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[2006] ZASCA 158
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Heneways Freight Services (Pty) Ltd v Grogor (387/04) [2006] ZASCA 158; 2007 (2) SA 561 (SCA) (26 September 2006)
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THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Reportable
CASE NO 387/2004
In
the matter between
HENEWAYS FREIGHT SERVICES
(PTY) LTD Appellant
and
KLAUS GROGOR
Respondent
______________________________________________________________
Coram: Zulman, Cloete JJA
and Theron AJA
Heard: 24
August 2006
Delivered: 26
September 2006
Summary
: Whether the conduct of the respondent constituted fraud or
recklessness within the meaning of s 424(1) of the Companies Act,
1973
rendering him personally liable for the debts of a company of
which he was the sole director and manager of its business.
Neutral
citation: This judgment may be referred to as
Heneways Freight
Services v Klaus Grogor
[2006] SCA 116 (RSA)
______________________________________________________________
JUDGMENT
______________________________________________________________
ZULMAN JA
[1] The appellant is a
clearing and forwarding agent. The appellant, with the leave of the
court below (Selvan AJ), appeals against
the dismissal of its claim
against the respondent for an order declaring the respondent, Mr
Grogor, personally liable, in terms of
s 424(1) of the Companies Act,
1973 (the Act) for the indebtedness to it of a company, ITITC (Pty)
Ltd which traded as
The House of Sports Cars
(the company).
The respondent was the sole director, and managed the business of the
company.
[2] The main argument on
appeal was based on fraud. The submission was that by providing
creditors with cheques when he knew or reasonably
foresaw the
possibility that there might not be funds in the company’s bank
account to meet them, the appellant committed a
series of frauds.
Assuming the submission to be correct, the conduct does not fall
within the section. The section, as will appear
more fully below,
penalises the carrying on of business with intent to defraud
creditors. As I will indicate hereinafter, that conclusion
is not
justified, if the totality of the facts are considered.
[3] In summary, the
appellant contends with regard to recklessness that the following
conduct of the company, to which it is common
cause respondent was
knowingly a party, rendered the respondent personally liable in terms
of the section:-
The use by the company
of a practice where certain cheques issued by the company for
amounts due to creditors, including the appellant,
were stopped or
dishonoured almost immediately after the due dates appearing on the
cheques, in order to overcome liquidity difficulties
of the company.
Seeking credit from the
appellant after that practice had been adopted for more than a year
which amounted to the business of the
company being carried on
recklessly or with the intent to defraud creditors or for a
fraudulent purpose as envisaged in the section;
and
The respondent, on
behalf of the company, did not have a reasonable expectation of
funds coming from two potential sources and if
so, whether this was
sufficient to exclude the respondent’s conduct from falling
within the ambit of the section.
[4] The relevant portion
of s 424(1) provides as follows:
‘
When
it appears, ... that any business of the company was or is being
carried on
recklessly
or with intent to defraud creditors of the company
... or for any fraudulent purpose, the Court may, on the application
of ... any creditor ... 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’
(the emphasis is mine).
The correct legal
interpretation of the section is not in real dispute between the
parties. The essential issue between the parties
concerns the proper
inferences to be drawn from various facts, many of which are not
really in dispute. The section penalises fraud
or recklessness on the
part of anyone who carries on or manages the business of a company
‘with intent to defraud creditors
of the company’.
‘Recklessness’ includes gross negligence with or without
consciousness of risk taking (see for
example
Philotex
(Pty) Ltd v Snyman
1
where the law is succinctly set out by Howie JA). As to fraud the
judgment of the English Court of Appeal in
R
v Grantham
2
is instructive. The case concerned the relevant provisions of the
1948 English Companies Act. It was pointed out with reference to
In
Re William C Leitch Bros Ltd
3
that that Court had
expressly disavowed an intention to define fraud. The Court of Appeal
approved, instead, the trial Judge’s
direction to the jury in
Grantham
,
according to which they would be entitled to find fraud if the
accused realised, when the debt in question there was incurred, that
there was no reason for thinking that funds would become available to
pay the debt when it became due or shortly thereafter.
4
(See also
Philotex.
5
)
Plainly the onus is upon
the party alleging fraud or recklessness in civil proceedings, such
as these, to prove same on a balance
of probabilities (cf for
example,
Philotex
6
).
[5] Turning firstly to
the appellant’s contention that the practice of stopping the
payment of cheques when they fell due for
payment rendered the
respondent personally liable, it is important to note that it was not
disputed that all the cheques that were
stopped were post-dated.
These cheques were among approximately 700 cheques that were issued
during the period under consideration.
