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[2013] ZAKZDHC 52
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Pinfold v Edge to Edge Global Investments Ltd (8744/13) [2013] ZAKZDHC 52; 2014 (1) SA 206 (KZD) (27 September 2013)
REPORTABLE
IN
THE KWAZULU-NATAL HIGH COURT, DURBAN
REPUBLIC
OF SOUTH AFRICA
Case
No: 8744/13
In
the matter between
Anthony
Richard Pinfold and Others
.....................................................
Applicants
and
Edge
to Edge Global Investments Limited
..........................................
Respondent
JUDGMENT
Delivered
on: 27 September 2013
STEYN
J
[1]
On 13 September 2013 the applicants applied for leave as required by
section 81(1)(e) of the new Companies Act, 71 of 2008 (hereinafter
referred to as ‘the Act’). After hearing all submissions
and a consideration of the papers filed, I was satisfied that
an
order should be granted without delay and accordingly granted the
order as per prayers 2 and 3 of the notice of motion and informed
the
parties that my reasons will follow. Hereunder are the reasons for my
order:
[2]
The application highlighted the duties
1
of
directors and focussed intently on the conduct of the directors of
the respondent company. The directors
in
casu
appear
to have lost sight of their role in managing the public company,
namely to act as agents of the shareholders and act in the
interest
of the shareholders and shareholders’ investments and to act in
the best interest of the company. The complaints
of the shareholders
in
casu
were
that the directors acted fraudulently, illegally and misapplied the
assets of the company and failed to account to the shareholders.
[3]
Section 81 (1 )(e) of the Act reads as follows:
‘
A court may
order a solvent Company to be wound up if - ... a shareholder has
applied, with leave of the Court, for an order to
wind up the
company on the grounds that -
(i) The directors,
prescribed officers or other persons in control of the company are
acting in a manner that is fraudulent or
otherwise illegal; or
(ii) The company’s
assets are being misapplied or wasted. ’
[4]
Mr Parker, appearing on behalf of the respondents, submitted in his
written heads that since the matter served before the
court as an
application the ordinary principles
and
rules
relating to applications
should apply. Therefore, so it was argued, mere allegations of
misconduct are insufficient for the purposes
of section 81. The
Court was invited to take into account the defences raised by the
respondents and in light thereof, was asked
to dismiss the
application or refer it for oral evidence. Mr Harpur SC, appearing
on behalf of the applicants, submitted that
the evidence against the
directors of the respondent is overwhelming. Furthermore, that the
court need not make a definite finding
regarding the grounds that
are required in terms of section 81(1)(e) all that is required is
that the court be satisfied that
there is
prima
facie
evidence that supports the
allegations. He submitted that the directors failed to make a full
and proper disclosure as demanded
of them and that innocent members
of the public remain at risk should the court not grant the
permission applied for.
[5]
Since the provision refers to fraudulent conduct
2
it is necessary to consider what would constitute fraudulent
conduct. Fraud is defined in our common law as: “unlawfully
making, with the intent to defraud a misrepresentation which causes
actual prejudice or which is potentially prejudicial to another”.
3
Although the aforesaid definition finds application in the context
of criminal law, it remains relevant in the corporate context.
[6]
In my view section 81 of the Act serves as a safeguard to prevent
solvent companies from being faced with frivolous applications
to be
liquidated on either or both of the grounds listed in section
81(1)(e) of the Act. It grants protection to solvent companies
by
requiring that a court should first grant leave. Where applications
are brought
male fide
or without substance leave ought not to be granted. A solvent
company is afforded an opportunity to set forth whatever submissions
it wishes to make to a court and show that the application is
without substance. Essentially the provision fulfils a filtering
function.
[7]
In my view the discretion to be exercised in terms of s 81 is a very
broad discretion and the
onus
of satisfying the Court that the directors acted fraudulently or
illegally is an evidential
onus
that requires an applicant to place sufficient evidence before a
court that the grounds exist. Reading the section it appears
that
prima facie
proof would suffice in showing the existence of the grounds listed.
I base this view on the ordinary literal interpretation of
the
provision. The test, in my view is no higher than showing a
bona
fide
triable ground. If that is
established then a court ought to grant permission.
