Moodaley and Others v King (800/2008) [2009] ZANCHC 52 (30 October 2009)

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[2009] ZANCHC 52
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Moodaley and Others v King (800/2008) [2009] ZANCHC 52 (30 October 2009)

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IN
THE HIGH COURT OF SOUTH AFRICA
(Northern
Cape High Court, Kimberley)
Case No:
800/2008
Heard:
21/09/2009
Delivered:
30/10/2009
In
the matter between:
DOCTOR
KRISHEN MOODALEY 1
st
Plaintiff
TISHEN
MOODALEY 2
nd
Plaintiff
YOGIE
MOODALEY 3
rd
Plaintiff
and
TIMOTHY
JONATHAN KING Defendant
JUDGMENT
KGOMO
JP
The Moodaleys, the
three plaintiffs, are members of the same family. First plaintiff,
Krishen, is a dental practitioner in Kimberley.
The second
plaintiff, Tishen, is his son who is an accountant and Yogie is his
wife and a business women. It is immediately
apparent that this is
a sophisticated and educated nucleus of people who could not have
been as gullible as Dr Moodaley, the
first plaintiff, who testified
for the family pretended.
The defendant, Mr
Timothy Jonathan King, a Kimberley resident, operated what in common
parlance has become known as a pyramid
or Ponzi scheme. Dispite Dr
Moodaley’s unwise denial that he and the family were aware of the
dubious nature of the operation
the scheme bore all the pronounced
hallmarks of an undertaking that was destined, sooner or later, to
implode with adverse ramifications
for some so-called investors who
are at the tail end of the queue while those upfront laugh all the
way to the bank. In
Fourie
NO and Others v Edeling NO and Others
[2005] 4 ALL SA 393
(SCA) para 1 Conradie JA describes a typical
scheme in these terms:
“
1. The audacity
of its perpetrators and the credulity of its participants combined to
produce a gargantuan fraud notoriously known
as the Krion Pyramid
Investment Scheme. --- [A]s all these schemes do, [it] collapsed
when the inflow of funds no longer sustained
the outflow of
extravagant returns to participants. Each participant on average
“invested” in the scheme three times.--- In
order to throw
regulatory authorities off the trail it was at one time or another
conducted by entities called MP Finance Consultants
CC, Madicor
Twintig (Py) Ltd, Martburt Financial Services Ltd, M&B Koöperasie
Beperk and Krion Finacial Services Ltd.
The way in which the scheme
was conducted made it attractive for investors to invest for periods
as short as three months. When
the loan capital with “interest”
was repaid at the end of the agreed investment period, the investor
would more often than
not reinvest the capital and interest. The
advantage for the investor of doing business in this way was of
course that this already
enormous interest was compounded. Typically
an investor would invest an amount in the scheme having been promised
a return of
10% per month, capital and profit repayable within three
months. Until the collapse of the scheme, investors received
repayment
of their capital and their profit when due. Sometimes an
investor would leave the capital and/or the profit in the scheme and
this would then have been reflected by means of a book entry as a
payment and a new investment. Other investors would take their

capital and profit on the due date, some of whom returned after a
while to reinvest a similar amount.”
Dr Moodaley claims
from the defendant an amount of R804 000,00 and his
wife and son R27 000,00 each. The three further
each claim interest
of 15,5% per annum plus costs. In respect of Dr Moodaley there are
five claims in respect of investments
made between 24 March 2007 and
18 May 2007. Mrs Moodaley and her son’s capital investments were
made on 24 March 2007. The
total investment made by Dr Moodaley was
the amount of R468 000,00. The yield on the investment was an
agreed fixed amount which
was payable within periods ranging from
about three to about five months.
Dr Moodaley’s
overall yield for the stated short periods computed to an
astronomical R336 000,00. The other family members’
yield that
was due and payable on 20 July 2007 was R14 000,00 each, for the
period of four months.
Appended to the
plaintiff’s summons are Annexures “A” to “G” being
certificates of investment issued to the plaintiffs
by an entity
named Sovereign Investment CC and signed by the defendant (TJ King)
as “Chief Executive Officer.” That the
investments were made in
the terms set out by the plaintiffs in their Particulars of Claim is
common cause, as this is confirmed
by the defendant in his plea
quoted below.
The defendant’s plea
is reproduced in full in that he was in default for the trial, was
not represented and because Dr Moodaley’s
views were canvassed
thereon when he testified. The defendant pleads that he acted for
an entity called Favour Unleashed Investments
(Registration No. C/K
2006/137656/23) when the various agreements were entered into (or
when the investments were made). He
says that
“the
defendant specifically pleads that it fully disclosed to the
plaintiffs at the time of each investment that the amounts
would be
paid into the account of Favour Unleashed Investments who would pay
the yields as pleaded.”
