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[1995] ZASCA 53
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Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others (9/93) [1995] ZASCA 53; 1995 (4) SA 790 (AD); [1995] 2 All SA 543 (A) (19 May 1995)
CASE NO
: 9/93 NvH
CAPE PACIFIC
LTD
Appellant
and
LUBNER CONTROLLING
INVESTMENTS (PTY) LTD
1st Respondent
GERALD LUBNER
INVESTMENTS (PTY) LTD
2nd Respondent
GERALD MERVYN LUBNER
3rd Respondent
SMALBERGER, JA
CASE NO
: 9/93 NvH
IN THE SUPREME COURT OF
SOUTH AFRICA (APPELLATE DIVISION)
In the matter between
CAPE PACIFIC LTD
Appellant
and
LUBNER CONTROLLING
INVESTMENTS (PTY) LTD 1st Respondent
GERALD LUBNER
INVESTMENTS (PTY) LTD
2nd Respondent
GERALD MERVYN LUBNER
3rd Respondent
CORAM
: VAN HEERDEN, SMALBERGER, VIVIER,
F H GROSSKOPF, et VAN DEN HEEVER,JJA
HEARD: 15 February 1995
DELIVERED
: 19 May 1995
JUDGMENT
SMALBERGER, JA
This appeal sees the culmination of protracted litigation
2
resulting 60m the sale in February 1979 by the first respondent to
the
appellant of shares and a loan account in Findon Investments
(Pty) Ltd
("Findon"). The Findon shares entitle their owner to use
and occupy a flat
(including garages, parking areas and servants'
quarters) situated in Clifton in the Western Cape ("the Clifton flat").
The contract of sale was concluded between a certain Shapiro, on
behalf of the appellant, and one Swersky representing the first
respondent, which at the time was known as Rosebank Parkade
(Pty) Ltd. Any reference to first respondent will include, where
appropriate, a reference to it by its former name.
The appellant (as plaintiff) unsuccessfully sued the
respondents (as first, second and third defendants) in the Cape
Provincial Division in an action in which the following relief was
sought:
"(a) An order directing the Second Defendant to deliver the said shares and
cede the said loan account to the Plaintiff within a time
to be fixed by the
above
3
Honourable Court;
(b)
Alternative to (a) herein,
an order directing Second Defendant to deliver to First Defendant the said
shares and cede the said loan
account within a time to be fixed by the above
Honourable Court and that the First Defendant then deliver the said shares and
cede
the said loan account to the Plaintiff within a time to be fixed by the
above Honourable Court;
(c)
An order directing
that the Third Defendant procure that the Second Defendant deliver the said
shares and cede the said loan account
to the Plaintiff within a time to be fixed
by the above Honourable Court.
(d)
Alternative
relief;
(e)
That the costs of this action be
borne by the Third Defendant on an attorney and own client basis; alternatively
the Second Defendant,
the Third Defendant and the First Defendant jointly and
severally the one paying the others to be absolved on an attorney and own
client
basis."
The judgment of the court
a quo
(NEL,
J) directing absolution from the instance is reported as
Cape Pacific Ltd v
Lubner Controlling
4
Investments (Pty) Ltd and Others
1993(2) SA 784(C) ("the judgment").
In a later judgment the appellant was ordered to pay the respondents' costs
(including the costs
of two counsel), but excluding the costs occasioned by the
calling of the witnesses Van Zyl, Miller, Stride and Behrmann. (The respondents
were in turn ordered to pay certain wasted costs but these do not feature in the
present appeal.) The appellant was granted leave
to appeal to this Court by the
learned trial judge; the respondents were simultaneously granted leave to
cross-appeal against the
order depriving them of their costs in respect of the
aforementioned witnesses. The history of the present matter (including the
relevant background facts), the detailed pleadings filed by the parties, the
evidence adduced at the trial and the impressions formed
by the trial judge of
the various witnesses who testified, appear from the judgment at 785G to 814F.
It is unnecessary to traverse
these in
5
detail. It will suffice to set out the salient facts as they emerge from the
judgment and the relevant evidence.
It appears that the third respondent
("Lubner") was (and presumably still is) an enterprising and successful
businessman who conducted
his business and private affairs through a number of
companies collectively known as "the Lubner group of companies" ("the Lubner
group"). Various companies were also owned by four children's trusts ("the
children's trusts") created by Lubner's father for the
benefit of Lubner's four
children. Lubner was one of the trustees of the children's trusts. The first
respondent ("LCI") was at all
relevant times owned by the children's trusts via
a company called Wencor (Pty) Ltd and the Gerald Lubner Family Trust (Pty) Ltd.
