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[2014] ZAGPPHC 101
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Corinth Trading (Pty) Limited v Greunen and Others (27635/2010) [2014] ZAGPPHC 101 (20 March 2014)
IN THE GAUTENG DIVISION OF THE HIGH COURT
PRETORIA,
REPUBLIC OF SOUTH AFRICA
CASE NO: 27635/2010
DATE: 20 MARCH 2014
In the matter between:
CORINTH TRADING (PTY) LIMITED [in
liquidation]
.....................................
Plaintiff
And
RENEY
VAN
GREUNEN
.............................................................................
First
Defendant
APPOLLO
PALLOURIOSSecond
........................................................................
Defendant
JAMES HENRY
WHEELERThird
.......................................................................
Defendant
JUDGMENT
Tuchten J
:
1
The plaintiff company
(“Corinth”), before its liquidation, functioned as a
vehicle for a venture conducted by the three
defendants. Now under
the control of its liquidators, it sued the three defendants on the
grounds that they had caused Corinth
to trade recklessly. Although a
number of factual allegations supporting the conclusion of
recklessness were pleaded, the case essentially
is that the three defendants used company money to pay themselves
salaries totalling
some R740 000 when at least one creditor, Midlands
Logistics, had not been paid any part of the sum of R608 603 owed by
Corinth
to Midlands Logistics. In addition, the plaintiff relies on
the fact that when Corinth reached the limit of the financing which
its banker was prepared to extend, the defendants caused revenue due
to Corinth to be paid into the second defendant’s bank
account.
2
Although no indication of the
source of the alleged obligation not to trade recklessly was pleaded,
counsel for Corinth made it
plain that Corinth was relying on s 424
of the Companies Act, 61 of 1973. Omitting presently irrelevant
wording, s 424 provides
as follows:
Liability of directors and others for
fraudulent conduct of business
(1)
When
it appears, whether it be in a winding-up, judicial management or
otherwise, that any business ofthe company was or is being
carried on
recklessly or with intent to defraud creditors of the company or
creditors of any other D person or for any fraudulent
purpose, the
Court may. on the application ofthe Master, the liquidator, the
judicial manager, any creditor or member or contributory
of the
company, declare that any person who was knowingly a party to the
carrying on of the business in the manner aforesaid, shall
be
personally responsible, without any limitation of liability, for all
or any of the debts or other liabilities of the
company as the Court may direct.
(2)
(a) Where the Court makes any such
declaration, it may give such further directions as it thinks
properforthe purpose of giving
effect to the declaration, ...
3
The remedy is a punitive one. A
director can be held personally liable for liabilities of the company
without proof of any causal
link between his conduct and those
liabilities. The onus is upon the party alleging recklessness to
prove it and, in civil proceedings,
to establish the necessary facts
on a balance of probabilities.
4
Knowingly, in this context, means
having knowledge of the facts from which the conclusion is properly
to be drawn that the business
of the company was or is being carried
on recklessly; it does not entail knowledge of the legal consequences
of those facts. It
follows that knowingly does not necessarily mean
consciousness of recklessness.
5
Being a party to the conduct of
the company's business does not have to involve the taking of
positive steps in the carrying on
of the business; it may be enough
to support or concur in the conduct of the business.
6
Recklessness does not connote
mere negligence but at the very least gross negligence. A person can
act recklessly if he acts in
a manner which is grossly careless: ie
does something which in fact involves a risk, whether the doer
realises it or not; and the
risk being such, having regard to all the
circumstances, that the taking of that risk would be described as
reckless. It includes
an attitude or state of mind characterised by
an entire failure to give consideration to the consequences of one's
actions, in
other words, an attitude of reckless disregard of such
consequences. Risk-consciousness in the realm of recklessness does
not amount
to or include that foresight of the consequences
(“gevolgsbewustheid”) which is necessary for dolus
eventualis. The
concept of reckless disregard of the consequences
pertains both to foreseen consequences and culpably unforeseen
consequences.
