Grancy Property Limited and Another v Gihwala and Others; InRe: Grancy Property Limited and Another v Gihwala and Others (1961/10; 12193/11) [2014] ZAWCHC 97 (26 June 2014)

About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Western Cape High Court, Cape Town
SAFLII
>>
Databases
>>
South Africa: Western Cape High Court, Cape Town
>>
2014
>>
[2014] ZAWCHC 97
|

|

Grancy Property Limited and Another v Gihwala and Others; InRe: Grancy Property Limited and Another v Gihwala and Others (1961/10; 12193/11) [2014] ZAWCHC 97 (26 June 2014)

IN THE HIGH COURT
OF SOUTH AFRICA
[WESTERN CAPE
DIVISION, CAPE TOWN]
Case
No: 1961/10
DATE:
26 JUNE 2014
In the matter
between:
GRANCY PROPERTY
LIMITED
.............................................................................
First
Plaintiff
MONTAGUE
GOLDSMITH AG IN
LIQUIDATION
........................................
Second
Plaintiff
And
DINES CHANDRA
MANILAL
GIHWALA
......................................................
First
Defendant
LANCELOT LENONO
MANALA
................................................................
Second
Defendant
SEENA MARENA
INVESTMENTS (PTY)
LTD
............................................
Third
Defendant
DINES CHANDRA
MANILAL GIHWALA NO
..........................................
Fourth
Defendant
SHANTI GIHWALA
NO
..................................................................................
Fifth
Defendant
KANTIELAL JERAM
PATEL
NO …
.............................................................
Sixth
Defendant
NARENDRA GIHWALA
NO
......................................................................
Seventh
Defendant
KIRAN GIHWALA
NO
.................................................................................
Eighth
Defendant
NGATANA PROPERTY
INVESTMENTS (PTY) LTD
................................
Ninth
Defendant
And
Case
No: 12193/11
GRANCY PROPERTY
LIMITED
......................................................................
First
Plaintiff
MONTAGUE
GOLDSMITH AG IN LIQUIDATION
..................................
Second
Plaintiff
And
DINES CHANDRA
MANILAL GIHWALA
.................................................
First
Defendant
LANCELOT LENONO
MANALA
..........................................................
Second
Defendant
SEENA MARENA
INVESTMENTS (PTY) LTD
......................................
Third
Defendant
DINES CHANDRA
MANILAL GIHWALA NO
.....................................
Fourth
Defendant
SHANTI GIHWALA
NO
..............................................................................
Fifth
Defendant
KANTIELAL JERAM
PATEL
NO
............................................................
Sixth
Defendant
NARENDRA GIHWALA
NO
...............................................................
Seventh
Defendant
KIRAN GIHWALA
NO
...........................................................................
Eighth
Defendant
NGATANA PROPERTY
INVESTMENTS (PTY) LTD
.........................
Ninth
Defendant
BRUK MUNKES &
CO
.........................................................................
Tenth
Defendant
HYMAN
BRUK
................................................................................
Eleventh
Defendant
MINISTER OF TRADE
AND INDUSTRY
.......................................
Twelfth
Defendant
JUDGMENT
DELIVERED: 26 JUNE 2014
FOURIE, J:
INTRODUCTION AND
BRIEF BACKGROUND
[1] The above
consolidated actions form part of protracted litigation between
plaintiffs and a number of defendants. The actions
were instituted on
29 January 2010 and 17 June 2011, respectively, and are conveniently
referred to as the 2010 and 2011 actions.
The relief sought by
plaintiffs in the actions is wide-ranging and aims to impose
liability upon a number of defendants in terms
of a variety of causes
of action.
[2] During the
course of the trial, it became clear that the claims are advanced by
first plaintiff only, as the role played by
second plaintiff was that
of an investment adviser to, and a representative of, first
plaintiff. With regard to the defendants,
third defendant did, at the
commencement of the trial, withdraw its defence and abides the
decision of the court. No relief is
sought against ninth defendant,
whilst a settlement was reached, before the commencement of the
trial, between plaintiffs and tenth
and eleventh defendants. The
twelfth defendant is the relevant executive authority joined in the
proceedings for purposes of the
determination of the constitutional
issue, to which I will in due course refer.
[3] As appears from
pages 140 to 178 of the 2010 action, second and third defendant’s
instituted claims in reconvention against
the plaintiffs. Third
defendant, who abides the decision of the court, has not pursued its
claim in reconvention. On 13 February
2014 (the seventh day of the
trial) second defendant formally withdrew his counterclaim and
tendered the wasted costs occasioned
thereby.
[4] The main role
players in the events giving rise to the litigation, are the
following:
4.1 The first
plaintiff (“Grancy”), a company duly incorporated under
the laws of the British Virgin Islands, with principal
place of
business in Vaduz, Principality of Liechtenstein.
4.2 The second
plaintiff (“MG”), a company with principal place of
business in Zurich, Switzerland.
4.3 Mr. KI Mawji
(“Mawji”), a British citizen permanently resident in the
United Kingdom, who was at all relevant times
the directing mind and
will of Grancy and MG.
4.4 Mr. AK Narotam
(“Narotam”), at the relevant time the Chief Operating
Officer of MG.
4.5 The first
defendant (“Gihwala”), at the relevant time a practising
attorney of the High Court of South Africa and
chairman of Hofmeyr,
Herbstein and Gihwala Inc. (“HHG”). Gihwala has been a
director of third defendant (“SMI”)
from June 2003 until,
at least, 28 February 2011. He is also and has been a director and
chairman of ninth defendant (“Ngatana”)
since March 2006.
4.6 The second
defendant (“Manala”), a director of companies who has
been a director of SMI since June 2003 until his
registration on 18
September 2011. He has also been a director of Ngatana since October
2004.
4.7 The Dines
Gihwala Family Trust (“DGFT”), as represented by its
trustees, the fourth to eight defendants. The evidence
shows that
Gihwala was the managing trustee of the DGFT.
[5] Central to the
actions and the issues which arise, is an investment in linked units
in Spearhead Property Holdings Limited (“Spearhead”).

Spearhead is a commercial property loan stock company listed on the
Johannesburg Securities Exchange. It wished to attract black

investors with the potential to add value to its assets and
operations and to raise further capital. Ngatana is a black economic

empowerment company, which took up units in the Spearhead investment.
SMI, of which Gihwala and Manala were then the only shareholders,
had
been offered a 40% shareholding in Ngatana, while another investor ,
namely Bonitas Medical Fund, had been offered an 18% shareholding
in
Ngatana. However, Bonitas decided not to take up this shareholding in
Ngatana.
[6] In January 2005,
Gihwala approached Narotam, a close friend of his, with the
suggestion that MG should take up this 18% shareholding
in Ngatana.
He explained that, because the offer of Spearhead units to Ngatana
was an empowerment transaction, it would be advisable
for MG to take
up the 18% through SMI. MG would fund the purchase by SMI of the
additional 18% shareholding in Ngatana, and would
become the third
shareholder in SMI, with Gihwala and Manala. SMI would then have a
58% shareholding in Ngatana.
[7] On 3 February
2005, and at the Sandton Sun Hotel, Johannesburg, Gihwala, Narotam
and Mawji met, and concluded an agreement (“the
February 2005
agreement”), with regard to the anticipated investment in
Spearhead units, via the two special purpose vehicles,
i.e. SMI and
Ngatana.
[8] This agreement
serves as the foundation for the 2010 and 2011 actions, as well as
several other proceedings instituted by plaintiffs
during the course
of the protracted litigation between the parties. I will, when
necessary, refer to such other proceedings in
more detail.
[9] The plaintiffs
contend that, those defendants against whom they seek relief in the
2010 and 2011 actions, have breached their
obligations arising from
the February 2005 agreement, and these alleged breaches of contract
form the basis for the relief sought
against them.
THE NATURE, TERMS
AND CONDITIONS OF THE FEBRUARY 2005 AGREEMENT
10] As mentioned
above, the meeting at which this agreement was arrived at, was
attended by Gihwala, Narotam and Mawji. At the trial
Mawji testified
on behalf of plaintiffs regarding the conclusion of the February 2005
agreement, while defendants decided not to
call any witnesses to
testify on their behalf. Narotam had, subsequent to February 2005,
left MG and it appears that, at the time
when this trial commenced,
he found himself in the defendants’ “camp”. The
minute of a pre-trial conference recorded
that Narotam would be
called as a witness to testify on behalf of the defendants. This did
not happen. There is accordingly no
viva voce evidence presented by
defendants to gainsay the evidence of Mawji, as to what was discussed
and agreed upon at the meeting
of 3 February 2005.
