Maize Board v Hart (2726/1996) [2004] ZAFSHC 109 (18 November 2004)

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[2004] ZAFSHC 109
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Maize Board v Hart (2726/1996) [2004] ZAFSHC 109 (18 November 2004)

IN THE HIGH COURT
OF SOUTH AFRICA
(ORANGE FREE STATE
PROVINCIAL DIVISION)
Case
No. : 2726/1996
In
the matter between:
THE
MAIZE BOARD
PLAINTIFF
and
TEMPLE ALBERT
HART
DEFENDANT
_____________________________________________________
CORAM:
HANCKE, J
_____________________________________________________
HEARD ON:
27, 28, 30 JANUARY 2004
8, 9, 11 NOVEMBER
2004
_____________________________________________________
DELIVERED ON:
18 NOVEMBER 2004
_____________________________________________________
The plaintiff is the
Control Board referred to in section 6 of the Maize Marketing Scheme,
published by proclamation R.45 of 1979,
and established in terms of
the Marketing Act, 1968 (Act No.59 of 1968).
It is common cause that
the defendant concluded two written agreements with Rainbow Chicken
Farms (Pty) Ltd., (“Rainbow”), a breeder
and producer of broiler
chickens, which were described respectively as a “lease agreement”,
and a “management agreement”.
The terms of the lease agreement
were to the effect that the defendant let and Rainbow hired for the
particular season farmland
situated within the Magisterial District
of Harrismith and that Rainbow undertook to plant, grow and harvest,
inter
alia,
yellow maize, on the said land.
The terms of the
management agreement were to the effect that Rainbow appointed the
defendant as its manager to manage the farm operations
on the land
leased by it in terms of the lease agreement, and that the defendant
undertook to supply the necessary labour, machinery,
equipment, fuel,
expertise and to prepare and fertilize the land, plant seed, apply
herbicide and insecticide, cultivate, harvest
and produce the said
crop and arrange the delivery of the crop to a milling company, or at
such other place as Rainbow may direct.
It is also common cause that
thereafter the defendant produced and delivered, according to
Rainbow’s directions, a crop of yellow
maize of 409,263 tons.
It is the plaintiff’s
cause of action that each of the lease and management agreements were
simulated and were concluded in their
terms with the intention of
disguising that the defendant in fact sold, and Rainbow in fact
purchased, the yellow maize produced
on the land, and of evading the
payment of levies on the basis that Rainbow was the “producer” of
the crop for its own use and
thereby exempt from the said levies,
whereas in truth and in fact the defendant was in respect of each
such crop the “producer”
of it, as defined in the said Maize
Marketing Scheme, and therefore the entity obliged to pay the levies.
According to the plaintiff’s
particulars of claim, the said levies
ought, according to law, to have been paid by the defendant to the
plaintiff which defendant
failed to do.
The issues between the
parties therefore relate to the question as to whether or not the
management agreement and the lease agreement
are simulated
transactions.
THE EVIDENCE:
The first witness, on
behalf of the plaintiff, was Mr. Leon du Plessis. He testified as to
the structure of the Marketing Schemes
and legislation relevant to
the production of yellow maize. According to him the plaintiff
became an exporter of maize and the delivery
price to the export pool
was set as R330,00 per ton for the 1995/1996 marketing season. In
terms of the management agreement the
price per ton was set at
R394,80.
Professor Hammes was
called as an expert agronomist to evaluate the relevant maize farming
method on behalf of the plaintiff. He
was critical of the
composition of the budget which forms part of schedule 1 of the
Management Agreement. He said it looked as if
the budget had been
put together to arrive at a figure of R875,00 per hectare. He
further said it made no sense for several farmers
in the Eastern Free
State to have exactly the same provision for example for chemicals
and although he disagreed with the farming
methods supposedly to have
been adhered to, he conceded virtually everything that was put to him
in cross-examination.
Mr.