7
The test for recklessness is
objective insofar as the defendant's actions are measured against the
standard of conduct of the notional
reasonable person. It is
subjective insofar as one has to postulate that notional being as
belonging to the same group or class
as the defendant, moving in the
same spheres and having the same knowledge or means to knowledge.
8
In the application of the
recklessness test to the evidence before it, a court should have
regard, inter alia, to the scope of operations
of the company, the
role, functions and powers of the directors, the amount of the debts,
the extent of the company's financial
difficulties and the prospects,
if any, of recovery. The extent of a director's duty of care and
skill depends to a considerable
degree on the nature of the company's
business and on any particular obligations assumed by or assigned to
him. His duties and
qualifications are not equal to those of an
auditor or accountant. He is not required to have special business
acumen or expertise,
or singular ability or intelligence, or even
experience in the business of the company. He is nevertheless
expected to exercise
the care which can reasonably be expected of a
person with his knowledge and experience. A director is not liable
for mere errors
of judgment, in respect of all duties that may
properly be left to some other official, a director is, in the
absence of grounds
for suspicion, justified in trusting that official
to perform such duties honestly. He is entitled to accept and rely on
the judgment,
information and advice of the management, unless there
are proper reasons for querying such. While a director exercising
reasonable
care would not accept information and advice blindly, he
is not bound to examine entries in the company's books. His access to
the particular information and the justification for relying upon the
reports he receives from others, for example, might be relevant
factors to take into account. If a company continues to carry on
business and to incur debts when, in the opinion of reasonable
businessmen, standing in the shoes of the directors, there would be
no reasonable prospect of the creditors receiving payment when
due,
it will in general be a proper inference that the business is being
carried on recklessly.
[1]
9
Corinth’s business involved
the export of ore, mined in Postmasburg, to a single buyer. The ore
was bagged at Postmasburg,
transported by road to the coast and
loaded from the trucks on which it had come first into containers and
then into vessels.
10
Corinth’s summons was never
served on the first defendant. The estate ofthe third defendant has
been sequestrated. The issue
before me was thus only the liability of
the second defendant. The second defendant was the only witness who
testified at the trial.
Additional evidentiary material was provided
by documents and by a record of what was said by the defendants at an
enquiry under
the insolvency legislation held into the affairs of
Corinth after its liquidation.
11
The three defendants became
acquainted while serving as security contractors in Iraq. After their
contracts in that zone came to
an end, they found themselves back in
South Africa, without jobs. They decided to go into the import/export
business.
12
They identified an opportunity.
There was a mine in the Postmasburg district which produced
manganese. The ore contained iron as
well as manganese. The mine was
controlled by Webmin Trading Limited (“Webmin”). They
identified a purchaser: Shivam
Iron and Steel Limited (“Shivam”),
of Kolkota, in India. They brought buyer and seller together. Shivam
sent out a
representative. The defendants took Shivam’s
representative to the mine at their own cost and put Shivam and
Webmin’s
agent, Heriot Commodity and Trade Finance (Pty)
Limited (“Heriot”) together. In about February 2008,
Shivam and Webmin,
through Heriot, concluded a written agreement
(“the sale agreement”) in terms of which Webmin agreed to
sell to Shivam
a minimum of 60 000 and a maximum of 100 000 metric
tons of ore per month.
13
Webmin had to deliver the ore to
a bagging facility designated by Shivam at the mine in Postmasburg.
The price of the ore was $2,94
per percentage of manganese content
per dry metric ton FOT Postmasburg.
14
On 13 February 2008, Shivam and
Corinth concluded a written agreement (“the transport
agreement”). Corinth had to have
the ore bagged and transported
by road to containers to be loaded onto vessels procured by Shivam in
Durban or Maputo. The price
payable to Corinth by Shivam under the
transport agreement was expressed in the transport agreement in three
options, depending
on the road route and port selected. The quantity
of ore to be bagged and transported each month was a minimum of 15
000 and a
maximum of 30 000 metric tons per month.
