M A Vleisagentskap cc and Another v Shaw N.O. (6859/2002) [2003] ZAWCHC 54 (15 October 2003)

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[2003] ZAWCHC 54
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M A Vleisagentskap cc and Another v Shaw N.O. (6859/2002) [2003] ZAWCHC 54; 2003 (6) SA 714 (C) (15 October 2003)

IN THE HIGH COURT OF SOUTH AFRICA
(Cape
of Good Hope Provincial Division)
REPORTABLE
Case No. 6859/2002
In the matter
between
M A
VLEISAGENTSKAP CC
First Plaintiff
WESTERN
PROVINCE MEAT SUPPLY BK Second
Plaintiff
And
BRYAN
NEVILLE SHAW N.O.
Defendant
JUDGMENT: DELIVERED ON 15 OCTOBER 2003
DAVIS J
Introduction.
Plaintiff issued summons against
defendant in his capacity as trustee of the insolvent estate of Harry
Sacks (‘Sacks’). Plaintiff
basis its claim in terms of section
64(1) of the Close Corporations Act 69 of 1984 (‘the Act’) and
seeks to establish personal
liability on the part of Harry Sacks by
reason of his carrying on of the business of Sacks and Sons CC (in
liquidation) in a reckless,
alternatively grossly negligent manner
with intent to defraud creditors. In the alternative, plaintiff
seeks damages from defendant
based on a common law action for
misrepresentation.
The background to this action can be summarised
thus:
The plaintiffs are wholesalers who sold meat for a
number of years to Sacks and Sons CC (“the close corporation”).
The close corporation
was placed under a provisional order of
liquidation on 18 September 2000 and the order was made final on 17
October 2000. The liquidator
of the close corporation brought an
action for the sequestration of the estate of its majority member,
Sacks based on the latter’s
debit loan account in the amount of R2
865 720,00. Sacks’ estate was provisionally sequestrated on 24
October 2000 and finally
sequestrated on 5 December 2000. Defendant
was appointed as the provisional trustee of the debtor’s estate and
subsequently as
trustee thereof. First plaintiff proved a claim
against the close corporation in liquidation on 20 February 2001 in
the amount of
R588 696,18 for goods sold and delivered. On the same
date, second plaintiff proved a claim against the close corporation
in liquidation
in the amount of R63 918,19 for goods sold and
delivered.
Claim forms were deposed to by Hendrik Reneé
Ahlers on 21 December 2001 on behalf of plaintiffs. It was recorded
in paragraph 5
thereof that no person beside the said estate was
liable for the debt or any part thereof. On 24 April 2001 Ahlers
deposed to a
claim form on behalf of plaintiffs in which identical
amounts were claimed from the insolvent estate of Sacks for goods
delivered.
These claims were proved against Sacks’ insolvent
estate. Upon receipt of the invoices in respect of the goods sold
and delivered,
defendant became aware that the goods had in fact been
sold and delivered to the close corporation. Defendant accordingly
applied
to the Master to have the claims expunged and this was duly
done in terms of section 45(3) of Act 24 of 1936 on 5 March 2002.
In March 2002 plaintiffs launched an application
in which they sought an order declaring that defendant in his
capacity as trustee
of Sacks’ insolvent estate was liable for the
debts of the close corporation in the sums of R588.696,18, and
R63.918,70 respectively.
This application was subsequently
withdrawn, and plaintiffs agreed to pay defendant’s costs. The
present action was then instituted
in September 2002.
The Claims.
In its main claim first plaintiff
claimed that during the period 21 August 2000 to 15 September 2000
the close corporation, represented
by Sacks, ordered a quantity of
meat. First plaintiff further alleged that during this period Sacks
conducted the close corporation’s
business recklessly and/or with
gross negligence and/or with the intention to defraud first plaintiff
in that Sacks ordered and
took delivery of meat while knowing that
the close corporation was insolvent and that it accordingly would not
be able to pay for
it. It is alleged in its pleadings that Sacks
fraudulently advised first plaintiff that the close corporation would
pay for the
meat. During this period Sacks wrote out cheques on
behalf of the close corporation which he knew could not be honoured.
