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2024
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[2024] ZAECQBHC 65
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Wedale (Proprietary) Limited and Another v McDermott (3647/2023) [2024] ZAECQBHC 65 (22 October 2024)
IN
THE HIGH COURT OF SOUTH AFRICA
(EASTERN
CAPE DIVISION, GQEBERHA)
Reportable/Not
Reportable
CASE
NO: 3647/2023
Matters heard on: 19
September 2024
Judgment
delivered on: 22 October 2024
In
the matter between:
WEDALE
(PROPRIETARY) LIMITED
First Plaintiff/First Respondent
NICKISYS
(PROPRIETARY) LIMITED
Second Plaintiff/Second Respondent
and
LISA McDERMOTT
Excipient/Defendant
JUDGMENT
BRODY
AJ:
The
exception
[1]
On the 24
th
of October 2023 the plaintiffs, Wedale
(Proprietary) Limited (“Wedale”) and Nickisys
(Proprietary) Limited (“Nickisys”)
instituted action
against the defendant, Ms Lisa McDermott,
[2]
The cause of action relied upon in the particulars of claim is that
Ms McDermott carried
on the business of Lighting Innovations Africa
(Pty) Limited (“Lighting”) recklessly within the meaning
of section
424(1) of the Companies Act (“the Act”).
[3]
Ms McDemott defended the action and shortly thereafter served and
filed notices in
terms of rules 23 and 30 (on 1 December 2023 and on
20 March 2024).
[4]
Notices were met by an amended particulars of claim (after 15 March
2024) and a further
notice of intention to amend on 18 April 2024, in
response to the second notice.
[6]
Ms McDemott, as an excipient, contended that the proposed amendment
did not cover
the grounds of the complaint and accordingly delivered
a notice of exception on 2 May 2024.
[7]
Ms McDemott has four separate bases for the exceptions and these will
be summarised
below.
[8]
The exception is, on the main, that the amended particulars of claim
lack averments
necessary to sustain a cause of action, alternatively,
are vague and embarrassing.
[9]
It is trite that particulars of claim must disclose a cause of
action
[1]
. In Mackenzie vs
Farmers Co-operative Meat Industry Limited
1922 AD 23
and Dusheikov
Millburn 1964(4) SA 648(A) 658A, the following definition for “cause
of action” was given:
“…
3.
Every fact which it would be necessary for the plaintiff to prove, if
traversed, in order to support his right
to judgment of the court. It
does not comprise every piece of evidence which is necessary to prove
each fact, but every fact which
is necessary to be proved.”
[10]
Rule 18(4) of the Uniform Rules of Court provide that every pleading
shall contain a clear and
concise statement of material facts upon
which the pleader relies for his claim, defence, or answer to any
pleading, with sufficient
particularity to enable the opposite party
to reply thereto.
[2]
In the
matter of Jowell vs Bramwell-Jones 1998(1) SA 836(W) the court stated
the following:
“
The plaintiff is
required to furnish an outline of his case. That does not mean that
the defendant is entitled to a framework like
a cross-word puzzle in
which every gap can be filled by logical deduction. The outline may
be asymmetrical and possess rough edges
not obvious until actually
explored by evidence. Provided that the defendant is given a clear
idea of the material facts which
are necessary to make the cause of
action intelligible, the plaintiff will have satisfied the
requirements.”
[11]
Where the ground for exception is that the pleading does not disclose
a cause of action, a court
must examine the description of the
factual basis for the claim, and whether this gives rise to a legal
right.
[12]
Although exceptions provide a useful mechanism to weed out cases
without legal merit they should
be dealt with sensibly and an
over-technical approach is not to be preferred.
[3]
[13]
An exception can only succeed if it is shown by the excipient,
ex
facie
the allegations made by a plaintiff and any document upon which the
plaintiff’s claim may be based, that “the claim
is (not
maybe) bad in law”
[4]
[14]
There is no exhaustive test to determine whether a pleading contains
sufficient particularity
for the purposes of rule 18(4). It is
essentially an issue of fact: a pleading contains sufficient
particularity if it identifies
and defines the issues in such a way
that it enables the opposite party to know what they are
[5]
Section
424(1) of the Act
[15]
As indicated above, the action between the plaintiffs and Ms
McDermott is a claim in terms of
section 424(1) of the Act.