15
Under the sale agreement, the ore
was required to contain certain percentages of manganese and iron
respectively. Broadly stated,
the more manganese and the less iron,
the better. Webmin guaranteed the manganese and iron contents under
the sale agreement. Corinth
did not guarantee this under the
transport agreement. Corinth’s obligation was merely to bag the
ore delivered to the bagging
station, transport it to the port and
load it into containers and load those containers onto the vessel
provided.
16
If the minimum quantity of ore,
ie 15 000 tons per month, was bagged and transported, Corinth could
anticipate revenue of some R20
498 000 and expenditure of R20 110 100
per month. If the minimum quantity was exceeded, the net revenue
inflow to Corinth
could reasonably be anticipated to be greater
because increased quantities were likely to attract only
proportionately increased
costs.
17
Using the minimum quantity of 15
000 tons per month, the three defendants could and did, according to
a spreadsheet produced by
one of them (probably the first defendant
but certainly not the second defendant), anticipate a monthly net
inflow of revenue to
Corinth of some R360 000 per month.
18
Although there were initial
teething problems, by March 2008 the venture appeared to be
proceeding well. The three defendants procured
Corinth as a shelf
company, changed its name to Corinth by special resolution and on 20
March 2008 held a meeting. It seems that
although the three
defendants had equal shareholdings, the first defendant was the only
one with business experience. The second
defendant had at one time
been in the SA Defence Force, with the rank of corporal, and the
third defendant had formerly been a
policeman.
19
At the meeting the second and
third defendants asked the first defendant to define their roles and
portfolios in Corinth. The first
defendant declared himself to be
managing director, the second defendant to be financial director and
the third defendant to be
operations director. This was accepted by
the other two defendants.
20
While the second defendant
impressed me as an honest witness, he appeared to be lacking in even
a basic knowledge of commercial
affairs. His capacity for inferential
reasoning seemed very limited. Although designated financial director
and appointed a director
of Corinth, the second defendant’s
duties were nothing more than clerical. When the first defendant
provided him with an
invoice reflecting an indebtedness on the part
of Corinth, the second defendant had to pay the creditor as per the
invoice and
then hand the invoice over to Corinth’s appointed
accountant. The accountant kept Corinth’s books. In addition,
the
second defendant had to attend at the port (in each case, as it
happened, Durban) and, when the ore arrived in 34 ton trucks,
facilitate
the loading of the ore into containers and onto the
vessels for onward shipment. The evidence did not disclose the
destination
of the vessels.
21
The second defendant loyally
carried out the duties entrusted to him. Corinth had no sources
offinancing until July 2008 except
for what the defendants could
raise in their personal names. Corinth’s bank statements show
that over and above payments
to Corinth’s creditors, only
modest amounts were paid out by Corinth for travelling and
subsistence on the part of the second
and third defendants, usually
to Durban to facilitate the loading of the ore. The second defendant
explained that on occasion he
and the third defendant had spent the
night in their vehicle at the quay in Durban to make sure that the
ore was not stolen.
22
But although the progress of the
manganese project was relatively slow, it appeared to be steady. In
March 2008, Shivam established
a letter of credit in favour of
Corinth for $255 100 per month. The quality of the ore at the mine
was tested at the instance of
Shivam, which paid the fee for testing
to Corinth during May 2008. On 26 May 2008, Corinth invoiced Shivam,
in advance of shipment,
for 1 065,95 tons of ore at $9,25 per ton
plus $2 per ton for “project management”.
[2]
23
This shipment was in the nature
of a trial run. All appearances were that the trial run was
successful, because on 2 and 3 June
2008, Shivam paid into Corinth's
account with Nedbank the sums of R962 029 and R91 136 respectively.
