Strydom N.O. and Others v Bakkes and Another (21263/2012) [2014] ZAGPPHC 342; 2014 (4) SA 29 (GP) (2 April 2014)

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[2014] ZAGPPHC 342
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Strydom N.O. and Others v Bakkes and Another (21263/2012) [2014] ZAGPPHC 342; 2014 (4) SA 29 (GP) (2 April 2014)

REPUBLIC
OF SOUTH AFRICA
IN THE HIGH COURT
OF SOUTH AFRICA
(NORTH GAUTENG,
PRETORIA)
CASE
NO:
21263/2012
DATE
HEARD:
18-27
March 2014
DATE
:
2 APRIL 2014
In the matter
between:
PIETER
HENDRIK STRYDOM
N.O
.................................................................................
1st
Plaintiff
JOHN
RODERICK GRAEME POLSON N.O.
…
..............................................................
2
nd
Plaintiff
LOUIS
STRYDOM
N.O
.........................................................................................................
3
rd
Plaintiff
DEON
MARIUS BOTHA
N.O
...............................................................................................
4
th
Plaintiff
TIRHANI
SITOS DE SITOS MATHEBULA
N.O
...............................................................
5
th
Plaintiff
SEAN
CHRISTENSEN
N.O
...................................................................................................
6
th
Plaintiff
GAIL
LLYN WARRICKER
N.O
...........................................................................................
7
th
Plaintiff
ALTRON
GROUP PENSION
FUND
....................................................................................
8
th
Plaintiff
and
JOHAN
HENDRIK BAKKES
…......................................................................................
1
st
Defendant
LOUIS
KOTZE
VENTER
................................................................................................
2
nd
Defendant
LIESL
MARÉ
......................................................................................................................
3
rd
Defendant
BHEKAMA
SWAZI
MSHIZOBOMVU
............................................................................
4
th
Defendant
GERHARDUS
JOHANNES VAN
ZYL
.............................................................................
5
th
Defendant
HANS
JURGENS
BRITS
...................................................................................................
6
th
Defendant
JOHANNES
GERHARDUS DU
TOIT
..............................................................................
7
th
Defendant
DERREK
JOHN
ELLERBECK
........................................................................................
8
th
Defendant
SIYABONGA
GQOLI
…....................................................................................................
9
th
Defendant
FREDERICK
VERMAAK
...............................................................................................
10
th
Defendant
LUCAS
WILLEM
VILJOEN
...........................................................................................
11
th
Defendant
DESRÉ
PATON
..................................................................................................................
12
th
Defendant
ANNA
JACOBA VAN HEERDEN
…..............................................................................
13
th
Defendant
MARK
DAVID
ARENDSE
...............................................................................................
14
th
Defendant
RYAN
MARK BOTHA
…................................................................................................
15
th
Defendant
DAVID
THOMAS OOSTHUIZEN
….............................................................................
16
th
Defendant
VINCENT
REVOR
SMITH
.............................................................................................
17
th
Defendant
ERNEST
PHILIPPUS
SEVENSTER
..............................................................................
18
th
Defendant
NSALO
FINANCIAL SERVICES (PTY)
LTD
..............................................................
19
th
Defendant
MARTINA
CORNELIUS
BAKKES
...............................................................................
20
th
Defendant
MARICIA
BAKKES
.........................................................................................................
21
st
Defendant
REZANNE
BAKKES
.......................................................................................................
22
nd
Defendant
JUDGMENT
MURPHY
J
1.
The eight plaintiffs initially instituted action against twenty two
defendants for various orders in terms of section 424 of
the
Companies Act 61 of 1973 (“the old Companies Act”)
and/or section 218 of the Companies Act, 71 of 2008 (“the
new
Companies Act&rdquo
;) and for judgment against those defendants
personally for the debts of Corporate Money Managers (Pty) Ltd
(“CMM”)
and ten other entities who were associated or
connected with CMM in a collective investment scheme and
securitisation arrangements
which have failed and brought about
substantial losses for the investors in the scheme.
2.
On 3 April 2009, the collective investment scheme, CMM Cash
Management Fund (“CMF”) was closed by its manager, Ayanda

Collective Investment Solutions Ltd (“Ayanda”) and
pursuant to an investigation conducted by the Financial Services

Board (“FSB”), the financial services regulator, CMM,
CMF and their associated companies were placed under provisional

curatorship by an order of this court on 28 April 2009. The order
was confirmed and made final on 18 June 2009. On account of
CMM
having been the provider of funds to the Allegro group of companies
(consisting of Allegro Bridging (Pty) Ltd (“Allegro

Bridging”), Allegro Holdings (Pty) Ltd, Allegro Bridging House
(Pty) Ltd and Allegro Group Investments (Pty) Ltd) a close