The plaintiffs adduced
evidence and produced proof through its attorney that Sovereign
Investments CC (CK Reg No 2006/137656/23)
was fake and that the
registration number belonged to Favour Unleashed Investment CC, a
close corporation which, not surprisingly,
had been liquidated.
This ploy of juggling entities as also alluded to in the
Fourie
NO case
(above) is typical of the conductors of pyramid schemes.
The aforegoing recital
gives context to the defendant’s plea which runs in part as
follows:
“
ALTERNATIVELY
7. In the event of
the honourable Court finding that the Agreement as pleaded above
cannot be rectified as pleaded by the Defendant,
then the Defendant
pleads that:
7.1 The written
Agreements that was concluded between Sovereign Investments CC with
Registration Number CK 2006/137656/23, as evidenced
in Annexure “A”,
“B”, “C”,”D”,”E”, “F” and “G” to the
Plaintiff’s Particulars of Claim, were all
illegal Contracts as
they were against the provisions of the Usury Act, Act 73 of 1968
which were repealed on 1 June 2006 by the
National Credit Act, Act 34
of 2005. Section 5, of Schedule 3 of the Usury Act stipulated that
the Usury Act, despite its repeal,
would continue in force despite
the repeal thereof until the Minister first prescribed maximum rates
of interest in terms of Section
105 of the National Credit Act. The
Minister only prescribed interest rates to be applicable from 1 June
2007, thus after the
conclusion of the Agreements marked Annexures
“A” – “G”. The investments were in fact a pyramid-scheme
in terms whereof
investments were solicited from the public through a
Close Corporation known as Favour Unleashed Investments CC with
Registration
Number CK 2006/137656/23 and were at all times operated
as a pyramid-scheme.
7.2 The Plaintiffs
duly performed in terms of the illegal contracts and paid the amounts
as set out in Annexure “A”-“G”
to the Defendants.
7.3 The Defendant,
being fully unaware of the fact that it was in fact a pyramid-scheme,
in good faith paid the monies into the
account of Favour Unleashed
Investments.
7.4 In the premises
plaintiffs are not entitled to restitution of the monies so invested,
as the Defendant duly invested the monies
as per the plaintiffs’
verbal instructions into the account of Favour Unleased Investments.
7.5 In the premises
the Defendant is no longer in possession of any of the funds so
received from the plaintiffs.
7.6 In the premises
the plaintiffs should have realized that the yields so offered [are]
not market related, [are] speculative and
amount to gambling,
alternatively undue profits, and the Plaintiffs became party to a
pyramid scheme.
7.7 In the premises
therefore the Defendant pleads that it would not be in the interest
of justice or public policy to require the
Defendant under the
circumstances pleaded to effect payment of any of the capital so
received and transferred into the account
of Favour Unleashed
Investments to the Plaintiff.
FURTHER
ALTERNATIVELY
8.1 Further in the
alternative and in the event of the honourable Court dismissing the
Defendant’s Plea, as well as its alternative
Plea as so pleaded,
then the Defendant pleads that the Plaintiffs can only be entitled to
repayment of their capital invested in
terms of Annexures “A” –
“G” as the provisions of the Usury Act [were] not repealed prior
to the conclusion of the Agreements,
alternatively the National
Credit Act, if same is found to be applicable, specifically provides
that interest cannot be recovered
at the rate of 107,6923% which
would have been the effective interest rates applicable to the
Agreements and therefore pleads that
the Plaintiffs can only be
entitled to repayment of the capital so invested.
8.2 The Defendant
pleads that in terms of Annexures “A” – “G” interest would
have been paid on the initial capital amounts
invested equal to an
interest rate of 107,6923%.
8.3 The National
Credit Act prescribes interest at the maximum rate of 36,6% per annum
for the time applicable to the Agreement.
Since the parties did not
agree to payment of an amount of 36,6% the parties’ arrangement
pertaining to the payment of interest
is illegal, contra bonos mores
and against the provisions of the National Credit Act and the
Plaintiffs would therefore not be
entitled to payment of interest on
the amounts so invested.”
