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[2012] ZALAC 24
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Bargaining Council for the Furniture Manufacturing Industry, Kwazulu- Natal v UKD Marketing CC and Others (DA 2/11) [2012] ZALAC 24; [2013] 2 BLLR 119 (LAC); (2013) 34 ILJ 96 (LAC) (20 August 2012)
Reportable
REPUBLIC OF SOUTH AFRICA
IN THE LABOUR APPEAL COURT OF SOUTH
AFRICA
(HELD AT DURBAN)
Case no: DA 2/11
BARGAINING COUNCIL FOR THE
FURNITURE
MANUFACTURING INDUSTRY,
KWAZULU-NATAL
..........................................
Appellant
and
UKD MARKETING CC AND 11 OTHERS
......................................................
Respondents
Heard: 17 May 2012
Delivered: 20 August 2012
Coram: WAGLAY DJP, DAVIS JA and
JAPPIE JA
JUDGMENT
DAVIS JA
Introduction
[1] This is an appeal against a
judgment of Molahlehi J in which he dismissed an application by the
appellant for an order that:
the first respondent was obliged to have
registered with the appellant in terms of Clause 17 of the Main
Collective Agreement promulgated
in Government Gazette No 18896 of 18
May 1998; to have complied with the various terms of that agreement,
including Clause 26 thereof,
and the various other collective
agreements in the furnishing industry within the Kwazulu-Natal
Province in respect of the said
period; to have kept records provided
for in Clause 20 of the Main Collective Agreement and to have paid to
the appellant the amounts
provided for in Clauses 13 and 16 of the
Main Collective Agreement; Clause 13 of the appellant’s
Provident Fund and Mortality
Benefit Association Collective
Agreement; and, to have paid its employees the wages prescribed by
Clauses 2 and 16 of the Main
Collective Agreement.
[2] With leave of the court
a quo,
the appellant has approached this Court on appeal.
The factual matrix
[3] Various respondents conduct a
business that manufactures and markets readymade kitchen cupboards to
major retail chain stores.
For the period which is relevant to this
dispute, namely that which commences on 1 March 2003, the operation
of the business was
structured so that first respondent solicits
orders from retail chain stores for various ranges of readymade
kitchen cupboards,
manages the workflow to meet these orders and acts
as a wholesaler or distributor in selling and delivering the finished
product
to the store.
[4] The various stages of the
manufacturing process are undertaken by the other respondents through
close corporations or sole proprietorships.
According to the
respondents, through their joint but separate efforts, kitchen
cupboards are produced to meet the orders which
first respondent has
procured.
[5] Each of the respondents contends
that it operates a separate business entity with its own workforce.
In one case, that of fifth
respondent, it has subcontracted work to
other contractors. From the evidence, it appears that most of the
respondents are registered
for VAT and those that have employees pay
contributions for UIF, PAYE and Workman’s Compensation on
behalf of their employees.
[6] A minute of a consultation held at
first respondent’s premises on 28 September 2006 and which was
attended by Mr Bengy
Premrajh, who together with his wife, are the
members of first respondent, Mr A Hamilton, the attorney for
appellant, Mr J du Toit,
the attorney for first respondent and Mr D
Furmage, an independent accountant employed by appellant to check the
business operation
of respondents, provides a clear overview of this
structure. According to this document, Premrajh initially produced
readymade
kitchens through his own entity. However, as a result of
labour problems and proposals from ex-employees, he decided to
initiate
a new structure. The basis of this structure is set out in
the minute. As it represents a critical component of evidence, I
reproduce
extensive parts thereof:
‘
1.6
The ex-employees would form their own individual entities, register
with the Bargaining Council (BC), charge per set produced,
employ
their own labour and comply with all government regulations.
1.7
The ex-employees are referred to as “sub-contractors
/suppliers”.
1.8
The Suppliers applied to the BC to register for levies however they
were turned down as they were not affected (or did not meet
the BC
requirement for registration).