relationship existed between CMM and Allegro. As will be explained
more fully in due course, Allegro Bridging appears in many
instances
to have been the originator of assets in the property development
sector in which CMM invested on behalf of its clients.
On 15 October
2009 the order of curatorship was extended to include the Allegro
group of companies under the curatorship of the
companies.
3.
At the date of the curatorship, 28 April 2009, CMM’s liability
to investors stood at approximately R1,152 billion. Cash
and cash
equivalents under control of CMM at that date amounted to
approximately R100 million. Many of the investors have lost
their
life savings as a result of the failure of the scheme. The curators
have since their appointment been engaged in the recovery
of the
investors’ funds. They anticipate that the ultimate recovery
on behalf of the investors will in all probability
amount to no more
than 25% of the capital invested.
4.
Section 424(1)
of the old
Companies Act provides
:
“
When it
appears, whether it be in a winding-up, judicial management or
otherwise, that any business of the company was or is being
carried
on recklessly or with intent to defraud creditors of the company or
creditors of any other person or for any fraudulent
purpose, the
Court may, on the application of the 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.”
5.
Section 218(2)
of the new
Companies Act provides
:
“
Any person
who contravenes any provision of this Act is liable to any other
person for any loss or damage suffered by that person
as a result of
that contravention.
6.
The first, second and third plaintiffs are the curators of the whole
of the business of providing financial services and of
managing a
portfolio of assets of the CMM, its associated entities and the
Allegro group of companies. The fourth and fifth plaintiffs
are the
joint liquidators of Dunrose Trading 160 (Pty) Ltd, (“Dunrose”)
a company which in broad terms was involved
in certain investments
made by CMM and Allegro. The sixth and seventh plaintiffs are the
joint liquidators of Amalgum Investments
102 (Pty) Ltd (“Amalgum”),
a shareholder in Dunrose. The eight plaintiff is Altron Group
Pension Fund, an investor
in CMF.
7.
The trial of the action has been set down before me from 17 March
2014 until 23 May 2014. At the commencement of the proceedings
I was
informed by counsel for the plaintiffs, Mr Terblanche SC, that the
plaintiffs had been able either to settle the action
or have
withdrawn it against most of the defendants, while other have
consented to judgment. These defendants were directors
and
shareholders in various companies in the CMM and Allegro group of
companies. Only four defendants are continuing to defend
the action.
They are: Mr Johan Bakkes, (“Bakkes”) the first
defendant, the managing director of CMM and a director
of various of
the other companies, who allegedly either controlled those companies
or at least participated in the carrying on
of their business; Nzalo
Financial Services (Pty) Ltd, (“Nzalo”) the nineteenth
defendant, the majority shareholder
of CMM, the shares in which were
beneficially held and controlled by Bakkes and his wife through the
Betterknow Trust, and the
ultimate holding company of various
entities associated with CMM; Mrs Maritha Bakkes, the twentieth
defendant, the wife of Bakkes,
a trustee of the Betterknow Trust and
a director of Nzalo; and Mr Vincent Smith, the seventeenth
defendant, a director of CMM
Corporate Finance (Pty) Ltd (“Corpfin”),
a company associated with CMM of which Bakkes was a co-director.
The
application for separation in terms of rule 33(4)
8.
After counsel had presented his opening address at the commencement
of the trial, the plaintiffs made application in terms of
rule 33(4)
for an order that certain questions be decided separately from the
other issues of the trial. As part of their case
against the
defendants that the business of the various companies was carried on
recklessly or with the intent to defraud the
creditors or for a
fraudulent purpose, the plaintiffs allege that certain conduct of
the defendants in the scheme of investment
devised and pursued by
them involved contraventions of provisions of the legislation
forming part of the regulatory framework.
Various companies in the
CMM group issued promissory notes over a three to four year period
in an aggregate amount of approximately
R1 billion, with the
consequence that substantial funds of the CMF, the collective
investment scheme managed by CMM, were invested
in such promissory
notes. The four questions the plaintiff wishes to be decided
separately relate to the legality of those investments.
9.
The first question is whether the promissory notes issued by the
entities referred to in the paragraph 1.1 of the unamended
notice of
motion of the application in terms of rule 33(4) were legal
commercial paper. The entities referred to are six private
limited
companies falling within the CMM group and Thunderstruck Investments
15 (Pty) Ltd. The six companies in the CMM group
are: Miro Capital
(Pty) Ltd, Four Rivers Trading 307 (Pty) Ltd, Regent Group Capital
(Pty) Ltd, Escascape Investments (Pty) Ltd,
CMM Corporate Finance
(Pty) Ltd and CMM Finpro (Pty) Ltd. For reasons which I will
elucidate later I granted an amendment with
agreement of the parties
deleting paragraph 1.1.5 of the notice of motion with the result
that the plaintiffs no longer seek
determination of the questions in
relation Corpfin at this stage of the proceedings.
10.
The second question is whether the issue of the promissory notes by
these entities against the acceptance of money from the
general
public constituted “the business of a bank” in
contravention of the Banks Act.
11.
The third question is if in the event of the court finding that the
promissory notes were issued in contravention of the Banks
Act,
whether the promissory notes qualified as “approved assets”
under GN 1503 of 2005 as determined and promulgated
by the Registrar
of Collective Investment Schemes under
sections 40
and
46
of the
Collective Investment Schemes Control Act 45 of 2002
. These
provisions permit the Registrar to determine securities or classes of
securities that may be included in a portfolio of
collective
investment schemes as well as the manner in which and the limits and
conditions subject to which securities or classes
of securities may
be included in a portfolio of a collective investment scheme.
12.
The fourth question which the plaintiffs want separately decided is
whether the investments by the CMF and the clients of CMM
in the
promissory notes were authorized by or were in breach of the approved
mandate or any variation thereof. CMM was granted
authorisation by
the Registrar of Financial Service Providers under section 8 of the
Financial Advisory and Intermediary Services
Act 37 of 2002 (“FAIS”)
to render financial services as,
inter
alia
, a Category II
financial service provider, specifically to provide services in
terms of a mandate granting it discretion regarding
the choice of
financial products. In terms of the provisions of the Notice on
Codes of Conduct for Administrative and Discretionary
Financial
Service Providers of 2003, promulgated in terms of the Act, a
discretionary financial service provider must obtain
a signed
mandate from a client. The content of the mandate and approval
thereof is prescribed by the Code. The mandate must initially
be
approved by the Registrar, and the financial service provider may
not amend the approved mandate substantially without the
prior
written approval of the Registrar.
13.
In their plea the defendants plead that the promissory notes were
legal commercial paper, that they were approved assets and
complied
with GN1503.
14.
The plaintiffs contend that the named entities were not permitted
legally to issue promissory notes or to receive deposits
in
contravention of the Banks Act, read with the so-called Commercial
Paper Notice GN2172 of 14 December 1994 and the Exemption
Notices
GNR681 of 4 June 2004 and GN2 of 1 January 2008 promulgated in terms
of the Banks Act. These statutory instruments designate
certain
activity as not falling within the meaning of the “business of
a bank” in the Banks Act and stipulate the
legal conditions
relating to the issue of commercial paper in general and by
special-purpose institutions for the purpose of
a securitisation
scheme.
15.
The plaintiffs submit that if it is found that the promissory notes
were not legal paper, were not approved assets and were
issued in
contravention of the Banks Act and in breach of the mandate, such
conduct would at the very least establish that the
business of the
various companies was carried out recklessly as contemplated in
section 424 of the old
Companies Act. There
is obvious merit in that
submission. The purpose of the statutory instruments making up the
regulatory framework governing commercial
paper is to provide
safeguards and protection to investors. The investment in commercial
paper that is not legal, or not subject
to regulatory protection,
invariably will disclose a choice by those responsible to ignore
prudential safeguards.
16.
Moreover, if the questions are decided against the defendants it will
mean that certain of the defendants were involved, as
managers and
shareholders, in the unlawful issue by the entities of promissory
notes to CMM, the manager of the collective investment
scheme. Such
conduct would be in contravention of
section 4
of the
Collective
Investment Schemes Control Act 2002
which provides that the manager
of a collective investment scheme must avoid conflict between the
interests of the manager and
the interests of an investor. If the
issuing of the promissory notes was illegal, the conflict of
interests would be exacerbated
in that the defendants would be shown
to have participated in illegal activity to their own advantage to
the disadvantage of the
investors. This too, it is argued, would
amount to the reckless carrying on of the business of CMM. Again,
the submission has
merit.
17.
On this basis, the plaintiffs submitted that the separate
determination of the four questions could be decisive of the whole

case. At the very least, a separate determination of these issues,
should they be decided in favour of the plaintiffs, will have
a
material bearing on the nature and extent of the evidence to be
adduced by the plaintiffs and will significantly shorten the

proceedings.
18.
At the end of the day, the defendants did not vigorously oppose the
application for separation. The advantages of separately
determining
the four questions are self-evident, for the reasons stated by the
plaintiffs. They are in the main legal issues
based on a limited
factual foundation which can be conveniently decided before other
evidence is led. Their determination will
assist the parties in
their choices regarding the nature and ambit of the other evidence
which they may wish to lead. Accordingly,
I granted an order in terms
of prayers 1 and 2 of the application for separation that the four
questions be decided separately
before any other evidence be led.
The plaintiffs closed their case on the separated questions without
leading any evidence. The
defendants led the evidence of Bakkes who
was cross-examined over four court days.
The
background: the CMF collective investment scheme and investment in
securitisation
19.
Before dealing with the four separated questions, it will be useful
to sketch the background and to refer to certain aspects
of the
investment and securitisation schemes involved. The evidence in this
regard is incomplete and has not been presented in
a comprehensive
fashion. The intention of the plaintiffs is to present expert
testimony in this regard during the main trial.
It is nonetheless
possible to provide a broad outline by drawing on the evidence of
Bakkes, documentary evidence admitted during
his testimony and the
common cause facts.
20.
CMM was an authorized financial service provider (“FSP”)
in terms of FAIS. It was controlled by Bakkes, Louis Venter
(the
erstwhile second defendant), Liesl Mare (the erstwhile third
defendant) and Nzalo. FAIS regulates the business of rendering

financial advice and intermediary services to clients in respect of a
wide range of financial products by financial firms. It
covers the
activities of investment managers, investment advisors, insurance
brokers, financial planners and financial advisors.
These providers
are referred to in the Act collectively as “financial service
providers”. FAIS enacts a comprehensive
regulatory framework
applying to FSPs, including the grant of authorisation to act as an
FSP, the duties of FSPs and codes of
conduct. CMM was registered as
an FSP by the Registrar of FSPs with effect from 30 September 2004
and was granted authority to
render financial services as a Category
I, Category II and Category III FSP. Category I FSPs are financial
advisers and intermediaries
who may not use discretion in the
rendering of financial services. Category II FSPs are those who may
render intermediary services
in terms of a mandate granting to the
FSP discretion regarding the choice of financial products. Category
III FSPs are investment
administrators specialising mainly in
bulking collective investments on behalf of clients.
21.
CMM was involved in the establishment of CMF, a collective
investment scheme regulated by the Collective Investment Schemes

