Knoop NO and Others v Birkenstock Properties (Pty) Ltd and Others (7095/2008) [2009] ZAFSHC 67 (4 June 2009)

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[2009] ZAFSHC 67
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Knoop NO and Others v Birkenstock Properties (Pty) Ltd and Others (7095/2008) [2009] ZAFSHC 67 (4 June 2009)

FREE STATE HIGH
COURT, BLOEMFONTEIN
REPUBLIC OF SOUTH
AFRICA
Case No. : 7095/2008
In
the matter of:-
KURT
ROBERT KNOOP N.O.
1
st
Applicant
NICOLA
CRONJE N.O.
2
nd
Applicant
MATLATSI
WILLIAM LEKHESA N.O.
3
rd
Applicant
JOHANNES
ZACHARIAS HUMAN MULLER N.O.
4
th
Applicant
and
BIRKENSTOCK
PROPERTIES (PTY) LTD
1
st
Respondent
JAN
GERRIT VAN DEVENTER N.O.
2
nd
Respondent
JACOB
VAN DER WESTHUIZEN
3
rd
Respondent
NEETHLING
N.O.
_____________________________________________________
HEARD
ON:
23
APRIL 2009
_____________________________________________________
JUDGMENT
BY:
NXUSANI,
AJ
DELIVERED
ON:
4
JUNE 2009
_____________________________________________________
[1] The
Applicants
are the Trustees in the insolvent estate of the Etrecia Birkenstock
to whom I shall refer as the insolvent in this judgment.
[2] The
insolvent estate was provisionally sequestrated on 16 November 2004
and finally sequestrated on 14 December 2004. The Applicants
were
appointed as Trustees of the insolvent state on 16 March 2005.
[3] During
the performance of their duties the Applicants reported to the second
meeting of creditors on 19 August 2005 that the
creditors would
probably have to make a contribution.
[4] The
Applicants conducted an investigation into the insolvent’s affairs
and arrived at the conclusion that the insolvent was
using a Trust
created by execution of a Trust Deed on 22 April 1999 as well as the
First Respondent as a front for her own benefit
even though her
estate had been sequestrated without assets for the benefit of
creditors. The Applicants discovered that a substantial
amount of
money was due to be paid to the First Respondent and that the
insolvent had made demands upon the First Respondent to
be paid.
[5] The
Applicants accordingly launched these proceedings to obtain what is
known as an anti-dissipation order.
[6] On
27 November 2008 the parties consented to an interim order being
granted preserving the proceeds from an investment released
from
Cherangani Trade and Invest 107 (Pty) Ltd. These monies were to be
deposited in an interest bearing account held by the Applicants’

attorneys. Provision was made for a sum of R517 000,00 to be
utilised by the First Respondent
inter
alia
to ensure that it would be in a position to meet the claims of
bona
fide
creditors. Since then the application has been adjourned from time
to time until it came before me as an opposed application.
[7] The
Respondents have raised a number of preliminary issues. One of these
issues raised is that the Applicants have not made
out a
prima
facie
case in respect of the claim in the action which the Applicants
intend to institute. I consequently requested the parties to stand

over any argument on the other issues remaining in the dispute
because if the Respondents were correct, it would dispose of the

