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[2014] ZAWCHC 50
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Nedbank Limited v Spannenberg and Another (5434/2011) [2014] ZAWCHC 50 (3 April 2014)
Republic of South
Africa
IN THE HIGH COURT
OF SOUTH AFRICA
(WESTERN CAPE
DIVISION, CAPE TOWN)
Case
No: 5434/2011
DATE:
03 APRIL 2014
REPORTABLE
In the matter
between:
NEDBANK
LIMITED
....................................................................
Plaintiff
(Registration No.
1951/000009/06)
And
SPANNENBERG,
COLIN PETER
................................
First
Defendant
SPANNENBERG,
YOLINDA AGNES
......................
Second
Defendant
JUDGMENT
DELIVERED ON 3
APRIL 2014
HENNEY, J:
Introduction:
[1] The Plaintiff’s
claim against the Defendants is for payment of the sum of R1 596
587,27 plus interest thereon. In addition,
the Plaintiff seeks an
order declaring the Defendants immovable property (which is their
home and place of residence) specifically
executable and costs.
[2] The Plaintiff’s
claim as set out in the Particulars of Claim is based on the
following:
(a) A written loan
agreement (“the second further bond agreement”) concluded
on 10 December 2007, as subsequently restructured
(“the
restructured agreement”) on 23 June 2008, entered into between
the Plaintiff and the Defendants.
(b) The fact that
the Defendants are in arrears with their monthly repayments due in
terms of the said second further bond agreement.
[3] To this the
Defendants raised in essence two defences namely that:
(a) The underlying
agreement, or scheme, which gave rise to the signing of the second
further bond agreement (annexure A) was void
as being in
contravention of section 38 of the Companies Act 61 of 1973 (“the
Companies Act”) applicable at that time.
Therefore the said
agreement upon which Plaintiff sought to rely was unenforceable.
(b) The second
defence was that the credit advanced in terms of the third home loan
agreement amounted to reckless credit as envisaged
in terms of
Section 80 of the National Credit Act 34 of 2005 (NCA).
[4] During the trial
the evidence mainly focused on the defence in terms of the Companies
Act.
[5] It emerged after
having heard the evidence of the First Defendant that no case was
made out by the Defendants in respect of
the second defence. Mr
Warner appearing on behalf of the Defendant conceded this, and in my
view correctly so. This judgment
will therefore only deal with the
defences in terms of section 38.
[6] Background Facts
During September
2005 the First Defendant (who is, and was married in community of
property to the Second Defendant) was employed
as the branch manager
of the Cape Town branch of Airoad Express (“the Company”).
He had been so employed since about
2000. He was approached by the
director and shareholder of Airoad Express, Mr Mentrup (“Mentrup”),
to buy shares in
terms of which he would acquire 25,1% shareholding
in the company for an amount of R1 079 000,00.
[7] First Defendant
who at that stage only earned R10 500,00 per month, was not able to
afford to pay for the shares. He was informed
by Mentrup that he had
made arrangements with Bruce Potgieter (“Potgieter”), a
business manager in the employ of the
Plaintiff, who were the bankers
of Airoad Express, to facilitate a process whereby he (the First
Defendant) would be able to purchase
the shares.
[8] This process is
set out in a document drafted by Potgieter. The purpose of the
document that was drawn up by Potgieter and/or
signed by the area
credit manager of the Plaintiff, Mr L Nel, and recommended by the
Area Credit Manager of the Plaintiff, G Gouws,
was to review the
financial position of Airoad Express. According to the document, it
was also to approve a request of R1 079
000,00, a medium term loan
for First Defendant who at that stage, was not a client of Nedbank.
[9] In the document
titled “APPLICATION FOR FACILITIES” relating to the
financial position of Airoad Express (page 9
document) , the
Plaintiff’s representative states under paragraph 2:
“We have been
requested to provide medium term loan finance of R1, 079K in the name
of K. Spannenberg to enable the purchase
of 25,1% shareholding in
Airoad Express (Pty) Ltd”.
Then further on the
same page it is stated:
“C Spannenberg
has been with Airoad Express (Pty) Ltd for the past five years and is
employed as the Cape Town Branch Manager.
The Board’s turnover
in 2000 amounted to R10K per month, which has grown to R140K per
month. Currently ….”
[10] Then further …
“Customers that have previously dealt with Airoad Express (Pty)
Ltd [were] forced elsewhere as
a result of non BEE compliance include
Ellerines who has 500 stores nationally. Ellerines gave notice to
Airoad Express (Pty)
Ltd two years ago that they would channel their
distribution elsewhere should they not be BEE compliant by February
2006.”
On page 10 of the
report it is further stated by Potgieter:
“In support of
the requested MTL we will be provided with R476K tangible security
(variation agreement) that will be raised
via available security in
Spannenberg’s Cape Town property.
The requested MTL to
be paid over a five year period. Spannenberg’s cost to company
earnings will be increased to meet this
monthly instalment
(additional R22K per month). We will register a bond over
Spannenberg’s property but will only place
reliance on this
security at 80% of the valuation current outstanding back with ABSA
amount to +- R110K.”
[11] Then on page 11
Potgieter of the Plaintiff makes the following recommendations:
“Given the
satisfactory conduct of the group together with the acceptable
trading results in February 2005 reflecting on going
profitability
with retained earnings of R1,5 million would fully recommend
continuation of facilities as currently extended including
request
for MTL finance of R1,079K and R570K RHL in the name of Spannenberg
against variation agreement over the equity available
in the RHL as
security for the requested MTL.
In view of the run
debt would further recommend key man insurance together with
contingent liability cover be made a condition of
facilities
extended?
In the same document
later on the same page the credit manager Nel of the Plaintiff in
paragraph 3 comments … “The
MTL will be at 44% tangibly
secured given the fact that the company will be increasing
Spannenberg’s package to include the
repayment, affordability
is not the question. Spannenberg’s bond will be taken over
from ABSA, the variation agreement must
be drawn up to secure the
available equity in support of the MTL”.
[12] To give effect
to the intention of the parties, which was to enable the First
Defendant acquire the shares in the company,
the following
transactions took place:
12.1 The First
Defendant after being contacted by one of the Plaintiff’s
representatives on 17 September 2005 signed an “Application
for
Home Loan”.