[11] According to
Mawji, the material terms of the agreement agreed upon orally on 3
February 2005, are the following:
11.1 The plaintiffs
(as subsequently transpired, through the medium of Grancy), Gihwala
and Manala would pursue the Spearhead investment
by utilising the two
special purpose vehicles, SMI and Ngatana. I will hereinafter refer
to the three contracting parties to the
February 2005 agreement, as
Grancy, Gihwala and Manala, respectively.
11.2 Gihwala, Manala
and Grancy would each hold a one third share in SMI. SMI, in turn,
would hold a 58% share in Ngatana. Ngatana
would hold the Spearhead
linked units. Gihwala and Grancy also agreed to provide Manala with a
loan to finance his investment in
SMI.
11.3 Manala and
Gihwala would be the directors of SMI and SMI would also, by virtue
of its majority shareholding, be in control
of Ngatana and its board
of directors.
11.4 The Spearhead
investment as contemplated under the agreement, would be implemented,
managed and controlled by Gihwala and Manala.
[12] Mawji explained
that, as Grancy and those in control of it, in particular Mawji and
Narotam, were based abroad, they placed
their trust and faith in
Gihwala and Manala to keep proper control of the investment. Mawji
says that he did not know Manala at
the time, but he was acquainted
with Gihwala and some background checking showed that Gihwala was a
highly respected attorney and
businessman. He was, at the time, the
chairman of HHG, a major South African law firm.
[13] On 21 February
2005, Gihwala sent an e-mail to Narotam in which he sought to
“regularise” the relationship of the
parties. In the
main, the e-mail sets out the financial contributions to be made by
the three parties to the February 2005 agreement.
Each would be
responsible for payment of an amount of R1 976 833-33, while the
e-mail confirms that MG (Grancy) and Gihwala would
lend Manala his
share by means of a contribution of R988 416-66 each. Gihwala also
confirmed that SMI had incurred costs of approximately
R225 000-00 in
setting up the deal and that, in respect thereof, the three parties
would accordingly be liable for payment of R75
000-00 each. Finally,
Gihwala recorded that he proposed drafting an agreement in due course
whereby he and Manala would acknowledge
MG’s (Grancy’s)
one third share “in our holding company”, namely SMI.
[14] It is common
cause that Gihwala did not in due course attend to the finalising of
a written agreement setting out the rights
and obligations of the
relevant parties. It is further common cause that Grancy had
subsequently complied with the financial obligations
undertaken by it
in terms of the February 2005 agreement. Gihwala too complied with
his financial obligations, but I should mention
that he made it
through the medium of the DGFT, with the result that the latter, and
not Gihwala personally, took up the shareholding
in SMI. Manala, by
means of the loans made to him by Grancy and the DGFT, took up his
agreed shareholding in SMI. Notwithstanding
continued insistence by
Mawji that, in terms of the February 2005 agreement, Grancy was
entitled to take up its agreed shareholding
in SMI, this did not
happen until much later, as the events detailed hereinafter, will
show.
[15] Returning to
the nature and terms of the February 2005 agreement, it was stressed
by Mawji that, having regard to the peculiar
circumstances, this was
an agreement underpinned by confidence, trust and utmost good faith.
In its pleadings Grancy has labelled
the agreement as one of
partnership, alternatively agency. Grancy therefore contends that the
implied and tacit terms, that one
would normally find in an agreement
based on a close relationship such as a partnership or agency, are
applicable in the instant
case. In my view, there can be no doubt
that this was an agreement underpinned by confidence, good faith and
trust. In this regard
it has to be borne in mind that this was the
first time Mawji had done business with Gihwala and Manala, with
Manala being completely
unknown to Mawji. Mawji would be physically
remote from the investment and therefore reliant on Gihwala and
Manala to keep him
advised of any development in regard thereto. What
is of significance too, is the fact that a decision whether or not to
participate
in the investment, had to be made on 3 February 2005,
while the necessary finance had to be made available soon thereafter.
[16] In these
circumstances, it is fair to say that Mawji, who is permanently
resident in the United Kingdom and Grancy, a foreign
company, would
be wholly reliant upon Gihwala and Manala to keep control of the
investment and to protect Grancy’s interests.
Furthermore,
Gihwala and Manala were the sole directors of SMI and also served as
directors of Ngatana, with the result that they
could be seen as
being able to exercise a measure of control over these two special
purpose vehicles.
[17] In view of the
aforesaid, I am in agreement with the submission on behalf of Grancy,
that the testimony of Mawji, regarding
the relevant surrounding
circumstances and of matters which would have been present to the
minds of the contracting parties on
3 February 2005, established the
basis for a finding that, apart from the express terms to which I
have already referred, the February
2005 agreement was subject to the
following implied or tacit terms:
17.1 that Gihwala
and Manala, and through them SMI, would keep proper and full books of
account and such accounting records as would
be necessary fairly to
present the state of affairs and business of the investment.
17.2 that Grancy
would be allowed full access to such books and records.
17.3 that Gihwala
and Manala would apprise Grancy of any material information, events,
changes and/or contemplated changes relating
to the investment in
Spearhead linked units.
17.4 that Gihwala
and Manala would seek Grancy’s approval in respect of all
decisions materially related to this investment.
17.5 that Grancy
would be entitled, without delay, to the full economic benefit
arising from its contribution to the investment.
In particular, the
proceeds of the investment would be distributed to Gihwala, Manala
and Grancy as soon as any profits on the
investment were available
for distribution.
17.6 that, as SMI
was a special purpose vehicle for pursuing the investment in
Spearhead units, all dividends flowing from Ngatana
would, subject to
the deduction of necessary costs and expenses, promptly be declared
and paid as dividends in favour of SMI’s
shareholders.
17.7 that, save as
may be subsequently agreed by Grancy, Manala and Gihwala, no
investments other than the investment made in Spearhead
units through
Ngatana, would be made by SMI.
[18] I have
mentioned that Grancy has labelled the February 2005 agreement as one
of partnership, alternatively an agreement of
agency. The defendants,
on the other hand, contend that, all that the February 2005 agreement
amounted to, was an agreement that
Grancy would be entitled to a
shareholding in an investment company, namely SMI. They accordingly
submit that Grancy’s rights
and obligations in relation to the
other shareholders (the DGFT and Manala) are confined only to those
of a shareholder, governed
by the Articles of Association and
Memorandum of Incorporation of SMI and company law generally.
[19] I do not agree
with this narrow view that Grancy was to be nothing more than a
shareholder in SMI. As held earlier, I am of
the view that the
evidence clearly shows that this was an investment agreement
underpinned by confidence, trust and good faith,
on the terms
referred to hereinabove. The shareholding in an investment company,
i.e. SMI, is but one facet of the overarching
agreement concluded by
the relevant parties. The position taken by the relevant defendants
that Grancy is merely a shareholder
in SMI, is gainsaid by the
detailed evidence given by Mawji as to the nature and terms of the
agreement.
[20] That it was not
the intention of the parties to the February 2005 agreement, to have
the investment and the rights and obligations
of the investors
regulated only in accordance with the rights and obligations
governing the shareholders of SMI inter se, is underscored
by the
fact that Mawji was not, prior to investing, provided with copies of
SMI’s Memorandum and Articles of Association
and that he did
not insist on a shareholders’ agreement being drawn up before
committing to the investment and paying over
substantial sums of
money. Mawji struck me as being an astute businessman, and I find it
difficult to believe that, had this only
been an investment in SMI,
he would have committed himself thereto without having taken steps to
obtain such documentation. His
conduct rather shows that he depended
entirely on his “partners”.
[21] It may be so
that Grancy’s labelling of the agreement is not correct. It
seems to me that one of the essentialia of a
partnership agreement,
namely to carry on business for the joint benefit of all the
partners, is not present in the February 2005
agreement. This
requirement is stated as follows in the Law of South Africa, Second
edition, volume 19, at para. 261:
“This
requirement implies, in the first place, that a partnership cannot be
formed if each party is entitled to obtain an
individual benefit from
the business. Thus, for example, an investment in shares cannot be a
partnership if the object is not to
make a profit jointly, but that
each party, individually, should obtain half of the shares for his
exclusive advantage.”