Control Act, 45 of 2002 (“CISCA”), in 2003 and 2004. A
collective investment scheme is a scheme in pursuance of which

members of the public are invited or permitted to invest money or
other assets in a portfolio and having done so hold a participatory

interest in a portfolio of the scheme through shares, units or any
other form of participatory interest. The investors in the
scheme
share the risk and the benefit of investment in proportion to their
participatory interest in a portfolio. In other words,
funds from
various investors are pooled for investment purposes with each
investor sharing proportionally in the benefits and
risks attached
to the underlying assets.
22.
CMF was a collective investment scheme in securities as defined in
section 39 of CISCA, being “a scheme the portfolio
of which
consists, subject to this Act, mainly of securities”. CISCA
does not define the term “securities”,
but such are
commonly understood to include shares, preference shares, bonds,
debentures, futures, options, warrants and various
money market
instruments.
23.
Section 40 of CISCA provides that the Registrar may determine
securities or classes of securities that may be included in a

portfolio of a collective investment scheme in securities. In terms
of section 46, the Registrar may determine the manner in which
and
the limits and conditions subject to which securities or classes of
securities may be included in a portfolio as well as
different
manners, limits and conditions for different securities or classes
of securities or different portfolios of a collective
investment
scheme in securities. Section 41(1) provides that no person other
than a company which has been registered as a manager
and its
authorised agent may administer any collective investment scheme in
securities. And section 85(1) provides that a manager
may not sell
or offer for sale any participatory interest in a portfolio of a
collective investment scheme unless at the time
of such offer the
portfolio included assets in the manner, within the limits or on the
conditions determined by the Registrar.
Non-compliance with section
85(1) is an offence in terms of section 115(b) of CISCA. In
addition, in terms of section 109(1)(a),
any person who contravenes
or fails to comply with any provision of CISCA is liable to any
other person for any loss or damage
suffered by that person as a
result of such contravention or failure.
24.
On 4 December 2005 the Registrar caused to be promulgated GN1503,
which is the determination of securities, classes of securities,

assets or classes of assets that may be included in a portfolio of a
collective investment scheme in securities and the manner
in which
and limits and conditions subject to which securities or assets may
be so included. It will be recalled that the third
question to be
determined is whether the promissory notes qualified as approved
assets in terms of GN1503.
25.
Section 68 of CISCA requires the manager of a collective investment
scheme to appoint either a trustee or a custodian for its
collective
investment scheme, which will typically be a bank or a long-term
insurance company. That appointment is made in terms
of a “deed”
defined in section 1 of CISCA to mean “the agreement between a
manager and a trustee or custodian,
or the document of incorporation
whereby a collective investment scheme is established and in terms
of which it is administered
….” The trustee has a
plethora of duties imposed upon it by section 70 of CISCA. They
include ensuring that the
transacting in and pricing of
participatory interests are in accordance with CISCA and that the
dealings and administration of
the scheme are in accordance with
acceptable market practice, the law, the deed and appropriate
auditing and accounting practice.
It has a duty to report
non-compliance to the Registrar. Section 71 provides that for the
purposes of CISCA any money or other
assets received from an
investor and an asset of a portfolio are regarded as being trust
property for the purposes of the Financial
Institutions (Protection
of Funds) Act 28 of 2001, and a manager, its authorised agent,
trustee or custodian must deal with such
money or other assets in
terms of CISCA and the deed and in the best interests of investors.
26.
The circumstances in which CMF came into existence were described by
counsel in his opening statement. There is a measure of
complexity to
the contractual arrangements which will no doubt be elucidated in
expert testimony. Suffice it to say that CMF appears
to have been
born out of the mCubed Unit Trust Scheme established by mCubed Unit
Trust Management Company Ltd (“mCubed”),
acting as
manager, and ABSA Bank Limited (“ABSA”) appointed as
trustee and custodian. That deed provided that the
scheme may
consist of one or more portfolios established by a supplemental
deed. ABSA was empowered to refuse to accept as part
of the assets
of a portfolio any asset which did not comply with the requirements
of the deed or a supplemental deed. On 16 April
2004, mCubed entered
into a contract with CMM as the portfolio manager which permitted
CMM to manage portfolios under the supervision
of mCubed. A few days
before this agreement, ABSA and mCubed entered into a supplemental
deed for the purpose of establishing
a portfolio to be known as CMM
Cash Management Fund, that is CMF. The Registrar approved the
supplemental deed on 28 April 2004.
In 2006 mCubed became Ayanda,
which remained the manager of CMF, while CMM continued as the
portfolio manager.
27.
The supplemental deed describes CMF as a specialist portfolio with an
investment policy which seeks to provide investors with
a level of
income in excess of that offered by money market portfolios, while
maintaining a high degree of liquidity and capital
preservation.
Counsel’s opening address quotes the following extract from the
supplemental deed:
“
To achieve
this objective, the securities to be included in the CMF portfolio
will comprise a combination of assets in liquid form
and securities
of an interest bearing nature, including loan stock, debentures,
debenture stock, debenture bonds, unsecured notes,
preference shares,
financial instruments and any other non-equity securities which are
considered consistent with the portfolio’s
primary objective
and that the CISCA Act or the Registrar may from time to time allow,
all to be acquired at fair market value.
Any fixed income security to
be included in the portfolio will typically have a maximum term to
maturity of three years and a weighted
average term to maturity of
180 days.”
28.
In mandates approved by the Registrar and concluded between CMM and
its clients, being investors in CMF, CMF is described as
a “low
risk South African cash management fund”. It is also stated
that the CMF aims to outperform the relevant money
market benchmark
over the medium term at low levels of risk within the money market
asset class. Exhibit X1-22 is the investment
management agreement
between CMM and Teba Bank, one of its investors. The annexed mandate
(Exhibit X13) includes the following
statement of investment policy:
“
All
investments shall be restricted to interest rate instruments
including:
2.1 Fixed interest
rate instruments;
2.2 Variable
interest rate instruments;
2.3 Commercial
paper;
2.4 Preference
shares;
2.5 Convertible
debentures;
provided that where
any investment is made in commercial paper, preference shares or
convertible debentures, the prior written consent
of Teba Bank is
required.”
Moreover, it is
common cause that in terms of the trust deed and the supplemental
trust deed CMF is a “non-equity securities”
portfolio as
contemplated in Chapter VII of GN1503 and consequently is subject to
the investment limits and conditions determined
by the Registrar in
that chapter.
29.
CMM from time to time distributed marketing material to potential and
existing investors soliciting investment in CMF. In general
terms
the material aimed at creating the impression that CMF was a unit
trust fund with the same benefits of a call account.
Investors were
told that they could earn fixed deposit rates while the money was
available on call. The investment was described
as low risk and
regulated by CISCA, the FSB and ABSA, and would be made strictly in
accordance with a standardized mandate approved
by the FSB and in
accordance with GN1503.
30.
CMM attracted large and numerous investments from investors as a
result of the attractive interest rates, the immediate availability

of funds and the supposedly regulated environment. As mentioned, by
the time CMM was placed under curatorship the amount invested
in CMF
was approximately R1,152 billion. It is common cause that at the
time of the closure of the fund the majority of the money
invested
via CMM was not actually pooled and held in CMF but had been
disaggregated and was held in “segregated portfolios”
on
behalf of individual clients, the legality of which is questionable.
Many of the funds invested in both CMF and in the segregated

portfolios were invested in promissory notes issued by special
purpose vehicles, securitisation institutions, which were
established
by CMM. It is these investments which are the subject
matter of the inquiry mandated by the four questions separated in
terms
of rule 33(4).
31.
CMM’s move into the securitisation business related principally
to two categories of underlying transactions: property
development
and factoring. To this end it set up so-called “special
purpose vehicles” - SPVs. The SPVs are the companies
referred
to in paragraph 1.1 of the notice of motion in terms of rule 33(4).
Miro Capital (Pty) Ltd (“Miro Capital”)
and Four Rivers
Trading 307 (Pty) Ltd (“Four Rivers”) issued promissory
notes in relation to bridging loans for property
development. Regent
Group Capital (Pty) Ltd (“Regent”), which was previously
Two Ships 427 (Pty) Ltd (“Two
Ships”), issued promissory
notes in relation to the provision of financing for factoring and
trade finance by Regent Factors
(Pty) Ltd. It is not clear from the
limited evidence available in respect of which assets the other
companies, Escascape Investments
(Pty) Ltd (“Escascape”)
trading as Sakha iBlokho, CMM Corporate Finance (Pty) Ltd
(“Corpfin”) and CMM
Finpro (Pty) Ltd (“Finpro”)
issued promissory notes. Most probably they too related to property,
factoring and trade
finance debts. Thunderstruck Investments 15
(Pty) Ltd (“Thunderstruck”) issued only one promissory
note to CMF which
was later split into two smaller promissory notes
allocated to specific investors.This note related to the purchase of
a building
by Thunderstruck.
32.
The specifics of the various securitisation arrangements will be
elucidated in expert testimony presented in the trial. However,
it is
possible to describe their general characteristics with reference to
certain documents admitted into evidence during Bakkes’

testimony. These include: a sale agreement between an originator of
debt transactions and an SPV issuing the promissory note;
a
facility agreement between CMF (or other investors) represented by
CMM and an SPV issuing promissory notes; a cession in security

between the SPV and CMF (or other investors) represented by CMM; a
legal opinion prepared by an attorney, Mr Paul Tindle, for
Global
Credit Rating Co. (Pty) Ltd (“GCR”), a rating agency,
explaining certain aspects of the transactions for the