12.2 On 17 October
2005 the First Defendant met with Potgieter in Mentrup’s office
at the premises of Airoad Express and signed
a medium term loan
agreement in his name for R1 079 000,00 in order to buy shares in
Airoad Express (“the first medium term
loan”). He also
signed as director of Airoad Express (although he was as yet at that
stage neither a shareholder nor director
of the company) a
notification of cession of the loan funds.
12.3 At the same
meeting he also signed a Deed of Suretyship in terms whereof he bound
himself as surety and co-principal debtor
to Plaintiff for the
repayment by Airoad Express of all monies owed by Airoad Express.
12.4 According to a
debit order authority given to the Plaintiff by Airoad Express and on
the written instructions of Mentrup, the
monthly repayments in
respect of the first medium term loan agreement for R1 079 000,00
would be deducted from the bank account
of Airoad Express held at the
Plaintiff bank.
12.5 Thereafter, on
18 October 2005 a day after the signing of the medium term loan,
Airoad Express and Mentrup sold to the First
Defendant 25,1% of the
shares in Airoad Express for a purchase price of R1 079 000,00 . On
30 November 2005 the First Defendant’s
gross monthly salary was
increased from the previous monthly gross of R10 583,00 to R55
000,00.
12.6 From the salary
advice of the First Defendant the monthly instalment due to the
Plaintiff in respect of the medium term loan
was deducted from the
R55 000.00 monthly salary. The first such deduction, from his
November salary, was R24 338,55 and the monthly
instalment was then
debited from Airoad Express’s account on or about 7 December
2005. This continued until February 2007
and during this time all
monthly instalments continued to be debited from the bank account of
Airoad Express.
12.7 The First
Defendant on 5 December 2005 signed a Housing Loan Agreement with the
Plaintiff (“the bond agreement”)
with account number
863121000101. In terms of this agreement a mortgage bond in the
amount of R576 000,00 would be registered
over the Defendants’
immovable property known as Erf 6270 Parow situated at 33 Jansen
Street, Parow. From this amount it
was agreed that R457 115,71 was
to be retained, as security for the first medium term loan (R1 079
000,00), the balance was to
be used to settle the Defendants’
previous bond with Absa on the property mentioned above and for the
payment of conveyancer’s
fees. According to Potgieter the
monthly repayment amount was calculated on the basis of the monies
drawn from the medium term
loan account and as such, until the
security component was used/withdrawn, the Defendants did not pay for
same on a monthly basis.
These monthly repayments were debited from
First Defendant’s account at Standard Bank.
12.8 On 9 February
2007, the Defendant signed a further Agreement of Loan constituting a
housing loan under the same account number
with the Plaintiff. In
terms of this further bond agreement a mortgage bond in the amount of
R224 000,00 was to be registered
over the Defendants’ property.
R217 630,45 of this amount was to remain in the account as further
security for the first
medium term loan.
12.9 On 15 March
2007, the First Defendant, at the request of Potgieter, authorised
the transfer of R679 000,00 from the bond account
to the credit of
the account of Airoad Express . The amount was apparently
transferred, to reduce the first medium term loan,
on 5 April 2007.
12.10 On 4 April
2007, the Defendant signed a further medium term loan agreement with
the Plaintiff in the amount of R158 719,89.
Just as in the case of
the first medium term loan the monthly instalments in respect of this
loan were to be debited to the account
of Airoad Express. The sum of
R158 719,89 was then used on the next day 5 April 2007, to settle the
balance, then outstanding,
of the first medium term loan.
12.11 On 10 December
2007, a second further bond agreement in the amount of R1 340 000,00
was signed by the Defendants with the
Plaintiff. It essentially
consolidated the amounts in terms of the original bond agreement, the
first further bond agreement,
and this agreement.
12.12 This second
further bond agreement was as such linked to the earlier agreements
and this is evident from paragraph 4 of his
agreement where it is
stated that:
“It is a
special condition of this Agreement that payment is made to Nedbank
out of the proceeds of the loan of the client’s
outstanding
indebtedness to Nedbank in respect of loan account number …”
12.13 In terms of
this bond agreement, a further bond in the amount of R540 000,00 was
to be registered against the Defendants’
property. As such the
total amount of R1 340 000,00 was made up of R576 000,00 being the
first bond, and R224 000,00 being the
second bond, and R540 000,00
being the third bond. The monthly repayments would be R16 103,63.
12.14 On the
evidence, there was a disagreement as to whether the Defendants had
received the full benefit of the R540 000,00 as
the additional amount
raised in terms of this bond. According to Potgieter the Defendants
received R370 000,00 which had been
used to pay a building contractor
who made some renovations to their house, plus an amount of R170
000,00, which was used to cover
an overdraft or bridging finance in
connection with the renovations. The First Defendant however
testified that they only received
approximately R350 000,00 which
they utilized towards renovations to their home. The First Defendant
contended that R119 372,35
had been used to on 19 June 2008 to settle
the balance outstanding on the second medium term loan.
12.15 As is clear
from a further report by Potgieter dated 28 May 2008, regarding the
financial position of Airoad Express, on
page 4 of the document, the
Plaintiff, as at such date, had a “lien” over a banking
account (call account) in the name
of the Airoad Express as security
for the medium term loan in the name of the First Defendant.
[13] The Defendants
were struggling to keep up with the payments in terms of the second
bond agreement and on 23 June 2008 signed
a restructured agreement.
Despite this arrangement the Defendants could still not keep up with
the payments and stopped making
the monthly payments during or about
September 2009.
Arguments
[14] Mr Warner who
appeared on behalf of the Defendants, argued that the underlying
medium term loan agreement which gave rise to
the signing of the
second further bond agreement was void as being in contravention of
section 38 of the Companies Act 61 of 1973
(“the Companies
Act”), which was applicable at that time, and as such the said
agreement upon which the Plaintiff sought
to rely was unenforceable.
[15] According to
him the Plaintiff was at all material times prior to the conclusion
and during the implementation of the first
medium term loan agreement
aware, that the purpose of the R1 079 000,00 first medium term loan
was to enable the First Defendant
to buy shares in Airoad Express.