The latter owned 100% of the shareholding in LCI. Lubner was never a director or
shareholder of either company. Nor was he a director
of LCI, its sole director
at all material times being Swersky. In 1979 Lubner owned all the
6
issued shares in the second respondent ("GLI"). Between then and October 1988
Lubner and Swersky were the sole directors of GLI. They
were then joined as
directors by a certain Kathleen Smith who was employed by Lubner. In about 1985
the Gerald Lubner Trust, a discretionary
trust, acquired a small minority
shareholding of 1000 ordinary shares in GLI. The judgment (at 800) contains a
diagram depicting,
as at 1979, the various companies in the Lubner group (in the
left-hand column) and the companies owned by the children's trusts
(in the
right-hand column). It was conceded on behalf of the respondents that the
evidence established that prior to 1979 LCI (as
owner of the Findon shares) was
the vehicle through which Lubner personally enjoyed the beneficial use of the
Clifton flat. It was
further conceded that at all material times Lubner was and
had been the "moving spirit" behind LCI and GLI "in the sense that he
was the
prime moving force". It is also common cause that Lubner became a "non-resident"
for exchange control purposes in about
7
1976 when he took up residence overseas.
In February 1979, through the
introduction of an estate agent, one Hirschson, negotiations commenced between
Shapiro and Swersky in
regard to the purchase of the Findon shares. The
appellant claimed that a sale eventuated on 22 February 1979; this was denied by
LCI. The upshot was that action was instituted by the appellant against LCI for
delivery of the Findon shares ("the original action").
Judgment in favour of the
appellant was granted in the Cape Provincial Division (FRIEDMAN, J) on 4 August
1987; LCI's subsequent
appeal to the Appellate Division was dismissed on 20
March 1989. In the meantime it transpired that in the second half of 1979 the
Findon shares had purportedly been sold by LCI to GLI. This first came to the
appellant's knowledge when Swersky, on 2 June 1980,
filed an affidavit in
opposition to an unsuccessful application by the appellant for the delivery by
LCI of the Findon shares. In
his affidavit Swersky drew the court's attention
"to the
8
fact that on the 30th December 1979 and consonant with the reorganisation of
the affairs of Lubner in certain of the Companies wherein
he was interested" the
Findon shares were "transferred" to GLI. In paragraph 9 of its plea in the
original action (dated 2 July 1982)
LCI stated:
"The shareholding in and claims on loan account against FINDON INVESTMENTS
(PROPRIETARY) LIMITED, previously held by Defendant [LCI],
were on or about 30th
December 1979 transferred to a Company known as GERALD LUBNER INVESTMENTS
(PROPRIETARY) LIMITED [GLI]."
LCI did not in its plea
specifically claim that it was unable, because of impossibility of performance
or otherwise, to deliver the
Findon shares to the appellant. The appellant did
not at any stage seek to join GLI in the original action.
LCI failed to deliver the Findon shares to the appellant pursuant to this
Court's judgment on 20 March 1989. The appellant then brought
an application
against,
inter alia,
the three
9
respondents to have them declared in contempt of court for
failing to do so. The application was dismissed. On 4 August 1989 the appellant
instituted the present action seeking the relief set out earlier. The
respondents pleaded,
inter alia
, that the Findon shares had been
transferred by LCI to GLI in December 1979; that LCI had called upon GLI to
deliver the shares;
that GLI had declined to do so; and that LCI was accordingly
unable to comply with the order against it.
On the assumption that GLI took delivery of the Findon shares from LCI with
knowledge of the appellant's rights to the shares, it
was open to appellant,
when it came to its notice that the Findon shares had been transferred to GLI,
to join GLI in the original
action and claim delivery of the shares from it on
the basis of the so-called "doctrine of notice"
(McGregor v Jordaan and
Another
1921 CPD 301
at 308;
Tiger-Eve Investments (Pty) Ltd and Another
v Riverview Diamond Fields (Pty) Ltd
1971(1) SA
10
351(C) at 358F-H). The appellant did not avail itself of the opportunity to
do so. It is common cause that any action it might have
had against GLI on that
score has since become prescribed. The consequence this may hold for the
appellant will be considered later.
The only cause of action ultimately
relied upon by the appellant was that pleaded in paragraph 12.2 of its amended
particulars of
claim - which is quoted in full in the judgment at 787D-G. What
is alleged in essence is that Lubner, with knowledge of the appellant's
rights,
and in fraud of such rights, and with a view to procuring for himself the
continued utilisation of the Clifton flat, caused
the Findon shares to be
transferred from LCI to GLI; that the court was accordingly entitled, with due
regard to all the relevant
circumstances, to disregard the separate corporate
personalities of LCI and GLI in order to give effect to the judgment in the
original
action for delivery of the Findon shares to the
11
appellant (what is commonly referred to as "lifting" or "piercing" the
corporate veil).
