse to cooperate or
interdict
him from doing so. What would ordinarily be required for
the investigation to continue in such a case would be an
amplification of
the provisional curator’s mandate by the
court, based on a prima facie case that the new grounds exist and
should be investigated;
and it is a shareholder, not the curator (and
not necessarily the same shareholder who brought the original
application) who would
have to bring such an application, after a
notice to the company in terms of s 266(2)(a) had been served on the
company. Nevertheless,
form should not be allowed to defeat the
purpose of the section. It is conceivable that a court might be
satisfied that the company
would not institute proceedings even if
given the statutory notice, that the new grounds not specified in the
order appointing the
provisional curator had been adequately
investigated and that the institution of proceedings on those grounds
would be desirable.
In such a case a court could, at the instance of
a shareholder, legitimately confirm the appointment of the
provisional curator to
enable the latter to institute action based on
such grounds. The alternative would be for the court to require
formal compliance
with the requirements of s 266(2) and (3) ─ a
hollow exercise if the resultant confirmation would be a foregone
conclusion.
7
Such cases will, however, be rare.
[5] I return to the facts of the present matter. The
appellants served a statutory notice dated 27 November 2003 on the
company. The
notice required the company to institute proceedings
against the directors for payment of amounts totalling
R98 288 446,53,
allegedly misappropriated by the directors
in one way or another; interest on such amounts, totalling
R122 759 992; and
a statement of account of transactions
undertaken by the directors which had been improperly funded by the
Company together with
an order compelling the directors to pay to the
Company the profits (past and future) made from such transactions.
The Company instructed
its auditors, KPMG, to investigate the
allegations made in the notice, and after consideration of this
report, it took a formal decision
not to institute the proceedings.
The appellants brought an application in the Johannesburg High Court
for the appointment of a provisional
curator
ad
litem
. The application was not opposed by the
company or the directors, who took up the attitude that the grounds
alleged in the founding
affidavit were without foundation but that
they had nothing to hide, and it was granted subject to all questions
relating to costs
being reserved.
[6] The notice of motion followed the terms of the
statutory notice, with one possible exception. The appellants’
counsel argued,
and the respondents’ counsel disputed, that the
statutory notice referred to misappropriation of corporate
opportunities divorced
from the allegation that company funds had
been misappropriated. It is not necessary to resolve the dispute as
the appellants’
counsel was constrained to concede that there
was no such allegation in the notice of motion. In the founding
affidavit, the purpose
of the application was thus stated:
‘
As
will appear more fully hereunder, this application has been brought
with a view to legal proceedings being instituted by [the Company]
against three of its directors, Rivera, Cardoso and Scott (“
the
implicated directors
”
)
whom, the Applicants maintain, have misappropriated, or unlawfully
withdrawn funds from [the Company] which they have utilised for
their
own private purposes. The funds concerned were paid to, and utilised
by certain companies, in which [the Company], subject
to what is
stated in 21 has no shareholding or other financial interest
whatsoever, and which have been described in the financial
statements
of [the Company] as “
affiliated
companies
”
.
The implicated directors or their nominee are members of the
affiliated companies
and the
affiliated
companies
are
controlled by the implicated directors or their nominees.’
Misappropriation of the Company’s funds was the
repeated refrain in the allegations which followed. There was no
allegation
that the directors had misappropriated corporate
opportunities, as opposed to, or independently of, the alleged
misappropriation
of funds of the Company. The appellants’
counsel sought to contend the contrary, relying on the following
paragraph of the
founding affidavit:
‘
In
respect of transactions of the
affiliated
companies
where
funds and assets of [the Company] were not so deployed by the
implicated directors, I am advised and submit, that the implicated
directors are nonetheless accountable to [the Company] for the secret
profits made because they embarked upon those opportunities
in
competition with [the Company], in circumstances where [the Company]
declined the opportunity to participate itself in those
opportunities,
because of the false picture which had been created by
the implicated directors in the minds of the directors who
represented the
Applicants, namely John Ghersi and myself, that [the
Company] had limited resources with which to pursue some of the
corporate opportunities
concerned, when that situation was
attributable to the misappropriation and/or unlawful lending of [the
Company’s] funds to
the
affiliated
companies
at
the instance of the implicated directors.’