[16]
Section 424(1) of the Act provides as follows:
“
When it appears,
whether it be in a winding-up, judicial management or otherwise, that
any business of the ompany was, or is being
carried on recklessly or
with intention to defraud creditors of the company or creditors of
another person or for any fraudulent
purpose, the court may, on the
application of the Master, the liquidator, the judicial manager, any
creditor or member or contributory
of the company, declare that any
person who was knowingly a party to the carrying on or business in a
manner aforesaid, shall be
personally responsible without any
limitation of liability for all or any of the debts or other
liabilities of the company as the
court may direct.”
[17]
In Ebrahim and another vs Airport Cold Storage (Proprietary) Ltd,
Cameron JA stated:
“
The section
retracts the fundamental attribute of corporate personality namely
separate legal existence, with its corollary of autonomous
and
independent liability for debts, when the level of mismanagement of
the corporation’s affairs exceeds the merely inept
or
incompetent and becomes heedlessly gross or dishonest. The provision
in effect exacts a
quid pro quo
: for the benefit of immunity
from liability for its debts, those running the corporation may not
use its formal identify to incur
obligations recklessly, gross
negligently, or fraudulently. If they do, they risk being made
personally liable.”
[18]
A declaration of liability under section 424(1) requires therefore
that the applicant alleges
and proves that:
[18.1] the business
of the company must carry on;
[18.2] recklessly;
[18.2.1]
with the intent to defraud creditors; or
[18.2.2]
for any fraudulent purpose.
[18.3] the person
sought to be held liable must have:
[18.3.1]
been a party to the carrying on of the business; and
[18.3.2]
had knowledge of the facts from which the conclusion is properly
to
be drawn that the business of the company was, or is being carried
on:
[18.3.2.1]
recklessly;
[18.3.2.2]
with the intent to defraud creditors; or
[18.3.2.3]
for any fraudulent purpose.
[19]
Recklessness may consist of blameworthy conduct characterised by a
failure to take any due care
in the management of a company that
results in the detriment to the company and others and exhibits a
high degree of disregard
for the standards observed by honest and
diligent men of affairs.
[6]
[20]
Recklessness, however, may also be demonstrated by similarly uncaring
and careless folio to attend
to the company’s business or to
prevent foreseeable harm from being caused from failing to take
reasonable preventative measures
against such eventualities.
[7]
[21]
The test is objective:
“
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 had been carried on recklessly.”
[8]
Argument
[22]
Mr Miltz SC, with Ms Morris, acted on behalf of the plaintiffs in the
application and Mr Eyles
SC with Ms Robertson acted on behalf of the
defendant.
[23]
I am grateful to all the counsel for the comprehensive heads of
argument in the matter.
[24]
Mr Miltz SC argued that the provisions of section 424 are fully
canvassed in the amended particulars
of claim and are sufficient for
the plaintiffs to obtain an order in due course.
[25]
With reference to the amended particulars of claim he argued that
this discloses that the plaintiffs
are creditors of the company and
so are persons with standing to seek an order in terms of section 424
and the defendant, amongst
others, carried on the business of the
company during the period 30 October 2018 to 31 October 2020, and
recklessly within the
meaning of the section of the Act.
[26]
He further argued that the defendant obviously knew of the reckless
conduct in that throughout
the relevant period she was the financial
director and was involved in its affairs, she acted as alleged, in
the amended particulars,
and she acted as alleged intentionally and
with reckless disregard for the rights and obligations of the company
and its current
and long-term creditors, including the plaintiffs, to
achieve the objectives as set out in the amended particulars.
[27]
He argued too that all the
facta probanda
necessary to sustain
a cause of action in terms of section 424 were fully, and
sufficiently, pleaded. He criticised the defendant’s
complaint
that the plaintiffs, by pleading that the defendant should have
“brought about the winding-up of the company”
failed to
take into account the category of “persons” that may make
application in terms of section 346 of the Act
for the winding-up of
a company.
[28]
He emphasised that the plaintiffs’ case was not that the
defendant itself should have launched
an application for the
winding-up of the company. He argued that the words used by the
plaintiffs being “brought about”
did not envisage the
defendant having the necessary status personally to launch a
winding-up application, or resolved to wind-up
the company.
[29]
So the argument went, the defendant as a member of the board of
directors of the company was
obliged, with the other directors of the
company, to do so but did not, instead acted recklessly in the manner
pleaded in the particulars
of claim.