After a comprehensive review of the evidence the trial judge
made the following factual findings:
1) That Lubner, although only one of the trustees of the children's trusts, had
complete control over the affairs of LCI (at 814G);
2) That until 1985 Lubner was the sole shareholder of GLI and there was no
evidence to suggest that he did not also effectively control
all the affairs of
GLI before or after that date (at 814 I);
3) That the evidence established that the Findon shares had been transferred by
LCI to GLI on the instructions of Lubner in an attempt
to evade the appellant's
"claim" thereto (at 815G).
Findings (1) and (3) were attacked on
appeal by the respondents; finding (2) was not seriously challenged.
Notwithstanding these findings
the learned judge a quo concluded that it was not
appropriate or permissible to disregard the separate corporate
12
personalities of LCI and GLI. He held that although the transfer of the
Findon shares to GLI could be described as "clearly improper",
their transfer
did not amount to an "unconscionable injustice"; that the appellant "had had
full opportunity to recover the shares
from GLI but did not do so timeously and
is thus the author of its own misfortune" (at 822 B-C). Hence the order of
absolution.
I propose to consider the factual findings made by the
trial
judge and then to determine what legal consequences flow from
the
proved facts. The evidence of the various witnesses who testified
is
dealt with in the judgment at 799E to 814C. I shall draw on such
evidence,
amplified where necessary, in arriving at my conclusions.
Finding 1
: That Lubner had complete control over LCI.
For reasons that will appear later, it is not in my view necessary to
determine whether Lubner had
complete
control of
13
LCI. The real issue is rather whether he exercised absolute control over LCI
in relation to its dealings with the Findon shares. As
previously mentioned, the
Findon shares guaranteed the occupation and utilization of the Clifton flat.
They had previously been owned
by Lubner and had been sold by him to LCI in 1976
consequent upon the restructuring of his affairs when he became non-resident.
According
to the evidence, the Clifton flat was regarded by Lubner as his home
(or one of them). Hirschson testified that his dealings with
Lubner left no
question in his mind that Lubner took all the decisions in regard to the Clifton
flat. He recalled an occasion when
Lubner, in an emotional outburst when
speaking over the telephone, claimed "it's his apartment, and nobody's going to
make any decisions
on his behalf". In a note dated 30 April 1979 Lubner recorded
that during his absence "no one is to gain entry to my apartment".
It is also
not without significance that although LCI purportedly owned the Findon
shares,
14
it was never debited with any expenditure in respect of the Clifton flat,
which suggests that its ownership was one of convenience
rather than
substance.
As previously noted, it was established in the original action that the
Findon shares were sold by LCI to the appellant in February
1979. It is common
cause that although the ultimate owner of LCI was the children's trusts, the
trustees did not take the decision
to sell the Findon shares. Everything points
to the decision to do so having been taken by Lubner. When it was put to the
witness
Miller (who at the time was one of the trustees of the children's
trusts) that it was not incumbent upon Lubner to consult Miller(
or any other
trustee, for that matter) if he (Lubner) wished to sell "the flat", Miller
replied: "Yes, I was just a trustee of the
trust".
Swersky, the sole director of LCI, did not testily at the trial. He did so in
the original action as a witness for LCI. The
15
appellant sought to have the evidence he gave on that occasion admitted in
the present proceedings. The trial judge, in the exercise
of his discretion in
terms of
sec 3(l)(c)
of the
Law of Evidence Amendment Act 45 of 1988
, ruled
Swersky's evidence admissible. In his reasons for doing so he stated that the
probative value of Swersky's evidence was obviously
great; that if
uncontroverted it would prove that Lubner had full and complete control of the
affairs of LCI relating to the Clifton
flat "because he controlled Swersky";
that the appellant could not have been expected to call Swersky; and that the
only possible
prejudice to the respondents was that they might have to call
controverting evidence, if such evidence existed. The trial judge's
ruling was
challenged on appeal, but having regard to all the relevant circumstances, I am
satisfied that he exercised his discretion
properly.
It is apparent from Swersky's evidence in the original action
16
that at all material times Lubner personally controlled the destiny of LCI.
Asked whether he (as sole director of LCI and other related
companies) deferred
to Lubner's wishes, Swersky replied "Invariably. I wouldn't do anything without
his approval". Lubner was therefore
in effective control of Swersky and, through
him, the Findon shares. Swersky's evidence makes it perfectly clear that he
would never
have contemplated selling the Findon shares other than on Lubner's
instructions.
Lubner, despite being available to do so, failed to testify at the trial.