application.
[8] The
Deed of Trust was executed on 22 April 1999, a considerable period
before the insolvency.
[9] It
must follow therefore that when the Trust was formed, the insolvent
could lay, in law, no claim to the Trust property.
[10] In
order to lay claim to the funds the Applicants are constrained to
make out a
prima
facie
case that the Trust and the First Respondent have misused or abused
the principle of corporate personality and that this court
must lift
the corporate veil so as to attribute liability to the person behind
the corporate entity. The Applicants must also
show that the
property of the First Respondent and the Trust are in truth that of
the insolvent.
See:
CAPE
PACIFIC LTD v LUBNER CONTROLLING INVESTMENTS (PTY) LTD AND OTHERS
[1995] ZASCA 53
;
1995 (4) SA 790
(A).
[11] The
corporate veil may be pierced where there is proof of fraud of
dishonesty or other improper conduct in the establishment
or the use
of the company or the conduct of its affairs and in this regard it
may be convenient to consider whether the transactions
complained of
were part of a “device”, “stratagem”, “cloak” or a
“sham”.
See:
THE
SHIPPING CORPORATION OF INDIA LTD v EVDOMON CORPORATION AND ANOTHER
[1993] ZASCA 167
;
1994 (1) SA 550
(A) at 556 C – F.
[12] A court will not
lightly disregard a corporate entity’s separate legal personality
and will endeavour to maintain the separate
personality.
[13] This
reluctance is said to exist because of the deeply seated notion of
fair play in our law.
[14] When
there is fraud, dishonesty or some other improper conduct, policy
dictates that the court engages in a balancing exercise.
The court
considers the circumstances and facts of each case to determine
whether in the appropriate case, it is proper to disregard
the
corporate personality and apportion liability where it belongs.
See:
CAPE
PACIFIC LTD v LUBNER CONTROLLING INVESTMENTS (PTY) LTD AND OTHERS
,
supra
,
at 803.
[15] Where
the use or the establishment of a corporate entity is borne out of
deceit, fraud or impropriety, the corporate veil may
yet still be
lifted.
[16] Where
a corporate entity was properly established but has been misused in a
particular instance to perpetrate fraud, or a dishonest
or improper
purpose, there is no reason in principle why its separate personality
cannot be disregarded in relation to the transaction
in question
while giving full effect to it in other respects.
See:
CAPE
PACIFIC LTD v LUBNER CONTROLLING INVESTMENTS (PTY) LTD AND OTHERS
,
supra
,
at 804 D.
[17] In
my opinion it matters not whether the corporate entity is a Trust or
a company. Provided it can be established on a balance
of
probabilities, that the particular transactions complained of were
the tainted fruits of fraud or other improper conduct, a
court would,
in appropriate circumstances, disregard the separate legal
personality in order to reveal the perpetrator as the “true
villain
of the piece”.
See:
CAPE
PACIFIC LTD v LUBNER CONTROLLING INVESTMENTS (PTY) LTD AND OTHERS
,
supra
,
at 804 I.
[18] When a court pierces
the corporate veil in regard to a particular transaction, it does not
thereby visit the other legitimate
and proper corporate activities
with illegality.
See:
CAPE
PACIFIC LTD v LUBNER CONTROLLING INVESTMENTS (PTY) LTD AND OTHERS
,
supra
,
at 804 J.
[19] In
the present case the monies transmitted to the insolvent by the First
Respondent and the Trust were effected
sine
causa
.
The fact that the insolvent received monies from these entities only
meant that they have a claim for the return of the asset
because they
are void of any legal validity. The Applicants can have no greater
right than the Respondents because they are the
true owners of the
property. In my judgment the Trustee of an insolvent estate cannot
lay claim to property which otherwise does
not belong to an
insolvent. The lifting of the corporate veil cannot make what is
otherwise the property of the entity, property
which belongs to the
insolvent.
[20]
The
Applicants have, in seeking to bolster in the case for piercing the
corporate veil, argued that the Trust was borne of an improper

purpose in the sense that it was designed to place the insolvent’s
assets beyond reach of her erstwhile husband, Mr. Dolf Birkenstock.
[21] I am not convinced
that the insolvent’s husband was entitled in law or otherwise to
claim a stake in the insolvent’s business
but even if he did have
such a claim he evidently abandoned any rights that he may have had.
[22] The
evidence is that the insolvent was herself married to an
unrehabilitated insolvent, Mr. Dolf Birkenstock, who had no assets
to
his name. The insolvent appeared to have commenced the transport
business and ran these in her own name. The insolvent’s
husband
who apparently endeavoured to rehabilitate himself employed means in
an effort to appropriate the insolvent’s assets
for himself.
[23] In
my view, it cannot be contended that the Trust was set up to sequest
the insolvent’s assets from her creditors. The insolvent’s

