Airport Cold Storage (Pty) Limited v Ebrahim and Others (3181/06) [2007] ZAWCHC 25; 2008 (2) SA 303 (C) ; (22 May 2007)

About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Western Cape High Court, Cape Town
SAFLII
>>
Databases
>>
South Africa: Western Cape High Court, Cape Town
>>
2007
>>
[2007] ZAWCHC 25
|

|

Airport Cold Storage (Pty) Limited v Ebrahim and Others (3181/06) [2007] ZAWCHC 25; 2008 (2) SA 303 (C) ; (22 May 2007)

in
the high court of South Africa
(cape
of good hope provincial division)
Case
No 3181/06
In
the matter between:
airport
cold storage (Pty) Limited Plaintiff
and
nizaar
ebrahim First Defendant
abbas
ebrahim
Second Defendant
h
m m terblanche n o
(in his capacity as liquidator of
Sunset Beach Trading 232
cc
(in Liquidation))
Third
Defendant
judgment:
delivered 22 May 2007
Griesel
J:
The
plaintiff in this matter,
Airport Cold Storage (Pty) Limited
,
was a creditor of a close corporation known as Sunset Beach Trading
232 CC (
Sunset Beach
or
the corporation
), which traded
under the name and style of
Global Foods.
During the period
March to June 2005 the plaintiff sold and delivered imported meat
products and frozen vegetables to the corporation
on open account.
On 12 August 2005, when the corporation was placed into
pro­vision­al liquidation by order of this court,
a balance
of R278 377.19 remained owing according to the plaintiff’s
calculations.
The
provisional order was made final on 27 September 2005. The plaintiff
duly proved a claim against the corporation in liquidation
for the
amount out­standing. It received no dividend in the liquidation,
however, since the corporation had no assets.
The
plaintiff thereupon launched the present action, seeking to hold the
first and second defendants personally liable for such
debt in terms
of the provisions of the Close Corporations Act 69 of 1984 (
the
Act
). It is common cause that the first defendant, Mr Nizaar
Ebrahim (
Mr Ebrahim Jnr
), who is the son of the second
defendant, Mr Abbas Ebrahim (
Mr Ebrahim Snr
), was the sole
member of Sunset Beach and was also its manager and in control of
its business at all relevant times. The plaintiff
alleges that Mr
Ebrahim Snr was ‘an employee, manager and/or officer of the
corporation’. The third defendant is the liqui­dator
of Sunset
Beach, but no relief is claimed against him and he played no part in
these proceedings as a litigant. I will accordingly
refer to the
first and second defendants collectively as ‘the defendants’,
save where it is necessary to refer to either of
them individually.
The
plaintiff’s claim is based on three alternative statutory causes
of action:
First,
the plaintiff relies on the provisions of s 64(1) of the Act,
alleging that ‘during the period March to August 2005,
the
business of the corporation was carried on recklessly or for
fraudulent pur­poses or with the intent to defraud the creditors
of the company’.
In
the alternative, the plaintiff alleges that the incorporation and
use of the corporation by the defendants constituted ‘a gross
abuse of the juristic personality of the corporation as a separate
entity’ in violation of the pro­visions of s 65 of
the
Act.
The
final alternative claim is directed against the first defendant
alone, based on the provisions of s 63(
h
) of the Act,
which holds a member of a close corporation personally liable,
jointly and severally with the close corporation, for
debts incurred
by the corporation ‘where the office of accounting officer of the
corporation is vacant for a period of six months’.
On
the evidence presented in this matter, it is clear that the three
individual causes of action are in fact inextricably inter­twined
and form part, to a greater or lesser extent, of one composite
complaint of abuse of the separate juristic personality of Sunset
Beach by the defendants.
I accord­ingly propose dealing
with the matter on that basis and proceed to con­sider the legal
require­ments for this
cause of action before examining the
factual allegations advanced in support thereof.
Abuse
of juristic personality
One
of the most fundamental conse­quences of incorporation is that a
close corporation – just like a company – is a juristic
entity
separate from its members. Incorpo­ration also entails ‘limited
liability’ of members, with the result that they
are generally not
liable for the debts of the corporation. Furthermore, the assets of
a corporation are the exclusive property
of the corporation itself
and not of its members.
1
In the
locus classicus
on this topic,
Salomon v Salomon &
Company
,
2
Lord MacNaghten said the following with regard to some of the
motives for incorporation:
‘
Among
the principal reasons which induce persons to form private companies
… are the desire to avoid the risk of bank­ruptcy,
and the
increased facility afforded for borrowing money. By means of a
private company a trade can be carried on with limited liability,
and without exposing the persons inter­ested in it in the event
of failure to the harsh provisions of the bankruptcy law.’