Counsel’s reliance on this paragraph is misplaced.
The allegations in that paragraph also have as their foundation the
allegation
that monies of the company were misappropriated: the
reason why the Company did not pursue opportunities, according to the
appellants,
is because the directors represented that it did not have
the funds to do so whereas, according to the appellants, the reason
why
there was no money in the Company was precisely because funds of
the Company had been misappropriated.
[7] The curator went about his task conscientiously. The
Company made available to him 2000 pages of documents which he
collated,
paginated and indexed in six files. In view of the
complexity of the accounting issues which required forensic
investigation, he
retained the services of an acknowledged expert in
the field, Professor Wainer, who furnished him with a report. The
Company commissioned
a separate forensic accounting report by
PricewaterhouseCoopers. The provisional curator examined the deponent
to the founding affidavit,
Mr Paolo Michele (Michael) Ghersi, the
second applicant, Mr Michele Vittorio Ghersi, and the second and
third respondents, Messrs
Francesco Rivera and Steven David Scott,
over a period of eight days. Not surprisingly, in view of the
contents of the notice of
motion and the allegations in the founding
affidavit, the provisional curator concentrated on the allegation
that funds of the Company
had been misappropriated. The curator
produced a 129 page report which dealt in detail with his
investigation and the views he had
formed, which were fully
motivated. He came to the following conclusions:
‘
The
claim advanced in the application for payment of R98 288 446,53
cannot be sustained.
. . .
The claim for interest which is sought to
be recovered in the sum of R122 759 992 is not based on
valid grounds . . .
. . .
At present, there has been
no loss or damage or deprivation of opportunity as a result of the
contravention of s 226 of the Companies
Act or any breach or
fiduciary duties by the named directors
on any
grounds set out in the application
.’
(Underlining supplied.)
The provisional curator went on, however, to recommend
the institution of proceedings against the directors for a statement
of account
of all property developments and opportunities undertaken
by them (direct or indirectly) over the previous 23 years which were
not
offered to the Company, for debatement of the account and for
payment of all profits (present and future) made by them. In making
this recommendation, the provisional curator went outside his
mandate. The question which arises, however ─ assuming in
favour
of the appellants that the Company would not have instituted
proceedings had the statutory notice been served on it ─ is
whether
there was nevertheless a proper investigation on the strength
of which the court
a quo
could
legitimately have granted the relief recommended by the provisional
curator. The appellants’ counsel submitted that there
was. I
disagree.
[8] The curator investigated the competing versions as
to the shareholders’ agreement which both sides contended
existed, and
rejected both. He then said:
‘
I
am of the view that no agreement has been demonstrated which relieved
the named directors of their fiduciary duties which required
them to
present each opportunity identified by them for property development
to [the Company] for consideration by the Board of Directors
of [the
Company] or which released to them or to companies in which they had
an interest the opportunities not presented by them
through Tiber
Projects to [the Company].’
It is in this respect that the investigation by the
curator was inadequate to support the relief recommended by him. What
would have
been required absent amplification of the provisional
order was an investigation of the ambit of the fiduciary duty owed by
the directors
to the Company; an examination of the property
developments undertaken by the directors to ascertain whether they
should have been
offered to the Company in compliance with that
fiduciary duty; and an investigation as to the extent of profits
earned from those
developments.
[9] It does not follow that because a person is a
director of a company which engages in property development, such
person is automatically,
in the absence of an agreement to the
contrary, obliged to offer all property developments of whatever
nature to the company, on
pain of being held to have breached his or
her fiduciary duty to the company and being required in consequence
to hand over profits
made from the developments not so offered. As
Bristowe AJA held in
Robinson v Randfontein
Estates Gold Mining Co Ltd
:
8
‘
To
establish that the defendant’s purchase in 1906 was covered by
his fiduciary relation or his agency or an implied mandate
(I do not
think it makes much difference which term is employed) it would not
be enough to show that the purchase was within the
company’s
power or that the property might have been useful to it.