husband was not a
bona
fide
creditor.
But even if the Trust was set up to place the insolvent’s assets
beyond her husband’s reach this fact cannot be used
to augment the
Applicant’s case for a piercing of the corporate veil. I accept
that “opening the curtains” or piercing the
veil is rather a
drastic remedy. For that reason alone it must be resorted to, rather
sparingly, and, indeed as the very last
resort in circumstances where
justice will not otherwise be done between two litigants. It cannot,
for example, be resorted to
as an alternative remedy if another
remedy on the same fact can successfully be employed in order to
administer justice between
the parties.
See:
AMLIN
(SA) PTY LTD v VAN KOOIJ
2008 (2) SA 558
(C) at 567 J – 568 B.
[24] Piercing
takes at least two forms. Firstly, there are cases where the court
disregards the company and treats the members
as if they have been
acting in partnership (or where the company has a single member, as
if he had been acting on his own behalf),
the consequences are that
they are, for example, held to be the owners of the property
otherwise owned by the company, or to be
personally liable for its
debts and other liabilities.
[25] Secondly, there are
those cases where obligations incurred by the shareholders in their
personal capacity are treated as if
they were incurred by the
company.
See:
Blackman
et
al
Commentary
on the Companies Act
,
Volume 1 2002, with loose-leave updates, Revision Service 1 at 4-114
– 116.
[26] A
court may be empowered to go behind a Trust form. This may exist
where enjoyment and control are not functionally separate
in the
Trust instrument. It is this separation that serves to secure
diligence on the part of Trustees because it secures diligence
since
a lapse may be visited with action by the beneficiaries whose
interests conduce to proper control. This separation also ensures

independence and the careful scrutiny of transactions designed to
bind the Trust.
[27] A
Trust has the virtue of flexibility and a lack of formality in
creation and operation. It is therefore easy to use a Trust
to
manipulate a debtor’s precarious financial situation.
See:
LAND
AND AGRICULTURAL BANK OF SOUTH AFRICA v PARKER AND OTHERS
2005 (2) SA 77
(SCA) at 87.
[28] Where
Family Trusts are concerned it usually occurs that functional
separation between control and enjoyment is lacking. These
Business
Trusts are designed to secure the interests and protection of a group
of family members either identified in the Trust
by name or by
descent or by degree of kingship to the founder.
See:
LAND
AND AGRICULTURAL BANK OF SOUTH AFRICA v PARKER AND OTHERS
,
supra
,
at 88.
[29] Where
a Family Trust is set up to ensure either estate planning or to
escape the constraints imposed by corporate law and assets
are put
into a Trust, a court may in appropriate cases look beyond the Trust
form. A critical consideration here would be the
time-line between
the creation of the Trust and the complaint regarding the conduct.
[30] The
reason for looking behind the Trust form is because usually
everything has remained “as before”. Where the rupture
of the
control/enjoyment divide results in abuse, beneficiaries who control
the Trust, will in their capacities as Trustees, have
little or no
independent interest in ensuring that transactions are validly
concluded. If things go awry they would have every
inducement as
beneficiaries to deny the Trust’s liability. They are also
unscrupulous in that they are easily able to rely on
deficiencies in
form or lack of authority because their conduct as Trustees is
unlikely to be scrutinised by the beneficiaries.
In such cases the
Trustees are the beneficiaries or those who through close family
connection have an identity of interest with
them.
See:
LAND
AND AGRICULTURAL BANK OF SOUTH AFRICA v PARKER AND OTHERS
,
supra
,
at 88.
[31] I
have no doubt that the insolvent and Barnard treated assets of the
First Respondent and the Trust in a manner which is suspicious
and
highly irregular. An irregular or improper use of a corporate entity
does not
ipso
facto
make
their assets the property of a beneficiary.
[32] There
was a breach of section 38 of the Companies Act permitting the
First
Respondent to make a loan to the Trust to enable it to acquire shares
held by Business Partners in First Respondent.
[33] The
fact that there may well have been a breach of section 38 of the
Companies Act is in my view insufficient to vest the property
of the
First Respondent, in the insolvent. If this is so it can hardly vest
the property in the hands of the Applicants.
[34] On
assumption that the Applicants are correct that there have been
several instances of improprietary and fraud perpetrated
inter
alia
by
the insolvent, such conduct can never in my judgment, vest the
property belonging to these entities in the Applicants. For that

reason the application must fail.
[35] The
application is accordingly dismissed. Having regard to the conduct
of the First Respondent and the Second Respondent,
I consider that it
is not appropriate to make any costs order. I consequently make no
order as to costs.
_____________
J. NXUSANI, AJ
On
behalf of Applicants: Adv. R.M. van Rooyen
Instructed
by:
Honey
Attorneys
BLOEMFONTEIN
On
behalf of
Respondents: Adv.
F.W.A. Danzfuss SC
With
him:
J.G.
Gilliland
Instructed
by:
McIntyre
& Van der Post
BLOEMFONTEIN
/sp