See also Novick v
Benjamin
1972 (2) SA 842
(A) at 851.
[22] In Botha v
Coetzee (459/09)
[2010] ZASCA 90
(31 May 2010), two investors agreed
to acquire properties by using a company as a vehicle for such
acquisition. The one would initially
hold all the shares in the
company as a matter of convenience, but on request he would transfer
50% of the shares to the other.
The Supreme Court of Appeal commented
as follows on the nature of the contractual relationship, at para. 9:
“It follows
from this summary of the terms of the agreement that it was not a
partnership in the legal sense but rather something
akin to
one-probably a joint venture if a label is necessary. In any event,
the terms of the agreement, if established in due course,
provide a
cause of action, albeit not one based on partnership.”
[23] The fact that
Gihwala, Manala and Grancy would, in terms of the February 2005
agreement, each obtain one third of the shares
in SMI for his/its
exclusive advantage, indicates that this was not a partnership
agreement in the legal sense. Insofar as it may
be necessary to
provide a label for the agreement, I believe that the description of
a joint venture agreement, as suggested in
Botha v Coetzee, supra,
would be legally more acceptable. However, as pointed out in Botha v
Coetzee, supra, at para. 7, the question
is not whether the agreement
is correctly called a partnership, but what the terms of the
agreement were and whether those terms
could provide a cause of
action.
[24] I should also
add that it is not uncommon that members of a company may have claims
inter se, arising from a special relationship
between them, unrelated
to the affairs of the company. Blackman, Commentary on the Companies
Act, Volume 2, refers to this unique
position under the rubric
“Domestic companies or quasi-partnerships” at pages 9-138
to 9-138.1, as follows:
“Although a
limited company is a legal entity with a personality in law of its
own, there is room in company law for recognition
of the fact that
behind it or amongst it the members may have rights, expectations and
obligations inter se which are not necessarily
submerged in the
company structure. In such a case, some of the principles applicable
to the relationship between partners come
into play, even though the
shareholders of the company concerned are not necessarily found to
have been in substance partners.
Our law thus recognises that in the
relationship between shareholders in a company there may at one and
the same time be a formal
pecuniary nexus and also an intuitus
personae, a special relationship of mutual personal trust. Where that
relationship is breached
that may constitute a ground for relief
under s252 or, even where the breach is dehors the affairs of the
company, a ground for
a winding up order on the just and equitable
grounds in s344(h). But, at least in certain circumstances, these
rights may also
be directly enforceable by the member whose rights
have been infringed.” See also Rentekor (Pty) Ltd v Rheeder and
Berman
NNO and Others
1988 (4) SA 469
(T) at 500 D-G.
[25] In Hulett and
Others v Hulett
[1992] ZASCA 111
;
1992 (4) SA 291
(A), it was held that the
relationship subsisting between the three members of a limited
liability company was one based upon trust
and confidence and that,
apart from their rights inter se as shareholders, they would also, as
individuals, have rights, expectations
and obligations internally,
which are not necessarily submerged in the company structure. At
307I-308A, the court concluded as
follows:
“In the
instant case the picture which emerges from the evidence reveals
that, within the external structure of the company,
the relationship
between the shareholders which existed internally was one which may
be loosely described as a ‘quasi-partnership’.
A more
precise legal tag need not be appended. The crucial fact of the
matter is that the members of the trio considered themselves
as being
partners…and that they appreciated that good faith is required
from a partner in his dealings with his co-partners.”
[26] In Erasmus v
Pentamed Investments (Pty) Ltd
1982 (1) SA 178
(W) at 188-9, Nestadt
J (as he then was) said the following in this regard:
“Nevertheless
it is apparent that the relationship between the directors was more
than a purely commercial one; that an understanding
or at least a
contemplation that the original shareholders of respondent, whilst
they remained such, would also be and remain directors,
thus
participating in the management of the company, is to be inferred. As
Mr. Du Toit put it, the partnership relationship outside
the company
characterised the relationship of the shareholders inside it…An
alternative, although related, finding which
is, I consider, at least
prima facie, justified is that it was tacitly agreed that a personal
relationship of confidence and trust
should exist between the
directors and shareholders and that the Kobrin faction breached it.”
[27] I have already
found that, on 3 February 2005, a joint venture agreement was
concluded between Gihwala, Manala and Grancy on
the terms and
conditions set out above. This gave rise to contractual and fiduciary
obligations owed by these parties inter se,
which, if breached, would
provide the innocent party with a contractual remedy against the
co-contracting party who breached the
terms of the agreement. The
fact that the three contracting parties in this matter made use of
special purpose vehicles, and, in
particular SMI, in which they each
would have a one third shareholding, does not detract from the
contractual relationship between
them, based upon trust and good
faith. Such contractual rights and incidental remedies would be
separate from and additional to
any rights which the innocent party
may have in his or its capacity as a shareholder of SMI. Put
differently, the shareholdings
in SMI represented merely one facet of
the overarching joint venture agreement and the rights of the
participants in the joint
venture, are not restricted to such rights
as they may derive from their shareholding in SMI.
[28] In view of the
conclusions reached above, it follows that the defendants’
reliance on the rule in Foss v Harbottle [(1943)
[1843] EngR 478
;
2 Hare 461
; 676
ER159], is misplaced. This rule embodies the principle that, where
harm is wrongfully caused directly to the company and indirectly
to a
shareholder, the right to pursue an action for compensation, is given
to the company and not to the individual shareholder.
There are
exceptions to the rule in Foss v Harbottle, such as the employment of
a derivative action, a procedural device that allows
a shareholder to
act on the company’s behalf in enforcing its rights. See
section 266 of the Companies Act, 61 of 1973 (“the
1973
Companies Act”) and section 165 of the Companies Act, 71 of
2008 (“the 2008
Companies Act&rdquo
;).
[29] As I see it,
the present actions of Grancy are not based upon a wrong caused
directly to SMI and indirectly to Grancy, but
a claim pursued in
Grancy’s own right by virtue of the alleged breach by one or
more of the contracting parties to the February
2005 agreement,
which, according to Grancy, led to a loss directly suffered by it.
The cause of action is accordingly contractual
in nature and not a
claim derived indirectly as a shareholder where harm is wrongfully
caused directly to the company. Therefore,
the rule in Foss v
Harbottle does not find application.
EVENTS SUBSEQUENT TO
THE FEBRUARY 2005 AGREEMENT
[30] Notwithstanding
due compliance by Grancy of its obligations in terms of the February
2005 agreement, and, in particular, the
payment of the funds due by
it to acquire the Spearhead units and to provide the loan to Manala
to enable him to acquire his one
third interest, Grancy found that
Gihwala and Manala did not provide it with any material information
pertaining to the investment.
Repeated requests were made for such
information, but it was not forthcoming. However, Grancy assumed that
its investment was properly
managed in accordance with the February
2005 agreement. All of this appears from the undisputed evidence of
Mawji.
[31] On 11 September
2006, however, Grancy received an e-mail in which Gihwala, inter
alia, conveyed the following:
31.1 Grancy was
never intended to be and would not be a shareholder in SMI.
31.2 Grancy was not
entitled to be informed about the affairs of SMI, Ngatana or the
investment.
31.3 Grancy was not
entitled to be consulted on or to have any input in relation to any
decision by SMI or related to the investment.
31.4 Grancy would be
subject to the decisions made exclusively by Gihwala and Manala in
relation to the investment.
31.5 Gihwala would
conduct the affairs of SMI as he deemed fit.
[32] The evidence of
Mawji shows that Gihwala and Manala subsequently persisted in this
conduct, with Gihwala adopting the attitude
that Grancy would “come
in behind” him and Manala and would be entitled to no more than
“the full economic benefit”
of 630 000 units in
Spearhead. In response thereto, Grancy launched several legal
proceedings over the past seven years to vindicate
what, it believed,
to be a blatant disregard of its legal rights arising from the
February 2005 agreement. This included an application
in this court
under case number 15757/07, for an order recognising Grancy’s
entitlement to the shareholding in SMI and to
a full statement and
debatement of account and disgorgement of any profits made, as well
as the repayment of the loan made to Manala.