From this it may be inferred that he was unable to contradict
Swersky's
evidence, or to refute that of Hirschson and Miller. The evidence, coupled with
Lubner's failure to testify, goes way beyond
the concession that Lubner was the
moving spirit behind LCI. It establishes on the requisite balance of
probabilities that notwithstanding
LCI's corporate identify, Lubner at all
material times personally exercised control over the Findon shares (and
17
hence the Clifton flat) as effectively and completely as if they belonged to
him personally. In relation to its dealings with the
Findon shares LCI was more
than just Lubner's puppet; it was essentially none other than Lubner personally,
albeit in a different
guise.
Finding 2
: That Lubner effectively controlled the affairs of GLI at
the relevant time.
In 1979 when the sale of the Findon shares to the appellant, and the
subsequent transfer of those shares from LCI to GLI took place,
Lubner was the
sole shareholder of GLI. He and Swersky were the directors of GLI. Given
Swersky's evidence it is apparent that he
would have deferred to Lubner in
relation to all matters pertaining to the Findon shares. It is in fact common
cause that Lubner
had complete voting control at that time over GLI. Neither the
later acquisition by Gerald Lubner Trust of a minority
18
shareholding in GLI, nor the appearance of Kathleen Smith as a director of
GLI, would have altered the position. It was Lubner's idea
to transfer the
Findon shares from LCI to GLI. This was not done to further GLI's corporate
interests, but to ensure Lubner's continued
personal occupation of the Clifton
flat. Henceforth Lubner as LCI would no longer enjoy the benefit of the flat;
but Lubner as GLI
would continue to do so. It was a transfer, as the witness
Stride (on a proper reading of his evidence) fairly conceded, from Lubner's
left
to his right hand. When the situation is exposed for what it really is, the
inevitable truth that emerges is that not only did
Lubner control the affairs of
GLI, but in relation to its acquisition of the Findon shares GLI
was
Lubner in one of his guises.
Finding 3
: That the Findon shares had been transferred by LCI to GLI
on Lubner's instructions to evade the appellant's "claim" thereto.
19
This finding is justified on the evidence, but in my view it would be more
appropriate to speak of the evasion of the appellant's
"rights" to the Findon
shares rather than merely its "claim". The evidence not only establishes that
Lubner knew of the appellant's
claim, but that he appreciated that it was a
valid one, and that the transfer of the Findon shares to GLI was a device or
stratagem
resorted to by him in a deliberate attempt to thwart the appellant's
rights to delivery of the shares. His conduct in the circumstances,
if not
fraudulent, was at the very least gravely improper.
From the evidence, and
certain contemporaneous documentation in particular, it appears that Lubner, who
was overseas at the time,
was kept fully abreast of the negotiations between
Swersky and Shapiro in relation to the sale of the Clifton flat (via the sale
of
the Findon shares). In a telex from Lubner to Swersky on 19 February 1979 (i.e.
three days before the actual sale as found proved
in the original action) Lubner
states,
inter
alia,
20
"I am concerned that you will lose the deal with Shapiro. Anxious to conclude
on the basis discussed". In a later telex on 21 February
1979 Lubner exhorts
Swersky with the words "This purchase and contract has as its basis an affair of
the heart and his enthusiasm
will inevitably wane with delay and messing him
about". (The references to "his" and "him" are clearly to Shapiro.) On 12 March
1979
Lubner sent a telex to one Bensimon which included the following directive:
"Please have Swersky report to me on the Clifton
sale
". (My
emphasis.)
It is apparent from Hirschson's evidence (which was accepted by the trial
judge) that Lubner was aware by April 1979 that Shapiro
claimed to have
concluded an agreement with Swersky (on behalf of LCI) for the sale of the
Clifton flat and was intent on enforcing
the agreement. Hirschson testified that
he had two meetings with Lubner during April at which the sale of the flat was
discussed.
According to Hirschson, Lubner's attitude at these
21
meetings was that he wished to renegotiate the terms of the sale. On 30 April
1979 Lubner wrote a letter to Hirschson which is set
out in full in the judgment
at 805C-E. It refers, in the opening paragraph, to "the trustees' decision not
to proceed, at present,
with the sale of the Clifton apartment, through no fault
of ours". (This was a blatant untruth, for it is clear from the evidence
that at
no time did the trustees take any decisions, one way or the other, in regard to
such sale.) The letter proceeds to reflect
an intention "to give effect to the
sale of the apartment" after the happening of certain events. In the absence of
any explanation
by Lubner (which was never forthcoming) the terms of the letter
are consistent only with an appreciation or belief that a sale had
been
concluded, and that an attempt was being made (at any rate for the time being)
to avoid its consequences.