S.G. Smith, a practising chartered accountant, testified that the
defendant was paid the full contract sum of R131 250,00 during
December 1994 and he also levelled certain criticism with regard to
the financial statements, which Mr. Kemp prepared for the Receiver
of
Revenue on behalf of the defendant.
The sum of R131 250,00
represented the rent, the management fee and the fixed costs. Mr.
Hart could not remember why the full amount
was paid in December
1994, and not later, as the schedule provided. It made practical
sense for the full amount in respect of the
fixed costs to be paid at
an early stage and there is nothing sinister about the payment of the
rent and management fee in December,
rather than in April or June.
As for the financial statements, they were prepared by Mr. Kemp, who
is a bookkeeper in Harrismith.
Mr. Smith, being a chartered
accountant, was critical of the way in which the statements were
prepared, but conceded that from the
Receiver of Revenue’s point of
view there was no prejudice because “the loan in the 1995 statement
was reflected as income in
the 1996 statement”. The fact that rent
and management fee were reflected under farming income, was simply
how Mr. Kemp reflected
it, and from a tax point of view it made no
difference, although it could amount to bad bookkeeping practice. It
should be noted
that in the 1996 statement under farming income, the
fixed production costs, the maize production bonus, the management
fee and the
rental are all described as such. The evidence of Mr.
Smith, in my view, does not take the case any further.
After the plaintiff’s
case was closed, the defendant, Temple Albert Hart, testified that
after he attended a meeting at Harrismith,
he signed the management
and lease agreement on 26 October 1994. According to him Rainbow
explained that they would lease the land
from him and provide money
for input costs. He would then produce maize for them. He testified
that there was a severe drought
in the Eastern Free State in the
1991/1992 years and after 1994, when the new government came into
power, it was clear they would
not assist the farmers. The defendant
testified that the main attraction to him of the Rainbow scheme was
that his risk was removed.
Rainbow would pay all the input costs
together with a rental and management fee, and would bear the risk in
the crop. The defendant
did not know what the hedging rate meant.
He was interested in the sum of money allowed per hectare for the
growing of the maize
and the break-even yield. If he failed to
produce the break-even yield he would suffer no loss and would still
receive his rent
and management fee. If he did better, he would
receive a production bonus.
The defendant was adamant
that nobody discussed with him the purchase of his maize, or a price
of maize per ton. What concerned him
was the amount paid per hectare
and whether he could achieve the break-even yield. The defendant
regarded the maize as belonging
to Rainbow and he provided Rainbow
with regular reports with regard to the crop.
The levy system was
abolished in about 1997. In spite of this the defendant, and many
other farmers, continued to farm on the same
basis, that is they
leased their lands to Verus Farms and managed the farming operations.
Verus Farms pays for the input costs and
bears the risk relating to
the crop, and the farmer earns a production bonus if he produces more
than the break-even yield.
Mr. Andrew Geard Waller,
Rainbow’s group auditor testified in conclusion. According to him
Rainbow acquired maize in three ways
namely firstly, it purchased
maize at a ruling price, secondly, it had “maize contracts”
(which he said was a reference to the
management and lease contracts
such as those between the defendant and Rainbow) and thirdly, it
concluded forward buying contracts.
The expenses incurred by Rainbow
with regard to the input costs and the rent and management fees were
reflected in Ranbow’s annual
financial statements under the heading
“crops”, which was reflected as part of the stock. Mr. Waller
explained that the amounts
reflected in respect of crops, represented
the costs incurred by Rainbow. In order to satisfy the auditors that
there was an asset
which represented the expense incurred, the farms
were inspected by the auditors and they satisfied themselves that
there was a corresponding
asset and that the expense could be
reflected as the then value of the asset.