The question of
rectification which the defendant seems to plead does not arise
because he did not produce evidence to establish
a cause of action
to that end. As far as the extremely exorbitant interest offered by
the scheme and claimed by the plaintiffs
is concerned Adv Willem
Coetzee, for the plaintiffs, was constrained to concede that same
was usurious but contended that that
fact does not render the whole
agreement illegal. Of course Mr Coetzee would be correct if the
agreement is not attended by
any illegality. See
Prudential
Shippers SA Ltd v Tempest Clothing Co (Pty) Ltd and Others
1976 (2) SA 856(W)
at 861 A at which point the Court held:
“
It is clear that
the provisions of the Limitation Act and its precursor, the Usury
Act, 37 of 1926, were not intended to render
a transaction in which
usurious interest is charged a turpis causa, with the result that the
lender may recover neither his capital
nor interest at the
permissible rate. He is entitled to judgment for such amounts, but
not for the excessive interest (see
Radnan
v. Rabinowitz
,
1949 (4) SA 497
(C) at pp. 508, 509;
Mahomed
v. Nagdee
,
1952 (1) SA 410
(AD) at p. 416B; sec. 5 (1) of the Limitation Act).”
See also
Mndi
v Malgas
2006 (2) SA 182(E)
at 188.
It is unquestionable
that a pyramid scheme is illegal. In the Fourie NO–case (above)
the Court, dealing with dispositions in
an insolvent estate, had
this to say:
“
18. A
disposition, it has been decided on more than one occasion, is not
made for value if the payment is illegal. Estate Jagger
v Whittaker
and another
1944 AD 246
dealt with the payment of usurious interest.
‘No obligation of any sort,’ said Watermeyer CJ at 251-252, ‘to
pay a higher
rate of interest than that permitted by the Act can
arise from a promise to pay a higher rate, and it therefore follows
that such
a promise is a mere nullity, and any payment of such a
higher rate in pursuance of such promise is in effect a donation, or
disposition
not made for value, and is consequently liable to be set
aside under section 26 of the Insolvency Act.’ In Rousseau en
andere
v Malan en `n ander
1989 (2) SA 451
(C) at 459I-J this dictum
was applied to illegal commission payments from a scheme found to
have been a lottery. In Visser en
`n ander v Rousseau en andere NNO
1990 (1) SA 139
(A) where the operators of a pyramid scheme paid
participants for a useless product such payments were (at 154I –
156F) found
to be dispositions without value. ---
19. The
promise to reward investors with the returns paid by the scheme was a
“mere nullity” and any payment of a profit or
interest would have
been a disposition not made for value.--- If a “repayment” of
capital retained in the scheme by way of
a book-entry reinvestment
does not qualify as a disposition, then the “payment” of gains
retained in the scheme is not a disposition
either. Where gains
retained were made (in the manner that compound interest might be
earned by capitalizing it) only the actual
payment of the accumulated
gains would be a disposition without value.--- All the parties before
court accepted that the repayment
of an investor’s capital was not
a disposition without value: the investor’s condictio prevented it
from taking on that character:
where a disposition was made it was
made in discharge of an obligation to return the illegal payment.”
This principle applies
equally in this case. The plaintiffs are accordingly entitled only
to the recovery of their capital investment.
First plaintiff made a
capital investment of R468 000,00. He was repaid an amount of R120
000,00 on 02 May 2007. It is immaterial
for purposes of this
judgment whether the repayment was in respect of the yield/interest
or whether it related to the capital
investment. Plaintiff is
therefore only entitled to recover R348 000,00. Second and Third
plaintiffs have not had any repayment
on their investments. They
are entitled to the R13 000,00 each that they have invested.
There is no reason to
legitimize this unlawful scheme by awarding costs to the plaintiffs.
However if defendant is not ordered
to pay interest from the date
of this order there would be no incentive or mechanism for him to
liquidate the judgment debt expeditiously.
Bank interest rates are
currently very low; a rate of 15,5% would benefit the plaintiff
unduly. I will allow 10% interest per
annum.
I therefore make
the following order against the defendant:
1. Payment to first
plaintiff (Krishen Moodaley) in the amount of R348 000,00.
2. Payment to second
plaintiff (Tishen Moodaley) in the amount of R13 000,00.
3. Payment to third
plaintiff (Yogie Moodaley) in the amount of R13 000,00.
4. Interest on the
above amounts at the rate of 10% per annum from date of this order to
date of payment.
5. There shall be no
order as to costs.
_____________________
F
DIALE KGOMO
JUDGE
PRESIDENT
Northern
Cape High Court, Kimberley
On behalf of the Plaintiff
:
Adv. W Coetzee
Instructed by: Towell &
Groenewaldt Attorneys
On behalf of the Defendant
:
No appearance.