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[2013] ZALCD 21
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Goldfinch Garments CC and Another v Sheriff of the Court - Newcastle and Another (D393/11) [2013] ZALCD 21 (5 July 2013)
Reportable
REPUBLIC OF SOUTH AFRICA
THE LABOUR COURT OF SOUTH AFRICA, DURBAN
JUDGMENT
Case
no: D 393/11
In the matter between:
GOLDFINCH
GARMENTS CC
..........................................................................
First
Applicant
JCR
CLOTHING CC
....................................................................................
Second
Applicant
and
THE
SHERIFF OF THE COURT - NEWCASTLE
.........................................
First
Respondent
THE
NATIONAL BARGAINING COUNCIL FOR
THE
CLOTHING MANUFACTURING
INDUSTRY
(KZN REGION)
.....................................................................
Second
Respondent
Heard
:
15,
16 and 17 October 2012
Delivered: 5 July 2013
Summary: Interpleader: applicant’s claim dismissed
:
Lifting the corporate veil justified
.
JUDGMENT
GUSH J
This matter basically involves an interpleader claim by the
applicants who initially applied for an order in the following
terms:
that the first respondent is ordered to restore to the
applicants forthwith possession of the factory premises
situated 41 yellow speak, Newcastle, KwaZulu Natal;
that the attachment and seizure of all the property belonging
to the first applicant be and is hereby set aside;
that the first respondent is ordered to restore to the first
applicant forthwith, possession of all property belonging
to
the first applicant.
The application was launched as a result of the first respondent
having attached the property listed in the inventory attached
to
pleadings pursuant to a writ of execution having been issued in
respect of a consent arbitration award in favour of the second
respondent. The award was issued by consent against the second
applicant and ordered the second applicant to pay to the second
respondent an amount of R3,972,974 which amount the second
respondent had failed to pay.
The applicants originally launched their application as an urgent
application. It was subsequently agreed by the parties that
the
matter should proceed as an interpleader claim. The first applicant
subsequently elected to file particulars of claim in
which the first
applicant seeks an order:
declaring the property attached by the first respondent listed
in the inventory on the notice of a judgment dated
11 May 2011
is not the property of the second applicant;
releasing the aforesaid property from attachment.
The first applicant in its particulars of claim records that the
second respondent is the judgment creditor under reference number
U/6/534/9/09 in the sum of R3,972,974 and that the second applicant
is the judgment debtor. The second applicant further avers
that at
the time of the attachment the property on the inventory described
as raw material, work in progress or completed garments
was the
property of third parties, (persons who had ordered the making of
the garments) and the other items on the inventory
are owned by the
first applicant.
The consent arose in the following circumstances. On 24 February
2010, pursuant to a claim by the second respondent that the
second
applicant had failed to register as an employer, failed to register
its employees and fulfil its obligations as an employer
in terms of
the second respondent's main agreement, an arbitration was convened
under the auspices of the second respondent,
reference number
U/6/534/9/09, before an arbitrator Mr R Ramsumer. The arbitration
award issued on 24 February 2010 records that
the second applicant
consented to an order that is recorded in the following terms ‘the
parties agree as a settlement of
this dispute that the [second
applicant] shall pay R3,972,974 which is inclusive of the
underpayment assessment, levies, fine
and the cost within 14 days of
this award.’
1
Prior to the trial commencing, the parties entered into a pre-trial
minute in which the common cause facts as per the pleadings
are
recorded as
inter alia
:
it is admitted on the pleadings that the second applicant carries
on business manufacturing and distributing clothing, garments
and
related merchandise;
the second respondent is the judgment creditor in respect of the
arbitration award reference number U/6/534/9/09 and that the
second
applicant is the judgment debtor;
the first applicant was registered as a close Corporation on 29
October 2003;
the second applicant was registered as a close Corporation on 24
March 2009.
The facts in dispute were recorded as follows:
that the first applicant carries on business hiring machinery and
equipment;
that all the property in the Sheriff’s inventory which can be
described as raw material, work in progress or completed
garments,
was the property of third parties namely persons who ordered the
making of garments;
that all the other items listed on the inventory were owned by the
first applicant;
that none of the property attached by the first respondent is owned
by the second applicant;
that the creation of the second applicant as legal entity distinct
from the first applicant was a scheme designed to assist
the
business operated by the first and/or second applicants to evade
its legal obligations towards its employees and the second
respondent,
in fraudem legis.