During July 1979, and at Lubner's request, Hirschson spent a few days with
Lubner at St Tropez. Hirschson's evidence
22
concerning what transpired between them then and subsequently
is
correctly summarised in the judgment at 805G-J as follows:
"Lubner told him that he was still busy re-arranging his affairs and that he was
under a lot of pressure from his family who were
very upset about the sale of
the flat. Lubner also asked him to apply pressure on Shapiro to buy another
flat, in which event Lubner
would pay Hirschson $50 000. He declined the offer.
Later during the year when litigation became imminent, Lubner asked him to hand
over the file and all documentation regarding the sale of the flat to him. When
it was pointed out to Lubner that the file had already
been handed over to
attorneys, Lubner indicated that he would see Hirschson right financially if
Hirschson would become a hostile
witness; that, according to Lubner, would be a
person who was unco-operative with both sides, with the result that neither side
would
call him as a witness. This Hirschson also refused to
do."
Lubner's unsuccessful attempts, in effect, to bribe
Hirschson, are indicative of his concerned state of mind regarding the existence
of a valid sale of the Clifton flat (through the medium of the Findon
shares).
The gist of the respondents' case concerning the transfer of
23
the Findon shares from LCI to GLI was that it had been
considered advisable as part of the restructuring of Lubner's South African
interests as a consequence of his becoming a non-resident, as well as being
prompted by a concern about a potential tax liability
(see the judgment at
802G-J). This was first put forward by the witness Miller in an affidavit Sled
by him in the contempt proceedings.
It also formed the basis of the summary of
his evidence in terms of
Rule 36(9)(g)
as well as his later evidence at the
trial (see the judgment at 799F-J; 802A-G). In addition to Miller the witnesses
Van Zyl, Stride
and Behrmann gave evidence in this regard; one Lumb testified
for the appellant. The latter's evidence is set out at 803A to 804H
of the
judgment; that of the other witnesses I have mentioned at 806C to 812J. No
useful purpose would be served in repeating or
analysing their evidence in this
judgment.
The trial judge came to the conclusion that the reasons put forward by the
respondent for the transfer of the shares were
24
"obviously false" (at 815B). His reasons for so concluding
are
encapsulated in the following passage in his judgment (at 815B-G):
"The restructuring process had started in 1976 and it was then decided that the
shares in Findon would continue to be held by Rosebank
Parkade [LCI] (RSC 20).
One of the stated intentions of the restructuring was to regularise the loan
accounts between the two sides
of the Lubner group of companies in order to
comply with the borrowing restrictions laid down in terms of the applicable
foreign
exchange regulations and the main object was to eliminate loans between
them (RSC 20 and 28).
The effect of the sale and transfer of the
shares was, however, to increase and not decrease such borrowing and thus ran
counter to
this intention. It is also clear from the contents of certain of the
documents that the transfer of the shares had nothing to do
with the
restructuring of the companies and that it had come about as a result of a
directive from Lubner. According to the minutes
of the meeting held by Lubner's
advisers on 3 April 1979 (RSC 25), they were of the view that the flat should be
sold. However, on
24 April 1979 Flett advised Behrmann that the flat had to be
sold to GLI because Lubner was not prepared to allow it to pass out
of the
family control for the amount of R140 000 (RSC 1, p18). The further suggestion
that the transfer of the Findon shares
25
had partly been motivated by a concern about an additional tax assessment is not
supported by any documentary evidence. Such a suggestion
also conflicts with the
transfer of assets to Rosebank Parkade and Gerald Lubner Holdings and the
retention of other, more valuable
assets. An additional factor to be taken into
account is Lubner's failure to testify. He was present in Court during most of
the
trial and in the circumstances the inference must be drawn that had he given
evidence he would not have been able to support the
versions contended for on
behalf of himself and the first and second defendants."
If proper
regard is had to the evidence as a whole (including the documentary evidence)
and the credibility and other findings of
the trial judge in respect of the
witnesses who testified (at 814C-F), his reasoning and logic in arriving at the
conclusion he did
cannot, in my view, be faulted. Despite the criticism voiced
against his factual findings on appeal, there is no acceptable basis
for
interfering with them. Having regard to such evidence and findings, and the
failure of Lubner to testify, the following has in
my view been established:
26
1) Lubner accepted that there had been a valid sale of the Findon shares from
LCI to the appellant;
2) He unsuccessfully attempted to avoid the consequences of such sale,
inter
alia
, by bribing Hirschson;
3) He was instrumental in having the Findon shares transferred from LCI to
GLI;
4) The reasons put forward by the respondents at the trial for such transfer
were found to be without substance and "obviously false";
5) The most probable inference to be drawn is that the Findon shares were, at
the instigation of Lubner, transferred from LCI to
GLI in a deliberate attempt
to thwart or defeat the appellant's rights to them, conduct which was fraudulent
or, at the very least,
seriously improper.
