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[2010] ZAWCHC 24
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Bid Financial Services (Pty) Ltd v Forster (A92/2009) [2010] ZAWCHC 24 (22 February 2010)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE HIGH COURT, CAPE TOWN)
Reportable
CASE
NO.: A 92/2009
In
the matter between:
BID
FINANCIAL SERVICES (PTY) LTD
Appellant
And
MICHAEL
TRACY FORSTER
Respondent
JUDGMENT:
22 February 2010
Introduction
[1]
This is an appeal against a judgment of Wragge AJ in which he
dismissed a claim of appellant who had sued the respondent for
payment
of the sum of R 3,282,861.62 together with interest and
costs. The claim was based on an allegation of fraudulent conduct by
the
defendant; alternatively in terms of s 424 of the Companies Act
61 of 1973. The appellant also claimed special damages, being the
legal costs that it had allegedly incurred in a claim against the
liquidator of Valuefin. The latter claim was stood over by the
court
a quo for later determination.
Factual
Background
[2]
The summary of the particulars of claim provide an accurate
reflection of the facts which led to the dispute: At all material
times, respondent was a director of Paradigm Capital Holdings Limited
('Paradigm Holdings'). Paradigm Direct (Pty) Limited and Paradigm
Select (Pty) Limited, which later changed to Satellite Receiver (Pty)
Limited, were wholly owned subsidiaries of Paradigm Holdings.
During
October 2000, the directors of Paradigm Holdings purported to
conclude an agreement for the cession of certain rental agreements
with Docufin, the trading name of the Document Finance Trust,
alternatively the Digital Copier Trust. In late October/November
2000,
appellant agreed with Paradigm Holdings, which was represented
by the defendant and one Antony Allister Langley, to take cession
from Docufin of the latter's right to title and interest in certain
rental agreements.
[3]
The purchase price for the acquisition by appellant of these rights
was R 6,675,985.00. Appellant would make payment in an amount
of R
4,450,985.00 to Paradigm Holdings and a further sum of R 2,225,000.00
to a party nominated by Paradigm Holdings. It was common
cause that
these payments were made by appellant.
[4]
Appellant's critical allegations are made in paragraphs 8 and 9 of
its particulars of claim as follows:
"8.
The
Plaintiff made payment of the said purchase price on the strength of
the following representations made by the directors of Paradigm
Holdings that:
8.1.
a valid agreement existed for the cession to the plaintiff by Docufin
of Docufin's right, title and interest in and to rental
agreements.
8.2.
Docufin was entitled, in terms of the rental agreements, to receive
payment of monthly subscriptions from various third parties
who were
parties to the rental agreements.
8.3.
in return for payment of the purchase price of R 6,675,985,00 the
plaintiff would acquire the right to receive payment of monthly
subscriptions from third parties in terms of the rental agreements.
9.
The representations were false in that, to the knowledge of the
directors of Paradigm Holdings (including the defendant):
9.1.
Prior to Docufin and/or plaintiff acquiring the rights to the rental
agreements, the rights in the rental agreements had already
been
disposed of to Valuefin (Pty) Ltd;
9.2.
Docufin held no right, title or interest in and to the rental
agreements and would be unable to obtain such right, title and
interest without the agreement of Valuefin, which agreement had not
been and would not be obtained;
9.3
If the plaintiff were to pay the sum of R6,675,985,00, it would
receive no value in consideration of such payment."
The
original monetary amount of the claim was reduced by the time of the
trial on account of settlement payments made by other directors
of
the Paradigm Group in the context of separate proceedings instituted
in the Gauteng High Court
[5]
It was appellant's case that, as a consequence of these alleged
fraudulent misrepresentations made by respondent, appellant, before
the end of November 2000, paid an amount of R 6, 675, 985.00 in
accordance with the agreement but received no value in consideration
of these payments.
[6]
In the alternative, appellant claimed that respondent's conduct had
been reckless in terms of section 424 of the Companies Act
61 of 1973
in that: "He
knowingly
concluded or allowed his fellow directors to conclude on behalf of
Paradigm Holdings agreements for the sale of the same
rental
agreements to different parties, and knowingly allowed Paradigm
Holdings to receive payment of the agreed purchase price in
respect
of these rental agreements from the plaintiff although delivery of
the rental agreements to the plaintiff were
(sic)
not
longer possible."
[7]
To further understand the nature of appellant's claim, it is
necessary to briefly canvass the manner in which business was
conducted,
particularly by Paradigm Direct and Paradigm Select.