In its opposition to the first applicant’s claim, the second
respondent averred:
firstly that the items on the inventory are owned by the second
applicant and were probably attached in execution of the writ:
Alternatively and in the event that the first applicant is able to
establish a proprietary interest in the goods under attachment
that the clothing manufacturing business currently operated by the
second applicant was previously owned and operated by the
first
applicant;
the first and second applicants are owned, respectively, by one
Zhiliang Han and/or members of his immediate family;
the creation of the second applicant as a legal entity distinct
from the first applicant was a scheme designed to assist the
business operated by the first and/or second applicant to evade its
legal obligations towards its employees and to the second
respondent,
in fraudem legis.;
In the circumstances that the court should pierce the corporate
veil and hold that the first and second applicants are one
and the
same entity for the purposes of the execution of the writ; and or
hold that they are jointly and severally liable for the due
performance of the obligations contained in the arbitration award
and writ of execution.
2
The applicants commenced by leading the evidence of Zhiliang Han.
Han’s evidence was that he was a businessman living in
Newcastle. He had first come to South Africa in 2002 for a textile
factory in Isithebe before leaving in May 2003 to start his own
clothing factory. In July 2003, he had started a clothing factory
with friends and shortly thereafter started his own factory. He had
engaged the services of an accountant, who registered the
first
applicant CC for him in 2003.
According to Han, he was and is the sole member of the first
applicant and the operations manager. The factory was engaged in
the
CMT business (cut, make and trim) a process whereby the factory is
engaged to cut, sew and complete garments.
On 24 March 2009, Han caused to be registered a second Close
Corporation (the 2
nd
applicant) which according to the
certificate of registration commenced business on the same day. His
evidence was that he had
registered and set up the second applicant
in order to prepare his son, who was 19 years old at the time, to
inherit the business.
The second applicant was according to Han,
exclusively owned by his son. His son had however quit the business
five months later
and left South Africa to study in the United
States, in August or September 2009. Han’s evidence was that
his son was the
only member of the second applicant and that in
terms of “mostly oral agreements” the second applicant
would perform
the CMT operation and the first applicant would
contact the suppliers. Han also gave evidence that he was the second
applicant’s
operations manager. Han junior did not give
evidence.
Despite the pleadings and the pre-trial minute wherein it was
admitted that the second respondent was the judgment creditor in
respect of the consent arbitration award, Han variously gave
evidence that he was unaware of the award, and did not know who
had
represented the second applicant at the arbitration on 24 February
2010 or who had consented to or signed the award. Han’s
evidence was however that he employed a Labour consultant, one
Jacques de Necker who handled all his labour issues.
Han denied that the second applicant had been set up to avoid
liability due to second respondent and averred that it was intended
that the second applicant would pay the debts. Neither he nor his
son, according to his evidence, was aware of the amount due
to the
second respondent.
During cross-examination
inter alia
the following evidence
was elicited:
where dates on which affidavits were signed did not coincide with
his evidence Han’s explanation was that the affidavit
had
been prepared by his erstwhile attorneys. He could not explain how
his son who had not been in the country at the time
had signed an
affidavit in support of the original application;
When questioned why he had created the second applicant so as to
allow his son to inherit as opposed to preparing it will his
evidence was that "Chinese people don't do it that way";
in response to the question as to why the second applicant had been
set up so that its only indebtedness was intended to be
to the
second respondent and the employees Han’s reply was that he
had “not thought about it that way” (sic);
Han was unable to explain why the so-called "Agreement of
Hire" was undated he could not explain this and blamed
his
accountant;
when questioned on the financial statements, the contents of which
raised serious doubts as to the veracity of Han’s
evidence
regarding the structure of the "family business", Han
ultimately resorted to giving evidence to the effect
that he did
not understand any of the financial statements and all he looked at
and was concerned about was to see that he
had money in the bank.
Han somewhat plaintively endeavoured to explain that the items
attached which appear on the infantry were either goods belonging
to
third parties or equipment belonging to the first applicant. His
evidence regarding these issues suffered from the same lack
of
credibility as did his evidence regarding the rationale behind the
supposedly separate entities comprising the first and second
applicants and his explanation why he had established the second
applicant.
I do not intend to summarise in detail the cross-examination of Han,
but suffice to say that at best in answering the questions
he was
evasive, obtuse and he gave the distinct impression of being
extremely economical with the truth. In essence what Han
endeavoured
to portray was an ignorant simple businessperson who had no idea
whatsoever what was taking place in his business
except that he he
had simply sought to provide for his son’s inheritance when
registering the second applicant. Han persistently
denied any
knowledge of the second respondent’s requirements or its
functions.