[30]
Mr Miltz SC also criticised the defendant’s second complaint,
relying on the wording of
the Subordination Agreement that the
conduct referred to in paragraph 6 of the amended particulars of
claim could not have achieved
the release of Fagerhults from its
obligation.
[31]
In this regard, paragraph 5.1 of the Subordination Agreement reads as
follows:
“
A Creditor, hereby
agrees and undertakes that it will provide up to ZAR 50 000 000
(fifty million South African Rands)
financial support to the company
as may enable the company to pay the claim of any creditor of the
Company (other than the claims)
both present and future, as and when
payment of such claim is due.”
[32]
Mr Miltz SC argued that this clearly envisaged that the
R50 000 000.00 support would
be payable as and when the
payment of a claim by a creditor is due. He further argued that the
words “the conduct referred
to in paragraph 6 above” must
be read with the wording of paragraph 6 itself which states that
“acting in a manner
described in paragraph 5.3 above”.
Accordingly, it was not only the conduct in paragraph 6 that gave
raise to the outcome
as pleaded in paragraphs 7.1 and 7.2 but also
that in paragraph 5.3.
[33]
He further argued that the conduct referred to in paragraphs 5.3 and
6 could and did achieve
the release of Fagerhults from its
obligation.
[34]
Mr Miltz SC also argued that the complaint of insufficient
allegations could be cured by obtaining
the details in trial
particulars and did not strike at the heart of the plaintiffs’
cause of action.
[35]
The argument went further that the conduct of the defendant left the
plaintiffs with no remedy
for their considerable losses when the
company inevitably eventually was wound-up. The allegations in
paragraph 10 of the particulars
of claim, according to Mr Miltz SC,
was abundantly clear.
[36]
As far as the individual complaints were concerned, Mr Miltz SC
argued that:
[36.1] the
defendant complains that in paragraph 5.3.1 the plaintiffs have not
given sufficient information as an actual value
of the assets
overstated and the overstated values. According to him, the
plaintiffs do not need to plead this given the test for
recklessness.
All that needed to be pleaded was that the defendant overstated the
values of the assets to the auditors. The exact
details of the rands
and cents were to be provided during discovery and the defendant does
not require them to plead and cannot
be prejudiced;
[36.2] the
defendant complained that in paragraph 5.3.2 no details of the
payments made were provided. Again, Mr Miltz SC
argued, this related
to the rands and cents and all that needed to be pleaded is that such
payments were made and constituted dispositions
not for value for
them to fall within the test for recklessness;
[36.3] the
defendant complained that in paragraph 5.3.3 there was insufficient
particularity with regard to “the internal
controls”
pleaded therein. Mr Miltz SC argued that the exact details of the
internal controls and how such controls were
not followed, are
evidence that the plaintiffs are not required to plead;
[36.4] the
defendant complained that in paragraph 5.3.4 there was insufficient
information to conclude that the defendant
“acted and conducted
itself solely in the interest of Fagerhults”. Mr Miltz SC
argued that such particularity related
to evidence and the plaintiffs
are not required to plead although the particulars of claim in any
event contain sufficient information
in this regard – the
interest of Faterhults was to exit South Africa to the detriment of
the company and its creditors.
[37]
The final complaint was that the alleged lack of detail in paragraph
6 of the particulars of
claim and related to the exact orders, the
extent of the retrenchment packages, the basis that it is alleged
that stock was overpriced,
the price of the stock ordered, and the
extent to which the stock was overpriced.
[38]
Mr Miltz SC’s argument was that all the information sought
could be provided in trial particulars,
or discovery, or in evidence.
His argument was that all these complaints related to evidence, that
the plaintiffs were not required
to plead and therefore did not
render the particulars of claim excipiable or vague and embarrassing.
[39]
He denied that there was any vagueness and that the plaintiffs’
particulars of claim did
plead a cause of action, sufficiently, for
the defendant to plead. He argued that the application should be
dismissed with costs,
such costs to include the costs of two counsel
on scale C in terms of rule 69(7).
[40]
When it was put to Mr Miltz SC that the date of the liquidation was
not pleaded and whether this
was not a requirement, he alleged that
it was not a ground for the exception, and that the date was not an
essential particularity
to plead.
