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[1988] ZASCA 140
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Neugarten and Others v Standard Bank of South Africa (172/87) [1988] ZASCA 140; [1989] 2 All SA 90 (A) (11 November 1988)
CASE NO. 172/87 /CCC
IN THE SUPREME COURT OF
SOUTH AFRICA
(APPELLATE DIVISION)
In the matter between
H NEUGARTEN AND TWO OTHERS
APPELLANTS
and
THE STANDARD BANK OF SOUTH AFRICA LIMITED
RESPONDENT
CORAM
: CORBETT, VAN HEERDEN, SMALBERGER, KUMLEBEN JJA et NICHOLAS
AJA
DATE HEARD:
25 AUGUST 1988
DATE DELIVERED:
11 NOVEMBER 1988
JUDGMENT
NICHOLAS, AJA
:
The
dramatis personae
in this appeal are: the Standard Bank of South
Africa Limited; two companíes
2/
2. now in liquidation - Neugarten Fashions (Pty) Ltd
("Neugarten") and Paul Vivaldi Fashions (Pty) Ltd ("Vivaldi"); and five
individuals
- Messrs H Neugarten, M Hirschowitz, M Sacks, J Rosmarin and S
Eagle. (When I refer to Mr Neugarten I shall call him "H Neugarten"
so as to
distinguish him from the company which is abbreviated to
"Neugarten").
Neugarten carried on the business of importers and wholesale
distributors of ladies' clothing and knitwear. At the date of its liquidation,
the 200 issued shares which had been issued were held by H Neugarten (100
shares), Michael Hirschowitz Family Investments (Pty) Ltd
("MHFI") (50 shares),
Sacks (25 shares), and Rosmarin (25 shares). The directors were H Neugarten and
Hirschowitz. Its business and
affairs were managed by H Neugarten, Hirschowitz
and Sacks, who were the company's principal executive officers. H Neugarten was
in charge of buying, marketing and sales; Hirschowitz was in charge of
general
3/
3. administration; and Sacks's responsibilities were those of
a financial director. No important decision was taken in regard to the
affairs
of Neugarten without prior discussion by H Neugarten, Hirschowitz and
Sacks.
Vivaldi was incorporated on 5 May 1982. Its business was the
importation and wholesale distribution of men's clothing and knitwear.
At the
date of liquidation, the 100 shares which had been issued were held by H
Neugarten (40 shares), MHFf (20 shares), Rosmarin
(10 shares), Sacks (10 shares)
and Eagle (20 shares). The business and affairs of Vivaldi were managed in the
same way as those of
Neugarten. Although Eagle was also a director he was
essentially a salaried employee, whose function it was to buy and sell
merchandise.
Neugarten and Vivaldi shared the same premises, and had the same
personnel, the same shippers and bankers and the same bookkeeper
and auditors.
Their businesses were similar in character: the main difference was that
Neugarten dealt in ladies', and Vivaldi in
men's,
4/
4. clothing.
On 2 July 1982, Hirschowitz, H Neugarten,
Sacks, Rosmarin and Eagle executed a guarantee for the repayment of all sums of
money which
the Vivaldi company might thereafter owe to the Standard Bank. This
was in connection with an application for overdraft facilities
by Vivaldi to the
bank. Vivaldi did not in the result make use of the overdraft facilities which
were granted: its finances were
provided by Neugarten. By September 1982 it had
become plain to the Standard Bank that Neugarten was financing Vivaldi, and that
Neugarten was becoming increasingly indebted to the bank in consequence. The
bank accordingly informed Hirschowitz that unless Vivaldi
provided a guarantee
for Neugarten's indebtedness to the bank, Neugarten's credit facilities would be
curtailed. As a result Vivaldi
executed a guarantee ("the Vivaldi guarantee"),
which was signed on its behalf by H Neugarten and Hirschowitz, for the repayment
of all sums of money which Neugarten might thereafter owe to
5/
5.
the bank. Attached to the guarantee were two documents.
One
was in the following terms:
"
CONSENT
in terms of Sec 226(2)(a) of the Companies
Act, 1973.