I turn now to what is
really the crux of the present appeal. The fundamental issue is whether the
appellant, having regard to the
27
facts found proved, is entitled to the relief which it seeks.
An essential pre-requisite for the grant of such relief is that the
separate
corporate personality of LCI and GLI would have to be disregarded insofar as
their dealings with the Findon shares are concerned.
Unless that can be done, no
legal basis exists on which the judgment which the appellant obtained in the
original action against
LCI can be enforced against GLI or Lubner, as there
would otherwise be no privity between them.
It is trite law that "[a] registered company is a legal persona distinct from
the members who compose it" (
Dadoo Ltd and Others v Krugersdorp Municipal
Council
1920 AD 530
at 550). Equally trite is the fact that a court would be
justified in certain circumstances in disregarding a company's separate
personality in order to fix liability elsewhere for what are ostensibly acts of
the company. This is generally referred to as lifting
or piercing the corporate
veil. (I shall confine myself to the use of the word
28
piercing.) The focus then shifts from the company to the
natural
person behind it (or in control of its activities) as if there were
no
dichotomy between such person and the company
(Henochberg on
the Companies Act
: 5th Ed: Vol 1, p 54). In that way personal
liability is attributed to someone who misuses or abuses the
principle of corporate personality.
The law is far from settled with regard to the circumstances
in which it would be permissible to pierce the corporate veil. Each
case involves a process of enquiring into the facts which, once
determined, may be of decisive importance. And in determining
whether or not it is legally appropriate in given circumstances to
disregard corporate personality one must bear in mind
"the fundamental doctrine that the law regards the substance rather than the
form of things, - a doctrine common, one would think,
to every system of
jurisprudence and conveniently expressed in the maxim
plus valet quod agitur
quam quod simulate concipitur
"
(Dadoo Ltd and Others v Krugersdorp Municipal Council (supra
) at
29
547.) Whatever the position, it is probably fair to say that a
court has no general discretion simply to disregard a company's separate
legal
personality whenever it considers it just to do so
(Botha v Van Niekerk en 'n
Ander
1983(3) SA 513(W) at 524A; Gower's
Principles of Modern Company
Law
: 5th Ed, 133).
Much of what is considered to be the current law on the subject is set out in
the judgment at 815H to 821C. I do not deem it necessary
or advisable in the
present appeal to attempt to formulate any general principles with regard to
when the corporate veil may be pierced.
I propose to do no more than apply what
I conceive to be the appropriate legal principles to the facts of the present
matter.
The principle of a company's separate juristic personality was first asserted
in the House of Lords in
Aron Salomon v A Salomon and Company Limited
[1897] AC 22.
There already it appears to have been recognised that proof of
fraud or dishonesty might justify
30
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
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
31
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) are found to
be present, other considerations will come into play.
The need to preserve the separate corporate identify would in such circumstances
have to be balanced against policy considerations which arise in favour of
piercing the corporate veil (cf Domanski : Piercing The
32
Corporate Veil- A New Direction :
1986 SALT 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
33
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.
I revert to the facts of the present matter. It will be recalled that the
Findon shares, which guaranteed Lubner (and his family)
personal occupation of
the Clifton flat, were initially owned by Lubner. They were transferred to LCI
in 1976 when Lubner became
a non-resident. They were held by LCI on Lubner's
behalf as a matter of convenience. Lubner exercised complete control
34
over LCI in respect of the Findon shares via Swersky who did
his
bidding. LCI did not transfer the Findon shares to GLI for
a
legitimate reason. It did so at Lubner's behest solely for the
purpose
of thwarting or defeating the appellant's rights to the shares.
With the same
purpose in mind GLI, over whom Lubner exercised
absolute control, and acting
on his instructions, took transfer of the
Findon shares from LCI. Neither LCI
nor GLI stood to benefit
from the transaction, only Lubner. The transfer was
in fraud of the
appellant's rights; at the very least it was carried out with
an
improper purpose - the evasion of legal obligations - in mind.
Lubner's
motive in transferring the Findon shares from LCI to GLI,
or causing them to
be transferred, is a highly relevant consideration
- see
Adams and Others
v Cape Industries p1c and Another
[1991]
1 All ER 929
(CA) at 1022j,
1024j. The misuse by Lubner of both
LCI and GLI amounted to an abuse of their
separate corporate
identities. In reality, in relation to their dealings with
the Findon
35
shares, both LCI and GLI were Lubner's alter egos. There was but one purpose
- that of Lubner, and one will - that of Lubner. Policy
considerations strongly
suggest that the veil of corporate personality should be pierced in relation to
LCI's and GLI's fraudulent
or improper dealings with the Findon shares in order
to reveal Lubner as the true villain of the piece. To pierce the corporate veil
for that purpose would not detract from the otherwise legitimate and proper
corporate activities of LCI and GLI or prejudice their
shareholders. It is
within Lubner's power to compel GLI to disgorge the Findon shares. In the
circumstances the separate corporate
identities of LCI and GLI in relation to
their dealings with the Findon shares should, in my view, be disregarded unless
there is
some other consideration which precludes that being done.