Customers would agree to subscribe to the Multichoice Satellite
Service and
to enter into a contract for equipment necessary to
receive and to view the service with Paradigm Select. The contract
would then
be concluded with the customers and Paradigm Direct,
acting on behalf of Paradigm Select, to which the customer would pay
a rental
for the service. In effect, this would constitute a rental
stream for the period of the agreement. At the commencement of its
business,
Paradigm Select was strapped for cash. It was therefore
crucial to both its and Paradigm Holdings' financial future that it
generated
a cash flow by ceding the income streams from these rental
agreements to financial institutions in return for immediate payment
of
a discounted amount and thereby obtain the cash flow that would
enable it to continue to operate and expand its business.
[8]
Initially, Paradigm Holdings ceded income streams from the rental
agreements to New Republic Bank (NRB). The evidence suggests,
however, that NRB was not prepared to pay for all of the income
streams arising from the rental agreements which had been concluded
by Paradigm Select. Further, not all the agreements which had been
sent to NRB were accepted by the latter because it had stricter
credit criteria than that which was adopted by Paradigm Select.
Payment would be made in respect of the agreements accepted and the
remaining agreements would be returned to Paradigm Select which would
then seek to find another financial institution that might
acquire
the income streams at a discount, alternatively advance a loan in a
sum equivalent to the discounted value of the income
streams against
the security of a cession of the rights to collect the income
streams.
[9]
At the end of the period of the agreement and once the income stream
had been paid by the customer to the financial institution
in
question, the agreement would be returned to Paradigm Select as the
agreement had a notice period which, if not invoked by the
customer,
obliged the customer to continue to subscribe to the service and to
continue to rent the equipment, until at least the
end of the notice
period. Thus, the opportunity existed for Paradigm Select to continue
to earn further income from such an agreement.
[10]
During 1998, respondent and his fellow directors were approached by
Boland Financial Services which proposed a securitisation
scheme
which would involve the interposition of a company between Paradigm
Holdings and the financial institution which eventually
took over the
income stream. The purpose of this structure was to insulate the
financial institutions from any consequences of a
liquidation of
Paradigm Holdings or its subsidiaries. To this end, a company was
acquired for this purpose which ultimately took
on the name of
Valuefin.
[11]
The directors were advised that it would be necessary for this
company to have reserves of at least R50 million in the form of
cash
or an income stream from agreements that had been ceded to it to
fulfil this purpose. Each of the five shareholders of the Paradigm
group contributed R5 million. Attempts were then made to raise the
remaining R25 million.
[12]
From its inception, it appears that all the shares of Valuefin were
owned by one Anthony Glass. However, the beneficial shareholders
were
various trusts controlled by Paul and Anthony Glass, Mr Havenga and
respondent, together with a company controlled by a Mr Rimer.
[13]
It appears that agreements which were not ceded to NRB were then
ceded to Valuefin. Valuefin did not only take cession but paid
for
the income streams arising from agreements concluded by Paradigm
Select. It also took cession and paid for the income streams
from
other companies operated by respondent and his colleagues.
[14]
During 1999, the business fortunes of Paradigm took a marked decline.
It appears that respondent and his colleagues were unable
to obtain
an overdraft facility of R25 million that was needed to complete the
securitisation process for which Valuefin had initially
been created,
although shares in Valuefin which were placed through Investec Bank
and various investors had raised R15 million. In
the same year, NRB
was placed under curatorship.
[15]
By September 1999, Valuefin had employed a sum of R40 million which
it had obtained both from its original shareholders and the
share
placement which had been effected by Investec. Accordingly, by the
latter part of 2000, the financial position of Paradigm
Holdings was
desperate. The cession of some rental streams took place between
Valuefin and Saambou and Allianz but other financial
institutions
were reluctant to take cession of rental agreements. Hence, the
insufficient volume of ceded agreements meant that Valuefin
was
unable to support Paradigm Holdings' demand for further funds.
[16]
At this time, respondent and Mr Langley met with Mr Sean Cambier, who
represented Docufin. Docufin was a trust that discounted
or ceded
rental streams from various rental agreements to the appellant,
Bidfin. An agreement was concluded between Mr Cambier and
Mr Langley,
pursuant to which it was agreed that Paradigm Holdings would cede to
Docufin certain rental agreements which had been
concluded by
Paradigm Select in return, upon payment on delivery, of these
agreements to Docufin,
[17]
Pursuant to this transaction, Docufin required a resolution to be
signed by the directors of Paradigm Holdings which authorised
the
latter to enter into the finance agreement with Docufin, providing
for the cession of the rental agreements. That resolution
was signed
by respondent and Mr Langley on 2 October 2000. On 9 October 2000,
the two men signed a deed of suretyship in terms of
which they bound
Paradigm Holdings as surety and co-principal debtor in respect of the
liabilities of Paradigm Holdings and Paradigm
Select in favour of
Docufin. On the same day, respondent and Mr Langley signed a further
resolution in terms of which Paradigm Holdings
agreed to discount
various rental agreements to Docufin. Mr Langley, in his capacity as
director of Paradigm Holdings, was authorised
to sign the relevant
documentation on behalf of Paradigm Holdings. On 10 October 2000,
Docufin formerly ceded the rental agreements,
that were the subject
of its agreement with Paradigm Holdings, to appellant. The
interpositioning of Docufin in the scheme of events
is, however, of
no real importance because it is apparent that it acted throughout as
either an agent of the appellant or as a broker.