PAUL VIVALDI FASHIONS (PROPRIETARY) LIMITED
Registration no. 82004475/07
We
being all the members of the Company, hereby
consent to the Company signing a
guarantee for an
unlimited amount in favour of The Standard Bank of
South
Africa Limited, Kine Centre Branch
guaranteeing the obligations of NEUGARTEN
FASHIONS
(PROPRIETARY) LIMITED in respect of such banking
facilities as
the bank may in its sole discretion
deem fit (either by way of the
continuation of any
existing facilities and/or provision of new or
further facilities).
We further
consent to the Company providing the
Bank with such securities in support of
the
aforesaid guarantee as the directors may from time
to time in their discretion deem
fit.
This done and signed at
JOHANNESBURG on the 28th
day of SEPTEMBER 1982.
Signed:
The signatories to this document were H
Neugarten, Sacks, Rosmarin and Hirschowitz. It was not signed by Eagle, or
specifically by
MHFI.
On 10 March 1986, by which date Neugarten
6/
6.
and Vivaldi had both been placed in liquidation, the Standard
Bank brought an application in the Witwatersrand Local Division against
H
Neugarten, Sacks and Rosmarin as first, second and third respondents
respectively. It claimed payment of R2 755 242,31 and other
relief, alleging
that this was an amount owing by Neugarten; that payment had been guaranteed by
Vivaldi; and that the respondents
were liable for Vivaldi's indebtedness to the
bank under the guarantee signed
inter alios
by them. As proof of the
alleged indebtedness the bank relied on a certificate issued in accordance with
the provisions of the Vivaldi
guarantee and the guarantee signed by the three
respondents. In their answering affidavit, the respondents contended that the
Vivaldi
guarantee was invalid, and challenged the correctness of the
certificate. The alleged ground of invalidity of the guarantee was that
its
provision was contrary to s.226 of the Companies Act, 1973 inasmuch as Eagle had
not consented thereto.
7/
4
The matter first came before FLEMMING J who, in a considered judgment, made
an order directing that oral evidence be heard to determine
(a) wheLher Eagle
did consent in terms of s.226(2) of the
Companies Act
, 1973 and to
determine questions (b) and (c), which related to the certificate and the amount
of Neugarten's liability. The judgment
is reported:
Standard Bank of S A Ltd
v Neugarten & Others
, 1987(3) S A 695(W).
Subsequently evidence
viva voce
was heard before GOLDBLATT AJ.
No evidence was led in regard to questions (b) and (c) set out in the order
oC FLKMMING J, because Mr Henderson, a manager employed
by the Standard Bank,
produced and identified a new certificate (which excluded interest) reflecting
Neugarten's indebtedness as
R1 363 157,64. Henderson was not cross-examined and
the amount of the indebtedness ceased to be in contention.
Eagle was the only other witness called.
8/
8. His evidence related to the validity of the Vivaldi
guarantee. In his judgment (which is reported:
Standard Bank of S A Ltd v
Neugarten & Others
, 1988(1) S A 652(W)), GOLDBLATT AJ summarized Eagle's
evidence (at 656 D - 657 J). He held (at 660 E) that "all the directors of
Vivaldi consented, as provided for in s.226(2) of the Act, to the provision of
security by Vivaldi to the applicant f or the debts
of Neugarten." (The word
"directors" is plainly a slip of the pen for "members"). He accordingly granted
judgment against the three
respondents for the sum of Rl 363 157,64, interest
and costs.
With the leave of the Court a
quo
H Neugarten, Sacks and
Rosmarin now appeal to this court. The only matter in issue is the validity of
the Vivaldi guarantee.
The relevant provisions of s.226 of the
Companies
Act
, are ss (1), (1A), (2)and (4). They are set out hereunder. (The words in
ss (2) which I have underlined
9/
9.
are those which directly relate to the present matter.)