Plaintiff was also aware that in order to meet the monthly instalment
due to pay off this loan,
Airoad Express increased the First
Defendant’s monthly cost to company earnings and gross income
from R10 583,00 to R55 000,00.
The Plaintiff was furthermore aware
that Airoad Express was to pay Plaintiff the monthly instalment of
the first medium term loan.
This was not deducted from the First
Defendant’s bank account but from that of Airoad Express.
This repayment
source of the monthly instalment, in respect of the first medium term
loan would be, inter alia, the cashflow of
Airoad Express according
to the evidence of Potgieter.
[16] According to Mr
Warner, Mr Potgieter conceded in argument that Plaintiff would not
have advanced the loans had it not been
for Airoad Express’s
involvement. Mr Warner argued further that it was apparent from the
evidence of Potgieter that no less
than four bank officials
(including himself) had insight into, or were involved in, the
application for facilities by Airoad Express.
[17] He further
argued that Potgieter conceded in cross-examination that the taking
out of the second medium term loan would not
have benefitted the
Defendants and the only party who would have benefitted thereby would
have been Airoad Express whose monthly
instalments would have, as a
result, decreased.
[18] He further
argued that if regard is to be had to the manner in which the
financing of the purchase of the shares in Airoad
Express was
effected, such scheme did not (for want of compliance with the
various requirement thereof) fall within the ambit of
Section 38(1)
of the Companies Act. For this argument he placed reliance on the
decision of Lipschitz NO v UDC Bank Ltd
1979 (1) SA 789
(AD) that an
agreement in contravention of Section 38 is void and unenforceable
and further submitted that it is clear from the
evidence that the
invitation to the First Defendant to become a shareholder in Airoad
Express was only expedient in order to increase
the company’s
BEE compliance and nothing more than that.
[19] He further
submitted that since the First Defendant was not able to afford to
pay for the purchase price of the shares, Airoad
Express then
directly and or indirectly rendered (or caused to be rendered) the
necessary financial assistance to Spannenberg.
This was done, so he
argued, by:
a) Arranging the
medium term loan (and subsequent loans) with the Plaintiff and, in
order to meet the commitments to the Plaintiff;
b) Inflating
Spannenberg ‘salary’ by approximately 500%;
c) ‘Deducting’
the monthly instalments due to Plaintiff (in terms of the first
medium term loan) from Spannenberg’s
inflated salary;
d) Providing
security to the Plaintiff for the loan advanced to Mr Spannenberg;
and
e) Paying him a
marginally increased net income.
[20] Thus he
concludes that the conduct of Airoad Express was in contravention of
section 38 of the Companies Act.
[21] Mr Warner
submitted that the Plaintiff was, as illustrated by the evidence,
through its employees in the course and scope of
their employment,
aware of the purpose for which the loan was given and was only
willing to advance the loan to the First Defendant
because of the
involvement of Airoad Express and also obtained security from Airoad
Express.
[22] The Plaintiff
was or should reasonably have been aware that the granting of the
loan in such circumstances was in contravention
of section 38(1) of
the Companies Act. The initial and subsequent related medium term
loan was void and unenforceable.
[23] Mr Warner
further submitted that the so-called “housing loans” and
related mortgage bonds (all of which were under
the same account
number) were all, to varying degrees, granted and registered for the
purpose of providing security for the void
medium term loans, and are
as such also unenforceable.
[24] Finally, Mr
Warner argued that although the Plaintiff has handed up a Certificate
providing prima facie proof of the Defendants’
indebtedness, it
has failed to lead related evidence as to how such sum is calculated.
According to Mr Warner if the court should
find that the various
loan agreements are void and unenforceable. He then further states
that Plaintiff failed to prove what amounts,
if any, is due and
payable by the Defendant pursuant to the re-allocation of payments
made to the amounts by which the Defendants
admit that they
benefitted.
[25] Mr Bremridge on
behalf of the Plaintiff submits that the Defendants case is not only
factually incorrect but it is also bad
in law in a number of
respects.
[26] Even if the
Plaintiff did contravene the section, the Defendants did not seek to
have the original agreement for the acquisition
of shares set aside
(and have not joined the seller of the shares in those proceedings),
so that the relief sought by the Defendants
would result in the
untenable position that the agreement for the First Defendant’s
acquisition of the shares would stand
and he would retain the shares
(which would be shown to be valuable), but would be excused from
repaying the funds he utilized
to acquire them.
[27] In developing
this argument, he submitted that the law would not countenance a
position where the agreement which the Defendant
alleges to
contravene section 38 of the Act would stand but subsequent
agreements with third parties, certain of which concluded
years
later, should be held void because they are alleged to be somehow
related to the allegedly infringing but unchallenged agreement.
[28] He further
submitted that the Defendants’ case fails to distinguish
between the transaction which is alleged to provide
for amount to the
provision of financial assistance in contravention of section 38, and
the separate agreements which contain no
obligation or term for the
provision of financial assistance by the company.
[29] Mr Bremridge
further argued that it disregards the principles of severability as
applied by the courts in relation to transactions
which are alleged
to contravene section 38, by failing to properly distinguish between
the home loan agreement and the mortgage
bonds registered to secure
them.
[30] To this end he
emphasized that the Plaintiff’s claim is for the repayment of
the funds advanced under the home loan agreement
while the mortgage
bonds serve only to secure such liabilities. The prohibition under
section 38(1) cannot be used as a remedy
or escape clause available
to purchasers of shares in companies to enable them to avoid their
agreements for the acquisition of
shares and all related agreements.
This would be a fundamental misconception and misapplication of the
provision of section 38.
[31] He relied on
the decision of Lewis v Oneanate (Pty) Ltd and Another
[1992] ZASCA 174
;
1992 (4) SA
811
(A), where it was held (at 818B) that:
“The object of
a provision such as s 38(1) is the protection of creditors of a
company, who have a right to look to its paid-up
capital as the fund
out of which its debts are to be discharged. (see Trevor v Whitworth
(1887) 12 AC 409
(HL) at 414.) The purpose of the legislature was to
avoid that fund being employed or depleted or exposed to possible
risk in consequence
of transactions concluded for the purpose of or
in connection with the purchase of its shares.”