[33] The latter
application was initially opposed by Gihwala, Manala, the DGFT and
SMI. However, shortly before the hearing of the
matter, the parties
came to a settlement, which was made an order of court on 9 March
2009. It was accepted that SMI had acquired
only 630 000 Spearhead
units on behalf of Grancy, which is equivalent to a 31% shareholding
in SMI. The court order recognised
the entitlement of Grancy to a 31%
shareholding in SMI. In addition, the rendering of a full statement
of account, debatement thereof
and payment of any amounts due from
such debatement, was also ordered. Pursuant to the order of 9 March
2009, Grancy was officially
registered as a 31% shareholder in SMI on
25 March 2009.
[34] According to
Mawji, more information was subsequently obtained showing various
breaches of the February 2005 agreement by Grancy’s

co-contracting parties, with the result that, on 30 June 2009, notice
was given on behalf of Grancy of its cancellation of the
agreement.
In the letter of cancellation the February 2005 agreement is referred
to as one of partnership, but as previously indicated,
the question
is not whether the correct label was used, but whether the agreement
provides Grancy with a cause of action.
[35] The evidence of
Mawji, supported by relevant documentation, shows that the February
2005 agreement had been breached in several
material respects by
Gihwala and Manala as co-contracting parties, which breaches clearly
justified the cancellation of the agreement
by means of the letter of
30 June 2009. In general, the following breaches may be highlighted
(I will in due course, when dealing
with the individual claims
brought by Grancy, deal with the specific breaches giving rise to the
different claims).
35.1 The failure to
keep proper books of account or to ensure that proper books and
records were kept, also at SMI level;
35.2 The failure to
allow Grancy access to such books and records;
35.3The failure to
disclose material information to Grancy regarding the Spearhead
investment;
35.4 The failure to
seek Grancy’s approval in respect of decisions materially
related to the investment;
35.5 The failure to
distribute proceeds of the investment, in proportion to Grancy’
s
31%
entitlement;
35.6 Preferrring
themselves or related entities as creditors over Grancy;
35.7
Misappropriating funds of the joint venture, or funds destined for
the joint venture or SMI, for their benefit;
35.8 Making a secret
profit, thereby preferring themselves over Grancy.
[36] It is
necessary, at this stage, to make it clear that, as I understand the
evidence, the parties to the February 2005 joint
venture agreement
were Grancy, Gihwala and Manala. I do appreciate, as submitted on
behalf of Grancy, that other parties, such
as the other entities
involved (SMI, Ngatana and the DGFT) may, in the event of specific
obligations having been undertaken by
them, be regarded as separate
contracting parties to the February 2005 agreement and owe Grancy
specific contractual obligations
thereunder. However, this can only
be established on a case-by-case (or rather claim-by-claim) basis and
it does not follow, in
my view, that such other entities are to be
regarded as contracting parties to the primary overarching joint
venture agreement.
[37] I believe that
this was made clear by Mawji in his evidence, particularly with
regard to the contractual position of the DGFT.
As he put it, they
were three partners in SMI, the latter being “the vehicle that
was used by the three partners to carry
the investment”. Mawji
specifically identified Manala, Gihwala and Grancy as the three
partners and said that he was not
at the time of the February 2005
agreement, informed by Gihwala of the possible involvement of the
DGFT as a shareholder in SMI.
In response to a question put to him by
counsel for the DGFT, Mawji emphasised that the DGFT had no greater
responsibilities or
obligations to Grancy than that contained in the
Memorandum or Articles of SMI, upon Grancy becoming a (registered)
shareholder
in SMI.
[38] I will shortly
proceed to a consideration of the various claims brought by Grancy
and in respect of each I will determine whether
there has been a
breach of the February 2005 agreement causing Grancy a loss; which
defendant(s) has so breached the agreement
and caused Grancy the loss
and whether such defendant(s) is liable to Grancy for the loss. In so
doing, it has to be borne in mind
that, in seeking relief, Grancy has
adopted a blunderbuss approach, which has resulted in a great deal of
overlap between the relief
sought in the different alternative
formulations. However, before embarking upon an analysis of the
different claims in the consolidated
actions, it is convenient to
deal with the statutory liability in terms of section 424 of the 1973
Companies Act, which
Grancy seeks to impose upon Gihwala and Manala
in both the 2010 and 2011 actions.
SECTION 424
LIABILITY
[39] In both
actions, certain of the conduct ascribed to Gihwala and Manala, is
relied upon by Grancy in support of a prayer that
they be held
liable, jointly and severally, for some of the debts of SMI under
section 424 of the 1973
Companies Act.
[40
] Section 424 (1)
of the 1973
Companies Act provided
as follows:
“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.”
[41] The first
question which arises, is whether it is competent for Grancy to seek
a remedy under section 424 of the 1973
Companies Act, in
the 2011
action. As mentioned earlier, the 2011 action was instituted on 17
June 2011, which is after the effective date of the
2008
Companies
Act, namely
1 May 2011. In terms of section 224 of the 2008
Companies
Act, the
1973
Companies Act (including
section 424)
was repealed,
subject to the transitional provisions in Schedule 5 to the 2008
Companies Act.
[42
] Item 10 (1) of
the Schedule 5 transitional provisions, allows for the continued
application of repealed provisions of the 1973
Companies Act, in
terms of that Act, as if it had not been repealed, but only applies
to proceedings instituted under the 1973
Companies Act before
the
effective date of 1 May 2011. The proceedings under the 2011 action,
have obviously not been instituted before 1 May 2011,
with the result
that section 424 (1) of the 1973
Companies Act cannot
be available as
a remedy in the 2011 action.
[43] It has been
submitted on behalf of Grancy, that item 13 (1) (c) of Schedule 5 to
the 2008
Companies Act, also
makes provision for the continued
application of the 1973
Companies Act after
1 May 2011. I do not
agree. This item deals with the continued investigation and
enforcement of pending investigations by the Minister
or Registrar or
the Securities Regulation Panel, for a period of three years after 1
May 2011, and for a court to make any order
under the 1973
Companies
Act in
respect thereof. The clear wording of this item, in my
opinion, shows that it is not a general empowering provision
entitling the
court to make any order under the 1973
Companies Act,
but
only orders relating to such continued investigations. Therefore,
Grancy can only seek a remedy under section 424 of the 1973
Companies
Act, in
the 2010 action.
[44] Having regard
to the wording of section 424 (1) of the 1973
Companies Act, it
is
clear that this statutory remedy presupposes the existence of a debt
owing to a third party by the company concerned. Moreover,
a litigant
invoking
section 424
(1) is required to plead and prove that the
company against which it has the claim, is unable to pay its debts.
The latter requirement
was reaffirmed in Fourie v First Rand Bank
Limited
2013 (1) SA 204
(SCA) at 215A-E, as follows:
“...if,
despite the reckless conduct of the company’s business, it is
nevertheless able to pay its debt to a particular
creditor, that
creditor has no cause of action under
section 424
against those
responsible for the reckless conduct. This is so… because
section 424
was not intended to create a joint and several liability
between the company and those responsible for the reckless conduct of
its business, but rather to protect creditors against the prejudice
they may suffer as a result of the business of the company being

carried on in that way. Logic dictates that unless the company is
unable to pay, no such prejudice would follow. That does not
mean
that the plaintiff-creditor has to liquidate or excuss the company,
but only that there must be evidence of the company’s
inability
to pay.
[45] When dealing
with the separate claims under the 2010 action, I will, insofar as
reliance is placed on section 424 (1) of the
1973
Companies Act,
consider
whether or not Grancy has succeeded in showing that the two
requirements for the implementation of this section, are present.
RELIEF CLAIMED IN
THE 2010 ACTION
The Repaid Amount
[46] This claim
concerns an amount of R6 657 673-00 which was paid by Ngatana to SMI
in March 2007, representing the repayment of
the respective financial
contributions, plus interest, initially made to acquire the Spearhead
units. The amount due to Grancy
was R2 051 833-34, but Gihwala and
Manala, as directors of SMI, caused SMI to pay R2 643 722-00 to the
DGFT or Gihwala and R1 350
000-00 to Manala, while no payment was
made to Grancy.
[47] This failure
constitutes a clear breach of the terms of the February 2005
agreement, in that the parties to the joint venture
had to receive
payment of the repaid amount in accordance with their initial
contributions. In particular, it constituted a breach
of contract by
Gihwala and Manala, who, in their capacity as directors of SMI,
failed to cause SMI to make payment to Grancy of
its share, but
utilised same for an unauthorised investment for their own benefit.