securitisation of the trade receivables of the originator; and a
transaction memorandum prepared by Via Capital (an FSP) regarding

the “proposed securitisation of a pool of loans relating to
the discounting of property sales receivables by Miro Capital,
in
conjunction with Corporate Money Managers and CIA Holdings”.
It must be emphasised at this juncture, however, that the
legal
relationships and the structure described in the documents were not
necessarily established or implemented in practice.
From the
evidence already adduced it is quite evident that the accounting
treatment of the various transactions was frequently
not in keeping
with the envisioned contractual arrangements described in these
documents. My purpose in outlining the proposed
contractual
arrangements is therefore merely to give a contextual background and
overview without making any finding that the
scheme encapsulated in
the documents was implemented or followed in practice.
33.
In the documentation Miro Capital is defined and identified as the
originator. It is common cause that Miro Capital issued
numerous
promissory notes to a value of more than R400 million. It accordingly
seems in practice to have acted primarily as an
SPV. Promissory
notes were issued by Miro Capital before September 2007 to CMM and
after September 2007 to Four Rivers purportedly
as “back to
back” promissory notes as security for those issued by Four
Rivers. There are factual disputes in relation
to the purposes of
this arrangement which need not be resolved now. However, to avoid a
confusion of roles, in the description
that follows I have opted to
analyse the transactions for the securitisation of the trade
receivables with Allegro Bridging in
the role of the originator. I
assume for the purpose solely of elucidation (though there is no
supporting documentary evidence
to that effect before me at this
time) that Allegro Bridging played the role of an originator similar
to that assigned to Miro
Capital in the written contracts included
in Exhibit A and Exhibit X. I proceed on this assumption with
confidence by reason
of the fact that Bakkes testified that Allegro
Bridging did indeed act as an originator, and the fact that the
evidence of the
arrangements overall supports that.
34.
A significant proportion of the funds of the investors in CMF and the
segregated portfolios was invested through Four Rivers
and Miro
Capital, as SPVs, into property developments in the form of
residential housing estates. Allegro Bridging provided so-called

“bridging-finance” to borrowers usually for property
developments at high rates of interest upto 4% per month. Allegro

Bridging acquired funding from external sources, of which CMM was
the most significant. The funding was channeled by CMM through
the
SPVs (after September 2007 mainly Four Rivers) utilising funds
extracted from CMF. Often the loans provided by Allegro Bridging
to
developers were unsecured. Although the financing was referred to as
“bridging finance”, the loans were actually
often for
long term periods and were at usurious rates. Few of the promissory
notes could be redeemed at maturity resulting in
them being “rolled”
or re-issued in respect of the same or increased debt.
35.
The legal opinion of Mr Tindle describes a proposed securitisation
transaction and its structuring. In terms of that scheme
the
originator (Allegro Bridging) would agree in a written sale
agreement to sell to an SPV (Four Rivers) the claims or existing

receivables (the amounts owing to it by the developers arising from
the bridging loans) for an agreed purchase price payable
in cash.
Provision is also made for the sale of “future receivables”.
A facility agreement would then also be concluded
as part of the
scheme. It is a tripartite agreement between the SPV, CMM and CMF or
other segregated investors referred to collectively
as “the
Funders”. In terms of clause 2.3 of the facility agreement it
is recorded that the Funders have agreed to
grant Four Rivers (the
SPV) a facility on which it may draw down funds from time to time in
order to discharge the purchase price
payable in respect of the
receivables (purchased from Allegro). Clause 6 of the facility
agreement deals with the issue of the
promissory notes. It provides
that to facilitate the draw down of funds under the facility, Four
Rivers shall on each draw down,
against payment of the amount of the
draw down, deliver a corresponding promissory note to the Funders
(CMF), and that each promissory
note delivered would be required to
relate to a separate receivable (being the debt purchased from the
originator under the sale
agreement), and would be drawn in favour
of CMM or its nominee. Ownership of, and the risk and benefit
attaching to each promissory
note, would pass to CMF (or the other
funder) upon payment of the draw down and delivery of the promissory
note to CMM. In terms
of Clause 8 of the facility agreement CMM was
authorised to act as the agent of CMF and the funder in respect of
whom it held
a discretionary investment mandate.
36.
In addition to the sale agreement and the facility agreement, the
securitisation scheme set out in the documentation further
involved a
management agreement in terms of which CMM as manager agreed to
manage and administer the business of Four Rivers,
the SPV. Although
I have not had sight of such an agreement, it appears from Tindle’s
opinion that CMM would manage the
SPV to ensure the effective
implementation of the securitisation programme. In the course of
managing the business of the SPV,
CMM would collect or procure the
collection of the receivables (the amounts payable by the developers
ceded as accounts receivable
to the SPV by means of the sale
agreement) and would procure the amounts so collected to be
deposited directly into a bank account
maintained by or on behalf of
Four Rivers with either Standard Bank, Nedbank, FNB or ABSA. As
security for the amounts owing
to CMF and the other funders in
respect of the promissory notes, Four Rivers (the SPV) ceded to CMF
or the other Funders
in securitatem debiti
all its rights to
the bank account into which the collections would be deposited. In
this way ownership of the receivables was
intended to vest in the
SPV which was in turn ceded
in securitatem debiti
to CMF.
37.
The description of the securitisation transactions, as I have said
and repeat with emphasis, is derived from the agreements
and legal
opinion. There is no evidence before me that these documents
submitted by Tindle to GCR ever formed the basis of contractual

relationships between the various role players. On the contrary,
there are indications in the evidence adduced thus far that
the
transactions involving CMM, Allegro and the SPVs probably did not
proceed in practice in accordance with the prescriptions
of the
different agreements. The extent of compliance or deviation and the
legal consequences of the conduct of the parties in
that regard is a
matter to be determined in the light of additional evidence. My
purpose in describing the proposed scheme is
merely to provide
insight into its potential workings. However, it must be kept in
mind, the scheme was described by Tindle to
GCR for the purpose of
obtaining ratings under CISCA.
38.
The plaintiffs intend to demonstrate that the securitisation
programme was a high risk investment in dodgy assets. They claim