[32] It was
submitted that the home loan and mortgage agreements which the
Defendant seeks to declare unenforceable, if measured
against the
purpose of section 38, clearly do not offend against the provision of
section 38 because they do not constitute agreements
which were
concluded for the purchase of shares in the company in question,
Airoad Express. The said agreements also do not contain
any
provision for the company to give financial assistance for the
purpose of the acquisition of its shares or otherwise.
[33] Mr Bremridge
further argued that the Defendant bore the onus to prove that the
agreements it wishes to declare void and unenforceable
contravene
section 38 of the Act (narrow approach).
[34] The Plaintiff
argued that there was no substance to the Defendants’ position
that because the first medium term loan
for the amount of the
purchase of the shares acquired by the First Defendant, was void.
Therefore all the subsequent loan agreements
(whether home loan or
term loan) concluded with Plaintiff are also void. Plaintiff argued
that the term loan agreement does not
create any legal obligation on
the company Airoad Express to make repayment of the amount of the
loan advanced to the First Defendant.
[35] Furthermore, it
was argued that there can be no suggestion that the agreement is in
contravention of section 38, unless the
court is satisfied that the
salary payment and the set-off of the instalment against such salary
is fictitious and that the Plaintiff
was aware that this was a
fictitious salary paid to the First Defendant and a party thereto.
[36] Such a
conclusion so Mr Bremridge argued is totally against the evidence
which showed that the salary paid to the First Defendant
was properly
accounted for in the books of the company and that statutory
deductions for PAYE and UIF were made and are accounted
for in
respect thereof, as well as other deductions for medical aid and a
staff loan. Furthermore, as the liability under the
term loan was
reduced, the First Defendant’s net salary increased over time
from under R10 000,00 to over R27 000,00. The
reasons for this
increase were due to him becoming a shareholder and director as well
as his worth to the business as a BEE shareholder.
The Plaintiff was
therefore entitled to accept that the salary increase was
commensurate with the First Defendant’s increased
status and
position.
[37] Mr Bremridge
emphasized in argument that the first medium term loan did not impose
any legal obligation on the company to attend
to the repayment of the
loan and the deduction from the company’s account was in
essence a matter of administrative convenience.
This fact cannot be
construed to deny the reality that the obligation to repay the loan
lay solely on the First Defendant. The
payment was later accounted
against the First Defendant’s salary.
[38] It was argued
that the mere fact that the First Defendant’s salary was
increased upon him becoming a shareholder and
director is not unusual
and the fact that such increase was used to acquire shares does not
constitute a contravention of section
38 unless it was shown to be
fictitious.
[39] It was
submitted on behalf of the Plaintiff that the Defendants’
reliance on the case of Saambou Nasionale Bouvereniging
v Ligatex
(Pty) Ltd 1976 (1) 868 (E) is misplaced. This case was concerned
with a situation where the company in which the shares
were acquired
raised a loan in its own name and secured a bond over the company’s
property in circumstances where the lender
knew that the company
intended to use the loan for the purposes prohibited by section 38.
The company in that instance was the
borrower under the loan
agreement and granted a bond over its own assets. The facts in this
case are entirely different.
[40] Mr Bremridge
contended that even if a transaction is deliberately constructed to
avoid the prohibition in terms of section
38, it does not per se mean
that it contravenes the provisions thereof. For this proposition he
relied on the dictum of Peters
and Others NNO v Schoeman and Others
[2000] ZASCA 152
;
2001 (1) SA 872
(SCA) at 880.
[41]
In the light of
the above, Mr Bremridge argued the Defendants have not satisfied the
onus of showing that the first medium term
loan agreement contravened
section 38 of the Act.
[42] Mr Bremridge
continued that the further agreements are therefore also not
susceptible to challenge under section 38 of the
Act. The defence
therefore under section 38 must fail in its entirety.
[43] In the
alternative, Mr Bremridge argued that even if the court were to be
satisfied that the first medium term loan did constitute
a
transaction which contravened section 38 of the Act, this cannot
extend to the home loan agreements concluded and certainly not
to the
restructure agreement concluded in 2008, being entirely separate and
severable agreements. The purchase price according
to Mr Bremridge
was paid solely out of the proceeds of the first medium term loan.
[44] It was
submitted that in order to find that any of the home loan agreements
contravened section 38, the court would have to
find that these
agreements imposed some obligations on the company Airoad Express or
had the effect that Airoad Express thereby
rendered financial
assistance for the purpose of the purchase of the shares.
[45] Under these
home loan agreements Airoad Express bore no obligation to the
Plaintiff and it was not a party thereto. According
to Mr Bremridge
the evidence showed that the Defendants bore the sole obligation to
repay the amounts advanced under the home loan
agreements and in
particular the Restructure Agreement. All the instalments were to be
collected against the Defendants personal
Standard Bank account.
[46] In these
agreements the Second Defendant (Mrs Spannenberg) was also a party to
the home loan agreement as borrower and mortgagor,
though she was not
a party to the term loan agreements.
[47] It was argued
that for the purpose of section 38 neither the home loan agreements
nor the Restructure Agreements or the mortgage
bonds that secure the
obligations thereunder contain any element to the effect that Airoad
Express provided financial assistance
for the purpose of the
requisition of its shares.
[48] Mr Bremridge
stated that it may well be that the First Defendant took money from
his loan account to pay off a portion of the
term loan obligation to
the Plaintiff. That fact however does not have the effect that the
home loan agreement had been converted
or transformed into an
agreement whereby Airoad Express provides financial assistance for
the acquisition of its shares.
[49] The Defendants’
case, according to Mr Bremridge, is based on a legally unsound
premise that if the agreements are somehow
related to a prohibited
transaction, this enables the court to strike down all the
agreements. This argument is not in line with
the legal position,
that only if the court were to find that the agreements were
indivisible or inseparable, than under such circumstances
it will be
struck down.