In response to questions where he was unable to provide an answer he
either blamed his advisers, the Labour consultant or his
accountant,
or pleaded ignorance. An example of this was when questioned about
the contents of the founding affidavit Han’s
response was that
“I simply sign what Jacques tells me”
The second witness who gave evidence for the applicants was a Mr
Louis Kruger. Kruger is a chartered accountant and has known
Han
since 2003. Kruger had registered both the first and second
applicants.
Kruger confirmed that he had prepared the financial statements
contained in the bundle of documents. Unsurprisingly he confirmed
further that the information and financial details contained therein
was provided to him by the first applicants’ Han.
Han’s evidence regarding the averment that the first and
second applicants were separate trading entities lacked credibility
and did not accord with his evidence or the pleadings. One example
relates to his suggestion in evidence in chief that the reason
for
having established the second applicant was in order to provide for
his son’s inheritance. This explanation stands
in stark
contrast to, and must be considered and weighed up against, the
averments he made in his founding affidavit in the original
application:
5. My
family business
:
5.1 has invested approximately 1.5 million Rand of capital in the
economy of South Africa in terms of the costs of:
a.
setting up the infrastructure clothing manufacturing factory;
and
b. acquiring the necessary machinery and equipment;
c. the payroll of approximately 400 full-time and part-time
workers
;
6
in the interests of business risk management, which is vital for
the continued viability of any business operation,
I separated my
family business assets from its business operations with the result
that the business has two separate divisions.
One division procures
clothing manufacturing job orders, and owns and maintains the assets,
whilst the other division conducts
the actual clothing manufacturing
business operations using the assets in terms of a high agreement.
(my emphasis)
This averment in the applicants’ founding affidavit directly
contradicts the evidence in chief given by Han. Despite Han
blaming
his erstwhile attorney for the contents of any affidavit which did
not coincide with his oral evidence he also somewhat
startlingly
suggested that he had simply signed the affidavits and that his
attorneys had not explained the contents to him.
His excuses lacked
veracity as did his answers to the questions put to him in
cross-examination. His evidence on the whole can
best be described
as glib, disingenuous and largely fictional.
In response to the applicant’s case the second respondent
called the second respondent’s compliance manager and legal
counsel, Deepnath Seocharan, and Mndeni Mhlango an inspector for the
second respondent. Seocharan was the official who had launched
and
attended the arbitration that led to the consent award being made by
the arbitrator. His evidence was that de Necker the
Labour
consultant who represented the applicants was present at the
arbitration and consented to the award on the second applicant's
behalf. Needless to say de Necker was not called to give evidence by
the applicants.
Both Seocharan and Mhlongo explained the background to the dispute
which led to the arbitration award and the extensive efforts
the
second respondent had made to persuade the applicants to register
the employees and to ensure that the employees were paid
the correct
wages. The second respondent’s produced substantial
documentation in support of their evidence. Both witnesses
were
patently honest. The clear picture which emerged from their evidence
was that they had been continually frustrated in their
attempts to
secure compliance from the applicants and thereof.
Mhlongo in particular described in his evidence how he had been
continually frustrated in his attempts to ensure compliance with
the
second respondent’s agreements. He had explained to Han what
was required to register the employees and on one occasion
had at
Han’s request assisted him in the completion of the requisite
forms. He had communicated with Han in English which
Han had
understood. His evidence was that Han’ attitude was that he
did not believe that the second respondent could force
him to do
anything.
The distinct impression Mhlongo’s evidence left was that the
second respondent efforts to ensure compliance with the second
respondent’s agreements had for some years been frustrated at
every turn by the applicants. Mhlongo’s evidence that
he had
explained in detail to Han the second respondent’s
requirements and that he had served compliance orders on him
and
that he was aware of the arbitration award was not seriously
challenged in cross-examination. Suffice to say that in all
respects
where they differ the evidence of Mhlongo must be preferred to that
of Han.
At the conclusion of the evidence it was argued by both parties that
two issues need to be determined. The first issue regarded
the
determination of the ownership of the goods attached as set out in
the inventory and the second whether the registration
of the second
respondent was merely a scheme and whether the court should “pierce
the corporate veil” and disregard
the separate existence of
the second applicant. The second respondent argued that the court
should find that the first applicant
was the true employer.
Piercing the corporate veil does not only apply in circumstances
where the members of a close Corporation are held to be personally
liable for the debts and liabilities of the close Corporation, it
also applies in circumstances such as this matter when the
second
respondent urges the court to treat the applicants as a single
entity and ignore the separate existence of the two Close
Corporations.
The background to piercing the corporate veil was considered in the
matter of
Cape Pacific Ltd v Lubner Controlling Investments (Pty)
Ltd and Others.
3
‘
The
principle of a company's separate juristic personality was first
asserted in the House of Lords in
Aron
Salomon v A Salomon and Co Ltd
[1897] AC 22.