He further
alleged that Sacks conducted the business in a reckless
and/or gross negligent manner and the close corporation incurred
substantial
new debts during the relevant period while Sacks knew or
should reasonably foreseen that the close corporation was at that
stage
insolvent and could not pay any new debt. First plaintiff
therefore alleged that the value of the meat in question amounted to
R588
696,18 and that first plaintiff had not received payment in
respect thereof.
Second plaintiff’s main claim is identical to
that of first plaintiff save that it relates to the period 4
September 2000 to 15
September 2000 and the value of the meat is said
to be R63 918,70.
Both plaintiffs instituted an alternative claim on
the basis that during the relative period Sacks intentionally
defrauded and misrepresented
that the close corporation would pay for
the meat. Plaintiffs allege that the misrepresentation was false and
that Sacks knew that
the plaintiffs would receive no payment in
respect thereof. They further allege that the misrepresentations were
material and made
by Sacks with the intention to persuade plaintiffs
to deliver meat to the close corporation and further that plaintiffs
were so
induced.
Evidence.
Plaintiffs called two witnesses, one
Gerhard Snyders and Ahlers. Snyders testified that, as the erstwhile
manager of Rainbow Meat
Wholesalers (‘Rainbow’) on the Friday
preceding the Monday on which an urgent application was brought for
the liquidation of
Sacks and Sons CC, he received an order from
Sacks to deliver meat to the close corporation. He explained that
early on Monday 18
September 2000 he received a call from Sacks
during which Sacks impressed upon him the urgency of the delivery of
the meat which
had been ordered on Friday. Thirty sides of meat were
accordingly delivered to the close corporation by Rainbow Meat
Wholesalers.
On 18 September 2000 between 10h00 and 11h00 the
owner of Rainbow, Mr Prinsloo, informed Snyders that an urgent
application for the
liquidation of the close corporation was
scheduled for 14h00 on that day and that the meat which Rainbow had
delivered to the close
corporation had to be recovered before the
latter went into provisional liquidation. When Snyders arrived at
its premises, the staff
of the close corporation had already started
cutting up the meat which Rainbow had delivered earlier that day.
After initial resistance,
Snyders managed to regain possession of the
meat after Sacks agreed that the product could be removed.
Ahlers testified that he had built up a close
business relation with Sacks over a period of forty years. A month
prior to the liquidation
of the close corporation Sacks had assured
him that the close corporation was doing good business and that it
had signed a new and
favourable contract. Ahlers testified that
even when prompted about the apparent lack of profitability of the
Waterfront branch
of the close corporation, Sacks maintained that the
business had not experienced significant financial problems and
indeed was conducting
a profitable business. Ahlers explained that
on Friday 15 September 2000 certain cheques were collected from Sacks
for meat delivered
in the preceding fourteen day period as well as
post-dated cheques for meat delivered to the close corporation for
the week ending
Friday 15 September 2000. He testified that certain
cheques had been post-dated to a date too far ahead and that,
following a request
by him to this effect, Sacks had changed the
dates on these cheques in Ahlers’ presence to a date closer to 15
September 2000.
Ahlers explained that a cheque which was dated for
12 September 2000 had been handed to him by Sacks with the assurance
that, if
presented for payment on 15 September 2000, it would be
honoured.
He further testified that Sacks failed to disclose
to him that the close corporation had been incurring a loss in an
amount of R30,000
per month for a portion of the leased property
which the close corporation could not use itself and which it had
failed to sub-let.
He had also failed to disclose that the close
corporation had incurred losses at its Mitchell Plain’s branch by
reason of an opposition
meat retailer who opened a shop in the same
area, or that the close corporation had liabilities exceeding its
assets by more than
R8 m.