[48] I am in
agreement with the submission on behalf of Grancy, that the February
2005 agreement is a contract which imposes joint
and several
liability on Gihwala and Manala. Although our law, in the absence of
agreement to the contrary, imposes contractual
liability on
co-debtors that is merely joint, there are certain well-recognised
exceptions catering for claims against certain
types of co-debtors
whose obligations are deemed to be intrinsically joint and several.
See Christie’s, The Law of Contract
in South Africa 6th Edition
p. 263; Tucker and Another v Carruthers
1941 AD 251
and Shraga v
Chalk
1994 (3) SA 145
(N) at 156.
[49] Joint and
several liability is imposed in a contractual setting where, inter
alia, the contract clearly by necessary implication
imposes liability
in solidum. In my view, this principle applies to the February 2005
agreement, by virtue of the following circumstances:
49.1 This was an
agreement underpinned by confidence, trust and utmost good faith,
with Gihwala and Manala owing a fiduciary duty
to Grancy, in
undertaking to implement the investment on Grancy’s behalf.
49.2 Grancy
entrusted a substantial financial investment to Gihwala and Manala
and they were the only parties who knew how the funds
were to be
utilised. Grancy was entirely dependent upon them to protect its
interests.
49.3 Gihwala and
Manala were appointed as directors of SMI and Ngatana, which provided
them with the ability to exercise a measure
of control over the
investment.
49.4 Gihwala and
Manala were contractually bound to keep Grancy advised of matters
relating to the investment and to ensure that
Grancy would, without
delay, receive the full economic benefit arising from its
contribution to the investment.
[50] In the
particulars of claim, Grancy also seeks an order that Gihwala and
Manala be declared liable for this loss under section
424 (1) of the
1973
Companies Act. In
this regard, I refer to my earlier finding
that
section 424
liability may be imposed under the 2010 action, if
the requirements of that section are met.
[51] I do accept
that SMI, as the special purpose vehicle, is, in this regard, to be
regarded as a separate contracting party to
the February 2005
agreement, and that it had the obligation to pay Grancy its portion
of the repaid amount. This would satisfy
the first requirement of
section 424 (1) of the 1973
Companies Act, namely
the existence of a
debt or liability on the part of SMI.
[52] As mentioned
earlier, the second requirement to be proved by Grancy in this
regard, is that SMI is unable to pay its debts.
At the outset, it is
significant to note that there is no allegation in Grancy’s
particulars of claim in the 2010 action
(nor in the 2011 action),
that SMI is unable to pay its debts. The question then arises whether
this jurisdictional requirement
for the imposition of liability under
section 424 of the 1973
Companies Act, has
been proved by Grancy.
[53] What is
required, is proof of commercial insolvency, as opposed to factual
insolvency. It is accordingly a question of fact,
namely, whether the
company is unable to pay its debts when they fall due. In Absa Bank
Ltd v Rhebokskloof (Pty) Ltd and Other
1993 (4) SA 436
(C) at 440F-H,
Berman J stated the requirement thus:
“The primary
question…is whether or not it has liquid assets or readily
realisable assets available to meet its liabilities
as they fall due
to be met in the ordinary course of business and thereafter to be in
a position to carry on normal trading - in
other words, can the
company meet current demands on it and remain buoyant? It matters not
that the company’s assets, fairly
valued, far exceed its
liabilities; once the court finds that it cannot do this, it follows
that it is entitled to, and should,
hold that the company is unable
to pay its debts.”
[54] The financial
statements of Ngatana for the year ended February 2012, show that
SMI’s shareholding in Ngatana has a substantial
capital value
which has generated substantial dividend income in the past. These
statements show that Ngatana made a net profit
of some R6 million for
the 2012 financial year and that it has net assets of approximately
R15 million. Gihwala and Manala submit
that this serves as sufficient
proof of SMI’s commercial solvency.
[55] However,
evidence elicited during the cross-examination of Mawji, paints a
different picture. This shows that Mr. Patrick Chong,
an independent
director of SMI, has expressed the view that SMI has no funds
available to pursue an investigation into the conduct
of Gihwala and
Manala, as envisaged in the judgment of Grancy Property Ltd v Manala
and Others
[2013] 3 ALL SA 111
(SCA). Chong has set out the debts of
SMI in an e-mail of 12 February 2014 (including debts which SMI would
have to pay in the
ordinary course), stating that it clearly cannot
pay such debts as they fall due, without an urgent injection of funds
of some
R1 million. From this it follows that SMI cannot meet its
normal trade debts, nor the expense of undertaking an independent
investigation
into the conduct of Manala and Gihwala. It should be
borne in mind that SMI generates no income and its only source of
income is
dividend payments from Ngatana, which have not been
declared since the 2010 financial year. SMI can obviously not oblige
Ngatana
to declare dividends and Chong has described Ngatana as “not
being cooperative”. Moreover, Ngatana is apparently facing
a
multi-million rand tax and penal liability.
[56] Furthermore, an
extrapolation of the SMI balance sheet for the year ended 28 February
2010, shows that, as at 28 February 2011,
the current liabilities of
SMI cannot be met out of its current assets. Also, as pointed out on
behalf of Grancy with reference
to exhibit K, SMI cannot even meet a
fee of R5000-00 for annual duty and secretarial fees, or pay its
legal fees for December 2013
and January/February 2014.
[57] In these
circumstances, I am satisfied that Grancy has proven, on a balance of
probabilities, that SMI is unable to pay its
debts. It follows that
the second requirement for the imposition of liability in terms of
section 424 (1) of the 1973
Companies Act, has
also been met.
[58] It should be
borne in mind that Grancy does not seek a general declaration
rendering Gihwala and Manala liable under section
424 (1) of the 1973
Companies Act. It
rather seeks declarations that Gihwala and Manala
are personally liable under
section 424
for payment of specific
amounts, including the amount of R2 051 833-34 claimed under the
above rubric.
[59] In my view,
there could have been no doubt in the minds of Gihwala and Manala
that their conduct in preferring themselves by
utilising the repaid
amount, and in particular using Grancy’s portion thereof for
their own unauthorised purpose, was not
only in breach of the
February 2005 agreement, but clearly wrongful. It constituted a
reckless breach of their fiduciary obligations
owed to Grancy under
the February 2005 agreement, as well as their fiduciary duty owed to
SMI.
[60] For the sake of
completeness, I should mention that the evidence shows that, what
Gihwala and Manala did, was to misappropriate
Grancy’s portion
of the repaid amount, by investing R2 000 000-00 in the
Strand/Scarlet Ibis investment. No amount was paid
to Grancy. Had
they duly complied with their obligations in terms of the February
2005 agreement, Grancy would have received its
share in the amount of
R2 051 833-34. This represents Grancy’s loss for which Gihwala
and Manala are liable, jointly and
severally, under the February 2005
agreement and for which they are also personally liable in terms of
section 424 (1) of the 1973
Companies Act. Moreover
, Grancy is
entitled to the payment of interest on this amount, at the prescribed
rate of 15,5% per annum, calculated from the date
that the first of
these 2007/8 distributions was made, namely 20 March 2007, to date of
final payment.
[61] An aspect which
I should also mention with regard to this claim, is that, in June
2009, Manala tendered payment of an amount
of R1 976 000-00 to
Grancy, being Manala’s calculation of the amount due to Grancy
as its portion of the repaid amount. Grancy
refused to accept this
tender, as it took the view that such payment was due by SMI and, in
any event, the tender was not made
in a currency acceptable abroad.
Promotion Fees
[62] It appears from
SMI’s books of account that an amount of R225 000-00 in respect
of promotion fees was credited to Manala,
Gihwala and/or the DGFT.
There is some uncertainty as to the date of the transaction, but it
does appear in SMI’s detailed
income statement for the year
ended 28 February 2006. Grancy claims one third of this amount from
Gihwala and Manala, jointly and
severally, as being an unauthorised
crediting of themselves contrary to the terms of the February 2005
agreement. Grancy also asks
that Gihwala and Manala be declared
personally liable for the payment thereof in terms of section 424 (1)
of the 1973
Companies Act.
[63
] What the
evidence of Mawji shows, is that Gihwala and Manala impermissibly
credited themselves with promotion fees in an amount
of R225 000-00.