[18]
On 24 July 2001, Valuefin was wound-up. During that year Paradigm
Holdings and its other subsidiaries were also wound-up. The
liquidator of Valuefin was Mr C P van Zyl. In the amended first
liquidation distribution accounts which were lodged by Mr van Zyl,
the rental agreements which had been ceded to appellant were treated
as being an asset of Valuefin. Appellant's objection to the
first
liquidation distribution account proved to be unsuccessful and
accordingly the rental streams that were related to the agreements,
but purportedly ceded to appellant, were regarded as being the
property of Valuefin.
[19]
Once appellant was confronted with the problem that the liquidator of
Valuefin considered the assets to be those of Valuefin
and not of
appellant, it considered it had little alternative but to launch the
action which has been the subject of this dispute.
The
decision of the court
a
quo
[20]
The critical evidence which was placed before the court
a
quo
was
given by Mr Clyde Herman who, in 1999, took over the administration
of Valuefin, after having become the financial director of
Paradigm
Holdings in 1998. Mr Herman remained a director until Paradigm
Holdings was liquidated during July 2001. He testified on
behalf of
the appellant. Further significant evidence, on behalf of respondent,
was given by respondent himself.
[21]
In essence, Mr Herman testified that, as soon as the rental
agreements had been signed by the customer, they were ceded to
Valuefin.
Valuefin would then obtain the right to receive the rental
stream from the customer, in effect, without having made any payment
to
the cedant, Paradigm Select. Because respondent would have been
aware of the manner in which the system operated, namely that it
was
Valuefin which acquired the rental agreements by way of cession, he
would have also been aware that the invoices recording the
cession of
the rental agreements to Docufin were 'fictitious invoices'. In Mr
Herman's view, respondent caused the rental agreements
to be ceded to
Docufin because he was desperate to obtain further funds for the
Paradigm group which, by then, was in dire financial
straits.
[22]
Respondent testified that, with the demise of NRB, Paradigm Select
continued to cede income streams which were related to the
rental
agreements to Valuefin, so long as Valuefin had funds to pay for
these cessions. After September 1998, Valuefin no longer
had the
necessary funds and there was thus no commercial justification for
Paradigm Select to continue to cede income streams to
Valuefin on
credit.
[23]
The reason why agreements, that were eventually the subject of the
cession to Docufin, were reflected as being owned initially
by
Valuefin was due to administrative and accounting procedures. In
other words, respondent claimed the only way in which the Paradigm
group could monitor the agreements which were ceded, was to batch
them and then attach them to an invoice made out in the name of
Valuefin. This procedure gave Paradigm Holdings and Paradigm Select
knowledge of the value of the agreements in each batch. In other
words, the fact that an invoice was made out to Valuefin did not, in
itself, prove that Valuefin acquired the income streams which
were
related to the rental agreements by way of cession, but rather that
these invoices had been made out pursuant to administrative
and
accounting policy adopted by the Paradigm group.
[24]
In his decision, Wragge AJ found that the testimony of respondent, to
the effect that invoices which had been made out to Valuefin
regarding the rental agreements which were the subject of the
purported cession to Docufin had reflected the manner in which the
group sought to exercise control over the rental agreements, could
not be rejected. As respondent was in control of both Paradigm
Holdings and Valuefin, the former company was able to transfer the
rental streams in terms of the relevant agreements. For this reason,
the learned judge found that appellant had not discharged the onus of
proving, on a balance of probabilities, that the representation
made
by respondent and upon which appellant relied was false.
[25]
Turning to the claim in terms of section 424 of the Companies Act,
Wragge AJ found thus:
"In
my view, while it is evident that on occasions the separate identity
of the companies within the Paradigm group was disregarded,
there is
insufficient evidence to suggest that Mr Forster conducted the
business of Paradigm Holdings recklessly or with intent to
defraud
creditors. Mr Forster went to some length in his evidence to explain
what motivated him and his fellow directors in establishing
Valuefin.
There was also no suggestion that Multichoice was unaware of the
manner in which the affairs of Paradigm Holdings were
conducted.
Further,
the respects in which it was suggested during argument that the
business of Paradigm Holdings was carried on recklessly or
with
intent to defraud creditors had no relation to the transaction which
is the basis of Bidfin's claim. Having regard to the punitive
effect
of an order in terms of section 424 of the Companies Act, I would in
any event exercise my discretion against making the order
that Bidfin
seeks."