It is therefore necessary
to initially inquire into the respondent’s state of mind at the
time that the post dated cheques in
question were handed over to the
various creditors of the company. Furthermore it is necessary to
consider whether the appellant
proved, on a balance of probabilities,
that he had no reason for thinking that there would be funds
available to pay the cheques
on their due dates. This issue is
plainly relevant both to the question of fraud and recklessness. The
matter was not adequately
explored by counsel appearing for the
appellant at the trial. It was never put squarely to the respondent
that he did not entertain
such a belief. In my view there is no
acceptable evidence to support an inference of fraud or even reckless
conduct on this account.
Of further significance
is the evidence which was led concerning the reason why payment of
the cheques was stopped.
In a schedule prepared by
the appellant’s attorneys from the records of the company’s
bank the reason given for 47 cheques
which were stopped starting with
a cheque dated 3 June 199 and ending with a cheque dated 5 July 2000
was ‘alternative
arrangements’.
The company’s
bookkeeper, Mrs Alexander, was called as a witness by the appellant.
She was asked during her evidence in chief
to comment on the whether
the cheques had been stopped because alternative arrangements had
been made. Although she first said ‘no’
in answer to the
question whether the true reason was that alternative arrangements
were made, she went on to state that the reason
was that there were
no funds in the account and that she did not know ‘what Mr
Grogor tells the clients’. When the appellant,
who conducted
his own defence, put to her that she did not know whether he had made
alternative arrangements she replied that she
could not say and did
not know. Counsel, in support of his argument that the respondent had
in fact made no alternative arrangements
for payment with creditors
of the company to whom post-dated cheques were issued, pointed to the
following exchange in his cross
examination of the respondent. This
concerned a stopped cheque dated 31 March 2000, for R23 484,00 issued
to SARS:
‘…
you were running an
exercise where you had to stop cheques in order to prevent yourself
from being overdrawn on your bank account
and where you had to ask
indulgences from your landlord and where you had to take indulgences
from the Revenue Services for amounts
that totalled hundreds of
thousands of Rand --- That is correct‘.
The appellant’s
counsel placed emphasis on the word ‘take’ as opposed to
‘ask’. The respondent’s
home language is not
English. It may well be that what he was trying to convey by his
answer to the question was that he had ‘taken’
an
‘indulgence’ which had been given to him by agreement
with SARS and not that he had unilaterally ‘taken’
an
‘indulgence’. It is not as though he was asked directly
whether he had or had not made arrangements with the creditor
concerned.
Indeed the general thread
running through the respondent’s evidence was that he had an
explanation for stopping all of the cheques
issued. The appellant
presented no evidence to gainsay this. So for example the respondent
gave perfectly plausible explanations,
in my view, for stopping
cheques issued to Attorney Barry Farber with whom he had a friendly
relationship at the time; Attorney Nossel
who accepted that the
respondent was waiting for cash from the Imperial deal, which I will
refer to presently; and a Mr Essay with
whom he had several other
transactions.
As regards arrangements
with the company’s landlord, Domain Properties, the respondent
testified that he had arrangements with
it that it would not deposit
a cheque dated 2 August 2000 for R160 858,46 in its favour until the
Imperial deal, came to fruition.
As regards Sabila Cape
(Pty) Ltd (Sabila), the company’s previous clearing agents, the
respondent testified that there was a
dispute with this party because
it had incorrectly filled out certain customs documentation which
caused the company financial loss.
Because of this cheques in favour
of Sabila were stopped.
The respondent gave a
general explanation that he was expecting a large sum of money and
handed over various post dated cheques in
anticipation of receiving
this money. When the receipt of the money was delayed he stopped
certain cheques. The respondent was probably
referring to an amount
in excess of R2 million which was in fact received by the company in
August 2000.
[6] One also needs to
bear in mind that the majority of the 700 cheques issued by the
company during the relevant period were met.
As pointed out by Selvan
AJ the reality of the matter was that the company was experiencing
cash flow problems during the year in
question. The respondent was
aware of this and in order to keep the business of the company going
he delayed, and I would add, made
arrangements, with some of the
company’s creditors, in order to pay more pressing debts by
buying time as it were.
[7] It is of considerable
significance that Selvan AJ made no general adverse finding of
credibility against the respondent, thus
leaving this court to draw
what it considers to be the appropriate inferences from the evidence
presented. The learned judge said
of the respondent that he
‘
did not get the impression that
in giving evidence he was deliberately lying; on the contrary he
seemed to me to be trying to the
best of his ability to give an
accurate account of what had happened. But, there was a tendency on
his part to put forward a version
of events most favourable to his
case due no doubt in part to the blurring of his role as witness with
that of his role as advocate.’
[8] As regards the
seeking of credit from the appellant after the stopping of the
cheques referred to in the schedule of stopped cheques
to which I
have previously referred, it is convenient to consider what may be
termed the proposed Imperial deal.