In so doing, they clearly breached the February 2005 agreement, as
they had no authority to credit themselves with
this amount. Their
conduct necessarily led to them being preferred with the amount so
credited, while Grancy received no payment.
Had they not breached
their contractual and fiduciary obligations owed to Grancy, in this
regard, an additional amount of R225
000-00 would have been available
for distribution by SMI to the shareholders. I find that Gihwala and
Manala are accordingly, jointly
and severally, liable to Grancy in
this regard, for payment of 31% of R225 000-00, namely R69 750-00,
together with interest thereon
at the rate of 15,5% per annum
calculated from 28 February 2006 to date of final payment. This
conduct also constituted a reckless
breach of the fiduciary duty owed
to SMI.
[64] I do not,
however, believe that liability under section 424 of the 1973
Companies Act, arises
in respect of this claim. It was Gihwala and
Manala who improperly caused SMI to credit them with the promotion
fees of R225 000-00.
In these circumstances there is no liability on
the part of SMI for payment of this claim to Grancy. On the contrary,
SMI may have
a claim against Gihwala and Manala for repayment or
damages. The first requirement for a claim in terms of section 424
(1) of the
1973
Companies Act, is
therefore not present and a
declaration in this regard cannot follow.
Legal Fees
[65] Grancy’s
claim in this regard is for payment of 31% of R300 000-00, which
Gihwala and Manala caused SMI to pay for personal
legal expenses
incurred by the DGFT or Gihwala and Manala in the financial year
ending February 2009. Once again, it is clear that
Gihwala and Manala
acted unlawfully in this regard and contrary to their contractual and
fiduciary obligations in terms of the
February 2005 agreement. Had
they not done so, an additional amount of R300 000-00 would have been
available in SMI for payment
to its shareholders. In addition, their
conduct constituted a reckless breach of their fiduciary obligations
owed to SMI.
[66] It follows
that, as a consequence of this breach of contract, Gihwala and Manala
caused Grancy a loss of R93 000-00 (31% of
R300 000-00), for the
payment of which, together with interest thereon at the rate of 15,5%
per annum calculated from 28 February
2009 to date of final payment,
they should be held liable, jointly and severally.
[67] For the reasons
already advanced in respect of the claim for promotion fees, I do not
believe that Grancy is entitled to an
order under section 424 (1) of
the 1973
Companies Act, in
respect of this claim. The wrongful
misappropriation of the amount of R300 000-00, cannot result in a
claim by Grancy against SMI.
Grancy’s claim is against Gihwala
and Manala personally, while SMI may have a claim against Gihwala and
Manala, but this
does not result in a liability on the part of SMI.
Loan to Manala
[68] On 24 June
2009, and unbeknown to and without the authority of Grancy, an amount
of R2 million was paid to Manala, pursuant
to a resolution of SMI’s
directors (Gihwala and Manala), dated 15 June 2009. This payment was
in clear breach of the February
2005 agreement and resulted in the
depletion of the assets of SMI by R2 million. Manala has not repaid
this loan.
[69] As a result of
this breach of contract and the fiduciary duty owed to Grancy by
Gihwala and Manala, Grancy was caused a loss
of R620 000-00, being
31% of the unlawful loan of R2 million. In the result Gihwala and
Manala are liable, jointly and severally,
to pay the sum of R620
000-00 plus interest thereon at the rate of 15,5% per annum,
calculated from 15 June 2009 to date of final
payment. This conduct
certainly also constituted a reckless breach of their fiduciary
obligations owed to SMI.
[70] While Grancy,
in the body of its particulars of claim, purports to rely on section
424 of the 1973
Companies Act for
purposes of this claim, it does
not, in terms of the relevant prayer, seek to hold Gihwala and Manala
statutorily liable for payment
of this claim.
Strand/Scarlet Ibis
Investment
[71] During March
2007, Gihwala and Manala, ostensibly acting as SMI, used R2 million
which was due to Grancy (the repaid amount
referred to above) to make
an investment in Strand/Scarlet Ibis on their own behalf. This was
done without consulting or obtaining
Grancy’s consent. This
clearly constituted a wilful misappropriation of Grancy’s
funds. The evidence shows that the
development was unsuccessful with
the result that SMI’s assets have been depleted by R2 million
due to this unauthorised
conduct.
[72] This conduct of
Gihwala and Manala clearly constituted a breach of their fiduciary
and contractual obligations owed to Grancy
in terms of the February
2005 agreement. This has resulted in a loss to Grancy equal to 31% of
the misappropriated sum of R2 million.
The conduct also constituted a
reckless breach of their fiduciary obligations owed to SMI.
[73] It follows, in
my view, that Gihwala and Manala, jointly and severally, are liable
to Grancy for payment of the sum of R620
000-00 plus interest at the
rate of 15,5% per annum calculated from the date of payment of the
amount of R2 million (2 April 2007)
to date of final payment.
[74] As in the case
of the previous claim, Grancy has not sought in its relevant prayer
to have Gihwala and Manala declared statutorily
liable for payment of
this amount in terms of section 424 of the 1973
Companies Act.
[75
] Gihwala and
Manala submitted that, to award this claim, would amount to a
duplication, as Grancy’s loss of R2 million would
be covered by
the amount claimed by Grancy in respect of the repaid amount (paras
46 to 61 above). I do not agree. As I see it,
the fact of the matter
is that SMI’s assets have been depleted by R2 million and that
will forever be the case, resulting
in R2 million less to be paid out
by way of dividends to shareholders. Grancy has accordingly suffered
a separate loss in this
regard.
[76] I should
mention that Grancy also brought this claim against the DGFT. As
explained earlier, Mawji did not regard the DGFT
as a party to the
February 2005 agreement and the DGFT cannot, in my view, be held
liable for payment of this loss caused by the
breach of contract by
Gihwala and Manala.
Payment of
directors’ fees to Gihwala and Manala by Ngatana.
[77] On 3 March
2009, the directors of Ngatana resolved to pay, inter alia, a
director’s fee of R750 000-00 to each of Gihwala
and Manala.
The payment of this remuneration is reflected in the Ngatana 2010
financial statements. As submitted on behalf of Gihwala,
in terms of
SMI’s articles, the SMI directors on the Ngatana board of
directors, were entitled to receive such remuneration
without having
to account for it to SMI. The payment of such directors’
remuneration to Gihwala and Manala therefore seems,
on the face of
it, to have been a lawful payment.
[78] Grancy seeks to
link this payment to Gihwala and Manala, to a resolution of the
Ngatana directors taken on 7 March 2007. In
terms of this resolution
it was agreed that a R3 million fee be paid to SMI and Prescient Real
Estate for, amongst other things,
“their assistance in putting
the SPE deal and the RDF/Hyprop deal for New Trust together.”
According to the resolution,
the fee of R3 million would be split
equally between SMI and Prescient.
[79] There is no
evidence or other basis for linking the two resolutions. In
particular, there does not seem to be any basis for
a finding that
the payment of the directors’ remuneration to Gihwala and
Manala in March 2009, was the appropriation by them
of a 2007 fee
owing to SMI.
[80] I therefore
conclude that this claim cannot succeed, whether on a contractual or
delictual basis, as contended for by Grancy.
Late dividend
payments to SMI shareholders
[81] As I understand
this claim, it relates to dividends declared by Ngatana in October
2008 and March 2009 and thereafter onpaid
to SMI. There is no dispute
as to the dates and amounts of the dividends received by SMI and the
manner and amounts in which SMI’s
declaration of dividends to
its shareholders were implemented. Grancy’s complaint is that,
in effecting payment of dividends
to the SMI shareholders, Gihwala
and Manala assured that prompt payment was made to the DGFT and
Manala, while payments to Grancy
were only made after unexplained
delays.
[82] This conduct
constitutes a breach of the February 2005 agreement, which requires
Grancy, without delay, to be entitled to the
full economic benefit
arising from its contribution to the investment. As a consequence
thereof, Grancy suffered a financial loss,
being the loss of interest
on the amounts of dividends received late.
[83] I therefore
find that Gihwala and Manala are jointly and severally liable to
Grancy for payment of this loss, as calculated
in paragraphs 47.3,
47.4.1 and 47.4.2, read with prayers 13.1 to 13.3, of Grancy’s
particulars of claim.