"226 (1) No company shall directly or indirectly make a loan to
-
(a) any director or manager of -(i) the company;
or (ii) its holding company; or (iii) any other company which is a
subsidiary of its holding company; or ( b) any other company or other body
corporate controlled by one or more directors or managers
of the company or of
its holding company or of any company which is a sub-sidiary of its holding
company; or provide any security
to any person in connection with an obligation
of such director, manager, company or other body
corporate.
(1A) For the purpose of subsection (1)
-
(a)
(b)
(c) 'security' includes a guarantee.
(2)
The provisions oE subsection (1) shall not apply
-
(a)
in respect of
(i) the making of a loan by a company to its own director or manager, (ii) the
provision of security by a
company in connection with an
oh-ligation of its own direcLor or manager; (iii) the making of a loan by a
company to any ocher company
or other body corporate controlled by one or
more
10/
10.
of the directors or managers of the first-mentioned company; or (iv)
the
provision of security by a company in connection with an obligation of any other
company or other body corporate controlled by
one or more of the directors or
managers of the first-mentioned company
,
with the consent of all the
members of the company or in terms of a special resolution relating to a
specific transaction; or
(4) Any director or officer of a company who authorizes, permits or is a party
to the making of any loan or the provision of any
security contrary to the
provisions of this section, shall
-
(a)
be liable to indemnify the company and any other person who had no
actual knowledge of the contravention, against any loss directly
resulting from
the invalidity of such loan or security; and
(b)
be guilty of an offence.
"
The first questions which arise are,
what
is the purpose of s.226, and in whose interest was
it
enacted?
GOLDBLATT AJ said (at 658 F - G):
"The clear purpose of s 226 of the Act is to prevent directors or managers of a
company acting in their own interests and against
the interests
of
11/
11.
shareholders by burdening the company with obligations which are not for its
benefit but are for the benefit of another company and/or
for the benefit of its
directors and/or managers."
FLEMMING J expressed a
similar view.
I respectfully agree. Ss.(2), by providing that ss.(l)
shall
not apply where the transactions specified are concluded
"with the
consent of all the members of the company or in
terms of a special resolution
relating to a specific
transaction", makes it clear that the prohibition in
ss.(l)
is solely for the benefit of the members of the company.
The next question is whether, in order to
be effective to render ss.(l) inapplicable, the consent
referred to in
ss.(2) must be given prior to the transaction
concerned. FLEMMING J
considered (see p. 707 C) that
"consent may be effectively granted to remedy
the deficiency
in a transaction previously invalidly concluded",
and
GOLDBLATT AJ was of the view (658 J- 659 A) "that if the
shareholders consent at any stage to what the company has
12/
12. done, that would be sufficient to comply with s.226(2)
and to validate the acts of the company ..." Counsel for the appellants
challenged these views.
This much is plain. Where a transaction referred to
in s.226(1) has been concluded without the necessary consent, a subsequent
consent
"in the air" (that is, one not relating to the specific transaction and
directed to its validation) is not sufficient.
It is not the rule that in all
cases where the consent of some person is a prerequisite (whether at common law
or by virtue of a statutory
provision) to the validity of a transaction, it must
be a prior consent. A statute may indeed so provide. So, in
Incorporated Law
Society of Natal v Van Aardt
,
1930 NPD 69
, a by-law provided for a consent
"previously had and obtained". It was held that these words clearly meant that
the consent must
be obtained beforehand (see p. 76). Generally speaking,
however, consent may be given ex
post facto
by subsequent
13/
13. ratification.
In ordinary parlance the word
ratification "is used to express the giving of consent by
one without
whose consent a transaction entered into by
others would be incomplete or
invalid ..." (See
Stewart v
Kennedy
, (1890) 15 App Case (HL) 75
(at 99 per Lord WATSON).
The meaning in our law is not essentially different.
In
Edelstein v Edelstein NO & Others
1952(3) S A 1(A), VAN
DEN
HEEVER JA said (at p. 10 G -H):
"By
ratihabitio
or
confirmare
a Latin author does not mean to
convey the reinforcement of something tainted with less than the absolute degree
of voidness (whatever
that may mean) but to give a legal basis to something
which hitherto had no legal foundation at all. Accordingly
inanis obligatio
confirmatur
(D.46.3.95.3) and
legitima conventio est quae lege aliqua
confirmatur
(D.2.14.6; 50.16.130)"
Ratification
is equivalent to prior authorization and
confirms the transaction concerned with retroactive effect.