Appellant's
case on appeal
[26]
Mr Cassim who appeared, together with Mr Lamplough, on behalf of the
appellant, submitted that both the evidence of Mr Herman
and
respondent confirmed that the invoices issued by Paradigm Select,
which were evidence of the sale from Paradigm Select to Valuefin,
formed part of the accounting records of Holdings and Select, whereas
the invoices recording the sale from Paradigm Select to Docufin
were
not part of the accounting records of a public listed company. In Mr
Cassim's view, this omission provided external corroboration
for Mr
Herman's evidence that these latter invoices were 'fictitious' and
was indicative of an appreciation by Mr Forster that something
more
was required to make the purported cession of the rental streams by
Paradigm Holdings to Docufin or to the appellant effective.
[27]
Mr Cassim also placed emphasis upon a letter by Nedbank Limited to
the directors of Paradigm Holdings dated 15 November 2000.
The letter
was written in the context of arrangements that the directors of
Paradigm, in particular Messrs Forster and Langley, had
been seeking
to make for increased loan credit from the bank. In this regard a
meeting with the bank's representatives had been held
on 2 November
2000 attended by Mr Forster, amongst others. The bank's letter
referred to the content of this meeting in the following
relevant
respect:
'At
our
meeting of 2 November Tony Langley advised that the unencumbered
debtors (rental agreements) of Valuefin were not available to
us as
security, as these were being held by various financiers as
additional collateral. Tony estimated that only R5m was really
unencumbered. At our first meeting of 7 September we were advised
that +/- R85m was unencumbered. We later took a cession of these
unencumbered debtors believing that we would have title to them.'
In
reply to this letter written on the same date, respondent wrote as
follows:
"At
the
meeting of 07/09/00 I told the forum that we had a rental book of
approximately R300m with borrowings of approximately R145m.
A net
difference of approximately R155m. No discussion took place as to
whether or not they were encumbered. Without asking any questions
or
getting further details you insisted on us signing the cession form.
............
For
at least the third time we enclose annexure A setting out the
position regarding the rental agreements."
Annexure
A to Mr Forster's letter purported to set out the particulars of
various batches of contracts as at 1 October 2000, described
therein
as 'Valuefin Batches 1 to 56 at 1 October 2000'. Mr Forster did not
dispute that the contracts ceded to BOE that were in
part the subject
matter of the cession agreement with the appellant were included in
the contracts described in annexure A to his
letter. In short, there
was no suggestion in any of this correspondence that Paradigm Select
as opposed to Valuefin was the owner
of the rental agreements which
purported to be ceded to Docufin. Furthermore, Mr Forster, in his
reply, did nothing to disabuse Nedbank
of the evident apprehension by
its representatives on the basis of meetings with Forster and Langley
that the rental agreements were
held by Valuefin.
[28]
Mr Cassim also criticised the finding of the court
a
quo
that
Mr Herman's evidence represented a reconstruction of events as
opposed to reflecting direct knowledge of what had occurred at
the
time. According to Mr Cassim, Mr Herman testified directly about the
system that was in place in the Paradigm group for dealing
with these
rental agreements. His investigation established that, prior to the
purported cession to Docufin, Valuefin had never ceded
the relevant
rental streams back to Paradigm Select. In other words, there was
neither the possibility of a re-cession nor had it
occurred. The
evidence of Mr Herman had unequivocally pointed in the direction of
Valuefin being the owner of the rental streams
at the very time that
invoices were created and representations were made to the effect
that Paradigm Holdings and not Valuefin was
the owner thereof. This
explained why the invoices issued by Paradigm Holdings could not be
accepted by the Group's accounting system.
[29]
Mr Cassim further submitted that, whatever the role of Mr Langley,
once it was accepted that the rental streams were owned by
Valuefin,
it followed that respondent, as the person in effective control of
the Paradigm group, was aware of this feature of the
group's
modus
operandi.
He
signed the resolutions and subjectively, must have appreciated that
the agreement to be signed by Mr Langley, coupled with the
delivery
of the underlying agreements, would not, on their own, have the
effect of transferring ownership of the rental streams to
Docufin.
However, he must have foreseen that the appellant, by contrast, would
have believed on the strength of this documentation,
that it had
acquired ownership. In other words, by making the representations in
these circumstances, respondent had reconciled himself
to the
possibility of appellant suffering a loss. Accordingly, his conduct
was intentional; that is he had the intention to defraud
appellant.
Evaluation
[30]
A party which seeks relief on the basis of a fraudulent
misrepresentation, must establish the following elements:
1.
A pre-contractual, incorrect statement;
2.
Which was material or wrongful;
3.
Made by the other party to the contract;
4.
With the intention of inducing the contract or fraudulently;
5.
Which induced the contract to cause the representee to suffer loss.