Burland
v Earle
is
against this. Besides it would be intolerable if a director, even
though occupying the defendant’s position, could be held
accountable for any private purchase of property merely because his
company might conceivably want it.’
That the ambit of the duty can change from time to time,
appears from the decision of this court in
Bellairs
v Hodnett
.
9
In summary, as this court held in
Phillips
v Fieldstone Africa (Pty) Ltd
:
10
‘
The
existence of [a fiduciary duty] and its nature and extent are
questions of fact to be adduced from a thorough consideration of
the
substance of the relationship and any relevant circumstances which
affect the operation of that relationship …’.
11
Such an investigation was not adequately performed by
the provisional curator. In particular, the business that the Company
was actually
carrying on or intended to carry on at the time when
each development was undertaken was not sufficiently identified. Nor,
indeed,
were most of the developments undertaken by the directors
over the 23 year period stipulated by the curator identified at all.
It
does not suffice, as was submitted on behalf of the appellants,
for the curator to recommend the institution of proceedings where
the
directors would be obliged, as a first step, to provide a statement
of all property developments undertaken by them and not offered
to
the Company. The anterior question is what property developments, if
any, the directors were required to offer to the Company;
and that
depends as much on the extent of the fiduciary duty owed by them to
the Company from time to time as it
does on an identification of the property developments
themselves. In addition the investigation into profits made in some
property
developments ─ which may or may not have been in
breach of the directors’ fiduciary duties ─ was
superficial. Only
a handful of property developments out of scores
which were undertaken in the past 20 or so years by the 15 companies
involved were
even mentioned and the curator’s examination of
the second respondent in this limited regard was prefaced by the
introduction:
‘Just by way of interest were all of these
properties besides this one which you told you have lost money on,
were they profitable
projects or were there others on which money was
lost?’ The reply was in fairly general terms.
[10] All in all, the investigation of the provisional
curator does not provide a sufficient basis for the massive
litigation recommended
by him. Of course, the scope of the litigation
is not itself a reason for refusing confirmation of the rule; but
before the Company
and the directors are put to the inconvenience and
expense of such litigation, the court must be in a position properly
to exercise
the powers conferred on it in terms of s 266(4). That, of
necessity, requires a proper report from the provisional curator. It
is
not necessary to consider what remedies the shareholder who has
brought s 266 proceedings has when the provisional curator’s
report is inadequate. In the present matter the appellants supported
the recommendation of the curator on the basis of his report.
In the
circumstances the court
a quo
was
correct in discharging the provisional order.
[11] The appeal is dismissed with costs, including the
costs of two counsel.
______________
T D CLOETE
JUDGE OF APPEAL
Concur: Howie P
Jafta JA
Ponnan JA
Cachalia JA
1
Commission
of Enquiry into the Companies Act
,
Main Report RP 45/1970 para 42.10-18.
2
Blackman
Jooste & Everingham,
Commentary
on the Companies Act
vol 2 p 9-177.
3
Bradbury
Gretorex Co (Colonial) Ltd v Standard Trading Co (Pty) Ltd
1953 (3) SA 529
(W) at 533C-E. See also
Brown
v Nanco (Pty) Ltd
1976 (3) SA 832
(W)
at 835D.
4
Thurgood
v Dirk Kruger Traders (Pty) Ltd
1990 (2) SA 44
(E) at 52I-53C,
distinguishing
Loeve v Loeve Building and Civil Engineering
Contractors (Pty) Ltd
1987 (2) SA 92
(D).
5
In
terms of s 267(1) but subject to s 267(2) of the Companies Act.
6
Loeve’s
case above, n 4, p 102B-E.
7
I
therefore respectfully disagree with the decision in
Loeve
(above, n 4, at 101F-I) to the extent that it
holds the contrary.
8
1921
AD 168
at 268.
9
1978
(1) SA 1109
(A) at 1128A-1134D.
10
2004
(3) SA 465
(SCA) at 477H.
11
See
also
Howard v Herrigel NNO
[1991] ZASCA 7
;
1991 (2) SA 660
(A) at 678B-C.