Omnis
ratihabitio retrotrahitur et mandato priori
aequiparatur
.
14/
14.
In practice, no doubt, the consent of members under ss.(2)
will ordinarily be asked for, and given, prior to the conclusion of the
transaction concerned. But it does not follow that the transaction is incapable
of ratification if for any reason prior consent is
not given.
It might be argued that a transaction hit
by s.226(l) to which prior
consent was not given is incapable
of ratification, for the reason that
"ratification relates back to the original transaction, and there can be no
ratification of a transaction which is prohibited and
made illegal by statute."
(
Cape Dairy & General Livestock Auctioneers v Sim
, 1924 AD
167 at 170 per INNES CJ).
I do not think that that argument could
be sustained. There is a fundamental distinction to be
drawn. The dictum
of INNES CJ was in the context of a
transaction which was absolutely prohibited and illegal
per
se
; consent was not an issue. (The transaction in the
Cape
Dairy
case was a contract made on a Sunday which was
15/
15. prohibited and made illegal by Transvaal Law 28 of
1896.) The transactions set out in ss.(l) of s.226 are prohibited and illegal
only in the absence of the consent of all the members. The question in any
specific case is whether such consent has been given:
if it has, the transaction
is not prohibited or illegal. Consequently, to postulate that the transaction is
prohibited and illegal
is to beg the question. If the requisite consent is given
to the transaction in
initio
, it is a valid transaction. If the
transaction is subsequently ratified by the non-consenting members, the
ratification relates back
to the original transaction and the position is the
same as if consent had originally been given.
I do not think that any
assistance in the solution of the problem is to be obtained from decisions on
other statutes which prohibit
the doing of acts without the permission, or
consent or authorization of some third person. Each case depends on the terms of
the
particular statute.
During the argument there were debated a
16/
16.
number of questions relating to problems which might arise
in
the application of ss.(4) of s.226 if subsequent ratification
is
sufficient to render ss.(l) inapplicable. What effect
would ratification have
on criminal liability under ss.4(b)?
What would be the effect of ratification
on the liability to
indemnify under ss.(4)(a)? And various conundrums were
posed
which, it was suggested, showed that consent
ex post
facto
would give rise to anomalies.
FLEMMING J briefly referred to such
questions in his judgment. He said at 707 C - D:
"Uncertainty may arise about the resultant extent of retrospective consequences
but, assuming that criminal liability already incurred
cannot be erased and
contemplating other possibilities, I can envisage no difficulties which indicate
that my conclusion is wrong."
It is
unneccssary for the purposes of
this appeal to express any firm opinion on the question of
the effect of ratification on criminal responsibility, but my
impression is that it does not raise any serious problem. An
offence under ss.(4) is committed when a director or officer
17/
17.
of a company authorizes, permits or is a party to
a
prohibited transaction. Thus in the present case, if H
Neugarten, Sacks,
Rosmarin and Hirschowitz signed the consent
knowing that the guarantee was to
be given to the Standard
Bank without the consent of Eagle, the offence was
committed,
and it would not matter, so far as criminal liability
was
concerned, if Eagle subsequently ratified the transaction.
The other conundrums were directed at
showing that recognition of consent
ex post facto
would give
rise
to anomalies of a kind which the legislature could not
have intended to
create. In this connection reference may
be made to what STEYN CJ said in
Aetna Insurance Co v
Minister of Justice
, 1960(3) S A 273(A) at
278 B - C:
"Wat ongerymdhede betref, sou ek wil opmerk dat by wetgewing van hierdie aard,
wat by welke uitleg ook, in mindere of meerdere mate
ongerymdhede kan oplewer,
dit gevaarlik kan wees om veel gewig aan anomaliee te heg. Tog sou ek meen dat
daar 'n verskil te trek
is tussen anomalie wat ontstaan uit vergesogte of
seldsame gevalle aan die een kant, en dit wat ontstaan uit meer gewone en
voorsienbare
gevalle aan die ander kant. Dat die wetgewer
ten
18/
18.
aansien van voor-die-hand-liggende gevalle ongerymdhede sou wil skep, is minder
waarskynlik dan die aanvaarding deur die wetgewer
van die meer uitsonderlike,
wat buite die onmiddelike gesigsveld lê."