[41]
Mr Miltz SC made reference to numerous authorities and emphasised the
matters of Makjae vs Sentraboer
(Co-operative)
[1981] (4) SA 239(T)
and Dusheikov vs Millburn 1964(4) SA 648(A).
[42]
Mr Eyles SC argued that in paragraphs 5 – 7 of the particulars
of claim the plaintiffs
allege that the defendant carried on the
business recklessly in a number of respects and that their conduct
was intended, to the
knowledge of the defendant, to achieve to the
detriment of the company, Fagerhults’ disinvestment from South
Africa and its
release from its obligations until 31 December 2020 to
make payment of R50 000 000.00 financial support.
[43]
He further argued that in paragraphs 8 – 10 that between 1
December 2019 and 31 December
2020 the company was factually and
commercially insolvent and had the defendant not acted as aforesaid
but instead “brought
about the winding-up of the company”
before 31 December 2020, then Fagerhults would have provided the
R50.000 000.00 financial
assistance that it undertook and was obliged
to provide with the result that the claims of the plaintiffs would
have been paid.
[44]
In terms of section 346 of the Act an application for the winding-up
of a company can be brought
by the company, by creditors, or by
members. It does not allow for a “director” to make
application.
[45]
Mr Eyles argued that the allegation in the particulars of claim is
that the defendant (defined
as the financial director) did not bring
about the winding-up. His further complaint was that the plaintiffs
failed to plead any
allegations to demonstrate how the defendant
could have done so.
[46]
His argument went further that no evidence can assist the plaintiffs
in disclosing a cause of
action and that the claim was bad in law.
His alternative argument was that the plaintiffs’ claim is
vague and embarrassing
and does not contain a clear and concise
statement of material facts relied upon by the plaintiffs.
[47]
Mr Eyles SC argued that in paragraphs 7 and 7.2 it is alleged that
the conduct referred to in
paragraph 6 achieved the release of
Fagerhults from its obligations until 31 December 2020 to make
payment of R50 000 000.00
as financial support to the
company to enable it to pay present and future claims of any creditor
of the company as and when they
would become due.
[48]
On the express wording of the Subordination Agreement, the conduct
referred to in paragraph 6
could not have achieved the release of
Fagerhults from its obligation.
[49]
His argument was that no evidence could assist the plaintiffs in
disclosing a cause of action
and it was bad in law, alternatively,
was vague and embarrassing.
[50]
In addition, in paragraphs 7 and 7.1 it is alleged that the conduct
referred to in paragraph
6 did achieve Fagerhults’
disinvestment from South Africa “with reckless disregard for
the rights and obligations of
the company and its current and
long-term creditors including the plaintiffs”. Mr Eyles SC
argued that no allegation, alternatively,
insufficient allegations,
have been made in regard to this particularity.
[51]
Mr Eyles also argued that in paragraph 5.3.1 it is alleged that the
defendant in her contact
with the auditors “misrepresented the
[identified] assets of the company … by considerably
overstating the value in
the financial statements of the company as
at 31 December 2019”. He argued that no allegation,
alternatively, insufficient
allegations had been made in regard to
this particularity.
[52]
He also made reference to paragraph 5.3.2 where it was alleged that
the defendant “made
payments” to the defendant and
William Scott Meikle in October 2024, when the company was insolvent,
which payments constituted
dispositions not for value. His argument
was that no allegations, alternatively, insufficient allegations had
been made in regard
to this particularity.
[53]
A similar complaint was raised in regard to paragraphs 5.3.3 and
5.3.4.
[54]
His further argument was that paragraph 5.3 is vague and embarrassing
and did not contain a clear
and concise statement of the material
facts relied upon by the plaintiffs.
[55]
Mr Eyles SC referred to paragraph 6 which referred back to paragraph
5.3 and argued that this
too was vague and embarrassing and
prejudicial to the defendant.
[56]
Mr Eyles SC argued that the defendant’s exception be upheld and
that the costs should be
awarded to the defendant, including the
costs of two counsel.
[57]
Mr Miltz SC also referred this court to further authorities and in
reply Mr Miltz SC referred
to further authorities, not contained in
their heads of argument.
Vague
and Embarrassing
[58]
I do not intend repeating all the arguments made by Mr Eyles SC,
however, am of the view, considering
the arguments, and the
authorities relating thereto, that the particulars of claim are vague
and embarrassing for a number of reasons.