See
LAWSA: Volume 5 Part I at para 149
[31]
The key requirement which will resolve the present dispute concerns
the intention of inducing the contract or acting fraudulently.
[32]
A false representation is made fraudulently when the maker thereof
has no honest belief in its truth, or makes it recklessly
careless as
to whether it be true or not.
R
v Myers
1948 (1) SA 375
(A) at 382. Further he or she must foresee the
possibility that the representee will act on it to his or her
prejudice. Non disclosure
of a fact is fraudulent if the guilty party
foresees the possibility that failure to disclose that fact will
cause harm to the other
party, for instance, by inducing such party
to enter into a prejudicial transaction. LAWSA: Volume 5 Part I para
149.
[33]
The question which arises is whether the evidence revealed that
respondent made the representation to appellant with no honest
belief
as to its truth or, similarly, in a reckless and careless manner,
foreseeing the possibility that the representee (appellant)
would act
to its prejudice.
[34]
Mr Herman testified that three invoices generated by Paradigm Select
in favour of Docufin which reflected that a cession had
taken place
to Docufin of rental agreements were fictitious and that respondent
had been fraudulent in the generation of these invoices:
"Because
Mr Forster was fully aware of the whole system, that immediately the
agreements are signed by the subscriber they are
onsold to Valuefin
and I think that was the system that was set up right from the
start."
For
Mr Herman the reason was clear:
"He
(respondent)
wanted to get money into the group and - I think the simple reason is
that, to fund the group and also to enable the
group to continue for
another month or two months."
Furthermore,
Mr Herman placed emphasis on Annexure A, which reflected 'Valuefin
batches 1-56 at 1 October 2000. In his view, this
document revealed
that Valuefin owned the particular batches and that 'everyone knew
that those agreements were owned by Valuefin'.
[35]
Viewed holistically the evidence suggests, by contrast, at least to
this extent, that the Allianz group which was reflected in
the
document entitled 'Valuefin batches 1-56 at 1 October 2000' held, by
way of cession, some 7307 contracts. Accordingly, it could
not be
argued that Valuefin, as opposed to Allianz, was the owner thereof.
This evidence showed that Annexure A could not be employed
as
unqualified support for the argument that Valuefin owned all the
contracts reflected in the document. In short, this evidence
called
into question the veracity of annexure A as unequivocal support for
Mr Herman's contention about Valuefin being owner of all
the income
streams.
[36]
Mr Herman's evidence was not entirely convincing when he dealt with
Valuefin's alleged ownership of all the income streams derived
from
the rental agreements. For example, there was clear evidence that
certain rental agreements had been ceded to the Board of Executors
by
Paradigm Select. Under cross-examination, Mr Herman was asked as to
how a cession could take place without Valuefin's participation,
given his earlier testimony that all the rental agreements were
automatically ceded to Valuefin. His reply was particularly vague
as
is illustrated in the following passage from the evidence:
"Are
you saying somewhere in an arrangement with BOE there was an
agreement that Valuefin's documents could be used as security.
â
I
have no idea. Because, you know, I must see all the documentation. It
was five years ago, and you know it's not part of, you know,
this
documentation here. And that documentation. I actually collected all
the documentation. They gave it to the liquidator. And
that's the
last I saw of the documentation. So you don't know about that. âSo
I don't know exactly what documentation was formed,
and I'm only
assuming. I can give you what the accounts show. The accounts show
that the BOE, you know, loan was in the name of Paradigm
Capital
Holdings and the money came into Paradigm Capital Holdings and it was
also shown
in
the financial statements in June that Para - that there was
security
over the Valuefin, you know, rental agreements.
But
that must have been given by Valuefin. â I have no idea. I
don't
remember, and I haven't seen the documentation."
[37]
Significantly, it must be noted that Mr Herman signed the resolution
authorising these cessions to BOE.
[38]
Apart from a justifiable dispute about Mr Herman's account of
Valuefin's ownership of income streams, Respondent provided the
following reason for the role of Valuefin in the transaction
involving appellant. The relevant testimony is the following:
"The
allegation is without foundation and I can explain how these invoices
came to be. The workflow system, as I spoke about
earlier, was that
we entered on each agreement, each contract was entered next to it
which bank had been discounted to. And I'm not
sure if I made the
point earlier, because we jumped around a little bit, but when
agreements were sold to Valuefin it wasn't entered
on there, it was
left blank waiting for who the ultimate owner would be, but those
contracts would be on the system, would be attached
to a batch and
the batch would have an invoice, in this case made out to Valuefin.
So when Valuefin was unable to pay for these transactions,
and
therefore unable to take these transactions, we were able to place
these with Bidfin, and Bidfin required an invoice to pay us
out. But
Paul Allan was unable to generate a system invoice because these
batches had already been allocated in terms of the Valuefin
on the
workflow system, so it was, it required him to journalise that and
reverse those transactions. Because of the urgency of our
requirements to get cash he did a non, this invoice, and Mr Herman is
right, was generated on our normal system, and the reason it
wasn't
because it couldn't be."
