Saincic and Others v Industro-Clean (Pty) Ltd and Another (229/05) [2006] ZASCA 83; [2006] SCA 77 (RSA); 2009 (1) SA 538 (SCA) (31 May 2006)

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[2006] ZASCA 83
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Saincic and Others v Industro-Clean (Pty) Ltd and Another (229/05) [2006] ZASCA 83; [2006] SCA 77 (RSA); 2009 (1) SA 538 (SCA) (31 May 2006)

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REPUBLIC
OF SOUTH AFRICA
THE SUPREME COURT OF
APPEAL
OF
SOUTH AFRICA
Case number 229/05
Reportable
In the matter between:
IVAN SAINCIC
FIRST APPELLANT
SHARON JEAN SAINCIC SECOND
APPELLANT
CRISM
WATER SYSTEMS CC THIRD APPELLANT
and
INDUSTRO-CLEAN (PTY) LTD FIRST
RESPONDENT
INDUSTRO-CLEAN (NORTH WEST)
(PTY) LTD SECOND RESPONDENT
CORAM
: HARMS, STREICHER, FARLAM, HEHER et VAN
HEERDEN JJA
HEARD
: 15 MAY 2006
DELIVERED
: 31 MAY 2006
SUMMARY:
Company Law –
s 424, Companies Act 61 of 1973 – declaration of liability where
business of company conducted fraudulently or
recklessly by director
– insufficient evidence to bring case within ambit of section.
Neutral citation: This
judgment may be referred to as
Saincic v Industro-Clean (Pty) Ltd
[2006] SCA 77 (RSA).
________________________________________________________
JUDGMENT
________________________________________________________
FARLAM JA
INTRODUCTION
[1] The two respondents in this matter
instituted action against the three appellants in the Pretoria High
Court. Three of the four
claims in their summons were upheld by the
trial judge, Basson J. Only one of them, claim A, is on appeal
before us.
[2] The first plaintiff (the first
respondent before us) is a company Industro-Clean (Pty) Ltd, which
carries on business as a supplier
and distributor of cleaning
machinery, equipment and consumables. Since 1999 it has been the
holder of 80% of the issued share capital
in a company known as
Industro-Clean (North West) (Pty) Ltd, the second plaintiff (the
second respondent before us). In terms of
an agreement between the
two respondents the second respondent had the exclusive right to
market certain products supplied to it
on credit by the first
respondent in the North-West region.
[3] The first defendant (the first
appellant before us) was the sole director of the second respondent
from January 2002 to 19 March
2003. He was responsible for the
day-to-day running of the business during that period. The second
defendant (the second appellant)
was previously employed by the
second respondent as its bookkeeper or accountant: she is married in
community of property to the
first appellant. The third defendant
(the third appellant) is a close corporation of which the second
appellant was the sole member
at the relevant time of the trial.
[4] Claim A was brought in terms of s
424 of the Companies Act 61 of 1973. Although a declaration in
respect of a larger amount was
claimed in the summons the sum in
respect of which the first respondent obtained judgment against the
appellants was R572 507.98,
being the amount by which the debit
balance on the second appellant’s trading account with the first
appellant increased during
the period from 1 March 2002 to 19 March
2003.
[5] One of the other claims in the
summons was for payment by the first appellant to the second
respondent of an amount of R322 979.53
being the profits which it was
alleged that the second respondent would have earned during the
period January 2002 to 19 March 2003
but for the breach by the first
appellant of the fiduciary duties which he owed to the second
respondent. In his judgment Basson
J found that the second respondent
had established that the first appellant had breached the fiduciary
duties he owed to it and had
in the process indirectly made secret
profits totalling R148 665.92. In consequence, so the judge held, the
second respondent had
suffered damages in that amount which the first
appellant was ordered to pay to the second respondent.
RELEVANT
STATUTORY PROVISION
[6] Section 424(1) of Act 61 of 1973,
in terms of which the appellants were held liable to pay to the first
respondent the sum of
R572 507.98, reads as follows:
‘
(1) 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.’