The respondent’s
unchallenged evidence in this regard was to the following effect: The
company was formed in or about 1995.
Its main business was to sell
exotic cars. It had a franchise for the sale of Lamborghini, Aston
Martin, Bugatti and Bentley cars
from the manufacturers. At about the
middle of 2000 he was approached on behalf of the Imperial Group of
companies ( Imperial) to
enter into a joint venture with them. He met
with Mr Lynch, the managing director of Imperial, who indicated a
firm intention of
going into business with the company. Lynch,
according to the respondent, was not particularly interested in
balance sheets or accounts.
What he had in mind was the formation of
a new company of which the respondent would be a director and holder
of half the equity
capital. Lynch had proposed that capitalisation
for the new company would be R20 million of which R10 million would
be contributed
by Imperial and R10 million by the respondent who
would borrow the amount from Imperial and repay it out of profits
over a period
of five years. If the deal had come to pass the assets
of the existing company would have been taken over by the new company
and
all the company’s creditors paid.
As an alternative defence
to the imputation of the appellant that he had incurred credit with
the appellant recklessly, the respondent
claimed that even without
the Imperial deal, he expected the company to be in a position to
meet all its obligations given time.
He pointed to the fact that the
company had a number of cars in stock including a Rolls Royce
manufactured in about 1990 for which
it had paid R400,000.00, a
Lamborgini four wheel drive for which it had paid R600,000.00 to
R700,00.00 and a racing car valued at
approximately R1 million.
According to the respondent the profit margin on cars sold was
considerable and one or two transactions
would have solved the
company’s liquidity problems.
The evidence of the
respondent was that he had good reason to believe that the Imperial
deal would eventuate, not only because he
been assured by Lynch that
the preparation of legal documents was a formality but also because
the broad basis for the new arrangement
had been agreed upon.
Selvan AJ did not
consider that his evidence in regard to the Imperial transaction
could be rejected and considered that the respondent
was largely
corroborated by contemporaneously produced documents and other
circumstantial evidence.
As pointed out by the
learned acting judge, the crucial question is whether, when credit
was obtained from the appellant, there were
grounds upon which a
reasonable person in the position of the respondent would have
believed that a deal would be concluded. The
appellant’s credit
application form was delivered to the respondent on 8 August 2000 and
was signed by him on 15 August 2000.
What reasonable expectations
could the respondent have had at this time?
The first invoice of the
appellant for R309 734,36 was produced on 18 August 2000.
In his evidence in chief, the respondent
initially said that he met
with representatives of Imperial about June or July 2000. At what he
thought was his second meeting with
them, he considered that an
agreement in principle had been arrived at. According to his evidence
it was then that Lynch said to
him he was not interested in balance
sheets. I do not think that there is anything improbable about that
or about the respondent’s
assertion that it was his knowledge
and experience in the market for exotic cars and his trade
connections with their manufacturers
in overseas countries that
Imperial was keen to acquire.
As to when the second
meeting took place the respondent was somewhat vague when answering
questions in cross examination but he undertook
to produce his diary
on the following day which he did. The first entry having a bearing
on his negotiations with Imperial is dated
20 June 2000 and
relates to a telephone call to one Da Cunha of Imperial. There are
entries on 27 June and on 29 June 2000
and a reference
to a telephone call to one Colin Rezec who was a business consultant
whom the respondent had consulted in relation
to the deal. The next
significant entry is under the date 27 July 2000 where there is a
note in regard to an appointment with Da
Cunha at 11:00a.m. Also
written in the diary against that time is the name Associated Motor
Holdings, which was a company in Imperial
that figured in the draft
contracts. On 7 August 2000 there is a note to telephone Da Cunha and
under the date 14 August 2000 there
is mention of a further meeting
at 12 noon with him. On 18 August 2000 there is a notation of a
meeting with Lynch at 3:30 p.m. The
last significant entry is on 21
September 2000 where a note is made of a meeting with Lynch and Da
Cunha at 12 noon.
On a conspectus of all
the evidence I agree with Selvan AJ’s conclusion that by
14 August 2000, at latest, the negotiations
between the respondent
and representatives of Imperial had progressed to a stage when he was
justified in believing that the transaction
would go ahead. An
important circumstance in this regard is that the proposed business
plan, to which I have referred, was outlined
on that day.
[9] Neither party called
as witnesses any of the representatives of Imperial. The respondent
expressed an intention to call Lynch,
but he relinquished that idea
when it was pointed out to him by Selvan AJ that since Lynch had not
been subpoenaed it would be unlikely,
having regard to his other
commitments, that he would make himself available at short notice to
give evidence in the case. I agree
with Selvan AJ that no adverse
inference may be drawn against either party for not calling witnesses
from Imperial.