[8]
In interpreting section 81(1 )(e) I have been mindful of the
obligations resting upon this court in interpreting legislation.
Section 39 of the Constitution of the Republic of South Africa,
1996, provides as follows:
‘
(2) When
interpreting any legislation, and when developing the common law or
customary law, every court, tribunal or forum must
promote the
spirit, purport and objects of the Bill of Rights. ’
[9]
In
Investigating Directorate:
Serious Economic Offences and Others v Hyundai Motor Distributors
(Pty) Ltd and Others
:
In Re
Hyundai Motors
Distributors (Pty) Ltd and Others v Smit NO and Others
,
4
Justice
Langa, as he then was, stated:
‘
[Accordingly
judicial officers must prefer interpretations of legislation that
fall within constitutional bounds over those that
do not, provided
that such an interpretation can be reasonably ascribed to the
section, [At para 23].
[10]
Section 61 of the Act regulates shareholders meetings and places a
duty on a company to convene a meeting of its shareholders.
Section
61(7) provides as follows:
‘
(7) A
public
company must convene an annual general
meeting
of its
shareholders -
(a) initially, no
more than 18 months after the company’s date of incorporation;
and
(b) thereafter, once
in every calendar year, but no more than 15 months after the date of
the previous annual general meeting,
or within an extended time
allowed by the Companies Tribunal, on good cause shown. ’
(My
emphasis)
The
procedure that should be followed at such meeting is prescribed in
terms of s 61(8) which reads:
‘
(8) A meeting
convened in terms of subsection (7) must, at a minimum, provide for
the following business to be transacted -
(a) Presentation of-
(i)
The
directors’ report;
(ii)
Audited financial statements for the
immediately preceding financial
year;
and
(iii) An audit
report;
(b) Election of
directors, to the extent required by this Act or the company’s
Memorandum of Incorporation;
(c)
Appointment of
-
(i)
An auditor for the ensuing financial year;
and
(ii) An audit
committee; and
(d) Any matters
raised by shareholders, with or without advance notice to the
company. ’
(My
emphasis)
[11]
There should be no doubt that a financial statement of a company is
vitally important to everyone with an interest in that
company. The
Act compels companies to prepare annual financial statements within
six months of each financial year.
5
The directors
in casu
contravened various provisions in not submitting statements, i.e.
Section 28 (Accounting Records); Section 29 (Financial Statements);
Section 30 (Annual Financial Statements). Section 30 should however
be read together with Sections 26 and 28 of the Regulations.
In my
view, the financial statements would have served as cogent proof of
the assets of the respondent, its debts and its expenditure.
Facts
[12]
The applicants, who are all shareholders, claim that R60 to R70
million had been invested into the respondent on the strength
of
representations that were made to them. Investigations by the
shareholders have led them to believe that the directors have
either
misapplied the monies belonging to the company or have wasted the
monies. Most importantly the applicants contend, and
this was not
disputed, that the respondent had failed to issue financial
statements in respect of the years ending February 2012
and February
2013. The directors of the respondent who were faced with these
serious allegations elected to challenge the applicants’
locus
standi,
rather than answering to
the allegations against them. They, however, admit that they have
not issued financial statements for
the years 2012 and 2013. They
further admit that R31 million had been received by the company and
do not dispute the fact that
there were on-going attempts to market
the company.
[13]
Response of the directors
As
stated earlier the directors admit that no financial statements for
the year ending
2012
and
2013
had
been issued, and that the company had received
R31
million. A careful analysis of the
answers given by the directors, show that they have not directly
responded to the allegations
nor have they proffered reasonable
explanations to the allegations against them. For example to blame
the delay of issuing the
financial statements on Ms Etchells is a
dereliction of their own duties and the facts are not in support of
their contention.
Ms Etchells has left their service in March
2013
6
and the company had ample time to obtain the services of an
independent auditor and show to their shareholders that everything
is in order with the finances of the company. In considering the
management of assets owned by the company, the directors once
more
tried to shift the blame of managing its assets on Mr Stassen. Mr
Stassen, however, has left the company in November
2012
and no attempt was made by the
respondent to track down its assets and to protect and maintain
them.