A case somewhat analagous to the present where the court disregarded a
company's separate legal personality where the
36
company was used to facilitate the evasion of legal obligations is that of
Jones and Another v Lipman and Another
[1962] 1 ALL ER 442
(Ch.D). In
that case Lipman, after concluding a contract to sell land to Jones, formed a
company and conveyed the land to it in order
to defeat Jones's right to specific
performance. The court granted specific performance against both Lipman and the
company, holding
that such relief could not be resisted by a seller in Lipman's
position who had absolute ownership and control over the company concerned.
See
too
Gilford Motor Co Ltd v Home and Another
[1933] ALL ER 109
(CA).
As previously pointed out, the trial judge held that the transfer of the
Findon shares from LCI to GLI did not result in an "unconscionable
injustice"
because the appellant failed limeously to recover the Findon shares from GLI, as
it could have done. (The test of "unconscionable
injustice" is that formulated
by FLEMMING J in
Botha v Van Niekerk en 'n Ander (supra
) at 525F where
he
37
held that piercing the veil would be justified "as daar ten minste 'n
oortuiging was dat .... 'n onduldbare onreg aangedoen word en
wel ten gevolg van
iets wat vir die regdenkende duidelike onbehoorlike
optrede is". With due respect to the learned judge I would
avoid, in a
matter such as the present, what is perhaps too rigid a test and opt for a more
flexible approach - one that allows the
facts of each case ultimately to
determine whether the piercing of the corporate veil is called for.) It seems
implicit in the trial
judge's finding that the remedy of piercing the corporate
veil is only available where a plaintiff has no other remedy at his disposal.
No
authority was quoted for this proposition. Nor did the respondents, who support
it, refer us to any.
In principle I see no reason why piercing of the corporate veil should
necessarily be precluded if another remedy exists. As a general
rule, if a
person has more than one legal remedy at his disposal he can select any one of
them; he is not obliged to pursue
38
one rather than another (although there may be instances where once he has
made an election he will be bound by it). If the facts
of a particular case
otherwise justify the piercing of the corporate veil, the existence of another
remedy, or the failure to pursue
what would have been an available remedy,
should not in principle serve as an absolute bar to a court granting
consequential relief.
The existence of another remedy, or the failure to pursue
one that was available, may be a relevant factor when policy considerations
come
into play, but it cannot be of overriding importance. In this regard it is
relevant to note that the appellant took timeous
steps to enforce its
contractual claim against LCI. Although it had knowledge of the transfer of the
Findon shares to GLI, impossibility
of performance by LCI was never specifically
pleaded as a defence. Given the structure of the Lubner group and the extent of
Lubner's
interest and control over the relevant companies, the appellant had no
reason to believe that effect would not be given to any judgment
39
obtained in the original action. It clearly lay within Lubner's power to do
so. Whatever laxity or "fault" there may have been on
the part of the appellant
in failing to pursue its rights under the doctrine of notice pales into
insignificance compared to the
impropriety of Lubner's conduct. Yet respondents
seek to rely upon such failure to deny the appellant relief. Policy
considerations
dictate that they should not be permitted to do so. In the
circumstances the appellant's failure to pursue its remedy under the doctrine
of
notice does not in my view operate as a bar to the relief it seeks.