[59]
The particulars of claim refer to Ms McDermott as having acted
recklessly under section 424 of
the Act but lacks clear particulars
of how the conduct was reckless in terms that will enable the
defendant to plead properly.
[60]
The nature of the alleged misrepresentations, the effect of
insolvency, and the alleged breaches
by Ms McDermott are vaguely
described without sufficient detail of how Ms McDermott’s
actions directly caused the plaintiffs’
losses.
[61]
The amended particulars of claim implicate various individuals and
entities, as summarised above,
but it is unclear how the defendant’s
specific conduct was different to theirs and how she personally
caused the harm alleged.
It is unclear whether the defendant’s
actions were entirely independent, or influenced by instructions from
others. This
is vague and there is no clarity as to whether the
defendant is solely liable for the eventual outcomes.
[62]
The amended particulars of claim do not clearly establish a strong
counsel connection between
Ms McDermott’s alleged actions, and
the plaintiffs’ alleged loss.
[63]
While Ms McDermott’s conduct is alleged, there is no clear
allegation of how the actions
directly resulted in the company’s
insolvency, or failure to pay the plaintiffs. It is also vague that
the allegation is
made that, if not for the defendant’s
actions, Fagerhults would have provided financial assistance to cover
the plaintiffs’
claims.
[64]
Although legal conclusions, such as “recklessly”, “fail
to comply with internal
controls” and “misrepresented
information” are pleaded, insufficient factual detail is given
in the amended particulars
of claim to support the alleged specific
breaches, or alleged misrepresentations. The lack of precise facts
makes it difficult
for the defendant to respond meaningfully, which
renders, in my view, the claim, as presently pleaded, vague and
embarrassing.
[65]
The plaintiffs’ prayers for relief are also not clear as to how
the R50 000 000.00
amount was calculated, or justified. The
prayer for an alternative amount begs the question of how the trial
judge should determine
this liability, in turn, creates uncertainty
in the relief being sought. I am further of the view that to avoid
vague and embarrassing
particulars, an amended particulars of claim
should more clearly articulate the facts, supporting each allegation
made, particularly
in relation to Ms McDermott’s specific role,
the causation of loss, and the damages sought.
[66]
It is accordingly ordered that:
[66.1]
The defendant’s exception is upheld;
[66.2]
The plaintiffs are granted leave to amend their
particulars of claim
within ten days of the granting of this order;
[66.3]
The plaintiffs are to pay the defendant’s
costs, including
those of two counsel, on scale C in terms of rule 69(7), as
contemplated in terms of rule 67A (3).
B.B.
BRODY
ACTING
JUDGE OF THE HIGH COURT
APPEARANCES:
Counsel
for the Plaintiff/Respondent
:
Adv.
Miltz SC
with Adv Morris
Instructed
by
:
Rushmere Noah Inc.
5 Ascot Office Park,
Conyngham Road
Greenacres
GQEBERHA
(Ref.: Ms J
Theron/dp/MAT44792)
Counsel
for the
Excipient/Defendant
:
Adv. Eyles SC
with Adv Robertson
Instructed
by
: Hogan
Lovells
c/o MC Botha Inc.
255 Main Road
Walmer
GQEBERHA
(Ref.:
HOG1/0001)
[1]
Makgae vs Centraboof Ko-operatief (Bpk)
1984 SA 239(T)
244B to 245C
[2]
Trope vs South African Reserve Bank 1992(3) SA 208(T) at 2010G - I
[3]
Telematrix (Pty) Ltd t/a Matrix Vehicle Tracking vs Advertising
Standards of Authority 2006(1) SA 461 (SCA) at 465, paragraph
[3]
[4]
McKelvey vs Cowan N.O. 1980(4) SA 525(z) at 526D – E;
Vermeulen vs Goosevalley Investments (Pty) Ltd 2001(3) SA 986 (SCA)
at [7]
[5]
Nasionale Artappel Ko-operasie Beperk vs Price Waterhouse Coopers
Inc 2001(2) SA 790(T) at 798F – 799J
[6]
Henochsberg on a Companies Act [issue 25] at APPI-300
[7]
Cronje N.O. vs Stone 1995(3) SA 597(T); Engelbrecht N.O. and others
vs Zuma and others (2015) 3 All SA 590(GP)
[8]
Ozinsky N.O. vs Lloyd 1992(3) SA 396(C) at 414 - 413