THE AGREEMENTS:
The Management and lease
agreements were concluded on the same day. Rainbow leased 150
hectares from the defendant in order to grow
maize, and appointed the
defendant to manage the farming operations for it. In terms of the
Management Agreement -
the duties of the
manager were set out in clause 5 thereof;
the defendant would be
paid a specified amount per hectare in respect of fixed costs;
the defendant would be
paid a basic remuneration of R30,00 per hectare for managing the
farming operations;
the defendant would be
paid a bonus per hectare calculated in accordance with the formula
in schedule 1 should he achieve the minimum
yield reflected in
schedule 1;
Rainbow would at its own
expense supply seed, fertilizer, herbicide and insecticide;
In the event of a crop
failure Rainbow would pay the defendant his fixed costs, extended to
the date of such occurrence;
Rainbow would insure the
crop against hail and the proceeds of the policy would be solely for
Rainbow’s benefit.
As far as the agreement
of lease is concerned, Rainbow leased the land reflected in schedule
2, being 276 hectares, at a rate of R30,00
per hectare. Due to late
rains the defendant only planted 150 hectares, and was only paid rent
for 150 hectares. The rental was
payable within 14 days of the
effective date or the date of signature, which ever be the latter.
THE LAW:
If Rainbow produced its
own maize and fed it to its chickens, no levies in terms of the
scheme would have been payable. That would
not have been an improper
evasion of the levies or a destabilisation of the industry. The
position would be the same if Rainbow
produced the maize or leased
land, farmed for it by a manager. The fact that Rainbow may have
elected to do so in order to obtain
maize more cheaply because no
levies would be payable, is irrelevant.
MICHAU
v MAIZE BOARD
2003
(6) SA 459
(SCA) at 463 I – 464 E.
The onus to prove
simulation is upon the plaintiff.
ZANDBERG
v VAN ZYL
1910
AD 302
at 314.
The law in this regard
has been restated in the decision of the Supreme Court of Appeal in
ERF
3183/1
LADYSMITH
(PTY) LTD AND ANOTHER v COMMISSIONER FOR INLAND REVENUE
[1996] ZASCA 35
;
1996 (3) SA 942
AD,
subsequently
affirmed in
MICHAU
v MAIZE BOARD
(
supra
)
at 464.
In the Ladysmith case,
Hefer, J.A. paid considerable attention to the application of well
known principles of our law, firstly, the
principle which permits
parties to arrange their affairs so as to remain outside the
provisions of a particular statute, most notably
revenue statutes;
and secondly, the principle that a court of law will not be deceived
by the form of a transaction and will look
behind the wrapping and
examine its true nature and substance.
The
locus
classicus
on the subject of simulated transactions is the judgment of Innes J.
in
ZANDBERG
v VAN Zyl
supra
where he stated the following at 309:
“
The
court must be satisfied that there is a real intention, definitely
ascertainable, which differs from the simulated intention.
For if
the parties in fact mean that a contract shall have effect in
accordance with its tenor, the circumstances that the same
object
might have been attained in another way will not necessarily make the
arrangement other than it purports to be. The enquiry,
therefore, is
in each case one of fact, for the right solution of which no general
rule can be laid down.”
In
COMMISSIONER
OF CUSTOMS AND EXCISE v RANDLES, BROTHERS AND HUDSON LTD
1941 AD 369
the
following is
inter
alia
stated at 395 – 396:
“
A
transaction is not necessarily a disguised one because it is devised
for the purpose of evading the prohibition in the Act or avoiding
liability for the tax imposed by it. ……
A
disguised transaction in the sense in which the words are used above
is something different. In essence it is a dishonest transaction:
dishonest, in as much as the parties to it do not really intend it to
have,
inter partes
,
the legal effect which its terms convey to the outside world……
Of
course, before the Court can find that a transaction is
in
fraudem legis
in the above
sense, it must be satisfied that there is some unexpressed agreement
or tacit understanding between the parties.”