In
the sphere of companies, the directors and members of a company
ordinarily enjoy extensive protection against personal liability.
However, such protection is not absolute, as the court has the power
– in certain exceptional circum­stances – to ‘pierce’
or
‘lift’ or ‘pull aside’ ‘the corporate veil’ and to hold
the directors personally liable for the debts of the company.
3
According
to Blackman,
4
‘veil piercing takes at least two forms. Firstly, there are cases
where the court disregards the company and treats the members
as if
they had been acting in partnership (or where the company has a
single member, as if he had been acting on his own behalf),
with the
con­sequence that they are, for example, held to be the owners
of property other­wise owned by the company, or
to be personally
liable for its debts and other liabilities.’ (This is said to be
the most frequently stated consequence of veil
piercing.) Secondly,
there are those cases where obligations incurred by shareholders in
their personal capacity are treated as
if they were incurred by the
company. For present purposes, only the first form of veil piercing
needs to be considered.
Whatever
form it takes, veil piercing is an ‘exceptional procedure’
5
and, as pointed out by Scott JA in
Hülse-Reutter &
Others v Gödde
,
6
a court has no general discretion simply to disregard the existence
of a separate corporate identity whenever it considers it just
or
convenient to do so. However, the circum­stan­ces in which a
court will disregard the distinction between a corporate
entity and
those who control it are ‘far from settled’:
‘
Much
will depend on a close analysis of the facts of each case,
considerations of policy and judicial judgment. Nonetheless what,
I
think, is clear is that as a matter of principle in a case such as
the present there must at least be
some misuse or abuse of the
distinction between the corporate entity and those who control it
which results in an unfair advantage
being afforded to the latter
.’
7
(my
emphasis)
In
The Shipping Corporation of India Ltd v Evdomon Corporation and
Another
,
8
Corbett CJ required proof of ‘an element of fraud or other
improper conduct in the establishment or use of the company or
the
conduct of its affairs’ before a court can pierce the corporate
veil.
This
requirement of fraud or other improper conduct finds resonance in
the provisions of s 65 of the Act,
9
where the Legislature, with regard to close corporations, has
created a statutory remedy ‘which is equivalent to (the court’s)
jurisdiction at common law to “pierce the corporate veil” in
relation to a company’.
10
Liability under this section depends on a finding of ‘gross abuse
of the juristic personality of the corporation as a separate
entity’. However, no attempt has been made in the section to
indicate the facts or circumstances that would qualify as a gross
abuse of the juristic personality of the corporation as a separate
entity. The courts are required, in other words, to give content
to
the open-ended concept of ‘gross abuse’, based on the facts of
each particular case. This exercise does not take place in
a vacuum,
however, and it is axio­matic that the principles and categories
developed with regard to piercing the corporate
veil in the context
of company law will serve as useful guide­lines in this context.
The
starting point is that veil piercing will be employed ‘only where
special circumstances exist indicating that it [i.e. the
company or
close corporation] is a mere façade concealing the true facts’.
11
Fraud will obviously be such a special circum­stance, but it is
not essential. In certain circumstances, the corporate veil
will
also be pierced ‘where the controlling shareholders do not treat
the company as a separate entity, but instead treat it
as their
“alter ego” or “instrumentality” to promote their private,
extra-corporate interests’:
12
‘
Although
the form is that of a separate entity carrying on business to
promote its stated objects, in truth the company is a mere
instrumentality or business conduit for promoting, not its own
business or affairs, but those of its controlling shareholders.
For
all practical purposes the two concerns are in truth one. In these
cases there is usually no intention to defraud although
there is
always abuse of the company’s separate existence (an attempt to
obtain the advantages of the separate personality of
the company
without in fact treating it as a separate entity).’
13
Against
this background, I turn to consider whether the plaintiff has
established that the defendants have in fact abused the separate
juristic personality of the close corporation in question.
Evidence
The
evidence presented
on behalf of
the
plaintiff consists, firstly, of a substantial body of documentary
evidence contained in exhibits A, B, C and F. Apart from various
invoices and accounts, it includes a certified transcript of the
proceedings at an insolvency enquiry into the affairs of Sunset
Beach, held at the
magistrate
’s court in
Wynberg during November and December 2005.
14
The record was received as
prima facie
evidence of the
pro­ceedings recorded therein, in accordance with the provisions
of
s 68(1)
of the
Insolvency Act 24 of 1936
.