FACTS
[7] It was common cause at the trial
that the appellants conducted the business of the second respondent
recklessly within the ambit
of s 424 of Act 61 of 1973 from 1 January
2002 to 19 March 2003. The first appellant, who was the managing
director of the second
respondent during the relevant period,
indirectly made a secret profit at the expense of the second
respondent. This he did by permitting
the second respondent to sell
goods which it had purchased on credit from the first respondent
virtually at cost price to the third
appellant so that it, instead of
the second respondent, could make a profit from on-selling them. The
first appellant benefited indirectly
from this because, at the time
the profits were made, the only member of the third appellant was his
wife, the second appellant,
to whom he was (and is) married in
community of property. Furthermore the sales of the goods concerned
by the third appellant were
made in direct competition with the
second respondent. At the trial, as has been said above, the trial
judge computed the secret
profits indirectly earned by the first
appellant at R148 665.92 and accordingly held that the second
respondent had suffered damages
in that amount.
[8] The main witness who testified on
behalf of the first respondent in respect of claim A was its managing
director, Mr Edward Arthur
Bath. It emerged from his evidence that
the trading account whose increased balance formed the basis for
computing the amount awarded
to the first respondent on claim A had
been operative since 1999 and was still operative at the date of the
trial. In essence there
had been no change in the operation of the
account since 1999. At the time of the trial the balance on the
account was greater than
R572 507.88. It further appeared from Mr
Bath’s evidence that the debts incurred by second respondent on the
trading account during
the period from 1 January 2002 to 19 March
2003 might well have been discharged in the interim by the second
respondent as a result
of the continuous trading operations between
the respondents since 19 March 2003. Of course, as goods purchased on
credit before
19 March 2003 were paid for, further credit purchases
took place so that the balance on the account always exceeded R572
507.88.
[9] Mr Bath also testified that during
1999 prior to the first respondent’s acquisition of a majority
shareholding in the second
respondent the quantum of the latter’s
indebtedness on the account was in excess of R400 000.00. Before 1
March 2002 it was over
R1 000 000.00 It then increased, as I have
said, by R572 507.98 between the period 1 March 2002 and 19 March
2003 and it increased
substantially during the subsequent period up
to the date of the trial.
[10] It was also established at the
trial that from 1999 onwards the second respondent has been
technically insolvent but had been
able to continue trading because
the first respondent has subordinated its claim to the other
creditors’ claims. The first respondent
could at any time from 1995
onwards have taken steps to liquidate the second respondent. Instead
it kept it afloat, as it were, by
extended credit and extra funding.
Mr Bath expressed the view that, although there had not been what he
called an immediate turnaround
in the business, there was a
reasonable possibility in the long term that the company would be
able to pay its debts. He explained
that the first respondent had had
a strategic imperative to maintain a position in the North West
market to meet its national distribution
requirements with its
customers who trade all over the republic.
JUDGMENT OF COURT
A QUO
[11] The
trial judge found that the conduct of the appellants had not only
been reckless but also fraudulent. He also held that the
first
respondent did not have to prove a causal link between the
appellants’ fraudulent and reckless conduct and the debt for which
it sought to hold them personally liable. Nevertheless, he said:
‘
the figure of R572
507.98 is related to the period of fraudulent conduct and I therefore
agree with the argument that it would be
just and equitable if the
[appellants] are held liable for this amount. Even though Bath
testified that the said debt might have
been paid on the basis that
the oldest debts are paid first, the amount outstanding on the trade
balance today is even bigger with
the result that the running up of
the debt during the period in question played an indispensable and
vital part in the debt that
still remains today.’
[12] He rejected a submission, based
on the decision of this court in
L & P Plant Hire BK v Bosch
2002 (2) SA 662
(SCA), that as the first respondent was only
suing as creditor and had not proved that it was a member of the
second respondent,
it was not entitled to an order under s 424 of Act
61 of 1973. In this regard the trial judge held that the
L & P
Plant Hire
case could be distinguished on six grounds.
[13] The
L & P Plant Hire
case
dealt with
s 64
of the
Close Corporations Act 69 of 1984
, the section
which may be regarded as the counterpart of
s 424.