that the originated debt of the developers was self-evidently too
risky. They plan to lead evidence showing that the developers
were
inexperienced, did not qualify for loans from banks or reputable
financial institutions, did not invest their own money
in the
developments, used the funding obtained from the SPVs to settle old
debt and rarely furnished adequate security to either
the originator
or the SPV. The plaintiffs say therefore that the developments were
doomed to fail and that almost all of them
have in fact failed, as
could have been expected in the face of unsurious and punishing
interest rates of 4% per month which made
profitability impossible,
especially because what was supposedly bridging finance was in fact
long term lending. The defendants
deny the plaintiffs allegations
and maintain that the assets were profitable but that they are
victims of the 2008 financial
crisis and the subsequent bad
administration of the assets by the curators.
39.
Against this factual background, it is now possible to consider the
legality of the issue of the promissory notes by the SPVs
and the
investment in them by CMM on behalf of CMF and the investors in the
segregated portfolios.
The
first and second question: are the promissory notes “legal
commercial paper” issued in contravention of section
11 of the
Banks Act?
40.
The first question to be determined is whether the promissory notes
issued by the companies listed in paragraph 1.1 of the
notice of
motion were “legal commercial paper”. The second
question, being whether the issue of promissory notes against
the
acceptance of money from the public constitutes “the business
of a bank” in contravention of the Banks Act, is
related to
and overlaps with the first question. Should I find that the
promissory notes were not “legal commercial paper”
and
were not issued lawfully, it will follow that the companies carried
on the business of a bank in contravention of the Banks
Act.
41.
Section 11 of the Banks Act provides:
“
(1) Subject
to the provisions of section 18A, no person shall conduct the
business of a bank unless such person is a public company
and is
registered as a bank in terms of this Act.
(2) Any person who
contravenes a provision of subsection (1) shall be guilty of an
offence.”
42.
“The business of a bank” is defined in extensive detail
in section 1 of the Act. The primary elements of the definition
are
located in paragraphs (a) and (b) of the definition which read:
(a) the acceptance
of deposits from the general public (including persons in the employ
of the person so accepting deposits) as
a regular feature of the
business in question;
(b) the soliciting
of or advertising for deposits …”
43.
The term “deposit” is also defined in some detail. The
essential relevant part of the definition reads:
“
deposit”
,
when used as a noun, means an amount of money paid by one person to
another person subject to an agreement in terms of which –
(a) an equal amount
or any part thereof will be conditionally or unconditionally repaid,
either by the person to whom the money
has been so paid or by any
other person, with or without a premium, on demand or at specified or
unspecified dates or in circumstances
agreed to by or on behalf of
the person making the payment and the person receiving it; and
(b) no interest will
be payable on the amount so paid or interest will be payable thereon
at specified intervals or otherwise,
notwithstanding that
such payment is limited to a fixed amount or that a transferable or
non-transferable certificate or other instrument
providing for the
repayment of such amount
mutatis mutandis
as contemplated in
paragraph (a) or for the payment of interest on such amount
mutatis
mutandis
as contemplated in paragraph (b) is issued in respect of
such amount;”
44.
The definition of “the business of a bank” in the Banks
Act excludes certain activities from falling within the
primary
definition. Paragraph (cc) of the definition has particular
relevance. It excludes the following from the definition:
“
any activity
of a public sector, governmental or other institution, or of any
person or category of persons, designated by the Registrar,
with the
approval of the Minister, by notice in the
Gazette
, provided
such activity is performed in accordance with such conditions as the
Registrar may with the approval of the Minister
determine in the
relevant notice.”
The Registrar
referred to is the Registrar of Banks, who is an officer or employee
of the South African Reserve Bank designated
by it to perform the
functions assigned to the Registrar in terms of the Act.
45.
On 14 December 1994 the Registrar promulgated GN2172 in GG16167
(“the Commercial Paper notice”) in which, acting
in terms
of paragraph (cc) of the definition, he designated the activity in
paragraph 2 of the Schedule of the notice, and which
is performed in
accordance with the conditions set out in paragraph 3 of the
Schedule, as an activity that does not fall within
the meaning of
“the business of a bank”. Paragraph 2 of the Schedule
defines the excluded designated activity as:
“
The
acceptance of money from the general public against the issue of
commercial paper in accordance with the conditions set out
in
paragraph 3.”
46.
The Commercial Paper notice defines commercial paper to mean:
“
(a) any
written acknowledgement of debt irrespective of whether the maturity
thereof is fixed or based on a notice period, and irrespective
of
whether the rate at which interest is payable in respect of the debt
in question is a fixed or floating rate; and
(b) debentures or
any interest-bearing written acknowledgement of debt issued for a
fixed term in accordance with the provisions
of the Companies Act,
1973 (Act No 61 of 1973,
but does not include
bankers’ acceptances;”
Promissory notes
accordingly constitute commercial paper as defined.
47.
Paragraph 3 of the Commercial Paper notice subjects the issue of
commercial paper to numerous conditions. In the event that

commercial paper is issued not in accordance with the conditions,
such issue of commercial paper will not fall within the designated

activity excluded from the definition and will accordingly
constitute “the business of a bank” and will be illegal

in terms of section 11 of the Banks Act unless the issuer is a
public company and is registered as a bank; or unless the issuer
can
avail itself of other defences, for instance that the issue of the
paper did not constitute the acceptance of deposits from
the general
public as a regular feature of its business and falls outside the
scope of the prohibited activity on that account.
48.
The conditions set out in paragraph 3 of the Commercial Paper notice
are detailed. Those relevant to this matter may be summarized
as
follows:-
48.1 Commercial
paper may only be issued or transferred in denominations of R1
million or more.
48.2 Commercial
paper may be issued only by a listed company or one that holds
marketable net assets that exceeded R100 million
at least 18 months
prior to the proposed issue, or any other juristic person
authorised by the Registrar in writing, unless
the instruments are:
48.2.1 listed on a
recognised finanancial exchange; or
48.2.2 endorsed by a
bank; or
48.2.3 issued by the
central government; or
48.2.5 backed by an
explicit central government guarantee.
48.3 The commercial
paper issuer must be the ultimate borrower of the money obtained
from the general public, or if the issuer
is a company, only a
wholly owned subsidiary or a holding company of the issuer may
borrow money.
48.4 The funds to be
raised through the issue of commercial paper, may only be used for
the purpose of acquisition by the ultimate
borrower of operating
capital and may not, (except when issued by the central government),
be applied for the granting of money,
loans or credit to the
general public.
48.5 No market may
be made in unlisted commercial paper issued for a period of longer
than 5 years, and commercial paper may
not be used by means of
market making therein or in any other manner, to obtain overnight
funding.
49.
Promissory notes are governed and regulated by the Bills of Exchange
Act 34 of 1964. In terms of section 100 of that Act nothing
in the
Act shall affect or restrict any law relating to banks or companies.
All the conditions contained in the Commercial Paper
notice
accordingly apply to promissory notes.
50.
On 4 June 2004, the Registrar of Banks promulgated GNR681 in GG26415
(“the first exemption notice”) in which he
designated the
activity set out in paragraph 2 of the Schedule, and which is
performed in accordance with the conditions set
out in paragraphs 4
to 16 of the Schedule, as an activity that does not fall within the
meaning of “the business of a bank”.
The notice is
complex, but there is no need to examine all of its terms and
provisions. The designated activity is the acceptance
by a
special-purpose institution of money from the general public against
the issue of commercial paper by it, in respect of either
a
traditional or a synthetic securitisation scheme. The first exemption
notice was repealed and substituted by “the second
exemption
notice”, GN2 GG30628 on 1 January 2008. The securitisation
arrangements at issue in the present matter constitute
a traditional
securitisation scheme, defined in the exemption notice to be a
scheme whereby a special purpose institution issues
commercial paper
to investors and uses the proceeds of such issue to obtain assets;
and makes payments primarily in respect of
paper so issued from the
cash flows arising or the proceeds derived from the assets
transferred to such special purpose institution
by an originator.
51.
In order for the issue of commercial paper by a special purpose
institution in a traditional securitisation scheme to fall
outside
the scope of “the business of a bank”, there must be
compliance with the conditions in the notice, most importantly

paragraph 13 of the first exemption notice and paragraph 14 of the
second exemption notice, the latter being a re-enactment of
the
latter in exactly the same terms. Paragraph 14 of the second
exemption notice reads:
“
(1)
Conditions relating to the issue of commercial paper
(a) Notwithstanding
anything to the contrary contained in the Commercial Paper Notice, a
special-purpose institution may issue commercial
paper only for
purposes of a traditional or synthetic securitisation scheme in
accordance with the conditons specified in items
(b) and (c) below.
(b) The commercial
paper-
(i) shall be issued
or transferred only in minimum denominations equal to or greater than
an initial principal value of R1 million,
unless the commercial paper
is-
(A) listed on a
licensed financial exchange;
(B) endorsed by a
bank;
(C) issued for a
period of longer than five years; or
(D) backed by an
explicit national Government guarantee;
(ii) shall be issued
only by a juristic person authorised in writing by the Registrar to
issue commercial paper pursuant to a traditional
or synthetic
securitisation scheme, in accordance with the provisions of this
Schedule and subject to such further conditions as
the Registrar may
determine in such written authorisation.
(c) A
special-purpose institution issuing commercial paper pursuant to a
traditional or synthetic securitisation scheme shall publish
a
disclosure document relating to the said issue of commercial paper,
which disclosure document, as a minimum, shall contain the

information prescribed in paragraph 16 of this Schedule.
52.
Paragraph 16 of the second exemption notice and paragraph 15 of the
first exemption notice impose strict disclosure requirements.