In
addition, the plaintiff also presented
viva voce
evidence by
its managing director, Mr Patrick Gaertner; an accounting expert, Mr
Derek Hanslo; as well as a representative from
the liquidator’s
office, Mr Johan Theron. The defendants, in turn, also presented
certain documentary exhibits con­tained
in exhibits D1–3 and E
and, in addition, called an accountant, Mr Nasief Price, as a
witness. The defendants thereafter closed
their case with­out
themselves going into the witness box, despite earlier indications,
during cross-examination of the plaintiff’s
witnesses, that they
would be called to give evidence. The issues in dispute depend
therefore on inferences to be drawn from evidence
that is largely
common cause.
Factual
background
Sunset
Beach was incorporated as a ‘shelf CC’ on 18 June 2004.
According to the founding statement, the sole member at that
stage
was one Christian Gouws with Mal­herbe Lourens as the first
accounting officer, whereas the registered office was stated
to be
at 287 Lynnwood Road, Menlo Park 0081. On 20 January 2005, Mr
Ebrahim Jnr was officially substituted as the sole member of
Sunset
Beach in the place of the original member, who simultaneously
resigned.
15
However, no other changes to the details con­tained in the
original founding statement were recorded, nor was a new accounting
officer appointed.
The
day-to-day business of Sunset Beach was attended to by Mr Ebrahim
Jnr. In addition to his membership in Sunset Beach, Mr Ebrahim
Jnr
is also the sole member of two further close corporations, namely
Ehbro Property Investments No 7 CC (
Ehbro
) and Zaki Meat
Market CC (
Zaki Meat
), both of which featured prominently in
this case.
Sunset
Beach traded from premises in Athlone. Mr Ebrahim Jnr had
previously, from
approximately
2003,
traded from the same premises as
Pacific Foods
under the
corporate guise of Zaki Meat. This business had extensive dealings
with the plaintiff over a period of some 18 months
or so. At the
beginning of 2005, when Zaki Meat owed the plaintiff in the region
of R600 000, it was decided that this close
corporation would
cease trading and that the business conducted by it up to that stage
would, with effect from March 2005, be conducted
in the name of
Sunset Beach, trading as
Global Foods
. Much was made during
the trial of this change-over of the business from Zaki Meat to
Sunset Beach. I will deal with this issue
in more detail below.
Suffice it for present purposes to state that, as from the date
mentioned above, Sunset Beach for all practical
purposes took over
the business of Zaki Meat and con­tinued where the latter had
left off. In the result, the plaintiff’s
accounts also reflect
that, with effect from 1 March 2005, its debtor was Sunset Beach.
From
the inception of its business, Sunset Beach ordered meat products
and frozen vegetables from the plaintiff in fairly substantial
quantities. However, towards June 2005 it encountered severe
cash-flow problems. The total balance outstanding at that stage
amounted
to some R250 000. This led to various discussions and
negotiations between the plaintiff and Mr Ebrahim Snr in order to
try
and salvage the position. Certain post-dated cheques were
presented
on behalf of
Sunset Beach, some
of which were dishonoured upon presentation. The plaintiff’s
attorneys eventually addressed a statutory letter
of demand
16
to Sunset Beach, calling for settlement of the full outstanding
balance of R278 377.19 within 21 days. In response, Mr Ebrahim
Snr, through his erstwhile attorneys, offered to pay the plaintiff
an amount of R225 000 towards its claim. This offer, however,
was subject to ‘certain paperwork and procedures’ which first
had to be completed by Mr Ebrahim Snr.
17
This offer was not acceptable to the plaintiff, who proceeded with
the application for liquidation.
A
family business
In
considering whether the plaintiff has discharged the onus of showing
gross abuse of the juristic personality of Sunset Beach,
I bear in
mind, firstly, that it formed part of what was essentially a family
business or, to be more precise, a conglomerate of
associated family
businesses, involving Mr Ebrahim Snr and his sons. Although both
defendants, in their evidence at the enquiry,
denied that Mr Ebrahim
Snr was an employee or officer of Sunset Beach and attempted as far
as possible to minimise his role in
its affairs, it is clear from
the evidence that he actively assisted his son in the running of
Sunset Beach, as well as in various
other family businesses. This
was confirmed by Mr Gaertner, who testified that – save for a few
isolated occasions – he always
dealt with Mr Ebrahim Snr when it
came to placing orders; negotiating prices; collecting stock; making
payment; and general negotiations
regarding the affairs of Sunset
Beach.
He
and the rest of the family utilised a host of entities and trading
names at different stages. Thus, Mr Ebrahim Snr started off
in
approximately
1979, trading in his
personal capacity under the business name of
Broadway
. At
some stage, however, he ‘gave it over to the children’.