This court held
that it had to be interpreted restrictively as far as creditors were
concerned and that it could not be relied on
by a creditor where the
corporation, in spite of the fact that its business had been
conducted in a reckless or grossly negligent
manner, was still able
to meet the creditor’s claim. The first reason given (at 677E-F)
was that a creditor whose claim the corporation
was able to discharge
had no interest in the manner in which the corporation’s business
is conducted. The second reason given (at
677I-678A) was that it was
not the intention of
s 64
to provide creditors of a corporation whose
business had been conducted recklessly or grossly negligently with
co-debtors of the
corporation against whom they might proceed. The
court, however, left it open (at 677J) whether the position might not
be different
where the corporation’s business had been conducted
fraudulently.
[14] The first ground of distinction
on which the trial judge relied was his finding that the business of
the second respondent had
been conducted not only recklessly but also
fraudulently. The second ground of distinction was the fact that the
first respondent
was not merely a creditor but also held 80% of the
shares in the second respondent and had a large loan account with it.
The third
ground of distinction was the fact that the evidence
established that the second respondent was in fact insolvent and
unable to pay
its debts while, in the
L & P Plant Hire
case,
it had been said (at 677C) that there was no evidence as to the
financial position of the close corporation under consideration.
The
fourth ground of distinction was the use in
s 424
of the words ‘or
otherwise’ after the words ‘winding up, judicial management’,
which words do not appear in
s 64
of Act 69 of 1984. The fifth ground
of distinction relied on was stated as follows:
The first [respondent] is
not seeking to hold the first [appellant] liable as a co-principal
debtor. The second [respondent] has not
been sued simultaneously and,
in any event, is unable to pay its debt to the first [respondent].’
The final ground relied on in the
judgment of the court
a quo
was the apparent acceptance of a
submission advanced by counsel for the respondents that:
‘the
decision in
L & P Plant Hire
makes no reference to
overturning the decisions applicable (referred to above) [the
reference is to
Body Corporate of Greenwood Scheme v 75/2 Sandown
(Pty) Ltd
1999 (3) SA 480(W)
and
Harri and Others NNO v On
Line Management CC and Others
2001 (4) SA 1097
(T)] which held
that s 424 is applicable even where the company is in a sound
financial position.’
SUBMISSIONS
ON BEHALF OF THE APPELLANTS
[15] Counsel for the appellants
submitted that the judgment of the trial judge in so far as it
related to claim A was erroneous and
should be set aside. He
contended that it had not been proved that the business of the second
respondent had been conducted fraudulently.
He also argued that the
first respondent had not proved or been able to quantify the debts of
the second respondent during the relevant
period, viz the period from
January 2002 to 19 March 2003 and that the amount referred to in the
order, viz the nett movement on
the trading account during that
period, was not a ‘debt’ within the meaning of s 424.
[16] Counsel also submitted that the
grounds upon which the
L & P Plant Hire
decision had been
distinguished were not correct and that the ratio in that decision
accordingly applied. In this regard he contended
that s 64 of Act 69
of 1984 and s 424 of Act 61 of 1973 are essentially identical. He
pointed to the fact that the omission of the
words ‘or otherwise’
(which were used in s 424) from s 64 took the case no further
because s 64 began with the words ‘[i]f
at any time’
which
clearly indicated that s 64 could be used where a company was able to
pay its debts. He submitted further that the two cases
to which the
judge referred in support of his sixth ground for distinguishing the
L & P Plant Hire
case were incorrectly decided. Finally it
was argued that when regard was had to the amount awarded to the
second respondent under
claim D, namely an amount equivalent to the
damage it had suffered, it was clear that the court
a quo
had
not exercised its discretion under s 424 in a judicial fashion.
SUBMISSIONS
ON BEHALF OF THE RESPONDENTS
[17] Counsel for respondents supported
the reasoning contained in the trial court’s judgment. He also
argued that the
L & P Plant Hire
decision was clearly
incorrect and should not be followed. The court’s error, he
contended, lay in elevating what should have been
regarded as one of
the factors to be considered in exercising the court’s discretion
under s 64 of Act 69 of 1984 (and by extension
under s 424 of Act 61
of 1973) to the status of a jurisdictional fact which had to be
established in the case of a creditor’s claim
under the section
before the court was vested with a discretion to hold a person
knowingly a party to the conduct described in the
section liable for
all or any of the debts or other liabilities of the corporation.