1.9
They would enjoy some of UKDM’s profits and at the same time be
empowered to take control of their individual processes
within the
manufacturing process.
1.10
This was how the current structure was initially set up and this has
now progressed to the stage where they are buying their
own tools and
machinery.
1.11
The suppliers were initially running bank accounts in their personal
capacity and had not opened one in the name of the CC’s.
When
the case went to the CCMA, they didn’t have bank accounts and
were deemed to be employees of UKDM. BP asked to register
them as
employees and the BC said no as it was the same structure.
1.12
The suppliers would get all their own systems in place by doing the
following:
a)
Register and pay VAT;
b)
Pay a renal for use of the premises, lights and water, machinery etc.
c)
They would chard UKMD weekly for work produced (per item produced)
and not hours charged.
1.13
The current structure is like a clothing factory, CMT (or Cut, Trim
and Make).
1.14
The majority of the raw materials is purchased by UKDM and the
suppliers are responsible for manufacturing units.
1.15
JS Machinery (Machine Shop) owns all (or most) of the big machinery.
Sundry items e.g. hand guns, spray tools and other small
items are
owned by the suppliers.
2.
Paper Trail
2.1
UKDM will receive a bulk order from a customer e.g. Ellerines and
presumably there is some sort of a schedule worked out as
to when the
goods must be ready.
2.2
Individual, manual orders are issued daily to the suppliers UKDM and
the suppliers in turn will invoice their goods back to
UKDM each day.
The daily orders to the suppliers will match the bulk order received
from UKDM’s customer.
2.3
When units are completed by a specific section, they are invoiced to
UKDM as set prices, daily. Manual invoices are made out
and VAT is
charged on these invoices (assuming the supplier is VAT registered)>
the physical units are delivered back to UKDM
in a central holding
section on the floor where they can then be handed over to the next
stage in the process.
2.4
At each stage, the units are checked for quality before being handed
over to the next section. This ensures that the department
responsible for any quality defects can be easily identified. The
invoices are always verified for the number of units delivered
(and
their quality) but not necessarily signed.
2.5
Goods that are physically handed back to UKDM once a stage is
completed are not invoiced by UKDM back to the next department.
2.6
Invoices are accumulated from Thursday to Wednesday and then attached
to a statement which is given to UKDM on Thursday mornings.
The
statement is paid on the Thursday and the suppliers presumably pay
wages to their employees on Fridays.
2.7
A weekly statement is issued along with the daily invoices to UKDM
who will then make payment to the supplier.
2.8
The suppliers get paid per set produced at a preset price which is
usually adjusted annually. It would be unusual for prices
to be
adjusted during the year but it has happened if market conditions
have changed.
2.9
There are fixed lines and only 3, 4 or 5 piece lines are produced.
This is therefore all repeat work.
2.10
The suppliers have their own accountant’s however we could not
establish who actually did the manual invoicing to UKD
and other
day-to-day administrative work.
3.
JSPS Importers and Distributors cc
3.1
JSPS owns all the major machinery and the vehicles that transport the
kitchen units to customers.
3.2
JSPS charges rentals to the suppliers for use of the machinery and
transport however it does not appear as if invoices are made
out. (I
note that on the statements issued by the suppliers to UKDM, a charge
for rental is deducted from the amount payable by
UKDM). It needs to
be established who is charging the rental.
3.3
It also needs to be established whether UKDM charges rental for use
of the factory floor.
3.4
It does not appear as if invoices are issued for the rental however
receipts are issued for the payment of these rentals.
3.5
JSPS owns one of the CNC routers (there are two).
3.6
When the boards come out, these get invoiced to UKDM. JSPS cuts the
components and then the doors.
3.7
JSPS also supplies outside customers with these components.
4.