18
Mr Ebrahim Jnr, as mentioned earlier, is the sole member, not only
of Sunset Beach, but also of Ehbro and Zaki Meat. Ehbro conducted
business as
Jimmy’s Supermarket
and later also as
Bakerman’s Choice
. Zaki Meat traded as
Pacific Foods
,
whereas business was also carried on at some stage under the trade
name
Pacific Chilled & Frozen Foods
. Finally, Sunset
Beach, trading as
Global Foods
, came on the scene.
Further
proof of the involvement of the family in all of the business
entities came from Mr Ebrahim Jnr who, during an unguarded
moment,
con­ceded at the enquiry that ‘(t)here was a business
in
the family
called Pacific Foods’.
19
(my emphasis) This same mentality was revealed in their evidence at
the enquiry, where both father and son (unconsciously) repeatedly
used the plural pronouns ‘we’ and ‘us’ and ‘our’ with
reference to the business of Sunset Beach.
Further
examples of this corporate confusion between the various business
entities are the following: Sunset Beach traded from premises
in
Athlone, which it shared with Ehbro on an informal basis. It also
used delivery vehicles as well as office furniture belonging
to
Ehbro. It made indiscriminate use of the bank account of Ehbro, both
for the deposit of its own money and for paying its major
creditor,
namely the plaintiff. In addition, Sunset Beach simply ‘took over’
debtors of Zaki Meat and appro­priated the
proceeds. It utilised
the same telephone and fax numbers as those appearing on invoices of
Pacific Foods.
Thus
it is apparent from their own evidence that both Mr Ebrahim Snr and
his son had scant regard for the separate corporate identity
of
Sunset Beach – or of any of the other entities, for that matter.
An
informal business
As
is evident from the above, the business of Sunset Beach was
conducted in a very loose and informal manner, with little or no
regard for the requirements of the Act. Thus, it kept no
conventional books of account. Instead, it utilised a set of
standard
commercially available Croxley Tripli­cate invoice
books to record details of daily sales to its debtors. Details of
its trade
name,
Global Foods
, together with its business
address, telephone and fax numbers and VAT number were stamped on
the invoices. (As mentioned above,
the telephone and fax numbers
were the same as those appearing on invoices of
Pacific Foods
.)
However, the invoices contain no reference whatsoever to the
corporate identity of Sunset Beach. (This omission in itself, of
course, constitutes a breach of the mandatory requirements of
s 23(2)(
b
) of the Act and can, in suitable
circumstances, give rise to personal liability of the member(s) of
the corporation responsible
for such omission.)
The
business was conducted largely on a cash basis. Pay­ments
received from the debtors were casually noted on the copies of
the
invoices. Apart from its own invoice books in respect of sales and
deliveries, Sunset Beach also kept invoices from its creditors
–
mainly the plaintiff – in a lever-arch file. Although Sunset Beach
had a current account at Absa Bank, Claremont, very little
of its
cash turnover found its way into its bank account. According to the
evidence of Mr Hanslo, who examined the books of Sunset
Beach at the
request of the liquidator and whose evidence was not challenged in
this respect, the invoice books reflected sales
by Sunset Beach to
its customers during the period March to August 2005 amounting to
R1 818 254.64, of which only R148 607.70
– ie less
than 10% – was deposited into the bank account of the business.
Although
Sunset Beach was registered for VAT and although it collected VAT
from its customers, no VAT was in fact paid over by it
to the SA
Revenue Services and no VAT returns were submitted. Moreover,
although Sunset Beach employed between 10 and 20 employees,
no
payslips and no PAYE returns were kept.
Against
this background, there seems to be considerable force in the
plaintiff’s allegation that ‘no proper books of account
were
kept’ by Sunset Beach. In answer, however, Mr
Khan
, who
appeared
on behalf of
the defen­dants,
argued that what the Act requires of a corporation is to keep
‘accounting records’, not ‘books of account’,
and that it
had complied with this requirement by keeping the records to which I
have referred above.
I
cannot accept this argument. Section 56 of the Act governs the
keeping of ‘accounting records’. It requires every corporation
to keep in one of the official languages of the Republic ‘such
accounting records as are necessary fairly to present the state
of
affairs and business of the corporation and to explain the
transactions and financial position of the business of the
corporation’.
Although the section does not purport exhaust­ively
to describe the accounting records which are to be kept,
20
such records should include:
‘
(a) records
showing its assets and liabilities, members’ con­tributions,
undrawn profits, revaluations of fixed assets and amounts
of loans to
and from members;
(b) a
register of fixed assets showing in respect thereof the respective
dates of any acquisition and the cost thereof, depre­ciation
(if
any), and where any assets have been revalued, the date of the
revaluation and the revalued amount thereof, the respective dates
of
any disposals and the consideration received in respect thereof…
(c) records
containing entries from day to day of all cash received and paid out,
in sufficient detail to enable the nature of the
transactions and,
except in the case of cash sales, the names of the parties to the
transactions to be identified;
(d) records
of all goods purchased and sold on credit, and services received and
rendered on credit, in sufficient detail to enable
the nature of
those goods or services and the parties to the transactions to be
identified;
(e) statements
of the annual stocktaking, and records to enable the value of stock
at the end of the financial year to be deter­mined;
and
(f) vouchers
supporting entries in the accounting records.’