[39]
That evidence was not disturbed under cross-examination. In short,
the court was faced with a detailed explanation provided by
respondent as to how it came about that the rental agreements were
reflected in the name of Valuefin. It was common cause that
respondent
controlled both Paradigm Holdings and Valuefin. In other
words, given that respondent considered Valuefin to be no more than a
'nominee'
for the rental streams, his evidence that he could have
caused Paradigm Holdings, through Valuefin to cede the necessary
rental agreements
to appellant cannot be summarily rejected. On the
probabilities, it is difficult to justify the conclusion that
respondent intended,
viewed subjectively, on the available evidence,
to make a false representation in circumstances where he well knew
that the rental
agreements had already been disposed of to Valuefin,
in circumstances where the contract entered into between Paradigm
Holdings and
appellant could never be implemented.
[40]
For these reasons, the contentions relating to fraudulent
misrepresentations cannot be sustained and the court
a
quo
was
correct to so reject them. That, however, leaves for further
consideration the application of section 424 of the Companies Act.
Section
424
[41]
Section 424 (1) of the Companies Act provides as follows:
"(1)
When it appears, whether it be in a winding-up, judicial management
or otherwise, that any business of the company was or
is being
carried on recklessly or with intent to defraud creditors of the
company or creditors of any other 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 of the business in the 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."
[42]
As Wragge AJ held, given that the court
a
quo
did
not act fraudulently in the conclusion of the transactions which have
given rise to the dispute, the only part of section 424(1)
which is
potentially applicable to the present dispute is contained in the
phrase 'that any business of a company was or is being
carried on
recklessly'.
[43]
In support of the submission that respondent had acted recklessly, Mr
Cassim submitted that the fundamental basis for this claim
was to be
found in the invoices which reflected that respondent had allowed a
double sale to take place. The group's books of account,
invoices and
correspondence with other creditors disclosed a sale and cession to
Valuefin while the relevant resolution, which had
been generated,
disclosed to appellant that a cession had taken place to appellant.
This form of accounting justified an inference
of fraud, and if not
fraud at least an inference of gross negligence should follow. This
finding would be sufficient to justify a
claim in terms of section
424. As evidence of recklessness Mr Cassim referred to the letter
generated by Nedbank on 15 November 2000
(quoted in paragraph [27])
which confirmed the contents of a meeting which had been attended to
by both Mr Langley and respondent.
[44]
In short, at the meetings with the Nedbank representatives in
September and November 2000 it was accepted by those who attended,
including respondent, that the rental agreements had been ceded to
Valuefin. It was further argued that, to the extent that certain
of
the agreements were unencumbered, they could be used as security by
Valuefin. This impression was never corrected by respondent,
neither
at the meeting, nor, given the contents of the Nedbank letter,
thereafter. In dealing with Docufin and Bidfin, the respondent
was
party to a representation that Paradigm Holdings held the agreements
and proceeded recklessly in allowing the company to purport
to give
cession of the agreements for consideration in circumstances in which
he must have appreciated that nothing had been done
to transfer them
from Valuefin.
[45]
In his written argument, Mr Forster, who appeared in person,
submitted that the Nedbank letter was manifestly incorrect. He
contended
that it was clear from Annexure A that the majority of the
agreements making up the residual book were not in Valuefin's name;
in
fact only those reflected as Planet Finance/Saambou were in
Valuefin's name. The surplus on Planet/Saambou amounted to only R21m.
Further, the respondent did not reply on behalf of Valuefin but
rather replied on a Paradigm letterhead, i.e. on behalf of the
Paradigm
Group. Mr Forster claimed that this was the reason why the
respondent was so caustic in his reply to the Nedbank letter. But,
this
ex
post facto
rationale,
is insufficient in my view, to explain the reason for respondent's
omission to correct an allegedly fundamental legal misconception
contained in the letter to the effect that Valuefin was the owner of
the agreements. On the contrary, Mr Forster's failure to correct
what
he now claims was a misapprehension on the part of the Nedbank
representatives' evidence supports the inference that the bank's
representatives had been informed that the agreements were held by
Valuefin, which, of course, is consistent with the evidence given
by
Mr Herman.
[46]
The approach adopted by our courts to the phrase 'any business being
carried on recklessly' was set out by Howie JA in
Philotex
(Pty) Ltd and others v Snyman and other
s
[1997] ZASCA 92
;
1998 (2) SA 138
(SCA) at 145 I in which the following dictum from the
judgment in
Ozinsky
NO v Lloyd and others
1992 (3) SA 396
(C) at 414 G-H was cited with approval:
"If
a
company continues to carry on business as 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 is being carried on recklessly."
