Sonnenberg Mcloughlin Inc v Spiro (7277/2001) [2003] ZAWCHC 20; 2004 (1) SA 90 (C) (30 May 2003)

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[2003] ZAWCHC 20
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Sonnenberg Mcloughlin Inc v Spiro (7277/2001) [2003] ZAWCHC 20; 2004 (1) SA 90 (C) (30 May 2003)

Reportable
IN THE HIGH COURT
OF SOUTH AFRICA
[CAPE OF
GOOD HOPE PROVINCIAL DIVISION]
CASE NO: 7277/2001
In the
matter between:
SONNENBERG
McLOUGHLIN INC
Applicant
and
MARK
SPIRO
Respondent
JUDGMENT
DELIVERED ON 30 MAY 2003
_____________________________________________________________
H.J.
ERASMUS, J
Introduction
On 8 August 2002 the applicant, a private company
incorporated in terms of the provisions of the Companies Act 69 of
1973 ("the
Companies Act"), read with section 23 of the
Attorneys Act 53 of 1979, instituted proceedings for the
sequestration of the respondent,
a former director and shareholder.
The applicant says that the respondent has
committed acts of insolvency in terms of section 8(a), (c) (e) and
(g) of the Insolvency
Act 24 of 1936 (“the Insolvency Act”). The
applicant further avers that the “probabilities are that the
respondent is factually
insolvent”, and that the sequestration of
the respondent’s estate will be to the advantage of his creditors.
The respondent opposes the application of the
ground that he is not indebted to the applicant in any amount and
that he has not committed
any act of insolvency.
In their heads of argument, counsel for the
respondent raised two further issues --
that the applicant has not complied with
Court Notice 15 of this Court; and
that the court does not have jurisdiction.
Court Notice 15 requires that notice of intention
to apply for a provisional order of sequestration be given to the
debtor and, if
married, to the debtor’s spouse (whether married in
or out of community of property), who shall be joined as a
respondent. In this
matter, the applicant has not joined the
respondent’s spouse nor was a copy of the application at the outset
served on her.
The applicant has
brought an application for condonation of its failure to comply with
the provisions of the court notice. A copy
of the application was
served on the respondent’s spouse on 8 April 2003. The applicant
did not join the respondent’s wife as
is required by the court
notice. It is, however, apparent that the respondent’s spouse is,
and has been since the beginning, aware
of these proceedings.
At the hearing,
counsel for the respondent did not press for dismissal of the
application on the ground of the applicant’s non-compliance
with
the court notice, nor by reason of the alleged lack of jurisdiction.
Counsel made it clear that the respondent wants these proceedings
to
be finalised as soon as possible. Counsel for the respondent in
argument accordingly focussed on the substantive issue between
the
parties; namely, whether the applicant has discharged its onus in
respect of the existence of the alleged indebtness of the respondent
to the applicant.
The background
The respondent was
a director of the applicant until August 1999. At that time, the
other directors were Peter Fritz Sonnenberg ("Sonnenberg")
and Steven McCloughlin ("McCloughlin").
While the
respondent was a director of the applicant, the applicant incurred
certain liabilities. The applicant says that the respondent
is
jointly and severally liable with the applicant for the debts and
liabilities of the applicant contracted during the period while
the
respondent was a director of the applicant.
The applicant says
that it has discharged debts to its creditors in the sum of R2 761
773.00. These were debts that were incurred
during the respondent's
term of office as director. The applicant contends that, having
discharged these debts, it has a claim against
the respondent in his
capacity as a co-debtor for his proportionate share.
The applicant
further contends that the respondent agreed that he was liable for
43% of the applicant's liabilities as at the date
of his resignation.
The respondent is, therefore, indebted to it in the sum of R1 892
218.00, which sum includes interest calculated
at 15% per annum until
September 2002.
The respondent
denies that he has concluded an agreement with the applicant and that
he is indebted to the applicant in any amount.
He contends that he
has substantial claims against the applicant on loan account in
respect of payments made on behalf of the applicant
to various of its
creditors. The aggregate of these claims exceed R1 million.
The respondent’s
indebtedness
The applicant
alleges that a meeting was held between McLoughlin and the respondent
on 11 October 1999. A minute of the meeting was
prepared and a copy
forwarded to respondent in the United Kingdom. Paragraph 2 of the
minute records that --
“
in
the event that MDS [respondent] should elect to resign, then he is
liable for 42.5% of the total liabilities of the firm at the
date of
resignation, alternatively MDS will be entitled to 42.5% of the total
profit of the company as at the date of his resignation."