Description for the functions
No
Function
Entity
Description
1
UKD
Marketing CC
Acquisition
of raw materials and sales of finished products
2
Cutting
of Components
J
S Machining CC
Cuts
boards into the components
3
Edging
Sonke
Edging Works CC
Edging
and spraypainting of doors
4
Assembly
Saafies
Cabinet Works CC
Assembling
boxes, gluing and stapling
5
Filling
Govenders
Spraypainting
Sprays
undercoats and then fills any holes
6
Sanding
Moses
Sanding
Sands
down units (use portable sanders)
7
Spraypainting
MGV
Spaypainters
Gives
units the final spray
8
Finishing
Saafies
Cabinet Works CC
Performs
final assembly of units e.g. handles, hinges etc put on
9
Spray
Door Panels
SRS
Spraypainters CC
Does
the doors but this is not part of the main line
10
Oak
kitchen units
Brownwyn
Designs CC
Manufactures
the entire Oak range from start to finish
11
Oak
kitchen units
Musa’s
Assemblers CC
Sub-contractors
to Bronwyn Designs – has no interaction with UKDM
12
Oak
kitchen units
Brooklyn
Machining CC
Sub-contracts
to Bronwyn Designs – has no interaction with UKDM
13
Final
Assembly
Hampshire
Components CC
Closed
in February 2006 but was responsible for final assembly prior to
this being given to Saafies
[7] Notwithstanding this detailed
description of the structure, appellant still contends that the
entire ‘setup’ was
created as a ‘device, stratagem
or sham’ by Premraj to avoid the consequences of an employment
relationship between
first respondent and its employees, being the
balance of respondents together with those persons employed by
respondents. Accordingly,
it sought to have the ‘corporate
veil’ behind which it contested first respondent sought to hide
its employees pierced
or lifted so as to justify a conclusion that
first respondent was in fact and therefore in law the employer of all
those who were
members of the close corporations or ‘employees’
thereof. In this, appellant contended that all were employees of
first
respondent in the furniture manufacturing industry. This would
mean that all those persons engaged upon the various activities which
created the readymade kitchens, which were the subject of orders
procured by the first respondent, would be regarded as employees
of
first respondent.
The evidence led by the appellant
[8] Mr Numthkumar, an independent
furniture manufacturer, testified with regard to certain letters that
had been discovered and
which were addressed to him by some of the
respondents, which sought to solicit work from him. Mr Acker, who
appeared on behalf
of the appellant, contended that Mr Numthkumar’s
evidence made it clear that these letters that he had received were
false
and had been created to give the impression that the second and
third respondents in particular were entitled to take on other
customers (other than in respect of orders procured by first
respondent) in circumstances where this was plainly not the case. In
other words, the suggestion was that this evidence indicated the
nature of the sham which respondents sought to cover up by way
of
false letters.
[9] A major competitor of respondents
Mr Neethling, who had been a past chairman of appellant, was called
to testify on behalf of
the appellants. The essential thrust of his
evidence was that the restructuring of first respondent’s
business, to which
reference has been made, would not have been
viable if the bargaining council wage rates had been paid to all
employees. Accordingly,
he testified that the only persons who could
benefit were the various respondents and thus the persons employed in
the scheme had
to have been underpaid for the particular business
structure set up by Mr Premraj to have operated successfully.
[10] Mr Furmage, the independent
accountant, was taken carefully by Mr Acker through the minute of the
consultation meeting, to
which reference has already been made. He
testified that he was unable, other than by way of invoices, to
establish that there
was any documentation which confirmed the
relationship between first respondent and the other entities. Mr
Furmage also examined
a series of invoices generated by second and
further respondents which had been provided after the meeting on 16
January 2007.
He was then asked by Mr Acker as to the outcome of this
investigation. He answered as follows:
‘
I
was initially told by Mr Premraj that invoices would be accumulated
by the close corporations for one week running from Thursday
to
Wednesday of every week. A statement would then be issued on the
Thursday morning of each week for the prior week, working day
week.