[47]
In an expansion of this
dictum
Howie
JA went on to say:
"
The
above-quoted approach suggested in Ozinsky is, of course, an
evidential test, not a statement of substantive law. However, it
appears to me to accord recognition to the difference between
negligence, on the one hand, and recklessness, at least in the form
of gross negligence, on the other. Participation in business
necessarily involves taking entrepreneurial risks but s 424 only
penalises
the subjection of third parties to risk where (apart from
the case of fraudulent trading) it is grossly unreasonable. If,
therefore,
in a given case there is some ground for thinking that
creditors will be paid but a reasonable businessman would
nonetheless, because
of circumstances creating a material but not
high risk of nonpayment, refrain from running that risk, the
director who does
run that risk by incurring credit, and thus falls
short of the standard of conduct of the reasonable businessman,
trades unreasonably
and therefore negligently vis-a-vis creditors.
That departure from the reasonable standard could not fairly be
described as gross,
however, and the director concerned would not be
hit by the section. By contrast, an instance that manifestly would
fall foul of
the section is where the reasonable businessman would
realise that in all the circumstances payment would not be made when
due. To
incur credit in that situation would, as a matter of degree,
be so plainly more serious a departure from the required standard
than
the conduct in the first example that one has no difficulty
categorising it as grossly unreasonable and therefore grossly
negligent.
This
second example, one must emphasise, is an extreme one and it would,
in my view, impose an unduly heavy burden on a plaintiff
in s 424
proceedings to require proof of circumstances in which a reasonable
businessman would assess non-payment as a virtual certainty.
So, if a
plaintiff were to present evidence warranting the conclusion that
when credit was incurred there was, objectively regarded,
a very
strong chance, falling short of a virtual certainty, that creditors
would not be paid, that case would, I think, also involve
the
mischief which the section was intended to combat. It is not possible
to attempt to draw the line between negligence and recklessness
more
exactly. Each case must turn on its own facts and involve a value
judgment on those facts".
at
146 -147
[48]
Applied to the present dispute, and objectively considered (which is
the appropriate basis of enquiry), there was a very strong
chance in
the context of the Group's pressing financial predicament, given the
structure that had been adopted with regard to the
cession of rental
agreements to Valuefin (no matter what might have been the internal
arrangement), obviously falling short of a
certainty, that appellant
would suffer financial disadvantage in the manner in which respondent
had sought to structure these rental
agreements; that is without due
regard to the separate legal entities within the group or the law of
ownership as applied to the
rental agreements. Certainly, the
respondent and the other directors involved with the transactions
owed a particular duty in the
circumstances to ensure that the
necessary underlying procedures were followed within the Group so as
to give an effective transfer
of the ceded agreements to the
appellant. Respondent's failure to discharge this duty constituted
reckless conduct in that he must
have appreciated the risk to the
appellant, but failed to do anything at all to address it,
irrespective of what he must or, at least,
should have realised could
be the consequences of this omission. In the context, the
respondent's acquiescence in the issuance of
invoices that could not
be accepted on the Group's accounting system assumes a telling
significance.
[49]
Of further relevance to the present dispute, Howie JA in the
Philotex
(Pty) Ltd
case gave further content to the test of recklessness when he said:
"From
what has been said above regarding the meaning of recklessness and
the objective nature of the enquiry as to its proof,
it will be plain
that a director's honest belief as to the prospects of payment when
due, while critical in a case of alleged fraudulent
trading, is not
in itself the determinant of whether he was reckless. It will be
irrelevant if a reasonable person of business in
the same
circumstances would not have held that belief."
at
147 D
[50]
Respondent must have known that, so long as appellant received
monthly rentals it would not have been aware of the fact that
Valuefin might be the owner of the rental streams. Because respondent
controlled both Valuefin and Paradigm Holdings, he would be
able to
manage the process and therefore satisfy the monthly payments. Yet
under cross-examination, respondent gave the following
answer to the
following: in November 2000 if appellant's payment had not 'come in,
you [i.e. the Paradigm Group] would not have survived
is that right
the Holding company?' to which respondent replied 'we had other
things that we're working on there were other transactions
in the
minutes in the time there was a facility with Reunert so if we
haven't given the money [?rental streams] to Bidfin we would
have
gone to Reunert and use their R5 million.'
[51]
The point is that, absent receipt of appellant's funds and absent a
positive outcome to 'the other things that we were working
on',
Paradigm Holdings would have been forced into liquidation. In short,
it was in a parlous financial situation when the transaction
with
appellant took place. That conclusion was never rebutted by
respondent during his testimony. Indeed, respondent was forced to
concede that the various accounting treatment of the relationship
between Paradigm Holdings and Paradigm Select was incongruent with
the practical position contended for by respondent. An independent
party, as appellant would unquestionably have been misled as to
the
legal position contended for by respondent. The respondent, who was
an experienced businessman and former corporate banking manager
with
one of the leading commercial banks in the country, must have
appreciated that, in the event of the liquidation of the effected
entities within the Group, the accounting records, or the objectively
determinable facts which would be used to construct such records,
and
not his, or any other company officer's
ipse
dixit
would
in all likelihood be taken to reflect the state of the companies'
affairs. What actually transpired after the liquidation of
Valuefin
was therefore eminently foreseeable.