[13.1]
The directors most certainly made a misrepresentation to their
investors when they claimed that Blue Gold Water and Chemicals
(Pty)
Ltd is owned by the Respondent when it does not own 50% in Blue Gold
Water and Chemicals (Pty) Ltd. This is the company
that holds the
patent in respect of the water purifying component of ISC
7
[13.2]
The directors failed to show that the respondent registered patent
holder of ISCP. The true status of the patent is that
the Respondent
had applied for the registration in June 2013, but that objections
were lodged and the decision on the objections
are still pending.
8
There is a vast difference between lodging a registration and owning
the patent, and to hold out that you are the patent holder
in
instances where you are not. Such conduct is misleading and
potentially prejudicial to investors who rely on such a
representation.
[14]
The Private Placement Memorandum
9
which was aimed at persuading investors to invest in the company,
10
stipulates that:
(i)
ISCP enjoys protection worldwide since 24 June 2010;
11
and
(ii)
The company owns the trademark ‘Imuniti Nutrition for Life’
2005/27020 class 35 and 2005/27019 class 5 to the
product and that
such trademark is registered in South Africa and that the company
owns the manufacturing marketing and distribution
rights to the
product globally;
12
and
(iii)
Blue Gold One Drop is a water sterilizing agent manufactured for the
respondent and that the product has been successfully
tested.
13
The applicants aver that various other claims have been made in the
memorandum and that a large number of their claims are untrue
or
incorrect.
[15]
In addition to the above the applicants averred that both Ellis and
Louw, who are directors of the company, failed to disclose
to them
that Ellis has a previous conviction for fraud and that Louw has a
civil judgment against him.
14
It has been argued that their
ommissio
to declare the aforesaid facts constituted fraudulent
non-disclosure. The applicants claimed that it is unlikely that they
would ever have invested in the respondent had all the facts been
revealed.
[16]
Having considered all the allegations and the responses of the
directors of the respondent I was satisfied that in a number
of
instances misrepresentations were made and that there is a real
likelihood that the investors relied on these misrepresentations
when they invested. Given the said circumstances of this case, it is
likely that these misrepresentations could have caused prejudice
to
those acting upon it. Accordingly, I was satisfied that the
applicants had shown that they were entitled to an order i.t.o.
section 81(1)(e) of the Act.
[17]
In my view there was no genuine dispute of fact,
15
as the version averred by the respondents was untenable when
compared with the version of the applicants. I accordingly accepted
the version of the applicants and granted the order as applied for.
Steyn, J
Date
of Hearing: 13 September 2013
Date
of Judgment: 27 September 2013
Counsel
for the applicant: Adv Harpur SC
Instructed
by: Halstead Paola Attorneys
Counsel
for the respondent: Mr GM Parker
Instructed
by: GM Parker Attorneys
1
See
section 76 of the Act for the principal duties of directors and
section 77 for the liability of directors.
2
See
also the approach followed by the English Court of Appeal in
R
v Grantham
[1984]
QB 675
(CCA) as cited by Zulman JA in
Heneways
Freight Services (Pty) Ltd v Grogar
2007
(2) SA 561
(SCA), and
In
Re: South African Co-Operative Livestock Company, Ltd (in
Liquidation) Beachy-Head and Others v The Master
1911
TPD 1013.
Cf.
Estate
Nochomovitz v The Victory Shirt Co, Ltd
1923
CPD 467
at 468.
3
See
Burchell
‘
Principles
of Criminal Law'
3
rd
ed
Juta (2005) at 833.
4
2001
(1)SA 545 (CC).
5
See
section 30 of the Act.
6
See
page 508 of papers.
7
The
Imuniti
Nutritional Supplement Combo Pack.
See
page 221 for a more detailed description of the pack.
8
See
page 963 and 964 of papers.
9
See
page 168
et
seq.
10
See
para 31 of founding affidavit at page 13.
11
See
B205 of papers.
12
See
B205 of papers.
13
See
B207 of papers.
14
See
Case No: 25878/01 dated 29/05/2002 where summary judgment was
granted
against Louw for payment of R160 million, plus compounded interest
and costs.
15
See
Buffalo
Freight Systems (Pty) Ltd v Crestleigh Trading (Pty) Ltd and Another
2011
(1) SA 8
(SCA).