21
A
further requirement of s 56 is that the accounting records
relating to (a) contributions by members; (b) loans
to and
from members; and (c) pay­ments to members ‘shall contain
sufficient detail of individual transactions to enable
the nature
and purpose thereof to be clearly identified’.
22
Moreover, the accounting records referred to ‘shall be kept in
such a manner as to provide adequate precautions against
falsification
and to facilitate the dis­covery of any
falsification’.
23
There is, however, no limitation in the pro­visions as to the
form of the accounting records. Thus, they may be com­puterised.
24
When
considering the meaning of ‘accounting records’ in the context
of the Act, the court must, in my view, apply a purposive
approach.
The accounting records are required in terms of the Act ‘fairly to
present the state of affairs and business of the
corporation and to
explain the transactions and financial position of the business of
the corporation’. The records kept by Sunset
Beach were basically
limited to invoice books showing deliveries to its customers and
payments received from them; invoices received
from its creditors;
and bank statements. It cannot be held, in my view, that these
records could ever fulfil the purpose required
by the Act.
Furthermore,
the Act itself, in s 56(1)(
f
), draws a distinction
between ‘account­ing records’, on the one hand, and the
‘vouchers’ supporting the entries in
such records, on the other.
What Sunset Beach kept, were simply the ‘vouchers’ from which
‘accounting records’ had to be
compiled. I do not accept that
these raw source docu­ments qualify as ‘accounting records’
for purposes of the Act.
In
any event, such ‘records’ as were kept by Sunset Beach were
wholly inadequate fairly to present the state of affairs and
business of the corporation. Thus, the records do not show, for
example, all cash received and paid out by the corporation from
day
to day. As was evident at the enquiry, neither Mr Ebrahim Jnr nor
his father could account for the apparent cash shortfall
of some
R350 000 at date of liquidation, save to suggest in vague and
general terms that Sunset Beach had to pay rent in respect
of
premises and vehicles, salaries and various other unspecified
overhead expenses.
Finally,
the ‘records’ were not kept in such a manner as to provide
adequate precautions against falsification and to facilitate
the
discovery of any falsification, as required by s 56(3) of the
Act.
Based
on the evidence as a whole, I agree with the plaintiff’s
sub­mission, namely that Sunset Beach kept no proper books
of
account. This conclusion is also supported by the expert evidence of
Mr Hanslo as well as the liquidator’s representative,
Mr Theron.
No
accounting officer
A
further example of the corporation’s disregard for the
requirements of the Act is to be found in the fact that it operated

without having appointed an accounting officer from the date on
which it commenced trading to the date of its pro­visional

winding-up. In this regard, s 59(1) of the Act requires every
corporation to appoint an accounting officer. Section 59(3) provides
that ‘(i)f a vacancy occurs in the office of an accounting
officer, whether as a result of a removal, resignation or otherwise,
the corporation shall within 28 days appoint another accounting
officer…’.
The
defendants relied on the fact that, in terms of the founding
state­ment registered in the office of the Registrar of Close
Cor­porations, the name of Malherbe Lourens appears as first
accounting officer. In the amended founding statement, issued
by the
Registrar on 20 January 2005, the change in member­ship is
recorded, but Malherbe Lourens is still reflected as the
accounting
officer, who has not at any stage resigned as such.
To
my mind, this approach is highly technical and formalistic. It is
clearly the intention of the Act that there should be an accounting
officer on a continuous basis; hence the provision in s 59(3)
of the Act that requires a vacancy to be filled ‘within 28
days’,
and the provisions of s 63(h), imposing personal liability for
the debts of the corporation on individual members
where a vacancy
exists for more than 6 months. It cannot be held that the mere
reflection in the founding statement of the name
of someone as
accounting officer is sufficient compliance with the provisions of
the Act. Mr Ebrahim Jnr apparently also saw it
in this way because,
when asked at the enquiry who the accounting officer of Sunset Beach
was, he candidly conceded that it had
no
accounting officer.
25
The
clearest proof that Malherbe Lourens was not the accounting officer
of Sunset Beach is the fact that N Price & Co accepted
the
appointment as accounting officer when the corporation applied for
its VAT registration.