Paragraph 16(1)(a) provides:
“
Investors in
a traditional or synthetic securitisation scheme shall be made aware
that the instruments in which they invest do not
represent deposits
in a bank, but that the instruments are subject to investment risk,
including possible delays in repayment and
loss of income and
principal amounts invested, and that the institution that acts in a
primary role and its associated companies
and, when the institution
that acts in a primary role is a bank, any other institution within
the banking group of which such a
bank is a member, do not guarantee
the capital value or performance of the instruments issued by the
special-purpose institution.”
Paragraph
16(2) requires that a special purpose institution shall issue a
disclosure document to investors containing important
information
including: the total amount of commercial paper to be issued by the
special purpose institution, whether or not the
particular issue of
commercial paper is listed; a description of the assets transferred
or purchased as collateral, or the premiums
received that will be
utilised for the payments by the special-purpose institution in
respect of the commercial paper issued,
as well as other information
related to liquidity, risk and compliance.
53.
When Mr Snyman, counsel for the defendants, closed his case on the
separated questions, he made the concession, on behalf of
his
clients, that Four Rivers, Two Ships and Escascape did not have the
authority in writing of the Registrar to issue commercial
paper
pursuant to a securitisation scheme as required in terms of
paragraph 14(1)(b)(ii) of the second exemption notice and paragraph

13(1)(b)(ii) of the first exemption notice. On the basis of that
concession alone it is possible therefore to find that the
commercial paper issued by these three companies was not legal
commercial paper and that they had hence contravened the Banks
Act
by conducting the business of a bank. However, in the interests of
completeness, and as I am required to consider the conduct
of the
other companies, it will nonetheless be useful to review the common
cause facts and the evidence of Bakkes regarding the
securitisation
schemes.
54.
With regard to all of the companies (except Corpfin), the common
cause facts establish that they all issued promissory notes
which
constituted commercial paper. The ultimate borrower of the money
advanced against the issue of the promissory notes was
not the
relevant SPV, nor did the SPV receive the money as operating capital.
In the final analysis, the money extracted from
CMF found its way to
the debtors (developers) of Allegro Bridging or those of Regent and
Escascape. The capital of the loans
was advanced to persons who
constituted the “trade receivables” of the originators.
The promissory notes were not
issued in denominations of R1 million
or more. And, most importantly, none of the companies had the
written authorisation from
the Registrar of Banks to issue
commercial paper.
55.
Bakkes made important concessions during his testimony regarding all
of the companies. In relation to Miro Capital he admitted
that it had
acted as an SPV and that it had issued promissory notes. It appears
to have acted as an SPV until at least October
2007, but still
issued promissory notes after that. Bakkes claimed that the
promissory notes issued after October 2007 were not
issued to CMF
but were issued by Miro Capital to Four Rivers as “back to
back” security. His evidence is contradicted
by Exhibit X1
which is a promissory note dated 27 June 2008 issued by Miro Capital
to CMM. Miro Capital was part of the Four
Rivers structures. Prior
to October 2007 the funds on-lent to the Allegro developers would
exit CMF through the issue of Miro Capital
promissory notes. Miro
Capital was rated BB- (non-investment quality) in March 2007. During
October 2007, Miro Capital promissory
notes were “converted”
to become Four River promissory notes upon implementation of the
Four Rivers structure. Miro
Capital issued promissory notes to the
value of approximately R434 million. Prior to March 2007, Miro
Capital did not have a
rating, and was accordingly not investment
grade. Bakkes admitted in evidence that Miro Cpital did not have the
authority of
the Registrar of Banks to issue promissory notes and
did not intend to seek a listing of any kind. He accepted that the
promissory
notes of Miro Capital constituted commercial paper. Four
Rivers took over the business of Miro Capital in October 2007, by
which
date Miro Capital had issued promissory notes for approximately
R128 million. Bakkes acknowledged that CMM has a claim against
Miro
Capital for the face value of the promissory notes issued by Miro
Capital in favour of CMM or bearer.
56.
Four Rivers, as just stated, took over the book of Miro Capital in
October 2007 and began to issue promissory notes from that
date,
mainly if not exclusively in favour of CMM or bearer, in respect of
money advanced and used to acquire receivables from
Allegro
Bridging. Four Rivers thus received money from the investors in CMF,
represented by CMM. At the closure of the CMF, Four
Rivers owed
approximately R699 million to CMM in respect of the promissory notes
it had issued. Four Rivers, Bakkes admitted,
also did not have the
written authority of the Registrar of Banks to issue commercial
paper. When Four Rivers was brought into
the picture it was a shelf
company purchased by the management team that structured the
securitisation programme in order to
serve as the securitisation
vehicle. Four Rivers was created and set up by CMM acting in concert
with Allegro Bridging with the
specific purpose of providing
bridging finance facilities to developers for the development of
properties. CMM was the only investor
in Four Rivers’
investment instruments. However, any person in South Africa could
invest in Four Rivers through the agency
of CMM. In terms of the
facility agreement it was “the Funders” (CMF and other
investors) grant the facility, acquire
ownership of the promissory
notes and take the risk, which seems mostly to have been the case in
practice as well. CMM was the
authorised agent of the investors. This
means that any member of the public could through the agency of CMM
invest in Four Rivers’
promissory notes. CMM advertised for
investments and CMM investors in CMF were members of the general
public.
57.
Bakkes made similar concessions and admissions in relation to
Regent/Two Ships and Escascape. These two companies also issued

promissory notes to CMM or bearer which also constituted commercial
paper, and did so without the written authority of the Registrar.

Bakkes specifically admitted that Regent/Two Ships and Escascape
were securitisation vehicles. He admitted also that members
of the
public could invest in Regent/Two Ships promissory notes.
58.
The evidence regarding the issue of promissory notes by Finpro is
less comprehensive. Initially, Bakkes was of the view that
Finpro
had not issued promissory notes. However, when presented with a
promissory note issued by Finpro to bearer in the amount
of R450000
on 25 July 2008 he conceded that Finpro did in fact issue promissory
notes and later that Finpro had no authorisation
to issue commercial
paper from the Registrar of Banks. It is not clear whether Finpro
acted as a securitisation vehicle. The promissory
note of 25 July
2008 issued to bearer intimates that Finpro accepted money from the
general public against the issue of a promissory
note without
complying with the Commercial Paper notice. There is evidence that
the Finpro promissory notes issued to CMM approximated
a value of R93
million in March 2009.
59.
The evidence in relation to Corpfin is not straightforward. In his
plea Bakkes admitted that Corpfin issued promissory notes
against
the receipt of money. During cross-examination Bakkes was referred
to an affidavit he filed in another proceeding, Annexure
G2 File
H2(b) to the Van Romburgh report. In it he stated:
“
CMM Corporate
Finance (“Corpfin”) authorised the managing director to
commence with the operation of building a bridging
finance book. This
book grew to a volume and size of about R25 million. The bridging
loans would be granted in accordance with
all the Acts pertaining …..
These bridging loans and the security held against them would serve
as assets for CMM Corporate
Finance. Against these assets CMM
Corporate Finance would issue promissory notes in terms of the law
pertaining.”
The accounting
records analysed and reported on by van Romburgh indicate that
Corpfin was indebted to CMM in the amount of approximately
R20
million in April 2009. The version in Bakkes’ affidavit
equates Corpfin with a SPV in a securitisation programme similar
to
the one in which, for example, Four Rivers participated. It amounts
to an admission that Corpfin issued promissory notes as
a
securitisation vehicle and is accordingly consistent with the
admission by Bakkes in his plea. During cross-examination regarding

Corpfin, counsel put it to Bakkes that CMM engaged directly in
bridging finance in relation to assets originated by Corpfin.
Bakkes
denied this saying that CMM never invested directly in bridging
finance because it used a securitisation vehicle for that.
He then
identified Corpfin as that securitisation vehicle in question,
which, he added, was later reversed into Escascape. He
went on to
confirm that Corpfin was a securitisation vehicle which issued
promissory notes in which CMM invested. Bakkes further
admitted that
Corpfin did not have the written authorisation of the Registrar of
Banks. Consequently, Corpfin too did not fall
within the designated
activity in the exemption notices and thus, on this evidence,
conducted the business of a bank.
60.
However, it also emerged during the cross-examination of Bakkes that
the curators have not been able to locate any promissory
notes issued
by Corpfin. They have inferred that they were issued from the
accounting entries in the Hi-Port accounting system
of CMM.
61.
Bakkes was also cross-examined by the seventeenth defendant, Mr
Vincent Smith (“Smith”), about the Corpfin promissory