[50] According to Mr
Bremridge after having referred to the decision of Lipschitz NO v UDC
Bank Ltd (supra) and Vernon and Others
v Schoeman and Another
1978
(2) SA 305(D)
that the court do not apply section 38 on the basis of
one element of a transaction may offend the provision, the entire
transaction
is to be declared invalid.
[51] He thus
accordingly argued that even if the first medium term loan were held
to contravene section 38 of the Act, it does not
mean that the
subsequent home loan agreements and mortgage bonds must be held to be
agreements in contravention of the provisions
of section 38 for the
provision of assistance by Airoad Express for the acquisition of its
shares.
[52] Relevant
Statutory Provision – Section 38 of the Company Act 71 of 1973
reads as follows:
“(1) No
company shall give, whether directly or indirectly, and whether by
means of a loan, guarantee, the provision of security
or otherwise,
any financial assistance for the purpose of or in connection with a
purchase or subscription made or to be made by
any person of or for
any shares of the company, or where the company is a subsidiary
company, of its holding company.
2) The provisions of
subsection (1) shall not be construed as prohibiting—
a) the lending of
money in the ordinary course of its business by a company whose main
business is the lending of money; or
b) the provision by
a company, in accordance with any scheme for the time being in force,
of money for the subscription for or purchase
of shares of the
company or its holding company by trustees to be held by or for the
benefit of employees of the company, including
any director holding a
salaried employment or office in the company; or
(c) the making by a
company of loans to persons, other than directors, bona fide in the
employment of the company with a view to
enabling those persons to
purchase or subscribe for shares of the company or its holding
company to be held by themselves as owners;
or
(d) the provision of
financial assistance for the acquisition of shares in a company by
the company or its subsidiary in accordance
with the provisions of
section 85 for the acquisition of such shares.”
[53] Issues for
Consideration
The first issue for
consideration is whether Airoad’s actions in facilitating the
initial loan agreement between the first
defendant and the Plaintiff,
and its inflation of the former’s salary, amounted to the
provision of financial assistance
given by the company Airoad Express
to the First Defendant for the purpose of or in connection with the
purchase for the 25,1 %
shareholding in the company, in contravention
of section 38 of the Companies Act.
If the answer to
this question is yes, the further question arises whether the first
medium term loan as between the Plaintiff and
the First Defendant was
consequently invalid and unenforceable. The further questions are
whether the subsequent home loan and
mortgage loan agreements entered
into between the Plaintiff and Defendant, and in particular, the
second further bond agreement
and subsequent restructure agreement,
are also invalid and unenforceable for want of compliance with the
provisions of section
38 of the Companies Act. A related issue is the
severability of the subsequent loan and mortgage agreements.
[54] Analysis
The question is
whether the conduct of this company amounts to financial assistance
for the purposes as set out in section 38.
In Lipschitz NO v UDC
Bank Ltd (supra) at 797D, it was held that …”The
prohibition against the giving of financial
assistance is couched in
very wide terms. It relates to “any” financial
assistance, whether given “directly
or indirectly” and it
relates, moreover, to such assistance not only when it is given for
the purpose of the purchase of
or subscription for any shares in the
company, but also if it is given in connection with such purchase or
subscription.”
[55] It is clear
from the evidence that First Defendant, when he was approached by
Mentrup of Airoad Express to acquire the shares
was a branch manager
of the company earning R10 583,00 per month. He had to purchase the
shares at a cost of R1 079 000,00. He
was unable to raise this money
and was introduced to the bankers of the company, Nedbank
(“Plaintiff”), to provide
a medium term loan for this
purpose.
[56] The Plaintiff
was at all times aware of the purported purpose of the loan as
previously pointed out, (see para 9 supra) as
is clear from the
document titled “APPLICATION FOR FACILITIES” relating to
the financial position of Airoad Express,
where the employees of the
bank stated: “We have been requested to provide medium term
loan finance of R1 079K in the name
of K. Spannenberg to enable the
purchase of 25,1% shareholding in Airoad Express (Pty) Ltd.”
[57] For the purpose
of acquiring the shares, the First Defendant was promoted to a
Director and his salary was increased by 500%
to R55 000,00 per
month. It needs also to be mentioned that he was also appointed to
this position because of his worth to the
company as a BEE
shareholder.
[58] The company
gave the Plaintiff a debit order authority to deduct the monthly
repayments of the loan from the bank account it
held at the
Plaintiff’s bank. This amounted to approximately R24 338,55
per month which was later deducted from the salary
of First
Defendant.
[59] The Plaintiff
stated in the document “APPLICATION FOR FACILITIES” under
subheading “Security for medium term
loan facility” at
page 10 , “The requested medium term loan to be repaid over a
five year period. Spannenberg’s
costs to company earnings will
be increased to meet this monthly instalment (additional R22K per
month). He will register a bond
of R720K over Spannenberg’s
property but will only place reliance on this security at 80% of the
valuation.”
[60] On page 11 of
the same document under subheading Credit Manager’s Comments,
at paragraph 3 he says: “The MTL will
be at least 44% tangibly
secured, given the fact that the company will be increasing
Spannenberg’s package to include the
repayments, affordability
is not in question. Spannenberg’s bond will be taken over from
Absa – the variation agreement
must be drawn up to secure the
available equity in support of the medium term loan.” During
evidence, Potgieter of the Plaintiff
conceded that the Plaintiff
would not have advanced the loans had it not been for Airoad
Express’s involvement.
[61] For section 38
to be contravened two elements have to be present. The first element
is that there has to be financial assistance.
This includes the
giving of a loan, a guarantee and the provision of security. The
second element is the purpose for which the
financial assistance is
given. According to R Cassim and MF Cassim
2007 SALJ 37
–47 at
page 41, in the article, “Gardner v Margo: A misapplication of
section 38 of the Companies Act”, if the
first element of
section 38 is satisfied, in that financial assistance has been given
by the company, then in order to determine
whether section 38 has
been contravened it must still be determined whether the financial
assistance was given “for the purpose
of or in connection with
a purchase or subscription … of or for any shares of the
company within the meaning of the section.”
[62] The authors
goes on to say the following, “The courts have drawn a
distinction between the “ultimate goal”
of a transaction
and its ‘direct object’, and have laid down that it is
the direct object that is relevant in determining
whether section 38
had been contravened, as opposed to the ultimate goal.”