Although there was no evidence
of the rand dollar exchange rates, the
likelihood is that the invoice of
26
May
2008 was paid in full. The evidence is that ore continued to arrive
at the docks in Durban and that all the ore which arrived
was loaded
onto vessels for shipment in accordance with Shivam’s
instructions. It was common cause that after
the trial run of some 1 000 tons, another approximately 1 000 tons of
ore was later
shipped in accordance with Shivam’s instructions.
24
The payment into Corinth’s
account of the two amounts I have mentioned meant that on 3 June
2008, Corinth had a credit balance
with its banker of R1 052 486. The
defendants used this money to pay Corinth’s creditors,
including themselves. On 3 June
2008 they paid themselves R150 000
each. On 17 June 2008, they paid themselves R80 000 each. This was
the first money that any
of the defendants had drawn from Corinth.
They reflected the payments to themselves, in accordance with the
advice of their accountant,
as salaries.
25
Apparently on the strength of
Corinth’s prospects under the transport agreement, its only
asset and only source of revenue,
the first defendant managed to
raise a short term loan of some R690 000 on overdraft with Corinth’s
banker. On 5 July 2008,
this overdraft facility was used, together
with the balance of the money received from Shivam, to pay Boswil
Vervoer CC, a road
transporter employed to carry ore to Durban, the
sum R764 871.
26
Then Corinth hit a snag: it
needed additional finance and its banker was not prepared without
more to provide it. The first defendant
told the second defendant
that he was negotiating on the overdraft with the bank and asked the
second defendant if he, the second
defendant, would be prepared to
“lend”
[3]
Corinth his personal bank account. The second defendant agreed
immediately to do so. The second defendant appreciated that his
bank
account was needed because it was anticipated that further revenue
would be forthcoming from Shivam, but that if this further
revenue
were at that stage paid into Corinth’s bank account, it would
go to pay off the overdraft and would thus not be available
to
Corinth.
27
On 13 August 2008, an amount of
R347 063 was paid into the second defendant’s personal bank
account. The second defendant
used nearly all of it to pay Corinth’s
creditors. At the time this money arrived, the second defendant’s
personal bank
account was in overdraft to the sum of R15 962. He paid
the first and third defendants R30 000 each. He paid his own parents
R1
000. He paid two additional amounts of R10 000 to each of the
first and third defendants. The remaining few thousand rands, apart
from two lottery payments totalling R439, went towards the second
defendant’s modest living expenses.
28
It seems that Corinth in all
employed three road transport contractors. The first, as I have
mentioned, was Boswil Vervoer. The
second was apparently Kritzinger
Transport. The third was Midlands Logistics. Midlands Logistics did
transport work for Corinth
to the extent of R608 603. All of this was
due by 15 July 2008. No part of it was paid.
29
A final payment of R80 083 was
made into Corinth’s bank account on
4
August 2008. I have mentioned that a
second shipment totalling in the region of 1 000 tons went off. It
seems that Shivam did not
pay the full amount due to Corinth in
respect of this shipment. Judging by what was paid in respect of the
first shipment, something
in the order of R1 million was due by
Shivam to Corinth in respect of the second shipment. But Shivam only
paid Corinth, in respect
of the second shipment, the sums of R347 063
and R80 083. There was nothing in the transport agreement that
entitled Shivam to
withhold payment to Corinth on the ground of
deficiencies in the quantity or quality of the ore. So Corinth, and
the defendants,
were entitled to assume that Corinth was due a
further about R600 000, all of which would become available to pay
Corinth’s
creditors and the defendants themselves.
30
But then the venture collapsed.
By notice of motion lodged with the registrar on 25 August 2008,
Midlands Logistics applied to this
court under case no. 40110/2008 to
wind up Corinth on the ground that
Corinth was unable to pay its debts. Corinth
gave notice of intention to oppose but did not thereafter deliver any
affidavits and
on 18 September 2008 a provisional winding-up order
issued and was made final on 21 October 2008.
31
The reason why Corinth became
unable to pay its debts was, quite simply, because Shivam withdrew
(to use a neutral term) from its
contracts with Webmin and Corinth.