notes. He then directly contradicted his earlier testimony and his
plea. Smith asked him whether the Corpfin board, of which
they were
both members, had ever agreed to issue promissory notes. Bakkes
replied: “I was under the impression that Corpfin
did not
issue promissory notes on their own balance sheet”. Bakkes
further agreed with the proposition put to him by Smith
that he
(Smith) had never agreed to being a party to the issuing of
promissory notes by Corpfin. Smith did not testify in the
separated
hearing. After reserving judgment on the separated questions, and
after considering the issue, but before making any
ruling, I
requested counsel to address me on whether I was required to make a
credibility finding in relation to Bakkes in order
to determine
whether on a balance of probabilities Corpfin had indeed issued
promissory notes. The plaintiffs opted at that moment
to seek an
amendment to paragraph 1 of the notice of motion deleting any
reference to Corpfin, with the result that the separated
questions in
relation to Corpfin will be decided at a later stage of the trial
after there has been further evidence.
62.
Thunderstruck issued three promissory notes against acceptance of
money from CMM to finance the acquisition of an immovable
property
in Meyersdal in March-April 2008. Thunderstruck was not a
securitisation vehicle. The acquisition was initially financed
by a
single promissory note of R15 million which was then split into two
different promissory notes. Thunderstruck had no authorisation
from
the Registrar of Banks to issue commercial paper. Bakkes conceded
that the money used by Thunderstruck was a long-term loan
and was
not operating expenses. He further admitted that when the promissory
note was split into two it was allocated to two
investors in CMF who
were members of the public. On these facts it can be accepted that
Thunderstruck accepted money from the
general public against the
issue of commercial paper and did not comply with the conditions in
paragraph 3 of the Commercial
Paper notice. In particular, because it
was not a listed company or a listed company with a net asset value
exceeding R100 million
it required the written authorisation of the
Registrar of Banks in terms of paragraph 3(1)(b)(iii) of the
Commercial Paper notice,
which it did not have. In consequence, the
Thunderstruck promissory notes were not legal commercial paper in
the sense that they
fell within the ambit of the exemption. However,
as Thunderstruck issued only one promissory note, which was
subsequently split
into two, it cannot be said, (and it was conceded
by the plaintiffs in argument) that Thunderstruck accepted deposits
as a regular
feature of its business, within the meaning of the
definition of the business of a bank. Hence, Thunderstruck did not
contravene
the Banks Act by issuing the promissory note to finance
the property acquisition.
63.
Prior to the defendants making concessions in relation to Four
Rivers, Regent/Two Ships and Escascape, they put forward a possible

defence that the various companies did not accept deposits from the
general public and for that reason they did not conduct the
business
of a bank as defined and hence did not contravene section 11 of the
Banks Act. In light of the concessions, the defence
falls away in
relation to those three companies. For the reasons which immediately
follow the defence is of no avail to the other
companies either. The
definitions of “general public” and “public”
in the Banks Act are not inclusively
descriptive or comprehensive.
According to the definitions “general public” does not
include a bank and the “public”
includes a juristic
person. The words “general public” in their ordinary
connotation mean the members of the community
at large, in the sense
of natural persons –
Commissioner of Inland Revenue v
Plascon Holdings Ltd
1964 (2) SA 464
(A) at 470E-F. The
inclusion by the Banks Act of juristic persons within the meaning of
“public” means that all members
of the community at
large, including juristic persons, are members of the general public
as envisaged by the Banks Act. As explained
earlier, the promissory
notes issued by the companies were issued in favour of CMM or
bearer. It is common cause that CMM acted
as an authorised agent for
the investors in the pool of CMF and the individual investors in the
segregated portfolios. Some 870
investors invested in promissory
notes in this fashion. The SPVs who were controlled by Bakkes and
persons associated with him
accordingly solicited and accepted
through CMM investments from the general public against which
deposits they issued the promissory
notes.
64.
The moneys advanced to the SPVs on behalf of the investors by CMM
constitute deposits as envisaged in the definition of deposit
in
section 1 of the Banks Act in that they were “an amount of
money paid by one person to another person, subject to an
agreement
in terms of which an equal amount…. will be conditionally or
unconditionally repaid (and) … interest
will be payable
thereon … notwithstanding that such payment is limited to a
fixed amount or that a …. instrument
providing for the
repayment of such amount …. is issued in respect of such
amount”. There is no doubt that the acceptance
of money against
the issue of a promissory note falls within the definition.
65.
Bakkes readily conceded that the investors whose money CMM invested
in the segregated portfolios were members of the general
public, as
was CMM itself and CMF and those who had participatory interests in
it. He also admitted that any member of the public
could invest in
CMF and give CMM a mandate to invest in cash management. He
furthermore accepted that the issuing of promissory
notes by
Regent/Two Ships, and therefore by implication the other SPVs, would
constitute the taking of deposits and that if deposits
were taken
from the general public as a regular feature of the company’s
business it would constitute the business of a
bank. He also admitted
that authorisation from the Reserve Bank was required to conduct the
business of bank, or from the Registrar
of Banks, to benefit from
the securitisation exemption notices.
66.
There is accordingly no doubt that the commercial paper issued by the
SPVs, namely Miro Capital, Four Rivers, Regent Group
Capital/Two
Ships, Finpro and Escascape was not legal commercial paper in the
sense that the activity of issuing it fell outside
the definition of
a business of a bank. There is equally no question that these
companies solicited and accepted deposits from
the general public as
a regular feature of their business. In the result, the promissory
notes issued by them were not legal
commercial paper and the issue
of the promissory notes against the acceptance of money from the
general public constituted “the
business of the bank”,
which business they conducted in contravention of section 11 of the
Banks Act. For the reasons I
have already stated, the same cannot be
said of Thunderstruck.
The
third and fourth questions: contravention of GN1503 and the breach of
mandate
67.
I turn now to the questions regarding the contravention of GN1503
and breach of the mandate. In terms of clause 3 of the CCM-client

investment mandate, referred to as an investment management
agreement for cash management between CMM and the client, approved

by the Registrar and the FSB, CMM was authorised by the client to
withdraw such monies and/or to sell units to make payment in

accordance with the client’s instructions and/or to invest all
funds on behalf of the client in assets and under the strategy
as
set out in Clause 16 of the mandate, being the clause specifying the
investment guidelines. “Assets” are defined
for the
purposes of the mandate in clause 1.10 to include such money market
instruments, bonds, unit trusts and investment instruments
deemed
appropriate by CMM. Clause 16.1, as mentioned earlier, identifies
the nature of the investment as “a low risk South
African cash
management fund”, and states that the CMF aims to outperform
the relevant money market benchmark over the
medium term at low
levels of risk within the money market asset class.
68.
Clause 16.8 and 16.9 of the mandate deal with general and specific
investment contracts respectively. Clause 16.8 reads:
“
CMM will
invest on behalf of the client only in assets or underlying funds
that invest in Rand-denominated and
investment grade
South
African investment instruments. CMM may at times use fixed income
derivatives …. within the risk parameters set out
below.”
69.
Clause 16.9 deals with the risk parameters and the specific
investment constraints in two distinct tables. The first table

governs the aggregate exposure to rating classes. Of particular
relevance is the fact that the table limits the aggregate exposure

to long term class ratings AAA, AA, A and BBB corporate debt
combined to a maximum of 25% of the fund. The table expressly
records
that investment in instruments with a rating lower than BBB
is “not permitted”. The second table relates to specific

investment constraints as regards the exposure to any single
institution. The exposure to any single institution with an AAA,
AA,
A and BBB corporate debt rating is limited to “an absolute
maximum” of 5% of the fund.
70.
GN1503 contains additional specific investment constraints in
relation to collective investment schemes, and Chapter VII thereof

governs non-equity securities. Annexure B of GN1503 deals with the
national rating scales of rating agencies, including Global
Credit
Rating, (“GCR”) the agency involved in this matter. In
terms of clause 25 of GN1503 read with Annexure B,
the maximum
permissible percentage inclusion per instrument or issuer as a
percentage of the market value of the assets comprising
the
portfolio is: 20% in respect of instruments with a long-term GCR
rating of A+, A or A-; and 5% in respect of instruments
in respect
of instruments with a long term GCR rating of BBB+ or BBB. No
investments may be made in instruments with a long-term
GCR rating
lower than BBB. Clause 25(b) read with clause 3(10) of GN1503
indicates that unlisted non-equity securities can only
be included
in a portfolio if they are rated by one of the rating agencies
identified in Annexure B. Investment in unrated promissory
notes by a
collective investment scheme is therefore prohibited. Clause
25(b)(ii) prohibits inclusion of commercial paper rated
A- to A+ in
excess of 20% or rated BBB to BBB+ in excess of 5%, while clause
3(10) provides that unlisted non-equity securities
may be included
in a portfolio in the manner and on the conditions determined in
Clause 25, only if they are rated. By clear
implication unrated,
unlisted non-equity securities (including, by definition, commercial
paper) may not be included in a portfolio.
71.
Bakkes conceded under cross examination that to the extent that any
investment by the CMF in promissory notes exceeded the
20%
threshold, this would constitute a breach of GN1503. Bakkes also
conceded that CMM was not authorised, either in terms of
GN1503 or
the mandate, to invest on behalf of CMF or on behalf of specific
investors in unlawfully issued commercial paper. That
concession
alone, taking into account my findings that the issue of the
promissory notes did not fall within the exempted designated