He then explained that that statement would be paid by UKD into the
close corporation’s account. That would take place
on Thursday
and the object of this exercise was just to test a few of those close
corporations’ statements and see if money
was actually paid
over by UKD.
And?
--- And I found it was – that it did happen.’
[11] Mr Simelane, who had been an
inspector employed by appellant, testified about inspections that he
had undertaken of the business
operations of respondents and the
report that he had subsequently prepared. In this report, after
having analysed the activities
of the various respondents, he
concluded that:
‘
In
conclusion it was quite evident that the activities at Grimsby Road
were designed to produce kitchen units as an end result and
was very
similar, to the normal activities associated with a factory,
manufacturing the same products.
It
was also been observed that the employee’s irrespective of
where they work, earned more or less the same amount per week
irrespective of the alleged payment ‘per set’, system.
It
was also noted that the employee’s in general appeared to be
confused as to whom they are really employed by and the inference
was
drawn that U.K.D Marketing was ultimately in control of the entire
operation.
The
employee’s also indicated that they were reluctant to complain
about their rights concerning minimum wages and social
benefits as
they fear victimisation and dismissal.
The
employee’s indicated that they wish that the benefits and wages
as prescribed, be restored.’
[12] Another inspector, Mr Le Roux,
was also called to testify on behalf of the appellant. He produced a
flow chart which explained
how the operation of respondents business
took place, a description of which was broadly consistent with the
documentation to which
reference has been made earlier in this
judgment.
[13] The final witness on behalf of
the appellant was Mr Radebe, a former employee of Mr Premraj,
although employed by an entity
which at the time was referred to as
Unique Kitchen Designs. Mr Radebe appeared to be employed in some or
other capacity within
this operation from 1999 until 2006. Insofar as
the material period for this dispute commences in 2003, it appeared
that Mr Radebe
had been reemployed on 21 March 2005. He denied that,
when he returned to the operation, he worked for Mr Ramcherad, the
sole member
of the eleventh respondent. By contrast, he insisted that
he worked for Mr Premraj.
[14] So much for the witnesses who
testified on behalf of appellant. At the close of appellant’s
case respondents called no
witnesses. Accordingly, Mr Acker submitted
that an adverse inference should be drawn against respondents who had
failed to call
available witnesses in circumstances where the
relevant facts were particularly within their knowledge. He contended
that it was
clear that Premraj and the various ‘so called’
members of the close corporations together with the sole proprietors
were available to testify and that clear indications had been
provided during the cross-examination of appellant’s witnesses
of the intention, at least, to call some of them. In Mr Acker’s
view, this was a case where the internal workings of the
entire
structure and hence the scheme were exclusively within the knowledge
of Premraj and the other members of close corporations
and sole
proprietors. Their failure to testify in these circumstances was
inexplicable.
[15] In support of this argument, Mr
Acker referred to the well-known rule in
Galante
v Dickinson
1
where Schreiner JA said:
‘
In
the case of the party himself who is available, as was the defendant
here, it seems to me that the inference is, at least, obvious
and
strong that the party and his legal advisers are satisfied that,
although he was obviously able to give very material evidence
as to
the cause of the accident, he could not benefit and might well,
because of the facts known to himself, damage his case by
giving
evidence and subjecting himself to cross-examination.’
It is a prerequisite to the
application of this principle that appellant’s evidence must
have been of such a nature that,
when it closed its case, there was
sufficient evidence to enable the court to say, having regard to the
absence of an explanation,
that the appellant’s version was
more probable than not. See in particular
Putter v Provincial
Assurance Co Ltd
and Another
1963 (3) SA 145
(W) at 150 C;
Marine and Trade Insurance Co Ltd v Van der Schyff
1972 (1) SA
26
(A) at 49 H.
[16] Accordingly, it is necessary to
examine what case appellant made out in terms of the evidence which I
have briefly summarised.