The only evidence before me explaining why Shivam so withdrew is a
letter from Khaitan &
Co, Shivam’s Kolkota advocate and
solicitor, dated 19 September 2008. The suggestion in this letter is
that Webmin was unable
to supply either the minimum quantities of ore
promised or the quality of manganese ore promised. There is no
suggestion that Corinth
was at fault in any way.
32
There is no evidence to suggest
that Shivam had warned that it was contemplating withdrawing from the
sale and transport agreements
or that the quality of the ore was in
issue. The only evidence which suggests that there was ever a problem
with the ore supply
is contained in the letter of Khaitan &Co.
The suggestion in that letter is that on 4 July 2008 Shivam
complained to Heriot
that Heriot (sic) was committed to supply 1 500
tons of ore a week but had only supplied
200 tons and that on 15 July 2008, the first
defendant wrote to Heriot with a similar complaint.
33
When the salary payments of June
2008 were made, the second defendant had no reason to believe that
these payments might compromise
Corinth’s ability to pay its
creditors. The initial teething problems appeared at that point to
have been resolved with Shivam’s
payment in full for the first
some 1 000 ton shipment. The use of the second defendant’s bank
account is of the same order.
The second defendant had every reason
to believe that Corinth’s financial difficulties were merely
due to a delay in payment
of the balance owed for the second shipment
and that once Webmin began to deliver in the promised quantities,
Corinth would prosper.
There is no reason to believe that the second
defendant came into any information after the payment of the R347 063
into his account
that might have warned him of Shivam’s
imminent withdrawal from the agreements.
34
In my view Corinth has an
additional difficulty: the defendants had drawn no money at all
during the five months preceding June
2008. By June 2008, they had
reached the end of their financial resources. The second defendant
testified that he had gone into
debt to fund his participation in
Corinth’s business. The likelihood is that the other directors
had similarly incurred debts.
The business of Corinth could not
continue unless the defendants received something during June 2008
out of the money received
by Corinth. So the submission of counsel
for Corinth, that the defendants ought not to have paid themselves
anything at all, cannot
be correct. The question then arises: how
much ought the defendants to have paid themselves in the period June
to August 2008?
There is no evidential material before me upon which
to answer that question. The onus in this regard rests on Corinth.
The absence
of evidence therefore operates against Corinth.
35
And then, on the probabilities,
both Nedbank and Midlands Logistics risked dealing with Corinth on
the strength of the same information
which was available to the
defendants collectively. There is no suggestion in the pleadings, the
evidence or in the record of the
enquiry and the insolvency
legislation that either of these creditors was misled as to Corinth’s
prospects. If the risks
incurred by these creditors were acceptable
to them as reasonable men of business, there is no reason why they
should not have
been aceptable to the second defendant.
36
And finally, the payments by the
defendants to themselves had no impact on the ability of Corinth to
carry on business. This is
not a case of the directors of a business
depleting its cash reserves and thus
Page 18
causing the business to fail. Corinth’s
business failed because Shivam withdrew from the sale and transport
agreements. It
may be (I express no opinion on the point) that some
of the payments made by Corinth constituted preferences. But the mere
conferring
of preferences does not necessarily, and in the present
circumstances did not, assuming preferences, constitute recklessness.
37
I therefore conclude that Corinth
has failed to prove that the second defendant conducted the business
of Corinth recklessly. This
is a commercial dispute. Costs must
follow the
result.
38
I make the following order: The
plaintiffs claims against the second
defendant are dismissed
with
costs.
NB TUCHTEN
JUDGE OF THE HIGH COURT
19 MARCH 2014
[1]
These propositions as to the nature of reckless trading
are derived
from Philotex
(Pty) Ltd and Others v Snyman and Others:
Braitex (Pty) Ltd and Others v Snyman and Others
[1997] ZASCA 92
;
1998 2 SA 138
SCA
142-144.
[2]
Whether this $2 per ton was in fact for bagging
was not explained in
the evidence.
The term used in the evidence was "borrow”.