[52]
Precisely, because of the manner in which Paradigm Holdings and its
subsidiary companies chose to reflect the various transactions
relating to the rental agreements, the liquidator of Valuefin was
placed into a position where he could justifiably adopt the view
that
the rental agreements had been ceded to Valuefin. Accordingly, he
concluded that the acquisition by appellant of these agreements
by
way of a cession from Paradigm Holdings were legally invalid. To
this extent, respondent had conducted the activities of the
various
companies in the Paradigm group in a manner which, examined
objectively, placed appellant in a legally and thus financially
vulnerable situation, where the likelihood that it would suffer
financial harm was extremely foreseeable.
[53]
The evidence reveals that the manner in which respondent carried on
the business of the group, while not constituting fraud upon
appellant, blurred the legal boundaries between discrete corporate
entities thereby, creating a situation whereby, in law, one entity
owned less assets than it should have or as it was reflected to the
third parties. In the peculiar circumstances that constitutes
reckless business activity within the scope of section 424(1) of the
Companies Act. Hence, the appellant was entitled to invoke the
provision against respondent. For these reasons therefore, the court
a
quo
erred
in its dismissal of the claim pursuant to section 424 of the
Companies Act.
[54]
In the circumstances, the following order is made:
1.
The appeal is upheld with costs including the cost of two counsel.
2.
The decision of the court
a
quo
is
set aside and replaced with the following order:
2.1
It is declared in terms of s 424 of the Companies Act 61 of 1973
that the defendant was knowingly a party to the carrying on
of the
business of Paradigm Capital Holdings Limited in a reckless manner
and that he shall be personally responsible, without
any limitation
of liability, for the debt of the company arising out of the
company's purported cession of rental agreements to
the plaintiff on
or about 10 October 2000 as recorded in the invoices issued to
Docufin, dated 10 October 2000, 19 October 2000
and 10 November 2000
respectively in the amounts of R1 972 316, 79, R428 048,00 and R4
002 382,56, respectively.
Pursuant
to the aforementioned declaration judgment is granted against the
defendant in the sum of R3,282,861.62 together with
interest
thereon a tempore morae at 15.5 % per annum from date of the
service of summons in the action.
The
defendant is ordered to pay the plaintiff's costs of suit,
including the cost of two counsel;
The
trial of the claim as set forth in paragraph 11.2 of the
particulars of claim is postponed sine die.
DAVIS
J
NDITA
J
I
agree.
BINNS-WARD
J:
[55]
I have had the advantage of reading the judgment of Davis J. I agree
with the finding by Davis J that the court
a
quo
should
have found that the appellant had made out sufficient cause for the
making of a declaration in terms of s 424(1) of the Companies
Act
that the respondent was knowingly party to the carrying on of the
business of Paradigm Capital Holdings in a reckless manner
and for
the granting of consequential relief. Save as set out in the
succeeding paragraphs I also concur in the terms of the orders
made
in terms of the judgment of Davis J.
[56]
It was apparent from the evidence that equivalent proceedings are or
were pending against the respondent's former co-director,
Mr
Langley, in the Gauteng High Court. It appears that the only reason
that proceedings were instituted separately against the
respondent
and Mr Langley was because it was considered by the appellant that
Mr Langley was not amenable to the jurisdiction of
this court. In my
view it would therefore be appropriate, if the proceedings in the
Gauteng Court were to result in a declaration
that Mr Langley should
be personally liable to the appellant either in fraud or in terms of
s 424 of the Companies Act, that the
respondent's liability, in that
event, should clearly be understood to be joint and several with
that of Mr Langley In saying this
I do not wish to be misunderstood
as anticipating in any way the outcome of the proceedings against Mr
Langley, or even to be suggesting
that the appellant is bound to
prosecute them to completion. Equally, I should not wish it to be
misunderstood that the order made
in this case in any way pre-empts
uncompleted proceedings against Mr Langley in the other court on the
same cause of action.
[57]
I would therefore have added the following sentence to paragraph 2.2
of the order made by Davis J:
'The
defendant's liability in terms of this order shall be deemed to be
joint and several with that of Anthony Allister Langley
in the event
and to the extent that Langley is found liable to plaintiff in
respect of the same claim in the proceedings being
prosecuted
against Langley by the plaintiff in the South Gauteng High Court.'
BINNS-WARD,
J