Ahlers testified that for the past ten years
cheques had been collected on a Friday in respect of the purchases
for the period two
weeks prior thereto. He stated that the last
purchases by the close corporation were on 13 or 14 September 2000.
However he did
say that a transaction might have taken place on the
Friday 15 September because ‘Soos ek vantevore gesê het ons
probeer om ons
voorrade tot nil te kry op ‘n Vrydagoggend en
hierdie moes die laaste goed gewees het wat ons gehad het of hulle
was Donderdag
bestel en Vrydagoggend vroeg uit gestuur of ons het hom
Vrydagoggend genader en gesê help ons asseblief, ons het nog
voorraad wat
ons ontslae van wil raak. Hierdie aflewering sou vroeg
in die oggend geskiet het’
Plaintiffs’ Case
.
Mr Potgieter, who appeared together with Mr Fourie
on behalf of plaintiffs, submitted that the evidence of Snyders and
Ahlers constituted
prima facie
proof of the fact that Sacks
had carried on the business of the close corporation in a reckless or
grossly negligent manner. The
evidence of Snyders, in particular to
the effect that Sacks wanted an urgent delivery of meat as early as
Monday morning despite
the fact that he knew that the close
corporation on whose behalf he sought to take such delivery would be
liquidated at 14h00 on
that day, constituted
prima facie
proof
that Sacks had conducted the business of the close corporation
recklessly or with direct intent to defraud creditors.
He submitted that the evidence of Snyders and
Ahlers must be measured, not only against the timing of the
application for liquidation
and Sacks’ conduct at the time, but
against the explanations offered by Sacks as well as the liquidator’s
report.
Mr Potgieter placed considerable emphasis on the
founding affidavit of Sacks to which the latter had deposed in
support of the application
for the liquidation of the close
corporation. In that affidavit Sacks stated ‘It has now become
clear that the Applicant has no
alternative but to move for the
winding up of the Applicant. The Applicant has no funds to carry on
servicing its trade creditors
or to pay the salaries and wages due to
its employees and there is no source of further obtaining such
funding’.
Mr Potgieter submitted that this passage from
Sacks’ affidavit showed that Sacks was prepared to expedite a
delivery of meat from
Snyders of Rainbow early on a Monday morning
while being well aware that the close corporation was not only in a
parlour situation
but that a decision had already been taken at 4.30
p.m. on the preceding Friday to liquidate the corporation. In this
he had manifestly
been reckless.
Mr Hodes, who appeared together with Mr Sievers on
behalf of defendant, began his argument by an examination of the
manner in which
plaintiffs had pleaded its case. The essence of this
case, in Mr Hodes’ view, was set out in the pleadings as being
that between
the 21 August 2000 until 15 September 2000 Sacks had
ordered meat on behalf of Sacks Butchery. Thus ‘Sacks, gedurende
die periode
vermeld…. namens Sacks Butchery tjeks uitgeskryf het
ten gunste van Eerste Eiser terwyl hy geweet het dat die vermelde
tjeks nie
gehonoreer sou word nie.’ Furthermore, the quantum was
set in the pleadings in the amount of R588 696,18.
Mr Hodes submitted that there had been no proof
that Sacks had run the business recklessly with the intent to defraud
first and second
plaintiff during the period as pleaded. In his
view, there was no evidence as to the value of the meat so ordered in
the amount
of R588 696,18 to justify a claim in this amount. Even on
the assumption that Sacks had been reckless, there was a possibility
that
a further dividend would be made available to creditors. In this
connection Mr Hodes referred to the liquidator’s report of 19
December 2000. In that report the liabilities of the close
corporation were said to exceed the assets by R6 168 001. However
amongst
the liabilities was an amount of R11 244 190 which was
described as comprising trade creditors, loan creditors, public for
meat stamps
and anticipated damages claims. Furthermore the
liquidator had stated ‘The trade debtors of the close corporation
have an outstanding
face value of R3 607 145. As at 9 November 2000
an amount of R1 232 666,64 had been collected from such debtors.