DISCUSSION
[18] In view of the conclusion to
which I have come it is not necessary in my view to consider whether
the
L & P Plant Hire
decision is correct or
distinguishable. I say this because, for the reasons that follow, I
think that the order made on claim A cannot
be upheld.
[19] In my view the evidence before
the court was too incomplete to enable the court to conclude - purely
on the basis that because
the nett balance on the trading account
increased by the sum in question during the period of fraudulent and
reckless conduct (as
found by Basson J) - that it would be just and
equitable for the appellants to be held liable for the amount of the
nett balance.
[20] It will be recalled that the
first appellant was ordered to compensate the
second
respondent for the damage it suffered as a result of his conduct. The
second respondent will be able, if the first respondent
considers it
appropriate, to use the amount so awarded to reduce the balance on
the trading account.
It
is true, as this court held in
Philotex (Pty) Ltd v Snyman ,
Braitex (Pty) Ltd v Snyman,
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) at 142 H-I,
that it is not necessary to prove a causal link between the relevant
conduct and the debts or liabilities for which
there is a declaration
of personal liability in terms of s 424. But the absence of such a
proven link is a factor to be taken into
consideration by the court
in the exercise of its discretion and in order to decide whether such
a declaration is, in all the circumstances,
just and equitable. Here,
where the conduct relied on consisted of breach of fiduciary duty
through unlawful competition, and damages
are to be paid to
compensate the second respondent for the harm caused thereby, more
evidence is required as to how and why the nett
balance on the
trading account increased during the relevant period. In so far as it
may have been caused by the unlawful competition
and breach of
fiduciary duty this has been addressed by the damages award. We do
not know, however, why the increase, or at least
that part of it that
was not caused by the conduct complained of, came about. What were
the trading conditions in the area of operation
of the second
respondent during the relevant period? Were the first and second
respondents’ other (lawful) competitors getting
a bigger share of
market for some reason unrelated to the activities (or lack thereof)
of the first appellant? And what about the
stock? Was the increase
perhaps attributable to an increase in stock, which was available to
be sold to the second respondent’s
customers in the period after 19
March 2003? No attempt was made to suggest even tentative answers to
these questions.
[21] Although I am of the view that
the section is wide enough to cover a declaration of personal
liability for debts incurred after
the period when the offending
conduct took place and that such an order would not be inappropriate
where the new debts take the place,
as it were, of old debts incurred
during the period because the balance owing on the running account
does not decrease, I am still
unable to say that it is just and
equitable that the declaration sought should be made. Because the
trial judge does not appear to
have addressed his mind to the
questions set out above and also failed to give consideration, in the
context of justice and equity,
to the effect of the damages award he
made in favour of the second respondent I am satisfied that he
misdirected himself and that
this court is obliged to consider the
matter afresh and award such amount as we consider to be just and
equitable in the circumstances.
[22] For the reasons I have given it
is not possible for this court on the scanty information before it to
exercise the discretion
conferred by the section in favour of the
first respondent.
[23] I am accordingly of the view that
the appeal must succeed with costs and that the order granted by the
trial court on claim A
should be set aside and replaced by an order
dismissing the claim.
[24] I
have read the judgment prepared by my colleague Harms and agree with
it.
ORDER
[25] The following order is made:
The appeal succeeds with costs.
The order made by the court
a quo
in respect of claim A is set aside and replaced by the following:
‘
Claim
A: This claim is dismissed with costs.’
……………
..
IG
FARLAM
JUDGE
OF APPEAL
[26] I
agree that the appeal should be upheld for the reasons given by
Farlam JA but I wish to add some comments.
[27] Section 424 of the Companies Act 61 of 1973 is for all intents
and purposes identical to
s 64
of the
Close Corporations Act, at
least as far as the underlying philosophy is concerned. The
difference in wording is for present purposes of no consequence. It
is
true that
s 424
can apply by virtue of the words ‘or otherwise’
irrespective of whether the company has been wound up or is under
judicial management.