There already it appears to have been recognised that
proof of fraud or dishonesty might justify the separate corporate
personality
of a company being disregarded. (See, in this regard, the
speeches of Lord Halsbury at 33 and Lord Macnaghten at 52-3.) And
over
the years it has come to be accepted that fraud, dishonesty or
improper conduct could provide grounds for piercing the corporate
veil. Recently this was confirmed in
The
Shipping Corporation of India Ltd v Evdomon Corporation and Another
[1993] ZASCA 167
;
1994 (1) SA 550
(A) where Corbett CJ expressed himself as follows at
566C-F:
“
'It
seems to me that,
generally, it is of cardinal importance to keep distinct the property
rights of a company and those of its shareholders,
even where the
latter is a single entity, and that the only permissible deviation
from this rule known to our law occurs in those
(in practice) rare
cases where the circumstances justify "piercing" or
"lifting" the corporate veil. And in
this regard it should
not make any difference whether the shares be held by a holding
company or by a Government. I do not find
it necessary to consider,
or attempt to define, the circumstances under which the Court will
pierce the corporate veil. Suffice
it to say that they would
generally have to include an element of fraud or other improper
conduct in the establishment or use of
the company or the conduct of
its affairs. In this connection the words "device",
"stratagem", "cloak"
and "sham" have
been used...”
Two matters arising from the
quoted passage merit further comment. First, reference is made to
'those (in practice) rare cases where
the circumstances justify
"piercing" or "lifting" the corporate veil'. It
is undoubtedly a salutary principle
that our Courts should not
lightly disregard a company's separate personality, but should strive
to give effect to and uphold it.
To do otherwise would negate or
undermine the policy and principles that underpin the concept of
separate corporate personality
and the legal consequences that attach
to it. But where fraud, dishonesty or other improper conduct (and I
confine myself to such
situations) is found to be present, other
considerations will come into play. The need to preserve the separate
corporate identity
would in such circumstances have to be balanced
against policy considerations which arise in favour of piercing the
corporate veil
(cf Domanski 'Piercing the Corporate Veil-A New
Direction'
(1986) 103
SALJ
224).
And a court
would then be entitled to look to substance rather than form in order
to arrive at the true facts, and if there has
been a misuse of
corporate personality, to disregard it and attribute liability where
it should rightly lie. Each case would obviously
have to be
considered on its own merits.
The second is the reference to
the inclusion of 'an element of fraud or other improper conduct in
the establishment or use of the
company or the conduct of its
affairs'. (My emphasis) It is not necessary that a company should
have been conceived and founded
in deceit, and never have been
intended to function genuinely as a company, before its corporate
personality can be disregarded
(as appears in some respects to have
been the view of the trial Judge - see the judgment at 821G-J). As
Gower (op cit) states (at
133):
“
It also seems clear that a
company can be a facade even though it was not originally
incorporated with any deceptive intention;
what counts is whether it
is being used as a facade at the time of the relevant transactions.”
Thus if a company, otherwise
legitimately established and operated, is misused in a particular
instance to perpetrate a fraud, or
for a dishonest or improper
purpose, there is no reason in principle or logic why its separate
personality cannot be disregarded
in relation to the transaction in
question (in order to fix the individual or individuals responsible
with personal liability)
while giving full effect to it in other
respects. In other words, there is no reason why what amounts to a
piercing of the veil
pro hac vice
should not be permitted.
In the matter of
Airport Cold Storage (Pty) Ltd V Ebrahim and
Others,
4
the court considered the principles applicable to piercing the
corporate veil and held the following:
‘
9
.
Whatever
form it takes, veil piercing is an 'exceptional procedure',
and, as pointed out by Scott JA
in Hülse-Reutter and Others v Gödde, 6 a court has no
general discretion simply to disregard
the existence of a separate
corporate identity whenever it considers it just or convenient to do
so. However, the circumstances
in which a court will disregard the
distinction between a corporate entity and those who control it are
'far from settled':
“
Much will depend on a close
analysis of the facts of each case, considerations of policy and
judicial judgment. Nonetheless what
is, I think, clear is that as a
matter of principle in a case such as the present there must at least
be some misuse or abuse of
the distinction between the corporate
entity and those who control it which results in an unfair advantage
being afforded to the
latter.”
(My emphasis.)
10. In
The
Shipping Corporation of India Ltd v Evdomon Corporation and Another
Corbett CJ required
proof of 'an element of fraud or other improper conduct in the
establishment or use of the company or the conduct
of its affairs'
before a court can pierce the corporate veil.