26
Mr Price made it clear in his evidence, however, that this had only
been done ‘for convenience’ and that his firm had never
acted
served as accounting officer of Sunset Beach.
In
any event, whether or not the corporation had
appointed
an
accounting officer, it is clear that it did not
utilise
the
services of any accounting officer, or the services of anybody else
with any accounting skills, in circumstances where such
skills were
clearly required.
Started
for a fraudulent reason
The
plaintiff further submitted that the incorporation itself of Sunset
Beach constituted a further example of gross abuse of its
juristic
personality. In substantiation of its claim in this regard, the
plaintiff pleaded that ‘the corporation was incorporated
for the
purposes of accepting transfer and control of the business of Zaki
Meat Market CC in March 2005 so as to –
20.1.1 avoid
the liquidation of Zaki Meat Market CC which had been trading in
insolvent circumstances;
20.1.2 avoid
the personal consequences that would have been visited on First and
Second Defendants in the event of the liquidation
of Zaki Meat Market
CC;
20.1.3 defraud
the creditors of Zaki Meat Market CC by the unauthorised cessation of
the business of that close corporation and the
stripping of any of
its assets;
20.1.4 facilitate
the continued trading of the insolvent business of Zaki Meat Market
CC under the auspices and control of the Corporation.’
These
very serious allegations were confirmed – virtually in so many
words – by Mr Ebrahim Jnr, who testified as follows when
asked at
the enquiry why he stopped trading out of Zaki Meat and moved the
business to Sunset Beach:
27
‘
We
wanted to start the business on an entirely new CC so that whatever
business we did in the past with regard to the supermarket,
the
lease was on there, that we could start from fresh on a new CC.
But
what was the purpose of that because by then you have already traded
for a year.--- Yes
If
not longer.--- Yes.
Through
this Zaki Meats CC.  Is that correct? --- Yes
And
you said that the lease in fact either wasn’t registered or
certainly wasn’t of much consequence. ---
There was certain
litigations or some disagreement with my previous landlord with
regard to Zaki Meats. Right. So we needed to secure
ourselves by
actually starting on an entirely different CC so that we don’t –
so that the business itself shouldn’t suffer
any repercussions in
the future as such
.
So
to protect the business against this pending litigation...--- Which
I believe was sorted out.
Okay,
but let me finish my question. To protect this business against this
pending litigation you decided to start trading out of
a new CC. ---
It wasn’t really pending litigation but …
Prospective
litigation. --- It was minor but we actually preferred to actually
start off on a different CC as such so we don’t
have the
possibility of…
Okay,
I am now – I originally understood and now I am a little bit more
confused.
Was the litigation the purpose for the commencement of
trading out of Sunset Beach or not? --- that would be true, yes
.
That
was the purpose. --- Yes.
And
the concern was that the assets and funds and everything arising out
of the business would be prejudiced by the litigation.
Or there was
a prospect of that occurring, is that correct? ---
Well, we
didn’t want to grow our business on a CC, right, that could have
pending litigation on it. So that if we do grow the
business that
there won’t be any risk in the business having to suffer due to
any disagreement with the previous landlord
.’
(my
emphasis)
Trading
in insolvent circumstances
A
final example of gross abuse of the juristic personality of the
corpo­ration on which the plaintiff relies, is the allegation
that during March 2005 the corporation accepted the assignment of a
debt totalling R600 000 owing by Zaki Meat to the plaintiff.
This had the result, so the argument went, that the liabilities of
Sunset Beach exceeded its assets right from the outset.
In
their original plea, the defendants initially admitted that Sunset
Beach had accepted the assignment of the debt of R600 000
owing
at that stage by Zaki Meat, but pleaded that this was done ‘at the
request of the plaintiff, represented by Mr Gaertner’.
In
their amended plea, however, filed on the first day of the trial,
the defendants retracted this admission by denying the plaintiff’s
allegations of an assignment of the debt from Zaki
Meat.
Instead, they pleaded that during April 2005 the plaintiff
‘unilaterally and without the consent of the defendants
transferred
[to Sunset Beach] an amount of R700 718.08 owing to
it by Zaki Meat Market CC in respect of the purchase of meat
products
during the period 1/3/05 to 29/3/05’.
This
new version was categorically denied by Mr Gaertner, who testified
that the change-over became necessary, quite simply, because
Zaki
Meat was not registered for VAT and because the plaintiff needed
valid VAT registration numbers for its cus­tomers in
order to
satisfy the requirements of the revenue authorities. Mr Gaertner’s
evidence in this regard was neither contradicted
by any evi­dence
from the defendants nor shaken during cross-examination. On the
contrary, direct corroboration for Mr Gaertner’s
version is to be
found in the letter written by Mr Ebrahim Jnr to SARS on 10 March
2005, requesting the urgent allocation of a
VAT number to Sunset
Beach ‘because of the legis­lation that came into action on 1
March 2005. My suppliers require a VAT
number from myself & they
refuse to supply me without one. This is jeopardising my newly found
business’.