(Cf.
Bowes-Lyon v Green
,
1963 AC 420
at 436 per Lord REID).
While anomalies such as those debated are
possible in theory, they would in my opinion arise but rarely, and are not
likely to arise in more usual and foreseeable cases.
On the other hand, there
are, in my view, strong reasons for holding that the legislature could not have
intended in ss.(2) to exclude
consent by way of subsequent ratification.
It
is a rule of interpretation that statutes should generally be construed in the
light of the common law. At common law ratification
is equivalent to prior
consent.
There is no reason, in logic or principle, for interpreting ss.(2) so as to
exclude consent
19/
19.
by way of ratifioation. No interest can be served thereby: on
the contrary it might operate to cause injustice to persons in the position
of
the Standard Bank in the present case, which was assured, incorrectly, that all
the members of Vivaldi had consented to the guarantee.
In my opinion,
therefore, in reference to transactions such as those referred to in s.226(1),
subsequent ratification is the equivalent
of prior consent, and I proceed to
consider the case on that basis.
The following propositions are trite. It is
a requisite that the party ratifying shall have the intention to confirm or
adopt the
act in question. As a general rule, he must have knowledge of all the
material circumstances. The
onus
of proving ratification is on the person
alleging it. Ratification may be express, or it may be tacit, that is, implied
by conduct
from which it is to be inferred that the person alleged to have
ratified intended to adopt or confirm the act.
20/
20.
It is not in dispute that the Vivaldi guarantee is a security
provided by Vivaldi in connection with the obligations of another company,
namely Neugarten; and that Neugarten was a company controlled by one or more of
the directors or managers of Vivaldi. The question
is, therefore, whether the
security was provided with the consent of all the members of Vivaldi in terms of
ss.(2). If it was not,
the Vivaldi guarantee is void, with the result that the
Standard Bank had no enforceable claim against H Neugarten, Sacks and
Rosmarin.
Eagle gave evidence that he did not sign the consent. That evidence was not
challenged.
Prima facie
, therefore, the Vivaldi guarantee was
invalid.
It was submitted on behalf of the Standard Bank, however, that Eagle's
conduct showed that he consented to the furnishing of the Vivaldi
guarantee: he
allowed Hirschowitz and Sacks
carte blanche
in conducting the financial
affairs and the day-to-day management of Vivaldi,
21/
21 . and by so doing he gave a general consent to their
concluding, on Vivaldi's behalf, whatever transactions they thought fit to
conclude.
GOLDBLATT AJ rejected this submission (see 659 E - G). In my view
he was correct in so doing.
It is clear from the evidence that Eagle did not
control the running of Vivaldi's business and had no power to control it. He was
a young man in his middle twenties, with limited business experience. His
directorship appears to have been nominal only: the object
of his appointment
was to give him the status of a director in the eyes of persons with whom he
dealt; and no formal directors' meetings
were held. He did not,
qua
shareholder (and it is his consent as a member which is in issue), have any say
in the administration of the company, and his so-called
acquiescence cannot be
regarded as a consent to the giving of the Vivaldi guarantee.
Then, as proof of consent by Eagle, the
22/
22.
bank relied on two documents dated 21 June 1983. One
(MRH6)
reads as follows:
"
PAUL VIVALDI FASHIONS (PROPRIETARY) LIMITED RESOLUTIONS PASSED BY THE
DIRECTORS ON 21 JUNE 1983
RESOLVED THAT:
The following entries in the books of the company and transactions in the
financial year ended 31 December 1982 are approved and
confirmed:
APPROVAL OF ANNUAL, FINANCIAL STATEMENTS
The annual financial statements
and reports are approved in terms of section 298(1) of the Companies Act, 1973,
as amended."