11. This requirement of fraud or
other improper conduct finds resonance in the provisions of s 65 of
the Act, 9 where the legislature,
with regard to close corporations,
has created a statutory remedy 'which is equivalent to (the court's)
jurisdiction at common
law to ''pierce the corporate veil'' in
relation to a company'. Liability under this section depends on a
finding of 'gross abuse
of the juristic personality of the
corporation as a separate entity'. However, no attempt has been made
in the section to indicate
the facts or circumstances that would
qualify as a gross abuse of the juristic personality of the
corporation as a separate entity.
The courts are required, in other
words, to give content to the open-ended concept of 'gross abuse',
based on the facts of each
particular case. This exercise does not
take place in a vacuum, however, and it is axiomatic that the
principles and categories
developed with regard to piercing the
corporate veil in the context of company law will serve as useful
guidelines in this context.
12. The starting point is that
veil piercing will be employed 'only where special circumstances
exist indicating that it [ie the
company or close corporation] is a
mere façade concealing the true facts'. Fraud will obviously
be such a special circumstance,
but it is not essential. In certain
circumstances the corporate veil will also be pierced 'where the
controlling shareholders do
not treat the company as a separate
entity, but instead treat it as their ''alter ego'' or
''instrumentality'' to promote their
private, extra-corporate
interests':
Although the form is that of a separate entity carrying
on business to promote its stated objects, in truth the company is a
mere
instrumentality or business conduit for promoting, not its own
business or affairs, but those of its controlling shareholders. For
all practical purposes the two concerns are in truth one. In these
cases there is usually no intention to defraud although there
is
always abuse of the company's separate existence (an attempt to
obtain the advantages of the separate personality of the company
without in fact treating it as a separate entity).
13. Against this background, I
turn to consider whether the plaintiff has established that the
defendants have in fact abused the
separate juristic personality of
the close corporation in question.’
5
I have no doubt that the applicants in this matter, as was held by
Griesel J in
Airport Cold Storage (Pty) Ltd v Ebrahim and Others
‘attempted to obtain the advantages of the separate identity
of the corporation[s]’ and ‘When it suited them,
to
ignore the separate juristic identity of the [corporations]. In
these circumstances, the [applicants’] cannot now choose
to
take refuge behind the corporate veil’
6
Applying the principles set out above and taking into account the
evidence of Han and the second respondent, I am persuaded that
the
creation of the second applicant as a legal entity distinct from the
first applicant was no more than “a scheme designed
to assist
the business operated by the first and or second applicants to avoid
its legal obligations towards its employees and
the second
respondent,
in fraudem legis”
and that lifting the
corporate veil is justified.
In the circumstances, the first and second applicants are one and
the same entity for the purposes of the execution of the writ
and
they are accordingly jointly and severally liable for the due
performance of the obligations contained in the arbitration
award
and writ of execution.
Although it is not necessary, for the purposes of disposing of this
matter, I am satisfied that to all intents and purposes the
first
and second applicants are jointly and severally liable as the
employers of the employees employed by both entities and
for the
purposes of complying with the second respondent’s agreements.
As regards the determination of the ownership of the goods attached
as set out in the first respondent’s inventory of the
goods
that the applicants aver belong to third parties; I am not persuaded
that the applicants have succeeded in proving that.
Han’s
evidence in all respects lacks sufficient credibility to sustain
such a claim. Regarding the balance of the items
attached of the
goods attached, I am satisfied that the first and second applicants
are jointly and severally liable for the
due performance of the
obligations contained in the consent order (arbitration award) in
respect of which the writ of execution
was issued.
As regards costs, I am satisfied that it is appropriate and fair
that an order of costs be made against the applicants and that
such
order be punitive.
In the circumstances, I make the following order:
(a) The applicants’ claim is dismissed;
(b) The property attached by the first respondent as listed in the
inventory and notice of attachment is properly attached and
the
process of execution may proceed;
(c) The applicants are ordered to pay the second respondent’s
costs on an attorney and client scale.
_______________________
D H Gush
Judge
APPEARANCES
FOR THE APPLICANTS: Adv M Bingham
Instructed by Tomlinson Mnguni James Inc
FOR THE SECOND RESPONDENT: Adv P Schumann
Instructed by Shepstone and Wylie
1
Arbitration
award pleadings pages 64 - 65
2
Second
respondent’s statement of defence: pleadings pages 168 -9.
3
[1995] ZASCA 53
;
1995
(4) SA 790
(A) at 803C-.804D.
4
[2007] ZAWCHC 25
;
2008
(2) SA 303
(C).
5
At
pages 307 -308; paragraphs 9 – 13.
6
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others
at
para 52.