Collections are
ongoing and it is anticipated that an excess of R3
000 000 will be collected from the debtors. In this eventuality
there was sufficient
to cover the secured claim of Standard Bank of
South Africa Limited in the amount of R1 577 416,00 and the balance
will accrue to
the benefit of the general body of creditors’. Mr
Hodes contended that, absent a more recent report from the
liquidator, the plaintiff
was obliged to wait until a further
dividend was paid in order to be in the position properly to quantify
its damages.
Section 64(1)
of the
Close
Corporations Act.
>
Section 64 (1) of the Act provides
that ‘If it at any appears that any business of a corporation was
or is being carried on recklessly,
with gross negligence or with
intent to defraud any person or for any fraudulent purpose, a Court
may on the application of the Master,
or any creditor, member or
liquidator of the corporation declare that any person who was
knowingly a party to the carrying on of
the business in any such
manner, shall be personally liable for all or any of such debts or
other liabilities of the corporation
as the Court may direct, and the
Court may give such further orders as it considers proper for the
purpose of giving effect to the
declaration and enforcing that
liability.
This section follows the wording of section 424
of the Companies Act 61 of 1973. Hence the manner in which courts
have sought to
interpret s 424 is of considerable relevance to this
dispute. However it is necessary to deal firstly with a judgment
relied upon
by plaintiffs.
In
L & P Plant Hire BK en Andere v Bosch en
Andere
2002 (2) SA 662 (SCA) at 677 J – 678 A
Brand AJA
(as he then was) described the purpose of section 64 thus:
‘Wat skuldeisers betref is die bedoeling van art
64….immers nie om vir hulle mede hoof skuldenaars met die beslote
korporasie
te skep nie. Die bedoeling is om hulle te beskerm teen
nadeel wat die roekelose of gronalatige bedryf van die beslote
korporasie
se sake vir hulle mag meebring’.
Brand AJA
then offers this significant
qualification to the scope of section 64 at 678 B ‘So gesien moet
art 64, wat skuldeisers betref, beperking
uitgelê word om slegs
betrekking te hê op ‘n roekelose en ‘gronalatige’ bedryf van
die beslote korporasie se besigheid wat
‘n nadelige effek op die
skuldeiser se vordering teen die beslote korporasie het. Waar die
beslote korporasie ten spyte van die
roekelose of gronalatige bedryf
van sy besigheid steeds die skuldeiser se vordering kan ontmoet, kan
die skuldeiser nie ingevolge
art 64 ageer nie’.
Whereas in the
L & P Plant Hire
case, a
suspicion that a close corporation was unable to pay a debt was
considered to be insufficient to justify the application
of section
64, Mr Potgieter submitted that, in the present case, the close
corporation had been liquidated, at the time of liquidation
its
liabilities far exceeded its assets, and further that it was not
clear whether any significant dividend would be realised. Thus
plaintiffs would be left only as concurrent creditors.
Mr Potgieter submitted further that the plaintiffs
had duly elected to pursue the recovery of damages by way of an
action in terms
of section 64 of the Act. The mere fact that minor
dividends had been received from the realisation of assets in the
liquidation
of the close corporation together with the possibility
that some future dividend might be received did not preclude
plaintiffs from
seeking relief in terms of section 64 of the Act.
Evaluation
In examining whether a close
corporation has conducted its business recklessly or with gross
negligence, a court must examine the
principles which are inherent
in the Act within the context of the particular facts of the case.
For this reason the key factors
to be considered in this enquiry
include the scope of the business of the close corporation, the role,
function and powers of the
persons whom it is sought to hold liable,
the amount of the debts of the close corporation, the nature and
scope of the close corporation’s
financial difficulties and its
prospects of recovery and the extent to which the persons whom it is
sought to be held liable in terms
of section 64 have deviated from
the standard of a reasonable person. See in this connection
T J
Jonk BK h/a Bothaville Vleismark v Du Plessis NO en ‘n Ander
1998(1) SA 971 (O).