Mr. Gordon, counsel for
the plaintiff, submitted that Rainbow and the defendant neither
intended nor performed the two agreements
between themselves in
accordance with their tenor. He argued that the true agreement
between the parties was one of purchase and
sale. He submitted that
a lease of land to grow crops and a management agreement in terms of
which the farmer of the land is to
manage the crop ought to be simple
to draft. Instead, in the instant case, the agreements are complex,
unduly obtuse, and the endeavour
to interpret them requires a
“hopping” from one part to the other, and sometimes from one
agreement to the other. He also submitted
that both agreements are
so lacking in clarity that this court would be justified in finding
that they were never intended and could
not be implemented.
It is important to note
that on 8 April 2004 Hugo J. delivered a judgment in a Natal
Provisional Division in a matter of
THE
MAIZE BOARD v JACKSON
(Case No. 1867/1996).
The
management agreement and the lease agreement in that case were in
identical terms to the agreements in the present matter, save
that
the formula for the production bonus, the farming budget and
obviously the lands were different. Hugo J. dealt in the said
judgment (p. 9 onwards) with “certain curiosities” in the
agreement raised by Mr. Gordon in argument before him. I am in
agreement
with what was said in that judgment, namely that the
parties are “not prisoners of their agreement” and that it does
not take
the plaintiff’s case any further.
Even on the assumption
that the agreements are unduly obtuse and complicated, what is
important in the present case, are the advantages
of the agreement,
especially to the defendant, namely that he would not bear the risk
of drought, or other disasters. Rainbow paid
all the production
costs, including the preparation of the land, seed, fertilizer,
insecticide and pesticide. In addition, the defendant
was paid a
rental and management fee. If the crop failed, it was Rainbow’s
crop that failed. The defendant would still receive
his rental in
terms of the lease agreement and his remuneration in terms of the
management agreement. There was an incentive for
the defendant to
produce as high a yield as possible. If the yield was lower than
break-even, then the defendant would receive nothing
in addition to
his rental and remuneration. If he did better than break-even, he
would receive a production bonus. These advantages
appear to me to
outweigh the fact that no levies would be payable because Rainbow
would feed its own maize to its own chickens. It
is also important to
note that after the levy system was abolished, the defendant, and
many other farmers continued to farm on the
same basis – that is
they leased their lands to Verus Farms and managed the farming
operations, Verus Farms pays for the input
costs and bears the risk
relating to the crop, and the farmer earns a production bonus if he
produces more than the break-even yield.
It is clearly not a scheme
designed to avoid levies, because there were no longer any levies.
Mr. Gordon criticised the
defendant and submitted that he was not a satisfactory witness
especially in view of his alleged “amnesia”
of exactly what
happened at the Harrismith meeting, and the fact that he knew nothing
about levies where Mr. du Plessis testified
to the fact that the
levies had created the gap between the relevant prices. I do not
agree with this submission. Mr. Hart made
a favourable impression in
the witness box and appeared to me to be an honest witness who gave
his evidence to the best of his ability,
having regard to the fact
that the events to which he testified happened 10 years ago. His
main interest was the sum of money allowed
per hectare for the
growing of the maize and the break-even yield. At that stage he was
a young farmer who was concerned about the
drought and the risks
involved in farming operations. This scheme provided him with some
financial security.
CONCLUSION:
In view of the a
foregoing I am of the view that the plaintiff failed to establish, on
a balance of probabilities, that the defendant’s
intention was
anything different from what is contained in the management and lease
agreements or that the management agreement and
the lease agreement
were simulated transactions.
Accordingly
the plaintiff’s claim is dismissed with costs, such costs to
include the costs of two counsel.
________________
S.P.B. HANCKE, J
On
behalf of the plaintiff: Adv. D.A. Gordon S.C.
with
Adv. S. Joubert and Adv. E. Lingenfelder
instructed
by: Horn & Van Rensburg
BLOEMFONTEIN
On
behalf of the defendant: Adv. J.A. Ploos van Amstel S.C.
with
Adv. A. Stokes instructed by:
Webbers BLOEMFONTEIN
/spieterse