In this process, a court shall take into
account the
dictum
of Miller JA in
Titus
v Shield Insurance Co Ltd
2
‘
It
is clearly not an invariable rule that an adverse inference be drawn;
in the final result the decision must depend in large measure
upon
“the particular circumstances of the litigation” in which
the question arises. And one of the circumstances that
must be taken
into account and given due weight, is the strength or weakness of the
case which faces the party who refrains from
calling the witness.’
[17] In my view, the evidence which
was provided by appellant’s witnesses was, at best, equivocal,
to its own case. For example,
Mr Numthkumar accepted that Mr Premraj
had operated ‘within a bigger system involving outsourcing’.
He also conceded
that the eleventh respondent had advertised that
they were prepared to do business with Mr Numthkumar in that they had
excess capacity
to take additional order. Mr Furmage, on whose
evidence much emphasis was placed by appellant, conceded that the
entire structure
had been transparent, that he had been shown how the
operation had worked, that there had been no pretence by those whom
he had
interviewed and, that something different in the manufacturing
process was being conducted at the various operations. He was asked,
‘in respect of the labour there is UIF, there is Workman’s
Compensation, those sorts of government regulations, the
CC’s
were the ones that were responsible for complying with that and as
far as you could see he did’, to which Furmage
answered ‘As
far as I could see, yes.’ Under cross-examination, he accepted
that he had spoken to a number of the members
in the CC’s and
they testified when he asked ‘who employs you’ that ‘I
am working here for myself but I
was employed by UKD and was given
this task now to take this department to be on my own.’ It is
significant, given the emphasis
placed upon Furmage’s evidence,
that when read as a whole, it did little to gainsay the description
of discrete operational
units as described in the minute of 28
September 2006.
[18] Faced with this evidence, Mr
Acker was invited by this Court to provide an indication of the best
possible and unequivocal
evidence which appellant had produced to
substantiate its case. He referred to a
souvenir
brochure
which had been produced to celebrate the 25
th
anniversary
of first respondent. This document,
inter alia
, spoke about
‘the business outgrew its premises and Ironstone Road and
required a further 200m to accommodate its current
level of
production including fellow expansion’. Further ‘it is
not uncommon to find Bengy (Premraj) at his desk drawing
designs that
he may have thought of doing during his drive to work. His creative
genius is not duly acknowledged but it is his
ability that has played
a key role in the success of UKD’.
[19] Later Mr Premraj was described as
a ‘charismatic leader who is in full control of his staff and
business’. But,
in the very same document, the following
appears as a description of the new business strategy:
‘
This
new business strategy was in line with Government’s philosophy
of job creation and Black Economic Empowerment. Bengy
resolved to
restructure his entire business based on the principle of empowerment
and job creation.
He
Empowered his staff by sharing profits and assisted then in becoming
the employers in their own right. Mr Premraj empowered his
production
staff and allowed them to form their own companies, which are now
contracted to UKD. The benefit of this restructuring
enabled the
creation of job opportunities for more people. Employees formed their
own companies and started contracting to UKD
Marketing to manufacture
UKD Marketing to manufacture modular kitchens on a piece meal basis.
The
benefit of the restructuring to UKD is a fixed labour cost per unit
produced. The benefit to these subcontractors is the distribution
of
wealth as they now participate in profit sharing… UKD has now
engaged thirteen subcontractors to produce kitchen components
each
with its own staff, machinery and infrastructure and quality control
standards.’
[20] In summary therefore, when all of
this evidence is read and analysed as a whole, it did not provide a
sufficient basis to enable
this Court to conclude that,
notwithstanding no direct explanation on the part of respondents,
appellant’s version was more
probable than not. To the
contrary, there is no justification, on the probabilities, to have
concluded that the various proprietorships
and close corporations did
not operate for their own account or that it could be said that first
respondent had any financial interest
therein. In particular, the
uncontroverted evidence was that there were close corporations
registered as employers with UIF, some
were VAT vendors duly
registered with SARS, the various respondents hired and fired
employees, paid their wages, made statutory
deductions and regulated
the hours of work of those who were so employed. The evidence
certainly did not suggest that these respondents
were not entitled to
assume additional work outside of that which was required in terms of
orders which had been procured by first
respondent.