The respondents contended on appeal that the appellant's failure to establish
in the present action that there had been a sale of
the Findon shares by LCI to
it was fatal to its case. In the original action the appellant succeeded in
proving such a sale against
LCI. GLI and Lubner were not parties to that action.
They were accordingly not afforded an opportunity to contest that
40
there had been a sale. In the present action the appellant disavowed from the
outset any intention to again prove the sale from LCI
to it. The respondents
contend that the judgments in the original action, finding and upholding on
appeal that there had been a sale
between LCI and the appellant, are not
admissible for the purpose of proving such sale as against GLI and Lubner. They
rely in this
respect on the controversial rule in
Hollington v F Hewthorn
& Company Limited
[1943] 2 ALL ER 35(CA)
that a previous judgment is not
admissible in a civil action against someone who was not a party thereto, as
well as the fact that
no privity exists between LCI, GLI and Lubner. If, as the
respondents contend, no sale has been proved between the appellant and
LCI as
against GLI and Lubner, then the circumstances surrounding the transfer of the
Findon shares from LCI to GLI are no longer
relevant and the validity of that
transaction not open to challenge. The respondents' argument in this respect
does not, in my
41
view, assist them in the present matter. I consider the
appellant to be correct in contending that it has a judgment debt against
LCI
which it is entitled to follow and enforce against both GLI and Lubner. That it
can do so is a logical consequence of piercing
the corporate veil and
disregarding the separate juristic personalities of LCI and GLI. To hold
otherwise would be to negate the
very reason for piercing the veil. In
casu
the facts establish that, in relation to the dealings with the
Findon shares, Lubner was both LCI and GLI. Acccordingly, the judgment
against
LCI was in substance and effect one against Lubner. It should therefore be
effective against Lubner in any guise. Once that
basic truth is asserted it
matters not that GLI and Lubner were not formally parties to the original
action. Lubner was there in
his LCI hat, and it is idle and unrealistic to
suppose that in his GLI hat or personally he is likely to have done anything
which
could have altered the course of the original action or influenced its
outcome. Once
42
therefore the sale of the Findon shares by LCI to the appellant was proved in
the original action, and the corporate veils of LCI
and GLI pierced in the
present, effect can be given to the judgment in the original action against all
three respondents. It follows
that in my view the appeal must succeed and that
the appellant is entitled to an order in terms of prayers (a), (b) and (c) of
its
particulars of claim.
The respondents' cross-appeal is directed against the finding of the trial
judge that the four witnesses whose costs were disallowed
were called to
establish a defence which, to the knowledge of Lubner, was untruthful. In my
view, in the light of his unassailable
factual findings, the exercise by the
trial judge of his discretion against the respondents in that respect cannot be
faulted. In
any event, a consequence of the appellant's success on appeal will
be to deprive the respondents of their award of trial costs in
the court below,
so that the issue of whether they should
43
otherwise have been awarded the costs of the four witnesses falls away. The
cross-appeal consequently falls to be dismissed.
The appellant seeks an order
for costs in the court below on an attorney and own client scale. The essential
difference between an
order for costs on such a scale, as opposed to costs
simply on an attorney and client scale, appears from the decision in
Cambridge Plan AG v Cambridge Diet (Pty) Ltd and Others
1990(2) SA
574(T). Notwithstanding Lubner's conduct, an award of costs on the very punitive
attorney and own client scale is, in
my view not justified. However, as a mark
of this Court's disapproval of his conduct in refusing to give effect to the
judgment in
the original action when he was in a position to do so, and thereby
compelling the appellant to again come to court in order to enforce
its rights,
it would in my view be appropriate and just to award the appellant its trial
costs on an attorney and client scale.
One further matter requires mention. The present action was
44
originally set down for hearing on 6 June 1991. The parties agreed to a
postponement at a late stage leaving the issue of the wasted
costs to be
decided. CONRADIE J made an adverse order as to costs against the respondents,
but granted them leave to appeal to this
Court. The intention all along was that
that appeal should be heard at the same time as the present. The respondents
filed heads
of argument relating to the appeal which the appellant's counsel
were prepared to deal with. However, the respondents failed to set
the appeal
down for hearing and it was accordingly not before us. That much was conceded by
the parties. The appellant seeks an order
for wasted costs arising from these
circumstances. As that appeal was not before us it would be inappropriate to
make any costs order
in relation thereto. The appellant will be entitled to
raise the matter again, if it so wishes, when the appeal is heard in due
course.
In the result the following order is made:
45
1) The appeal succeeds with costs, such costs to include the costs of two
counsel.
2) The order of the trial court of absolution from the instance on 7 September
1992, and order (a) of its order of costs made on
10 December 1992, insofar as
it directed the appellant to pay the respondents' costs, are set aside and
replaced with the following
order:
"(a) The second defendant is
ordered to deliver the shares and cede the loan account in Findon Investments
(Proprietary) Limited (which
form the subject matter of the action between the
parties) to the plaintiff within thirty days of 19 May 1995;
(b)
Alternatively
,
within the aforesaid period, the second defendant is to deliver the said shares
and cede the said loan account to the first defendant
which in turn is to
deliver the said shares and cede the said loan account to the
plaintiff;
(c)
The third defendant is ordered
to take all such steps as may be necessary to procure that the second defendant
deliver the said shares
and cede the said loan account to the plaintiff, either
directly or through the
46
first defendant, within the aforesaid period;
(d)
The plaintiffs costs are to
be paid by the third defendant, alternatively, the first, second and third
defendants jointly and severally,
on a scale as between attorney and
client;
(e)
The costs are to include the costs
of two counsel and the qualifying expenses, if any, of the witness
Lumb."
3. The cross-appeal is dismissed with costs, including the costs of two
counsel.
J W SMALBERGER
JUDGE OF APPEAL
Vivier, JA)
F H Grosskopf JA ) concur
Van den Heever, JA )