This particularised approach to the application of
section 64(1) of the Act finds explication in the following
dictum
of
Howie JA
(as he then was) in
Philotex (Pty) Ltd and
Others v Snyman and Others
1998(2) SA 138 (SCA) at 146 G-I.:
‘Participation in business necessarily involves taking
entrepreneurial risks but s 424 only penalises
the subjection of
third parties to risk where (apart from the case of fraudulent
trading) it is grossly unreasonable. If, therefore,
in a given case
there is some ground for thinking the creditors will be paid but a
reasonable businessman would nonetheless, because
of circumstances
creating material but not high risk of non payment, refrain from
running that risk, the director who does run that
risk by incurring
credit, and thus falls short of the standard of conduct of a
reasonable businessman, trades unreasonably and therefore
negligently
vis-à-vis
creditors. That departure from a reasonable
standard could not clearly be described as gross, however and the
director concerned
would not be hit by the section. By contrast, an
instance that manifestly would fall foul of this section is where a
reasonable businessman
would realise that in all the circumstances
payment would not be made when due. To incur credit in that
situation would, as a matter
of degree be so plainly more serious a
departure from the required standard than the conduct in the first
example that one has no
difficulty characterising it as grossly
unreasonable and therefore grossly negligent….So, if a plaintiff
were to present evidence
warranting a conclusion that when credit was
incurred there was, objectively regarded, a very strong chance,
falling short of a virtual
certainty, that creditors would not be
paid, that case would, I think, also involve the mischief which the
section was intended to
combat’.
In the present case, the evidence of Ahlers
confirms that the close corporation was a business which ran for many
years with cash
flow problems. Ahlers’ own evidence was that, from
time to time, he would receive a phone call requesting that a
post-dated cheque
be held back. In an affidavit deposed to by Sacks
pursuant to the aborted application of plaintiff (upon which Mr
Potgieter placed
considerable reliance), Sacks stated: ‘The cheques
were not met as a result of the cash flow problem. To the knowledge
of the Applicants
the Butchery had suffered similar cash flow
problems in the past and was doing so at the time that the cheques
were handed over.
I had no reason to believe that they would not be
met’.
According to the liquidator’s report, at the
time of the liquidation, an amount of R3 607 145 was outstanding and
significantly
within a month of the close corporation being
liquidated (namely as at 9 November 2000) an amount of R1 232 666,64
had been collected
from debtors indicating that there were funds
available for the discharge of certain liabilities including those of
plaintiff.
In short, Mr Hodes submitted that, in the
circumstances, the manner in which the business had been conducted
over a long period of
time and in terms of which Ahlers was aware, a
reasonable businessman in the position of Sacks would not have
realised that ‘in
all circumstances payment would not be made when
due’. By contrast, the procedure adopted by Sacks accorded with a
long standing
practice. Notwithstanding the financial difficulties
of the close corporation, a significant amount was owed by debtors
who were
not recalcitrant in discharging their obligations as the
record of collection by the liquidator revealed. Thus, Sacks had a
rational
basis upon which to expect that debtors would pay so that
cash would be available to honour the cheques.
In seeking to rebut this approach, Mr Potgieter
cited a
dictum
of
Van Deventer J
in
Ozinsky NO v
Lloyd and Others
1992 (3) SA 396 (c) at 414 G ‘If a company
continues to carry on business and to incur debts when, in the
opinion of reasonable
businessmen, standing in the shoes of the
directors, there would be no reasonable prospect of the creditors
receiving payment when
due, it will in general be a proper inference
that the business is being carried on recklessly'.
Whatever inference can legitimately be drawn from
the evidence, the test remains whether a reasonable business person
standing in
the shoes of Mr Sacks would run a business for a long
time in circumstances where clearly there had been cash flow
problems, which
fact he had continued to communicate to his
creditors.