[63] In my view, the
evidence shows overwhelmingly that the company by appointing the
First Defendant as Director and by increasing
his salary, thereby
enabling him to purchase the shares, which he was previously unable
to do, gave him financial assistance to
do so. The salary increase
to purchase the shares came directly from the company. In my view,
the “direct object”
was the provision of financial
assistance to purchase the shares.
[64] The financial
assistance did not come from an independent source. The First
Defendant’s salary had to be increased in
order for him to have
been granted the first medium term loan of R1 079 000,00 to purchase
the shares in the company. This increase
was effected by the
company. The funding therefore to pay off the loan to purchase the
shares came from the company. The company
played a pivotal role in
assisting First Defendant to acquire the loan and it made sure that
the loan was paid off by inflating
his salary. By doing this, it
financed the monthly repayments of the medium term loan.
[65] According to
the Plaintiff at that stage the medium term loan would be “at
least 44% tangibly secured” given the
fact that the company
would be increasing First Defendant’s package to include
repayments, and that “affordability
was not in question”.
This is a clear indication that the company increased First
Defendant’s salary to enable him
to pay off the loan which was
granted to him by the Plaintiff to buy the shares in the company.
This in my view clearly falls
within the conduct prohibited by
section 38.
[66] Henochsberg on
the 1973 Companies Act at 74 – 75 , commenting on section 38,
states that:
“Subsection
(1).—The prohibition applies to every company having a share
capital, whether it is a public company or
a private company, and
irrespective of the proportion of the capital constituted by the
share or shares involved (Karroo Auctions
(Pty) Ltd v Hersman
1951
(2) SA 33
(E) at 37). It applies whether the financial assistance is,
or would be, given to the purchaser or the subscriber or to another,
provided it is, or would be, given for the purpose of, or in
connection with, the purchase or subscription (Jacobson v Liquidator
M Bulkin & Co Ltd
1976 (3) SA 781
(T) at 787–788; Armour
Hick Northern Ltd v Armour Trust Ltd
[1980] 3 All ER 833
(Ch) at
837).”
“The
prohibition . . . comprises two main elements; one is the giving of
financial assistance, the other is the purpose for
which it is given
(or the ‘in [Page 75] connection with’ provision). The
two elements are linked to form a single prohibition,
but although so
linked they are vitally different in concept” (per Miller JA in
Lipschitz NO v UDC Bank Ltd
1979 (1) SA 789
(A) at 799). It is
respectfully submitted that the fundamental enquiry in each case
involving a sale of shares is whether the effect
of the particular
transaction is that the company has given, or would give, financial
assistance and, if so, was it, or would it
be, given for the purpose
of, or in connection with, the purchase of the shares (Gradwell (Pty)
Ltd v Rostra Printers Ltd
1959 (4) SA 419
(A) at 424–426 as
explained in the Lipschitz case supra at 798–801; and see at
803–805; Miller v Muller
1965 (4) SA 458
(C) at 465–466;
Zentland Holdings (Pty) Ltd v Saambou Nasionale Bouvereniging
1979
(4) SA 574
(C) at 577–578). “In Gardner v Margo
[2006] 3
All SA 229
(SCA), the Court approved the distinction drawn in the
Gradwell case between the “ultimate goal” of the
transaction
and the “direct object” of the transaction,
and that it is only the “direct object” which is relevant
thus
(at 243): “If the direct object is not the provision of
financial assistance by the company for the purpose of or in
connection
with a purchase of its shares, then it is irrelevant if
the ultimate goal of the transaction is to enable the person to
purchase
such shares.” See R Cassim and MF Cassim
2007 SALJ
37
–47 for a discussion of the Gardner case supra.”
Henochsberg further
states at page 75:
“If the
purpose of the company in giving the financial assistance was not, or
would not be, in fact the purpose of the purchase
of its shares (ie
the prohibited purpose), it cannot be held that the giving of such
assistance was, or would be, “in connection
with” the
purchase of the company’s shares, within the meaning of the
subsection, unless the actual purpose sufficiently
closely resembles
the prohibited purpose (ibid at 804–805). For an example of a
case where it was held that the purpose of
the transaction was too
remote from the prohibited purpose, see Pires v American Fruit Market
(Pty) Ltd
1952 (2) SA 337
(T). The prohibition in s 38 (1) is “not
contravened when the direct object of the transaction is merely to
give another
that to which he or she is already entitled”
(Gardner case supra at 243 d–e), since in those circumstances
the direct
object of the transaction is not the giving of financial
assistance.”
[67] In my view,
therefore, the medium term loan granted to the First Defendant by the
Plaintiff in order for the former to acquire
the shares in the
company was advanced by the Plaintiff to the First Defendant, with
the knowledge of the Plaintiff which is financial
assistance by the
company in contravention of section 38.
[68] The next
question that arises, is whether the subsequent home loan agreements
were entirely separate and severable agreements,
whose validity for
the purposes of section 38 of the old Companies Act must be judged on
their own terms. The Plaintiff reminded
the Court that to find that
any of the home loan agreements contravened section 38, it had to
find that they imposed obligations
on the company Airoad Express or
had the effect that Airoad thereby rendered financial assistance for
the purpose of the purchase
of its shares. The Plaintiff, however,
argued that the company in the circumstance bore no obligation to the
Plaintiff as lender,
in respect of the home loan agreements, and was
in fact not a party thereto.
[69] Counsel for the
Plaintiff argued indeed, that such agreements are indeed entirely
separate and severable, drawing attention
to the facts that, firstly,
the defendants bore the sole obligation to repay the amounts advanced
under the home loan agreements
and the Restructure Agreement and all
instalments were to be collected against the defendant’s
personal account, and secondly,
the agreements were concluded with
the second defendant as borrower and mortgagor.
Counsel relied on
the judgment of Vernon & Others v Schoeman & Another (supra)
where Hefer J (as he then was) held at 307H:
“It is trite
that, where an agreement contains an unenforceable provision, the
whole agreement is not necessarily void and
that the enforceability
of its other provisions depends on whether they are severable from
the unenforceable one.”