This alleged
agreement falls short of an undertaking by a director to be liable
for the company’s debts in his personal capacity
vis-à-vis the
company. Regarding the alleged agreement, the respondent states in
his answering affidavit (paragraph 18.3 and 18.4):
I deny that I held a
“confidential” or any other formal meeting with McLoughlin
during October 1999. I only recall that I
had a brief discussion
with McLoughlin and I advised him that my permit had been approved.
Nobody kept minutes of this meeting.
I also deny that I
entered into the alleged, or any other, agreement with the
Applicant. I did not consider myself liable for
the debts of the
Applicant, let alone 43.5% thereof. I was aware of the fact that
certain of the Applicant’s creditors were
holding me and my
mother liable on the strength of suretyships given by us. I was
furthermore aware that in terms of section
53(b) of the Companies
Act, 61 of 1973, I could be held liable by creditors of the
Applicant for all debts and liabilities contracted
by the Applicant
during my term of office as a director. I accordingly would never
have assumed liability for a specific portion
of such debts without
knowing the extent thereof of without insisting upon a recoverable
indemnification from any erstwhile co-directors
against claims of
creditors exceeding such portion. The extent of the Applicant’s
liabilities at that point in time was still
unknown as an audit had
not yet been done. Also, the financial position of my said
co-directors was so precarious that an indemnity
from them would
have been virtually worthless.
The applicant says
that a further meeting was held between Sonnenberg, McLoughlin and
the respondent on 16 February 2000. At that
meeting, the applicant
contends, the parties entered into a further oral agreement in terms
whereof it was agreed that upon the respondent’s
resignation as a
director of the applicant, the respondent would be liable for 43% of
the applicant's net liabilities calculated
at that date. The
applicant says that it was further agreed that a business audit in
respect of the business of the applicant would
be carried out in
order to quantify the extent of the applicant's liabilities, as well
as the respondent’s pro-rata liability.
The alleged
agreement was subsequently reduced to writing and forwarded, in the
form of “Heads of Agreement”, to the respondent
in the United
Kingdom for his signature. These heads of agreement were not signed
by the applicant, Sonnenberg or McLoughlin. The
respondent has
declined to sign the heads of agreement. The respondent submits that
if it had indeed been a firm agreement that
was recorded in this
document, one would have expected on the probabilities that the
respondent would have been presented with a
document signed by the
applicant, and Sonnenberg and McLoughlin, with only the respondent’s
signature to be added.
In regard to this
alleged agreement entered on 16 February 2000, the respondent states
in his answering affidavit:
I admit that I
returned to the Republic of South Africa for AITH business during
February 2000, during which time I had an informal
meeting with
McLoughlin and Sonnenberg.
I deny that any oral
agreement was reached at the said meeting …
I agree that I have
refused to sign the Heads of Agreement but I deny that any
agreement was reached between the parties. Whilst
it is admitted
that the Heads of Agreement reflect certain proposals by McLoughlin
and Sonnenberg, it is denied that agreement
was reached thereon.
The
correspondence
The respondent
contends that upon analysis, the contemporaneous correspondence is at
variance with the existence of any agreement
on 11 October 1999 and
16 February 2000.
On 20 December 1999, Sonnenberg writes
to the respondent that he has checked "previous correspondence …
as well as minutes
of the meeting between Steve and yourself on 11
October 1999". He then states --
"As
per the agreement reached between you and Steve, if you choose to
resign and be released from your commitments to the firm,
you will be
responsible to repay to the firm 42.5% of the obligations as at 8
August 1999 which are huge”
The terms of the
agreement set out in the letter differs from the terms set out in the
minute (cited above). In the minute it is recorded
that the
respondent would be “liable for 42.5% of the total liabilities of
the firm at the date of resignations”. The letter
says that it was
agreed that the respondent “will be responsible to repay the firm
42.5% of the obligations”.
The respondent
replies on the same day:
“
I
never agreed with Steve that I would be liable for 42.5% of the
firm’s obligations. The terms of my release were never discussed
with Steve. Should it come to this, we would have to work out the
net value of the firm, which according to me would be the value
of
the assets, including the work in progress as at the 8
th
August
1999, less the firm’s obligations and less any monies paid by me to
the firm since this date. My interest in the sale of
the building
and interest in Theewaterskloof must also be taken into account”.
In regard to the alleged oral agreement
entered on 16 February 2000 which was subsequently reduced to writing
and forwarded to the
respondent in the United Kingdom for his
signature, the respondent on 28 February 2000 writes to Sonnenberg:
“
I
haven’t had a chance to properly look at the contract as time
hasn’t allowed me to. I will do so after Wednesday”.
On 12 June 2000, the applicant writes
to the respondent:
“
4. Further
to the meeting on 20 May 2000 held in Cape Town … we advise that
this correspondence serves as confirmation of the material
issues
which were discussed pertaining to the finalisation of your
(hereinafter referred to as MDS) resignation from Spiro Slot
Sonnenberg
Inc (hereinafter referred to as SSS).