[84] I have
mentioned that Grancy only became a registered shareholder of SMI on
25 March 2009. Although the first leg of Grancy’s
claim for
late payment of dividends (paragraph 47.3, read with prayer 13.1)
partially covers a period before Grancy’s registration
as
shareholder of SMI, I believe that Gihwala and Manala, jointly and
severally, should be held liable for the full amount of the
interest
lost in this regard, as it was their unlawful conduct (as explained
above) which caused Grancy’s belated registration
as a
shareholder on 25 March 2009.
[85] In sum, Gihwala
and Manala is declared liable, jointly and severally, for payment of
the following:
85.1 R213 789-57
(being the lost interest calculated on the late payment of R1 634
545-37 for the period 15 October 2008 to 19 August
2009), plus
interest thereon at the rate of 15,5% per annum calculated from 19
August 2009 to date of final payment.
85.2 R326 740-00
(being the lost interest calculated on the late payment of R5 270
000-00 for the period 26 March 2009 to 19 August
2009), plus interest
thereon at the rate of 15,5% per annum calculated from 19 August 2009
to date of final payment.
85.3 R165 660-60
(being the lost interest calculated on the late payment of R1 364
000-00 for the period 26 March 2009 to 6 January
2010), plus interest
thereon at the rate of 15,5% per annum calculated from 6 January 2010
to date of final payment.
Share of the residue
[86] I have to
confess that I find Grancy’s claim in this regard rather
confusing. It seems to me that, what it boils down
to, is a
contention that Gihwala and Manala in their capacities as directors
of Ngatana, could and should have controlled the immediate

declaration and payment of dividends by Ngatana to SMI. Grancy
accordingly claims consequential relief based upon the amounts
available to be distributed by Ngatana to SMI, but which were not
distributed, thereby causing Grancy a financial loss.
[87] It appears to
me that, as submitted on behalf of Gihwala, this contention is based
upon a misconception. Ngatana had five directors
of whom Gihwala and
Manala were two. According to Mawji, SMI would have been entitled to
appoint the majority of directors to the
Ngatana board and so control
the board. This view fails to take account of clause 10 of the
Ngatana shareholders’ agreement
which deals with material
decisions, such as the declaration of dividends. In such event, SMI
and Prescient, as shareholders in
Ngatana, both have to agree on the
relevant material decision. Put differently, SMI could not control
the declaration and payment
of dividends without the approval of
Prescient.
[88] In addition,
the declaration of dividends was a matter for the Ngatana board to
decide upon, having regard to the financial
circumstances of that
company. In the result, I am not persuaded that it was a term (either
express, implied or tacit) of the February
2005 agreement, that
Gihwala and Manala were required, in their capacity as directors of
Ngatana, to ensure that Ngatana immediately
distributed its profits
in the form of dividends to its shareholders (including SMI).
[89] I therefore
conclude that this claim cannot succeed, whether on a contractual or
delictual basis, as contended for by Grancy.
Declarations and
relief sought regarding the alleged partnership
[90] Under this
rubric I refer to the declarators sought by Grancy, regarding the
existence of a partnership, alternatively a relationship
of agency;
that the alleged partnership had been terminated and that a
liquidator be appointed to attend to the liquidation of
the assets of
the alleged partnership.
[91] I have already
found that the February 2005 agreement was not one of partnership,
but rather a joint venture agreement. In
the result the declarations
sought, based on the agreement being one of partnership, should not
be granted.
[92] As held in
paragraphs 34 and 35 above, the February 2005 agreement was duly
cancelled by means of the letter of cancellation
of 30 June 2009. The
fact that this letter referred to the cancellation of a partnership
agreement and not a joint venture agreement,
does not detract from
the fact that it constituted a cancellation of the February 2005
agreement. See in this regard the analogous
reasoning of Cloete J (as
he then was) in Bulldog Hauliers (Pty) Ltd v Santam Insurance Ltd
1992 (1) SA 418
(W) at 424 A-C. .
Abstract or
incidental declarations
[93] In prayers 2, 3
and 4 of its particulars of claim, Grancy seeks declaratory orders in
relation to the underlying conduct relied
on for the substantive
relief sought by it. As submitted on behalf of Gihwala, a court does
not grant declarators of this nature,
but either upholds or dismisses
the substantive relief sought. The declaratory orders sought in this
regard are accordingly refused.
Remaining relief
[94] What remains of
the relief sought in the 2010 action, is the prayer for the delivery
of books and records (prayer 5); the prayers
relating to the delivery
of a statement of account and relief consequential thereto (prayers
6-8), as well as a declaration disqualifying
Gihwala and Manala from
being directors of a company, pursuant to the provisions of sections
218 and 219 of the 1973
Companies Act.
[95
] This remaining
relief overlaps in certain respects with similar relief sought in the
2011 action. I will therefore deal with this
relief in conjunction
with the relief sought in the 2011 action.
RELIEF CLAIMED IN
THE 2011 ACTION
[96] In this action
Grancy also seeks a number of abstract or incidental declaratory
orders. For the reasons already furnished,
such orders will not be
granted. Insofar as underlying conduct may be relevant with regard to
relief sought, such conduct will
be considered in either upholding or
dismissing the substantive relief.
[97] For the sake of
clarity, I should mention that these abstract or incidental
declarations are sought in prayers 1.1-1.9, 1A-C,
3, 5 and 8 of the
particulars of claim. It should also be borne in mind that prayer 11,
in which relief is sought against the 10th
and 11th defendants, has
fallen away by virtue of the settlement reached before the
commencement of the trial.
[98] In dealing with
the claims under the 2011 action, it has to be borne in mind that I
have found that section 424 of the 1973
Companies Act has
been
repealed with effect from 1 May 2011, with the result that section
424 (1) of the 1973
Companies Act is
not available as a remedy in the
2011 action.
[99] I now proceed
to deal with the individual claims in the 2011 action and commence,
conveniently, with the monetary claims as
set out in prayer 9 of the
particulars of claim. At the outset it should be noted that, in
respect of each of the six monetary
claims in prayer 9, Grancy seeks
to hold Gihwala, Manala, the DGFT and SMI liable by virtue of the
breach of the February 2005
agreement. In addition, Grancy seeks to
hold Gihwala and Manala personally liable, jointly and severally,
under section 424 (1)
of the 1973
Companies Act, alternatively
, under
section 77
(3), read with section 77 (6), of the 2008
Companies Act,
for
payment of the relevant amounts.
Directors’
remuneration
[100] On 8 April
2009, Gihwala and Manala, without the knowledge or consent of Grancy,
caused SMI to pay them R2,75 million each
as a director’s fee.
This conduct constituted a clear breach of the obligations of Gihwala
and Manala under the February
2005 agreement. In addition, the
payment was made in breach of the provisions of Article 107 of the
Articles of Association of
SMI. In particular, no general meeting
contemplated in Article 107 was lawfully held, nor was the directors’
remuneration
ever determined as contemplated in Article 107.
[101] This
constituted an unlawful misappropriation of the funds of SMI, to the
financial detriment of Grancy. The unauthorised
misappropriation
certainly also constituted reckless, or at least grossly negligent,
conduct on the part of Gihwala and Manala
as directors of SMI.
[102] Gihwala has
(at least by necessary implication) acknowledged the unlawfulness of
this conduct by repaying an amount of R2
750 000-00 to SMI on or
about 23 November 2010. This has resulted in Grancy’s loss
being reduced to R852 500-00, being its
31% share in one half of the
amount paid out as directors’ remuneration, and which has not
been repaid. In my view, Gihwala
and Manala are jointly and severally
liable to Grancy for payment of this amount, by virtue of the breach
of their contractual
and fiduciary obligations arising from the
February 2005 agreement.
[103] The next
question which arises, is whether, in these circumstances, it is open
for Grancy to invoke section 77 (3) of the
2008
Companies Act and
thereby have Gihwala and Manala declared statutorily liable for this
debt. The difficulty that I have with a declaration on this
basis, is
that section 77 (3) of the 2008
Companies Act provides
that a
director of a company is liable for any loss, damages or costs
sustained by the company (my emphasis) as a direct or indirect

consequence of the director having acted in the manner set out in the
subsection. On my reading of
section 77
(3), it renders the director
liable to the company and not to a third party creditor. Grancy
argues that, in view of the remedy
which a creditor had to hold a
director personally liable under section 424 of the 1973
Companies
Act, it
is unthinkable that the legislature has now put paid to the
remedy which previously availed creditors to hold a director
personally
liable for his or her reckless and fraudulent conduct.