activity in the Commercial Paper notice and the exemption notices,
and furthermore was in contravention of section 11 of the
Banks Act,
is tantamount to an admission that investment in the promissory
notes was not permissible in terms of GN1503 and in
breach of the
investment mandate.
72.
The plaintiffs contend that besides breaching the mandate and GN1503
for non-compliance with the Banks Act, the investment
in promissory
notes issued by the various so-called SPVs contravened the
provisions of both the mandate and GN1503 in other material

respects. During the cross-examination of Bakkes, the plaintiffs
relied upon CMM’s “Hi-Port” accounting system
and
the report compiled by its expert van Romburgh from that system and
extensive source documentation. Bakkes conceded that
the asset
allocation can be determined from Hi-Port. He at times sought to
challenge the conclusions taken from Prof van Romburgh’s

expert report which were put to him, but put up no countervailing
evidence. The plaintiffs have established on a balance of
probabilities the value of both the investment funds in CMF under
management by CMM from July 2006 until closure on 3 April 2009
and
the investment in promissory notes issued by the various SPVs
throughout the period, from which it is possible to calculate
the
inclusion per instrument or issuer as a percentage of the market
value of the assets under management.
73.
Miro began issuing promissory notes in August 2006 and continued to
issue notes allocated to CMF until the end of September
2007. The
value of these notes fluctuated between R24172 947 and R128165 657
in the period, while their value as a percentage
of the assets of the
fund grew from 1,23% in August 2006 to 10,05% in September 2007. The
percentage exceeded 5% for the first
time in March 2007 and remained
above that figure consistently until September 2007 when the value
of the fund stood at R1,276
billion. Miro was not rated between
August 2006 and March 2007. It was awarded a BB- rating by GCR in
March 2007. Accordingly,
the investment in these promissory notes
offended the mandate and GN1503 in various respects. Firstly, the
rating of Miro as
BB- meant that investment in them was not permitted
and prohibited in absolute terms in terms of both the mandate and
GN1503.
The investment exceeded the 5% limit in terms of clause 16.9
of the mandate from March 2007 up to and including September 2007.

At the time of closure of the fund, Miro promissory notes (including
those issued to Four Rivers) amounted to R433148947, representing

37,59% of the value of the funds under management.
74.
Four Rivers received an A- rating from GCR in September 2007. GCR
downgraded this rating in January 2009 to BB because of a

“fundamental shift in the underlying risk profile of the
product offering” because the SPV did not generate sufficient

cash flows to fully redeem the promissory notes at maturity
resulting in the need for the notes to be rolled over at maturity.

It recognised that the cash flow problem was a consequence of the
discounting of property proceeds for developers having changed
“from
a short dated bridging product to longer dated property development
finance”. GCR further down graded Four River
to CCC in March
2009. It expressed concern about non-compliance with legal covenants
and noted that steps had not been taken
to address the sizeable
mismatch between assets and liabilities and other concerns in its
earlier downgrade report.
75.
The investment in Four Rivers promissory notes breached and
contravened the provisions of the mandate and GN1503 in various

respects. The investment exceeded the 5% exposure to a single
institution and issuer from inception until closure, moving from

10,19% in October 2007 to 57,07% in March 2009. In so far as Four
Rivers was rated A- until January 2009, and total exposure
to A-
corporate debt was limited by the mandate to 25% and to 20% by
GN1503, the investment in Four Rivers breached the mandate
from
August 2008 when the investment represented 28,97% of the assets in
CMF and remained in breach until the end of December
2008 when the
percentage grew to 39,76%. It contravened GN1503 from May 2008. As
from January 2009, Four Rivers was rated BB
and therefore the
investment was prohibited in terms of both the mandate and GN1503.
The percentage grew in the period January
2009 until April 2009 from
41,66% to 57,17%.
76.
The first investment in Two Ships/Regent was made in January 2008.
Regent/Two Ships was only rated by GCR in July 2008, when
it was
awarded an A-rating. In April 2009 CMF held R106779874 in Regent/Two
Ships promissory notes, representing 22,91% of CMF
assets. The
investment exceeded the 5% exposure to a single institution or
issuer from February 2008 until the closure of the
fund. Every
investment in these notes in the six months before the company was
rated in July 2008 was prohibited in terms of
both the mandate and
GN1503, being an investment in unrated commercial paper. As at July
2008, that exposure amounted to R103942634,
representing 9,6% of the
fund invested in unrated promissory notes. The investment in A-
rated corporate debt in the period from
July 2008 exceeded the 20%
threshold of GN1503 for February 2009 (22,52%) and March 2009
(22,91%). Thus, while the investment
was within the threshold of 20%
between 2008 and January 2009, it exceeded the 5% threshold of the
mandate in that time. But
Four Rivers and Regent/Two Ships combined
in any event exceeded the 25% aggregate exposure to corporate debt
permitted by the
mandate.
77.
The companies Finpro, Corpfin and Escascape were never rated by GCR.
Consequently, every and any investment made in promissory
notes
issued by these entities was not permitted in terms of the mandate
and GN1503. The aggregate amount of these promissory
notes at 3
April 2009 was R247851995,19 representing an exposure of 21,42% of
the funds under management. As stated, the dispute
about whether or
not Corpfin issued promissory notes remains unresolved. The
plaintiffs have not uncovered any promissory notes
issued by Corpfin
and the evidence in that regard is incomplete. Should it be found
that Corpfin did indeed issue promissory
notes, for reasons just
stated, Corpfin being unrated, any investment in them would be in
breach of the mandate and GN1503. The
accounting records disclose
entries in the amount of R20643760 being in respect of Corpfin
promissory notes unpaid at April 2009,
representing 1,78% of the
fund. Likewise, the investment in the Thunderstruck promissory note
of R15030000 was in breach of the
mandate and GN1504 for the same
reason. It too was unrated.
78.
With regard to costs, I see no reason why the costs of the hearing in
relation to the separated questions should not follow
the result.
79.
In the premises, I make the following declaratory orders:
1. The issuing of
promissory notes by the following entities:
1.1 Miro Capital
(Pty) Ltd;
1.2 Four Rivers
Trading 307 (Pty) Ltd;
1.3 Regent Group
Capital (Pty) Ltd t/a Two Ships 427 (Pty) Ltd;
1.4 Escascape
Investments (Pty) Ltd t/a Sakha iBlokho;
1.5 CMM Finpro (Pty)
Ltd; and
1.6 Thunderstruck
Investments 15 (Pty) Ltd
did not fall within
the activity designated by the Registrar of Banks in paragraph 2 of
the Schedule to GN 2172 of Government
Gazette 16167 of 14 December
1994, or in paragraph 2 of the Schedule to GNR681, Government
Gazette 26415 of 4 June 2004, or in
paragraph 2 of the Schedule to
GN2, Government Gazette 30628 of 1 January 2008, and hence such
promissory notes were not legal
commercial paper as contemplated in
paragraph 1 of the notice of motion in terms of rule 33(4) filed by
the plaintiffs on 18
March 2014.
2. The issue of
promissory notes, against the acceptance of monies, by the entities
referred to in paragraphs 1.1, 1.2, 1.3, 1.4
and 1.5 of this order,
constituted “the business of a bank” as defined in
section 1 of the Banks Act 94 of 1990 and
was in contravention of
section 11 of that Act.
3. The investment by
Corporate Money Managers (Pty) Ltd of the funds of the CMM Cash
Management Fund and that of its investor
clients in the promissory
notes issued by any or all of the entities referred to in paragraph 1
of this order was in contravention
of the provisions of GN1503,
Government Gazette 28287 of 4 December 2005 and in breach of the
investment mandate approved by
the Registrar and/or the Financial
Services Board or any variation thereof.
4. The 1
st
,
17
th
, 19
th
and 20
th
defendants are
ordered to pay the costs of the proceedings in relation to the
determination of the questions separated in terms
of rule 33(4),
jointly and severally, the one paying the other to be absolved, such
costs to include the costs attendant upon
the employment of three
counsel.
JR
MURPHY
JUDGE
OF THE HIGH COURT
Representation
for the Applicants:
Counsel:
Adv FH Terblanche SC
Adv.
KW Lüderitz SC
Adv
HR Fourie
Instructed
by Attorneys: Roestoff & Kruse
Representation
for 1
st
19
th
& 20
th
Defendants:
Counsel:
Adv MM Snyman
Instructed
by Attorneys: EY Stuart Inc.
Representation
for 17
th
Defendant:
In
person