The lifting of the corporate veil
[21] It is now possible to examine
appellant’s argument about lifting the corporate veil. In
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd
3
Smalberger JA noted that: ‘[o]ver
the years it has come to be accepted that fraud, dishonesty or
improper conduct could provide
grounds for piercing the corporate
veil.’ At 803 G He warned that ‘it is undoubtedly a
salutary principle that our
Courts should not likely disregard a
company’s separate personality but should strive to give effect
to and uphold it. To
do otherwise would negate and undermine the
policy and principles that underpin the concept of separate corporate
personality and
the legal consequences that attached to it.’ At
803 H The learned judge of appeal then went on to say that, where
fraud dishonesty
or other improper conduct was to be found, then
further considerations would influence the overall assessment as to
whether the
corporate veil should be pierced. In this connection, the
court would proceed to examine the substance rather than the form of
the adopted structure in order to determine whether there has been a
misuse of corporate personality which would justify it being
disregarded. Smalberger JA then noted that fraud or improper conduct
was not the only basis by which the corporate veil could be
lifted.
Citing Gower (The Principles of Modern Company Law (5ed at 133)) at
804 C ‘it also seems clear that a company can
be a facade even
though it was not originally incorporated with any deceptive
intentions; what counts is whether it has been used
as a facade at
the time of the relevant transactions.’
[22] In this case, the relevant
transactions appear to be between first respondent and a range of
other entities which are owned
by persons at arm’s length from
the members of first respondent. Furthermore the conduct of the
balance of the respondents,
particularly in the manner in which they
are registered for VAT, pay necessary amounts pursuant to their
obligations as employers
such as UIF, and when it cannot be
established that, in the event of excess capacity, these other
respondents are not entitled
to take on further orders, does not
provide the evidential basis to disregard a company’s separate
personality, particularly
when the authorities consider that this
decision should only be taken in rare cases.
Cape Pacific Limited
at 803 H. In these proceedings, appellant has not made out a case
which would justify conflating the entire structure and operation
as
set out in the minute of 28 September 2006 into a business conducted,
organised and operated solely and exclusively by first
respondent.
Yet, if the corporate veil cannot be so lifted, then that is the only
plausible conclusion to be arrived at by this
court.
Costs
[23] The court
a quo
made a
punitive costs order on the scale as between attorney and own client
as a mark of displeasure by the court of the conduct
of the appellant
in disclosing the inner workings, business model and financial
statements of the respondents to Mr Neethling,
who was a direct
competitor of first respondent. Mr Neethling himself had testified
that it was an extremely competitive market
where ‘there is a
tremendous scrap to get your piece of pie’. Accordingly, it
must have been to his considerable benefit
to obtain figures relating
to the costs of respondents’ operation and to examine files and
financial statements, invoice
minutes of meetings and detailed
information regarding the running of his competitors’ business
operation. These do not appear,
in my view, to be any basis by which
to disturb this particular order of the court
a quo
.
[24] For these reasons therefore, the
appeal is dismissed with costs.
_____________
Davis JA
I Agree
______________
Waglay DJP
I Agree
_____________
Jappie JA
APPEARANCES:
FOR
THE APPELLANT: B A Acker SC
Instructed
by Hamilton Attornyes
FOR
THE RESPONDENT: M Pillemer SC
Instructed
by Pearce and Lister and Company
1
1950
(2) SA 460
(A) at 465.
2
1980
(3) SA 119
(A) at 133 E-F.
3
[1995] ZASCA 53
;
1995
(4) SA 790
(A) at 803 D.