On the financial statements were a
number of notes,
including,
"8.
CONTINGENT LIABILITY
There is a
contingent liability in respect of the company's unlimited guarantee of the bank
overdraft of Neugarten Fashions (Proprietary)
Limited. Neugarten Fashions
(Proprietary) Limited is controlled by Messrs H Neugarten and H M Hirschowitz
who are directors of this
company. The amount of the overdraft at 31 December
1982 was R222 753."
The other document (MRH7) reads as
follows:
23/
23.
"
PAUL VIVALDI FASHIONS (PROPRIETARY) LIMITED
CONSENT TO LOANS AND
PROVISION OF SECURITY TO DIRECTORS AND MANAGERS AND COMPANIES CONTROLLED BY
THEM.
We, the undersigned, being all members of the company, consent in terms of
section 226 of the Companies Act, as amended, to the company
making loans to and
providing security in connection with the obligations of its directors and
managers and any other company or
other body corporate controlled by one or more
of the directors or managers of the company."
It was
signed by all the members of Vivaldi, including Eagle.
GOLDBLATT AJ said (at
659 H) that by signing these two documents, Eagle in his view, "...consented
twice to the provision of such
security."
In my opinion, Eagle's signature of
MRH6 did not amount to a ratification of the provision of the Vivaldi guarantee,
the validity
of which did not come into question until 1985. Eagle said in his
affidavit, and repeated in his
viva voce
evidence, that at that stage he
had not read s.226 of the Companies Act, and was not aware of its provisions. He
could not, therefore,
have had any intention
24/
24.
to ratify. The resolution in MRH6 was passed in pursuanoe of
the duty imposed on the directors by s.298(1) of the Act, which requires
that
the annual financial statements of a company other than the auditor's report
shall be approved by its directors. Such approval
is a signification by the
directors that the annual financial statements comply with the requirements of
the Act, including those
set out in s.286(3), namely, that the annual financial
statements shall, in conformity with generally accepted accounting practice,
fairly present the state of affairs of the company and its business at the end
of the financial year concerned. Plainly the approval
of the directors should
not be construed as a consent in terms of s.226(2) of the Act by members
qua
members.
Similarly the consent embodied in MRH7 is not to be construed as
a ratification of the Vivaldi guarantee. It was signed by all the
members
including those who had signed the consent dated 28 September 1982. It is in
25/
25.
general terms, and does not refer specifically to
the
Standard Bank or the Vivaldi guarantee. It is a consent to
loans to be
made and security to be provided, not a
confirmation of prior acts. Although
GOLDBLATT AJ held (at
660 C) that it was not a retrospective consent but a
consent
to future acts by Vivaldi, he said (at 660 C - D) that
the
suretyship furnished by Vivaldi was a continuing suretyship
for both
the past and future debts of Neugarten, and that
"Accordingly, whilst Vivaldi left the suretyship with the applicant, it
continued to provide security for Neugarten, and thus, by
leaving it with the
applicant after 21 June 1983, it continued to provide security to the applicant
on behalf of Neugarten."
In my respectful opinion
the learned judge was in error.
In the absence of the consent of all the
members of
Vivaldi, the Vivaldi guarantee was void. It did not
"provide
security" in
initio
, and it oould not "continue to
provide
security".
The conclusion is, therefore, that the
26/
26.
learned judge a
quo
erred in finding that all the
members of Vivaldi consented, as provided for in s.226(2) of the Act, to the
provision of security
by Vivaldi to the Standard Bank for the debts of
Neugarten. In the result the order made must be set aside.
The appeal is
upheld with costs, including the costs of two counsel. The order of the court a
quo
is set aside, and there is substituted therefor the following:
"The application is dismissed with costs including the costs reserved by
FLEMMING J (See 1987(3) S A 695 at 709 E - F). The costs
are to include the
costs of two counsel."
NICHOLAS AJA
SMALBERGER, JA - CONCURS