[70] The Plaintiff’s
contentions in my view are not consistent with the true facts of this
case and the facts in this case
are distinguishable from that in the
Vernon v Schoeman case (supra). While it is true that these
agreements were solely between
the Plaintiff and Defendants, it was
inextricably linked to the medium term loan agreement which the
Plaintiff advanced to the
First Defendant to acquire the shares in
the company. In Lipschitz NO v UDC Bank Ltd (supra) at 807G –
808A – D it
was held:
“The primary
question whenever a Court is asked to uphold the good while rejecting
the bad part of a contract is whether the
contract is divisible in
that respect. (In Spink's case supra at 601 the relevant portions of
the agreement were held to be "perfectly
severable".) Here
we are concerned with a provision as to guarantee which was
undoubtedly inserted for the benefit of the
lender, UDC. Clearly, UDC
could elect not to prefer any claim on the cross-guarantee. But that
circumstance alone does not render
the agreement divisible. It is
true that the cross-guarantee was in form a separately executed
contract of suretyship between UDC
and the signatories thereto but,
in the circumstances of this case, it would be unrealistic in the
extreme to regard it as independent
of, or as anything other than an
agreement fully integrated with, the loan agreement. It is very clear
that UDC was prepared to
lend to Ubco the sum of R87 000 only if
certain conditions, including the provision of the eross-guarantee,
were met. U
DC required not only
each of the companies to bind itself as guarantor, but it also
required Baker, who controlled all three companies,
so to bind
himself. The aim, clearly, was to obtain the greatest possible degree
of cover for this, the second loan, and at the
same time to increase
the cover in respect of the money already advanced in terms of the
first loan. The separate document recording
the cross-guarantee was
undoubtedly an essential and integral part of a design for the
obtaining of the second loan and it was
no less an integral and
inseverable part of such design and of the loan agreement than it
would have been had all been contained
in one document signed by all
the parties concerned and clearly reflecting the provision of the
cross-guarantee as a condition
of the granting of the loan. The
agreement of loan, therefore, was in breach of s 86 bis (2) and
illegal and I am unable to accept
(with due respect to certain
observations made by CROSS J in the South Western Mineral Water case
supra at 958B - E) that it could
thereafter be rendered lawful by a
decision by UDC not to found a claim on the cross-guarantee or by any
other unilateral act by
UDC or any one of the parties to the
agreement.” (own emphasis)
[71] Right from the
onset, the Plaintiff insisted that a bond be registered over the
property as security for the medium term loan
of R1 079 000,00
advanced to procure the shares in the company. In its “APPLICATION
FOR FACILITIES” at page 10 under
the heading “SECURITY
FOR MTL FACILITY” the Plaintiff indicates that it will register
a bond of R720K (value of First
Defendant’s property) but will
only place reliance on this security at 80% of the valuation which is
R576 000,00. At that
stage there was clearly no need for the
Defendants, who had an outstanding bond of R108 000,00 with Absa, to
register a bond with
the Plaintiff over their property in the amount
of R576 000,00 other than to secure the medium term loan. Thereafter
a second bond,
once again, of R224 000,00 was registered over the
Defendants’ property of which R217 630,45 was to remain in the
account
as further security for the first medium term loan.
[72] On 15 March
2007, an amount of R679 000,00 was transferred from the bond account
to credit the account of Airoad Express.
On 4 April 2007 the First
Defendant signed a further medium term loan agreement in the amount
of R158 719,89. The monthly repayments
in respect of this loan were
to be debited to the bank account of Airoad Express. This sum of
R158 719,89 was then used to settle
on 5 April 2007 the balance
outstanding of the first medium term loan.
[73] On 10 December
2007, the Defendant signed a further agreement of loan under the same
account of R1 340 000,00, the amount now
claimed in terms of the
Particulars of Claim.
[74] The total
amount was made up of R576 000,00 (the first bond to secure the
medium term loan) plus R224 000,00 being the second
bond to secure
and pay off the medium term loan advanced to acquire the shares and
an amount of R540 000,00. The home loans in
respect of the amounts
of R576 000,00 and R224 000,00 were used as security for the medium
term loan which was used to acquire
the shares. These loans were
advanced for no other reason than to secure the medium term loan and
cannot be regarded as separate
from it.
[75] Just as in the
Lipschitz case the Plaintiff in this case insisted that a separate
agreement be concluded in terms of which
a bond and a home loan were
advanced to secure the loan in terms of which the shares were
purchased. The Plaintiff clearly would
not have granted the medium
term loan had this condition not have been met.
[76] The Plaintiff
was a third party to the agreement between the company and the First
Defendant and was aware of the assistance
given to the First
Defendant. Henochsberg at 77 as supported by AJ Kerr
1976 SALJ 3
; R
C Beuthen 1976 Annual Survey 306 – 307 and AN Oelofse in
General Note 55-57, contrary to the decision of Manufacturers
Development Co (Pty) Ltd v Diesel and Auto Engineering Co
1975 (2) SA
776
(W), where the author states:
“But an
agreement between the company and a third party – ie someone
other than the seller or the purchaser of the shares
– by which
eg the company obtains money which it intends to use in contravention
of s 38(1) is not void where the third party
is unaware of such
intention (Saambou Nasionale Bouvereniging v Ligatex (Pty) Ltd
1976
(1) SA 868
(E)). Notwithstanding Manufacturers Development Co (Pty)
Ltd v Diesel & Auto Engineering Co
1975 (2) SA 776
(W), it is
respectfully submitted that if the third party knows that the
performance in terms of his agreement with the company
is to be used
by the latter to contravene s 38(1), such agreement is void (cf AJ
Kerr
1976 SALJ 3
; RC Beuthin 1976 Annual Survey 306–307; AN
Oelofse op cit in the General Note 55–56). It is also void, it
is respectfully
submitted, if it is an inseparable part of an
agreement by which the company gives, or is to give, financial
assistance, within
the meaning of s 38(1) (Lipschitz case supra at
807–808).”
I agree with this
contention and I am of the view that the same reasoning can be
applied in this case in relation to a situation
where a third party
(bank) knowingly (prospective shareholder) aided and facilitated the
company to financially assist another
in acquiring shares in that
company.
