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[2014] ZAGPPHC 158
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Strydom N.o and Others v Bakkes and Others (19428/11) [2014] ZAGPPHC 158 (4 April 2014)
REPUBLIC OF SOUTH
AFRICA
IN THE HIGH COURT
OF SOUTH AFRICA
(NORTH GAUTENG,
PRETORIA)
CASE
NO:19428/11
DATE:
4 APRIL 2014
In the matter
between:
PIETER HENDRIK
STRYDOM N.O. 1st Plaintiff
JOHN RODERICK
GRAEME POLSON N.O. 2nd Plaintiff
LOUIS STRYDOM
N.O. 3rd Plaintiff
DEON MARIUS BOTHA
N.O. 4th Plaintiff
TIRHANI SITOS DE
SITOS MATHEBULA N.O. 5th Plaintiff
SEAN CHRISTENSEN
N.O. 6th Plaintiff
GAIL LLYN
WARRICKER N.O. 7th Plaintiff
ALTRON GROUP
PENSION FUND 8th
Plaintiff
And
JOHAN HENDRIK
BAKKES 1st Defendant
LOUIS KOTZE
VENTER 2nd Defendant
LIESL MARÉ
3rd Defendant
BHEKAMA SWAZI
MSHIZOBOMVU 4th Defendant
GERHARDUS
JOHANNES VAN ZYL 5th
Defendant
HANS JURGENS
BRITS 6th Defendant
JOHANNES
GERHARDUS DU TOIT 7th
Defendant
DERREK JOHN
ELLERBECK 8th Defendant
SIYABONGA GQOLI
9th Defendant
FREDERICK
VERMAAK 10th Defendant
LUCAS WILLEM
VILJOEN 11th Defendant
DESRÉ
PATON 12th Defendant
ANNA JACOBA VAN
HEERDEN 13th Defendant
MARK DAVID
ARENDSE 14th
Defendant
RYAN MARK
BOTHA 15th Defendant
DAVID THOMAS
OOSTHUIZEN 16th
Defendant
VINCENT REVOR
SMITH 17th
Defendant
ERNEST PHILIPPUS
SEVENSTER 18th Defendant
NSALO FINANCIAL
SERVICES (PTY) LTD 19th Defendant
MARTINA CORNELIUS
BAKKES 20th Defendant
MARICIA BAKKES
21st Defendant
REZANNE BAKKES
22nd 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 m Cubed 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 R450 000 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
defense 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 R24 172 947 and R128 165 657 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 R433 148 947, 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 R106 779 874 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 R103
942 634, 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 R247
851 995,19 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
R20 643 760 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 R15 030 000 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 1st, 17th,
19th and 20th 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 1st 19th & 20th Defendants:
Counsel: Adv MM
Snyman
Instructed by
Attorneys: EY Stuart Inc.
Representation
for 17th Defendant: In person