7
Even if there was an evidential burden on the respondent to satisfy
the court that the negotiations with Imperial had progressed
to a
point where as a reasonable man in his position he was entitled to
rely upon their coming to fruition, he discharged such onus.
[10] It was put to the
respondent by counsel for the appellant that the financial state of
the company at various times constituted
proof, within the meaning of
s 424(1) of the Act, that its affairs were conducted recklessly or
with intent to defraud; this was
particularly so when he issued the
cheque for R309 734,36 post dated to 21 September 2000, as he
knew that it would not be paid
and therefore he was acting with
fraudulent intent. The respondent denied this. He pointed out that in
a telex which he gave the
instruction to his bank to stop payment of
this cheque he also stopped payment of a cheque in favour of his wife
for R35 000,00.
In my view the court
a
quo
was correct on the
basis of the undisputed evidence that I have mentioned above in
finding that the respondent had not acted with
fraudulent intent.
Furthermore as the respondent stated, apart from the appellant and
Sabila, nearly all of the trade creditors of
the company had been
paid within a maximum of thirty days from the date of their claims.
[11] It was also
contended by the appellant that during the period commencing June
1999 to the date when the company was placed under
winding-up the
respondent knew or should have known that it would not be able to pay
its debts on due date. This notwithstanding,
the company, represented
by the respondent, continued to incur credit with the appellant
amongst others. This conduct, so it was
argued, constituted reckless
trading within the meaning of the section. It would not be proper to
consider this state of affairs
in isolation. As pointed out by the
respondent in his evidence the matter needs to be looked at in the
context of the number and
amounts of cheques issued by the company
during the period in question. As already pointed out, of the
approximately 700 cheques
issued, the number of cheques stopped was
not considerable in number or amount and was approximately only about
8 per cent of the
total number of cheques issued. Indeed it is
apparent that approximately 650 out of 700 cheques were paid on the
due date thereof
and that of those that were countermanded, all but
the cheque handed to the appellant, were met shortly after the due
date of the
cheque. It is well to bear in mind the following remarks
in
Ex parte De Villiers
NNO:In Re Carbon Developments (Pty) Ltd (in liquidation)
8
‘
In
short, the mere carrying on of business by directors does not
constitute an implied representation to those with whom they do
business
that the assets of their company exceed its liabilities. The
implied representation is no more than that the company will be able
to pay its debts when they fall due.’
In other words it is not
a corollary to this proposition that where the assets of a private
company exceed its liabilities this has
no bearing on whether its
directors are justified in carrying on business. On the contrary,
where a company is technically solvent
it must often follow that it
will be in a position to pay its debts either because it will be in a
position to realise its assets
or because it will be able to obtain
loan finance on the security thereof. What is important in this
context is to enquire, proper
regard being had to the onus of proof,
whether the directors of the company genuinely believed that
‘the
clouds will roll away and the sunshine of prosperity will shine upon
them again and disperse the fog of their depression’
9
entitling them to incur
credit to enable them to get over the bad times.
[12] The court
a
quo
considered whether the
company was factually insolvent during the period of approximately
twelve months before it was placed under
winding-up and what the
belief would have been of a postulated reasonable businessman as to
the proposed discharge of its liabilities
as they fell due. Taking
into account various subjective factors to which the court
a
quo
referred, it does not
necessarily follow that because the respondent put the creditors of
the company who became such during the
last year of trading, at risk,
he thereby acted negligently. But even if he did, his negligence was
not of such an order that it
constituted recklessness within the
meaning of the section. The proposed Imperial deal in itself
justified carrying on with the business
of the company at the time
when it had dealings with the appellant. A court should not, as
pointed out in
Philotex,
10
lightly find recklessness.
[13] In summary I am
therefore of the view that the court
a quo
properly and for
good reason found that the appellant had not discharged the onus
resting on it to prove that the respondent was
either fraudulent or
reckless within the meaning of the section.
[14] The appeal is
dismissed with costs.
_____________________
R H ZULMAN
JUDGE OF APPEAL
CONCUR: ) CLOETE JA
) THERON AJA
1
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA).
2
[1984] QB 675
(CCA).
3
[1932] 2 Ch 71
at 77.
4
At 682 (QB).
5
(Supra) at 145J to 146F.
6
Supra at 142I.
7
(See for example
Galante
v Dickinson
1950 (2) SA 460
(AD) and
Elgin Fireclays Limited v Webb
1947 (4) SA 744
(AD) at 750 and
Minister
of Justice v Seametso
1963 (3) SA 530
(AD)).
8
1993 (1) SA 493
(AD) at 504E.
9
Palmer’s Company Law (24 ed) at 1463
quoted with approval in
Carbon
Developments
(supra) at 504B. See also
Ozinsky NO v Lloyd
1992 (3) SA 396
(C) at 415I-418D.
10
At 142H.