[77] This is clear
from the evidence of Potgieter. And also what was contained in the
Plaintiff’s document entitled “APPLICATION
FOR
FACILITIES” about how it set out to assist and aid Airoad
Express in facilitating the First Defendant to acquire the
medium
term loan to buy the shares in the company. It also obtained security
from Airoad Express for this purpose. Plaintiff throughout
was or
ought reasonably have been aware that the granting of the medium term
loan in such circumstances was in contravention of
section 38 of the
Companies Act.
[78] These two home
loans can therefore not be severed from the prohibited agreement
because it was used to secure the agreement
in contravention of
section 38 and it is inextricably linked to it. It is not a separate
agreement independent from the first
medium term loan agreement. In
the result therefore I find that the initial and subsequent medium
term loan void and unenforceable.
I also find that the housing loans
and mortgage bonds in the amount of R576 000,00 and R224 000,00
granted and registered for
the purpose of providing security for the
void medium term loan are also unenforceable.
[79] This brings me
to the next question, which is the amount that the Defendants are
indebted to the Plaintiff where it was not
used for the purposes of
acquiring the shares.
[80] There was
disagreement on the evidence as to whether or not Defendants had
received the benefit of the full amount of R540
000,00.
[81] Mr Potgieter
testified that Defendants had received the full benefit of the R540
000,00; R370 000,00 having been used to pay
the building contractor
and R170 000,00 to cover an overdraft or bridging finance used before
hand in connection with the renovations.
First Defendant testified
that they had received the benefit of approximately R350 000,00 that
was used towards the renovations
and that, ultimately, R119 372,85
had been used, on 19 June 2008, to settle the balance outstanding on
the second medium term loan.
[82] It is difficult
to find on the evidence whether the Defendants are indebted to the
full amount of R540 000,00, as submitted
by Plaintiff, to make up the
final amount of R1 340 000,00, or to the amount of R350 000,00 which
the Defendants admit that they
are indebted to the Plaintiff. From
the evidence it is common cause that the amounts of R576 000,00 plus
R225 000,00 were used
from the home loans to pay off the medium term
loan.
[83] The Defendants
also admitted that they have received the further benefit of R108
109,33 that was paid to settle their bond
with Absa. These amounts
according to the evidence constitute the only lawful benefit the
Defendants have received in terms of
the loans advanced by the
Plaintiff and which they are liable to pay.
[84] Although the
Defendants conceded that they are indebted to the Plaintiff in the
amounts of R350 000,00 and R108 109,33, it
would be unfair to dismiss
the Plaintiff’s case in its entirety where a concession was
made that they are at least indebted
in the amount as mentioned. Mr
Bremridge argued that as a result of this dispute, as to how exactly
the R540 000,00 was utilized
further evidence should be led to
quantify the amount owing if the Court should find that there is a
reduction in the amount due
to the provisions of section 38.
[85] Mr Warner on
behalf of the Defendants argued that absolution from the instance be
granted against the Plaintiff in respect
of any claims that may have
arisen pursuant to the Defendants’ admission that they had
benefitted from certain income advanced
by the Plaintiff.
[86] Whilst I
understand the dilemma Mr Bremridge found himself in, I am not sure
whether it is legally permissible for this court
at the end of the
proceedings, during the judgment stage, to make such an order. I am
however more inclined to follow the route
suggested by Mr Warner and
I have found authority for this proposition.
In Herbstein and Van
Winsen Vol 1 (5ed) at 924 it is stated …”Although there
is no express provision in rule 39 for
an order for absolution from
the instance at the conclusion of the whole case, the practice to
grant absolution when a Plaintiff
has not established the facts in
support of his case to the satisfaction of the court, has been
extended to cases in which evidence
for the Defendant had also been
given.”
In Zeffert and
Paizes (formerly Hoffman and Zeffert), the Law of Evidence (2nd ed)
at 178 the authors hold the view that …
“It is the
appropriate order when after all the evidence the Plaintiff has not
discharged the ordinary burden of proof.
Its procedural advantage is
that it enables the Plaintiff to bring another action on the same
facts; a privilege which is denied
to the Defendant of the facts in
an action in which the burden is upon him.”
And further at 933
the learned author states:
“In civil
cases it should be noticed that the practice of granting absolution
from the instance tends to mean that finality
is sauce for the
defendant but not for the plaintiff. A plaintiff who fails to prove
his case may claim that the court should
order absolution rather than
judgment in favour of the defendant and this gives him a right to a
new trial. So, in Deintje v Grains
and Gratus, the Appellate
Division refused leave to adduce further evidence but altered the
order of the court below from judgment
for the defendant to
absolution. In such a case the court’s choice is not between
re-opening the case and finality, but
between re-opening one issue
and re-opening them all. Logically, therefore, the only
consideration in making the choice should
be whether the opposing
party might be prejudiced by not having the other issues retried, but
so far the courts have not attempted
to relate the rules for
permitting further evidence to the practice of granting absolution.”
[87] I am therefore
in agreement with Mr Warner when he called for the court to make such
an order.
[88] Order
In the result I make
the following order:
1) That the
Plaintiff’s claim based upon, or arising from, the medium term
loan for R1 079 000,00 (including the subsequent
medium term loan and
all “bond” loan agreements) is dismissed;
2) That absolution
from the instance be granted against the Plaintiff in respect of any
claims that may have arisen pursuant to
the Defendants’
admission that they had benefitted from certain monies advanced by
the Plaintiff;
3) That mortgage
bonds No.’s B138021/2005 (in the amount of R576 000,00) and
B22367/2007 (in the amount of R224 000,00) registered
over the
Defendants’ immovable property known as Erf 6270, Parow and
situate at 33 Jansen Street, Parow, are invalid and
unenforceable;
and
4) Mortgage bond
B18842/08 also registered over the Defendants’ immovable
property as mentioned (in the amount of R540 000,00),
is also invalid
and unenforceable only insofar as it relates to the indebtedness
which the Defendants have not admitted to.
5) Plaintiff pays
the Defendants’ costs.
HENNEY, J
Judge of the High
Court