But that does not affect the underlying
philosophy as expressed in
L & P Plant Hire BK v Bosch
2002 (2) SA 662
(SCA), namely that the object of the provision is not
to create a joint and several liability between the delinquent
director and
the company in the interest of creditors. If the company
cannot pay, the creditor is entitled to claim from the director
without
having to place the company in liquidation or under judicial
management. This does not mean that the creditor has to excuss the
company
before proceeding against the director but only that there
must be evidence of the company’s inability to pay. I find it
contrived
to distinguish
L & P Plant Hire
, as the high
court did, on the ground that in the instant case the company and
director were not sued jointly and severally. The
question is not how
they were sued or not sued, the question is whether the provision
creates that kind of liability.
[28] Part of the ratio in
L & P
Plant Hire
was
contained in these statements:
‘
By oorweging van hierdie
vraag moet in gedagte gehou word dat 'n skuldeiser, anders as 'n lid,
se enigste belang by die bedryf van
die beslote korporasie se
besigheid geleë is in sy vordering teen die beslote korporasie.
Solank die beslote korporasie die
skuldeiser se vordering ten volle
kan betaal, het die skuldeiser gevolglik geen belang by die wyse
waarop die korporasie se besigheid
bedryf word nie.’ (Para 39.)
‘
So
gesien moet art 64 [of the
Close Corporations Act], wat
skuldeisers
betref, beperkend uitgelê word om slegs betrekking te hê
op 'roekelose' en 'grof nalatige' bedryf van die
beslote korporasie
se besigheid wat 'n nadelige effek op die skuldeiser se vordering
teen die beslote korporasie het.’
(Para
40.)
[29] These statements imply, at the least, that, as far as creditors
are concerned, there must be some or other causal link between
the
fraudulent conduct and the inability to pay the debt. In other words,
it must be due to the fraudulent conduct that a particular
creditor’s
debt cannot be repaid. In this regard the statements appear to be in
conflict with some generalized earlier dicta that
the section applies
irrespective of causation. These conflicting approaches should be
seen in context. Take the example of company
A that incurs a
liability towards creditor B for debt C while the business of A was
conducted in a fraudulent manner. The fraud did
not affect the
solvency of the company and debt C was paid. Thereafter A incurs debt
D at a time when the business was properly conducted.
Due to other
circumstances A cannot pay this amount to B. There can be little
doubt that B would not be entitled to rely on
s 424(1)
in these
circumstances. This example illustrates that the provision could not
have intended that causation does not play any role
at least as far
as creditors are concerned. Whether the matter should rather be
considered as part of the general discretion (as
Farlam JA has done)
or as a pre-requisite (as
L & P Plant Hire
has done),
makes no difference to the outcome of this case.
[30] The high court misquoted the following statement in
L & P
Plant Hire
:
‘
Wat
skuldeisers betref is die bedoeling van art 64 (afgesien - moontlik -
van bedrog) immers nie om vir hulle mede-hoofskuldenaars
met die
beslote korporasie te skep nie. Die bedoeling is om hulle te beskerm
teen nadeel wat die roekelose of grof nalatige bedryf
van die beslote
korporasie se sake vir hulle mag meebring.’
(Para
39.)
By rendering the words between brackets as ‘afgesien van moontlike
bedrog’ the high court thought that the dictum excluded cases
of
fraud while it simply posited the question whether they might be
excluded. I do not find in the provision any difference between
cases
of fraud and other wrongdoings for purposes of liability and I would
suggest that the qualification was unnecessary. Obviously,
when
turning to the exercise of the ultimate discretion the presence of
fraud and its nature and extent may be material considerations
in
determining the scope of the delinquent director’s liability.
[31] I agree with Farlam JA that there is nothing on record why, in
the circumstances of the case and the nature of the fraud, the
first
appellant should be held liable. No connection between the fraud and
an inability to pay the amount or debt for which he is
being sought
to be held liable has been proved.
………………
LTC
HARMS
JUDGE
OF APPEAL
CONCURRING
STREICHER JA
HEHER JA
VAN HEERDEN JA