However in an effort
to resolve all issues relating to MDS’s resignation on the basis
of expediency, fairness and in an attempt
to achieve a full and
final resolution of all outstanding issues without further ado, the
parties discussed the following Without
Prejudice proposals:…”
The letter then proceeds to suggest a compromise whereby the
applicant would accept payment of the sum of R625 000.00 in full and
final settlement of the respondent’s obligations. The amount is to
be paid in two instalments: a payment of R400 000.00 before
transfer
of the Margayle Properties CC is registered, registration being
anticipated on 23 June 2000, and the balance of R225 000.00
on or
before 30
th
June 2000. In return Sonnenberg and McLoughlin
and the applicant would indemnify the respondent from liability in
respect of any
obligations of the applicant for which the respondent
has bound himself as surety and co-principal debtor. It is further
stated that
the offer is open for acceptance by the respondent for a
period of 72 hours from the date of transmission and is tendered on a
without
prejudice basis. The letter is signed by Sonnenberg and
McLoughlin.
On 13 June 2000,
the respondent responded by email:
“
This
is more along the lines of our discussions. There are other issues
which come to mind, especially the issue of me being released
from my
obligations which obviously concern me, but we can deal with this in
the agreement. As I said before, I am concerned that
I pay all this
money and then find myself on the hook for sureties ETC. It remains
my intention to try and repay the 75% ASAP as
soon as the deal is
finalised …..”
It is clear from the email that the parties had not yet
reached consensus. Attached to this email of 13 June 2000 is an
amended, unsigned
version (incorrectly dated 18 June 2000) of the
letter of 12 June 2000. The proposal contained in this letter is for
an instalment
of R185 000.00 to be paid before the transfer of the
Margayle Properties CC is registered, and the balance of R440 000.00
to be paid
on or before 30
th
September 2001 upon the
respondent being satisfied that he has been released form all
liabilities in respect of any obligations of
the applicant for which
he has bound himself as surety and co-principal debtor. The offer is
made without prejudice and subject to
the respondent receiving a
certified audit for the period 1 March 1999 to 28 February 2000 from
the applicant’s auditors. This
amended version of the letter was
clearly intended as a counter proposal to the applicant’s offer of
settlement contained in the
letter of 12 June 2000.
On 14 September
2000, Sonnenberg writes to the respondent:
“
2. The
debts of the practice as at the date of your resignation were
approximately R2 200 000,00 and your 43% liability amounted to
approximately R940 000,00.
Unless the amount of
R435 000,00 is paid in full by no later than 30 September 2000, our
offer of settlement of R625 000,00 will
fall through and we will
have to revert strictly to Company Law and will assess your
indebtedness to the Firm in accordance with
your 43% shareholding as
at 8 August 1999’.
On 8 November 2000,
Sonnenberg writes to the respondent:
“
I
would like to have signed heads of agreement in place by Friday 10
November 2000”.
On the same day,
the respondent replies:
“
I
have told you 100 times, I cannot commit to anything until I have
seen the signed-off business audit. Please forward a certified
copy
of both the trust and business audits to me ASAP, as I am also
anxious to finalise things. You also need to realise that I have
already committed R400 000.00, and will not commit any further
payment, until I am satisfied that I have been sufficiently covered
against possible claims from creditors! Would you expose yourself to
a possible double exposure under the same circumstances?”
The respondent
reiterates this stance in a lengthy email dated 16 November 2000.
In a letter dated 23 November 2000 the applicant carries out
the threat to act in accordance with company law. In the letter it is
inter alia stated—
We can no longer wait
for you to fulfil your obligations and are adamant that this matter
is finalised forthwith.
In the light of the
above we must now insists that you furnish your proposals in writing
by no later that 12h00 on 30 November 2000
as to how you intend
liquidating your indebtedness (R805 922.00).”
On 6 December 2000,
the respondent writes:
“
4. I
deny that I am indebted to the firm for the amount claimed in your
letter of 23
rd
November 2000,
or any other amount.
I
further deny that I am liable for 43% of the alleged indebtedness of
the firm as at the 27
th
of
July 1999”
A perusal of the
documentation shows a lengthy process of negotiation between the
parties, an exchange of views and of proposals and
counter-proposals.
The respondent’s attitude is consistent throughout: he did not
regard himself liable for the liabilities of
the applicant except in
so far as he had bound himself as surety for such liabilities; he
wanted to be indemnified against possible
claims by creditors should
he make any payment to the applicant, and he wanted a certified audit
for the period 1 March 1999 to 28
February 2000 from the applicant’s
auditors.