28
Moreover,
the amended plea does not accord with the evidence given by Mr
Ebrahim Jnr at the enquiry. In his evidence, he conceded
that Sunset
Beach had knowingly taken over the debt of some R600 000 owing
by Zaki Meat as ‘that was the only way that we
could continue
trading’.
29
However, he described the transferring of the debt from Zaki Meat to
Sunset Beach as ‘basically just a formality so that we can
continue trading and buying up our stock from Airport Cold Storage
in the hope that we could trade that amount down from R600 000…’
30
In this regard, he pointed out that ‘there was an understanding
that we could trade ourselves out of it’.
31
He also made it abundantly clear that ‘the intention was to pay
each and every cent, whatever was owing had to be paid’.
32
He proudly (and repeatedly) pointed to the fact that by the date of
liquidation, the original debt had been reduced ‘from R600 000
to R250 000’.
33
In
the circumstances, I find that Sunset Beach knowingly and willingly
accepted liability for the
full
outstanding debt of Zaki
Meat. In these circumstances, it is clear to my mind that Sunset
Beach was in fact liable for whatever
amount was out­standing at
the date of liquidation, irrespective of whether the original debt
was in­curred by itself or
by Zaki Meat.
Given
the precarious financial position of Sunset Beach right from the
outset, and given the highly competitive nature of the market
in
which they operated, the decision of the defendants to continue
trading and to incur further debts in order to try and ‘trade
out
of its debt’ justifies an inference, according to the plaintiff,
that the business of Sunset Beach was being carried on recklessly.
34
The
defendants presented a counter-argument, based on a
dictum
from
an unreported English judgment quoted in Palmer’s
Company Law
35
which, in turn, was quoted with approval by Goldstone JA in
Ex
parte De Villiers & Another NNO: In re Carbon Developments
(Pty)
Limited
(in Liqui­dation)
36
and which reads as follows:
‘
In
my judgment, there is nothing wrong in the fact that directors incur
credit at a time when, to their knowledge, the company is
not able
to meet all its liabilities as they fall due.’
As
rightly pointed out by Adv
Van Helden
on
behalf of
the plaintiff, however, this statement was
specifically dis­approved by the Supreme Court of Appeal in the
Philotex
case,
supra
,
37
and no longer constitutes good law. I am accordingly unable to
accept the argument presented
on behalf of
the defen­dants
that there was any
realistic prospect of trading themselves out of the debt trap into
which they had landed themselves. The evidence
shows on a balance of
probabilities that, as a result of the debt burden voluntarily
assumed by it, Sunset Beach was incapable
of trading profitably and
of meeting its financial commitments to its major supplier as and
when they fell due. In my view, the
conduct of the defendants in
these circumstances was nothing short of reckless.
Summary
To
summarise thus far, and having regard to the cumulative effect of
the evidence discussed above, I am driven to the conclusion
that,
although the defendants attempted to obtain the advantages of the
separate identity of the corporation, they operated the
business of
Sunset Beach as if it were their own and without due regard for, or
compliance with, the statutory and bookkeeping
requirements
associated with the conduct of the corporation’s business. When it
suited them, they chose to ignore the separate
juristic identity of
the corporation. In these circumstances, the defendants cannot now
choose to take refuge behind the corporate
veil of Sunset Trading in
order to evade liability for its debts.
It
follows, in my view, that the plaintiff is entitled to a declaratory
order in terms of s 65 of the Act, to the effect that
Sunset
Beach is deemed not to be a juristic person but, in respect of the
plaintiff’s claim herein, a venture of the defendants
personally.
It follows, further, that the defendants should be held liable
jointly and severally to the plaintiff for whatever
amounts Sunset
Beach owed the plaintiff at the date of liquidation.
Quantum
With
regard to the
quantum
of the plaintiff’s claim, this
belatedly became a major issue during the trial. Through a
convoluted process of account­ing,
the defendants sought to cast
doubt on the accuracy of the plaintiff’s accounting records. In my
view, this was a futile exercise
in the light of my finding
regarding the assignment of the debt to Sunset Beach.
38
Even though there may have been instances during the transition
period (after the takeover of the business of Zaki Meat by Sunset
Beach) where invoices previously issued to Zaki Meat may have been
re-issued to Sunset Beach, this has been adequately explained
by Mr
Gaertner and does not, in my view, affect either the validity or the
quantum
of the plaintiff’s claim in any way.