The only evidence which raises a question as to
compliance with this test is to be found in the evidence of Mr
Snyders who was employed
by Rainbow and not by plaintiffs. He
claimed that Sacks still persisted with a meat delivery on Monday
18 September 2000, the
day of the urgent application for liquidation
of the close corporation. Given his vagueness about all dates other
than these critical
ones, there is, on this evidence alone, a
somewhat unsatisfactory and inadequate basis for finding that Sacks’
conduct fell within
the scope of section 64(1) of the Act as opposed
to constituting acts which stand to be classified as falling just
outside of the
border of the scope of section 64(1) of the Act.
Further, Snyders’ evidence is not strictly relevant to the period
in which it
is alleged on the pleadings that a breach of s 64(1) took
place.
There is a further and significant difficulty in
the way of plaintiffs’ success. While Mr Potgieter might be
correct in saying
that there was nothing in the papers to suggest
that the plaintiff would obtain a further significant dividend, that
possibility
cannot be excluded on the basis of the figures provided
in the liquidator’s report together with the additional uncertainty
as
to the contingent liability owing to Lloyds insurance. In the
liquidator’s report the following statement appears: ‘From the
information made available to me from his trustee and dependent upon
the negotiations for the release of certain securities which
had been
put up for obligations to Lloyds of London and Standard Bank, it
would appear that an amount in excess of R1 000 000 may
well become
available as a dividend in respect of the close corporation’s
claim’.
In summary, plaintiff has not provided any
evidence by way of a further report from the liquidator which would
show that, on the probabilities,
a further dividend of some
considerable significance would not be paid out. To the contrary,
there would appear to be a real possibility
of a further dividend
being paid to creditors. Accordingly, on the pleadings and hence on
the specific case brought by plaintiffs,
the latter have failed to
prove, on the probabilities, as to what loss may have suffered by it
even were it to prove that the conduct
of Sacks fell within the scope
of section 64(1) of the Act or that a fraudulent misrepresentation
had been made by Sacks.
For this reason Mr Potgieter was constrained to
ask for a declarator, being that the estate of Sacks is declared to
be personally
liable to the first plaintiff in terms of the
provisions of Section 64(1) of the Act in the amount of R588 696,18
less any dividends
that the first plaintiff may receive in respect of
its claim in Sacks & Son CC (in liquidation); further that the
estate of
Sacks is declared to be personally liable to the second
plaintiff in terms of the provisions of Section 64(1) of the Act in
the amount
of R63 918,70, less any dividends that the second
plaintiff may receive in respect of its claim in the close
corporation.
As Mr Hodes correctly submitted, both causes of
action relied upon by plaintiff have to fail in that plaintiff has
failed to prove
the
quantum
of any claim. In both claims,
plaintiffs claim damages where no basis for the quantification of
damages has been established. Further,
Ahlers confirmed in evidence
that a dividend had been received by plaintiff from the close
corporation in liquidation, thereby reducing
plaintiffs’claims for
goods sold and delivered.
Mr Ahlers was also referred to a letter of the
trustee of 21 August 2002 which stated ‘please note that I do not
anticipate that
there will be any further account lodged in this
matter until most probably June 2004 as it is only at that stage that
we would have
established whether or not any funds are going to
revert to the insolvent estate from his Lloyds’ investments and
whether or not
there will be funds to distribute to his creditors’.
He was then asked ‘In ander woorde hoeveel U uiteindelik gaan kry
uit Sacks
& Son CC weet u nie, is dit reg so?’ To which he
replied ‘Ek weet nie niemand weet nie Edel Agbaar’.
To the extent that the provisions of section 64(1)
confer a discretion upon this court, that discretion, in my view,
cannot be exercised
in favour of plaintiffs who might in future be
in receipt of substantial dividends in addition to those already
received. In this
connection, an exercise of this discretion in
favour of plaintiff would run the risk of mulcting the creditors of
Sacks’ insolvent
estate of dividends to which they would otherwise
be entitled.
For all these reasons, the action is dismissed
with costs including those consequent upon the employment of two
counsel.
____________
DAVIS
J