The applicant has failed to show that on a consideration of
all the affidavits, the alleged indebtedness on which it relies has
been
established on a balance of probability. On the contrary, the
probabilities on the papers favour the respondent and the application
must be dealt with in accordance with the principles enunciated in
Kalil v Decotex (Pty) Ltd and Another
1988 (1) SA 943
(A) at 978D—E
and 979E—980A. In accordance with those principles, the application
falls to be dismissed. At 979I Corbett JA (as
he then was) says that
“only in rare cases would the Court order the hearing of oral
evidence where the preponderance of probabilities
on the affidavits
favoured the respondent”.
Sequestration proceedings are not the appropriate vehicle to
resolve disputes which arise from the withdrawal of a director of a
private
company of the nature of the applicant. The procedure is, in
particular, not designed for the resolution of disputes as to the
existence
or non-existence of a debt (Meskin Insolvency Law §2.1.5
and cases cited in fn 5; Kalil v Decotex (Pty) Ltd and Another,
supra,
at 980B—H; Investec Bank Ltd v Lewis
2002 (2) SA 111
(C) at
116C—F).
Section 53(b) of the Companies
Act
In its replying
papers, the applicant says that apart from its main claim based upon
oral agreements between the parties, the applicant
has an alternative
claim against the respondent which, it submits, “is unassailable in
fact and in law”.
The applicant
founds its alternative claim upon the provisions of section 53(b) of
the Companies Act. The section provides as follows
–
The
memorandum of a company may, I addition to the requirements of
section 52 –
……
..
in the case of a
private company, provide that the directors and past directors shall
be liable jointly and severally, together
with the company, for such
debts and liabilities of the company as are or were contracted
during their periods of office, in which
case the said directors and
past directors shall be so liable.
Paragraph 6.1 of
the applicant's Memorandum of Association dated 24 November 1993
records that --
All
past and present directors of the company shall be liable jointly and
severally with the company for the debts and liabilities
of the
company contracted during their period of office.
The applicant says
that it has discharged debts to its creditors in the sum of R2 761
773.00, debts which were incurred during the
respondent’s term of
office as director. The applicant’s stance is that, having
discharged the debts, it has a claim against
the respondent in his
capacity as a co-debtor for his proportionate share (43%) in the sum
of R1 187 562.00.
Fundstrust (Pty) Ltd (in liquidation) v Van Deventer,
1997 (1)
SA 710
(A) the history of section 53(b) was traced. The section had
a predecessor in section 6A of the Companies Act of 1926 – the
latter
section was inserted into the 1926 Act by the Companies
Amendment Act 62 of 1968. The section provided as follows:
The
directors and former directors of a private company limited by shares
shall be liable jointly and severally, together with the
company, for
such debts and liabilities of the company as were contracted during
their period of office, if the memorandum of association
of the
company contains a provision to that effect.
The insertion of
section 6A proceeded form a recommendation of the Commission of
Enquiry into the Companies Act (usually referred
to as the Van Wyk de
Vries Commission) that provision be made “for a private company
with the concurrent joint and several liability
of the directors for
the debts and liabilities of the company”. The intention was not to
impose upon directors a liability equal
to the common law liability
of partners, but rather –
“
to
impose on them [directors] an entirely new statutory liability and to
provide creditors with an entirely new remedy not hitherto
available
to them which would enable them to hold the directors liable
singuli
et in solidumfor company debts and liabilities before the company’s
liquidation”.
(Fundstrust (Pty) Ltd (in liquidation) v Van Deventer, supra,
at 731G)
A similar intention clearly underlies section 53(b) of the
present Companies Act which “is intended primarily for the case of
certain
types of private company, ie incorporated associations of
professional persons (see eg s 23 of the Attorneys Act 53 of 1979).”
(Henochsberg on the Companies Act 5
th
ed volume I 106).
Section 53(b) is an empowering section – it empowers a
private company to include in its memorandum of association a
provision that
the directors and past directors shall be liable
jointly and severally, together with the company, for debts and
liabilities of the
company that were contracted during their periods
of office. If this is done, the effect is twofold: (a) creditors
would be able
to hold the directors liable singuli et in solidum for
company debts and liabilities, and (b) if a director pays any of the
company
debts, he would have a right of recourse against his fellow
directors for their proportionate share.
The section does
not provide a right of recourse to a company against its directors
where the company has paid its debts.
The alternative
ground based upon section 53(b) on which the applicant relies cannot
be sustained.
Conclusion
The application
accordingly falls to be dismissed by reason of the fact that --
The applicant has failed to show
that on a consideration of all the affidavits the alleged
indebtedness on which it relies has been
established on a balance of
probability.
The applicant’s reliance on
section 53(b) of the Companies Act cannot be sustained.
In the result, I
make the following order:
The application
is dismissed with costs, such costs to include the costs occasioned
by the employment of two counsel.
HJ ERASMUS, J