In
any event, the amount of the plaintiff’s claim had never been in
issue before the trial – not during the nego­tiations
between
Mr Ebrahim Snr and Mr Gaertner; nor when Mr Ebrahim Snr (through his
erstwhile attorneys) offered to pay the plaintiff
an amount of
R225 000 in response to its statutory demand for payment; nor
during the application for liquidation of Sunset
Beach; nor when a
claim in that amount was duly admitted by the liquidator; nor during
the defendants’ evidence at the enquiry.
In the circumstances, I
reject the defendants’ contentions in this regard and find that
the plaintiff has proved on a balance
of probabilities that the
amount claimed herein was indeed the amount owing by Sunset Beach at
the date of liquidation.
Order
For
the reasons set out above, the following order is issued:
(
a
) In
respect of the plaintiff’s claim for payment of the amount of
R278 377.19, it is declared, in terms of section 65 of the
Close
Corporations Act 69 of 1984
, that Sunset Beach Trading 232 CC t/a
Global Foods
(in Liquidation) is deemed not to
be a juristic person, but a venture of the first and second
defendants personally.
(
b
) The
first and second defendants are declared to be jointly and severally
liable to the plaintiff for the debts incurred by Sunset
Beach
Trading 232 CC t/a
Global Foods
(in Liquidation)
to the plaintiff in the sum of R278 377.19.
(
c
) Judgment
is granted in favour of the plaintiff for payment of –
(i) R278 377.19;
(ii) Interest
on the aforesaid amount at the prescribed rate
a tempore
morae
(from 29 March 2006) to date of payment;
(iii) Costs
of suit.
B
M Griesel
Judge of the High Court
1
Cf
Blackman
et
al Commentary on the Companies Act
Vol
1 (2002, with loose-leaf updates, Revision Service 1) at 4-114–116.
2
[1897]
AC 22.
3
Blackman
et
al op cit
at
4-133
et
seq
.
4
4(1)
Lawsa
1
st
Reissue (1995) para 42.
5
Lawsa
op
cit
para
43.
6
2001
(4) SA 1336
(SCA).
7
Para
20. See also
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others
[1995] ZASCA 53
;
1995
(4) SA 790
(A) at 802H–J.
8
[1993] ZASCA 167
;
1994
(1) SA 550
(A) at 566E–F. See also the
Cape
Pacific
case
supra
at 803.
9
Sec
65 reads as follows:
‘Whenever a Court on application by an
interested person, or in any proceedings in which a corporation is
involved, finds that
the incorporation of, or any act by or on
behalf of, or any use of, that corporation, constitutes a gross
abuse of the juristic
personality of the corporation as a separate
entity, the Court may declare that the corporation is to be deemed
not to be a juristic
person in respect of such rights, obligations
or liabilities of the corporation, or of such member or members
thereof, or of such
other person or persons, as are specified in the
declaration, and the Court may give such further order or orders as
it may deem
fit in order to give effect to such declaration.’
10
Meskin
Henochsberg Commentary on the
Close Corporations Act
(1997
with loose-leaf updates, Issue 13) at Com-189.
11
Lawsa
op
cit
para 44.
12
Id.
and
cf also para 46.
13
Lawsa
op cit
para 46.
14
Exhibit
B483–659.
15
Exhibit
A4 and E, read with s 15(2) of the Act.
16
In
terms of s 69(1)(
a
)
of the Act.
17
B467.
18
B614/28.
19
B513/11.
20
See
also s 1, where ‘accounting records’ are defined to include
‘accounts, deeds, writings and such other documents as
may be
prescribed’.
21
Sec
56(1).
22
Sec 56(2).
23
Sec
56(3).
24
Meskin
op cit
at
Com-159.
25
B503/25–504/22.
26
Exh
E.
27
B525/2–526/6.
28
Exhibit
E2.
29
B537/20.
30
B540/21–25.
31
B539/18–19.
32
B538/16–17;
540/19–20.
33
B538/14–15;
539/2–3, 540/26–28 and 543/25–26.
34
See
in this regard
Ozinsky
NO v Lloyd & Others
1992 (3) SA 396
(C) at 414G–H, quoted with approval in
Philotex
(Pty) Limited & Others v Snyman & Others
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) at 145I.
35
(24ed)
1987 at 1463.
36
1993
(1) SA 493
(A) at 504A–C.
37
At
148B–E.
38
Para
In the circumstances, I find that Sunset Beach knowingly and willingly accepted liability for the full outstanding debt of Zaki
Meat. In these circumstances, it is clear to my mind that Sunset Beach was in fact liable for whatever amount was outstanding at
the date of liquidation, irrespective of whether the original debt was incurred by itself or by Zaki Meat.
above.