[104] It appears to
me that this submission does not take proper account of the fact that
the remedy under section 424 of the 1973
Companies Act, was
available
in a different context, i.e. in circumstances where the company was
liable to the creditor and the director who acted
fraudulently or
negligently, may be declared liable for the debt in circumstances
where the company is unable to pay its debts.
This is not the aim of
section 77
(3), which, in my opinion, does not, on a proper
interpretation of the plain wording thereof, confer standing on
anyone other than
the company. In any event, section 218 (2) of the
2008
Companies Act, provides
that any person (this would include a
director of a company) who contravenes any provision of the Act, is
liable to any other person
for any loss or damage suffered by that
person as a result of that contravention. It follows that a director
who does not comply
with the standards of directors’ conduct as
set out in section 76 of the 2008
Companies Act, would
be liable to
any person suffering a loss as a consequence thereof.
[105] In my view,
there is in any event no need for Grancy to rely on section 77 (3) of
the 2008
Companies Act, to
hold Gihwala and Manala personally liable
in respect of this claim. As I have already indicated, they are
liable, jointly and severally,
by virtue of their contractual and
fiduciary breaches of the February 2005 agreement.
[106] Finally, I
have to deal with Grancy’s alternative contention, namely, that
the DGFT and SMI are also liable for payment
of this claim. In fact,
this alternative claim is made in respect of each of the monetary
claims under prayer 9 of the 2011 action.
[107] As explained
above, the loss under this rubric was occasioned by the unlawful
conduct of Gihwala and Manala, which also constituted
a breach of
their contractual and fiduciary obligations owed to Grancy in terms
of the February 2005 agreement. The DGFT and SMI
cannot, in my view,
be held liable for repayment of this amount, as they have not caused
the loss occasioned to Grancy.
[108] I therefore
find that Gihwala and Manala are jointly and severally liable to
Grancy for payment of the amount of R852 500-00,
with interest at the
rate of 15,5% per annum on the amount of R1 705 000-00 (31% of R5,5
million) calculated from 8 April 2009
to 23 November 2010 and on the
amount of R852 500-00, calculated from 23 November 2010 to date of
final payment to Grancy.
Surety Fees
[109] On 1 March
2008, Gihwala and Manala caused SMI to pay an amount of R1 114 539-00
to each of them as surety fees. As was the
case with the unlawful
payment of directors’ remuneration, the payment of the surety
fees amounted to an unlawful taking
of funds to which Gihwala and
Manala were not entitled under the February 2005 agreement. Not only
were the payments made in breach
of the February 2005 agreement, but
also contrary to Article 107 of the Articles of Association of SMI.
The surety fees were paid
in circumstances where, in my view, any
reasonable person would have realised that it was unlawful to do so.
This constituted reckless
or, at least, grossly negligent conduct on
the part of Gihwala and Manala.
[110] On 23 November
2010, Gihwala repaid the amount of R1 114 539-00 received by him, but
Manala has failed to do so. This conduct
of Gihwala and Manala has
resulted in a depletion of the assets of SMI and has caused Grancy to
suffer a loss equal to 31% of the
unpaid balance of R1 114 539-00,
namely R345 507-09, together with interest at the rate of 15,5%
per annum on the amount of
R691 014-18 calculated from 1 March 2008
to 23 November 2010 and on the amount of R345 507-09 calculated from
23 November 2010
to date of final payment to Grancy. Gihwala and
Manala are liable, jointly and severally, for payment thereof to
Grancy.
[111] As this loss
to Grancy was caused by the unlawful conduct of Gihwala and Manala,
as set out above, the DGFT and SMI cannot
be held liable for payment
thereof. I should add that, for the reasons furnished in paragraphs
103/4 above, Grancy cannot invoke
section 77 (3) of the 2008
Companies Act in
respect of this claim.
Auditors’
remuneration
[112] Grancy alleges
that, between 1 March 2009 and 28 February 2010, Gihwala, the DGFT,
Manala and SMI caused SMI to pay an unnecessary
expense of R101
529-00 by way of auditors’ remuneration. This, Grancy contends,
constituted a breach of the February 2005
agreement.
[113] I am not
persuaded that Grancy has proved, on a balance of probabilities, that
the auditors’ remuneration was unnecessary
or excessive. The
only evidence tendered was that of Grancy’s expert witness
(Greenbaum), who expressed the opinion that
“costs totalling
R52 759-00 charged to auditors’ remuneration appears to be
excessive.” As submitted on behalf
of Gihwala, this opinion is
not benchmarked against any measure of what might amount to
reasonable audit fees. It is also apparent
that Greenbaum does not
profess to be an expert in matters of auditors’ remuneration.
In the absence of any other evidence
that establishes that the
auditors’ remuneration was unnecessary or excessive, I conclude
that this claim has to fail.
Manala transfer
[114] This claim is
based on an alleged transfer of an amount of R2 898 145-00 to Manala
by SMI, as appears from the latter’s
financial statements for
the year ending February 2010. However, an analysis of the evidence
shows that the claim based on this
amount, overlaps with the claim
based on the R2 million payment to Manala, which has been addressed
in the 2010 action (see paragraphs
68 to 70 above).
[115] As I
understand the position, there was only one payment of R2 million
made to Manala on 24 June 2009, as appears from the
evidence of
Greenbaum. This payment is reflected in the analysis of SMI’s
Standard Bank call account. (See bundle A5/4350).
The payment was
authorised on 15 June 2009, as appears from the resolution at bundle
A5/4593. This is the amount upon which the
claim in the 2010 action
is based. It is also this payment that gave rise to the amount of R2
898 145-00 in SMI’s financial
statements, which serves as the
basis for the current claim. R898 145-00 apparently represents
interest on the loan of R2 million.
No evidence was presented showing
a different or separate payment of R2 million, apart from the single
payment of R2 million made
to Manala on 24 June 2009.
[116] I therefore
conclude that this claim in the 2011 action, does overlap with the
claim already dealt with in the 2010 action.
Grancy is accordingly
not entitled to any relief in respect of this claim.
June 2009 loan to
Manala
[117] In June 2009,
Gihwala and Manala caused an amount of R1 976 523-34 to be made
available by SMI to Manala, to facilitate the
repayment of Grancy’s
initial contribution. I have earlier alluded to this amount being
tendered to Grancy, which tender
was rejected, as the payment was due
by SMI and not Manala, and it was made by means of a South African
cheque in Rand which does
not constitute payment abroad. Upon
rejection, Manala took no further steps to repay the amount, but
utilised same for his own
purposes.
[118] The payment of
this amount to Manala, constituted a breach of the terms of the
February 2005 agreement, which requires the
parties to the joint
venture agreement to be treated equally. Gihwala and Manala, as the
directors of SMI, who authorised this
unlawful payment, thereby
caused the assets of SMI to be depleted, with a resultant loss to be
suffered by Grancy. In the circumstances
it ought to have been clear
to any reasonable person that it was unlawful to do so and the
conduct of Gihwala and Manala in this
regard, was reckless or, at
least, grossly negligent. In the circumstances they should be held
liable, jointly and severally, for
payment of Grancy’s loss
being equal to 31% of the unauthorised loan to Manala. This loss
amounts to R612 722-24 together
with interest thereon at the rate of
15,5% per annum calculated from 24 June 2009 to date of final
payment.
[119] As this loss
was caused by Gihwala and Manala’s unlawful conduct, and not by
the DGFT and SMI, the latter should not
be liable for payment
thereof. I should add that, for the reasons furnished in paragraphs
103/4 above, Grancy cannot invoke section
77 (3) of the 2008
Companies Act, in
respect of this claim.
Further Manala
Payments and Opposition Decision
[120] This is a
claim preferred against Manala and SMI. Firstly, it relates to
Manala’s decision to levy a R15 000-00 per
month director’s
fee from 1 August 2011, and, secondly, to a decision taken by Manala
in June 2011, acting on behalf of SMI,
to oppose the relief sought by
Grancy in the 2011 action. I should, however, mention that it is not
clear from the evidence whether
any monthly payments of R15 000-00
were received by Manala.
[121] The payments
of R15 000-00 per month to Manala from 1 August 2011, if made, would
have represented a breach of the February
2005 agreement.
Furthermore, the payments, if made, would have been in contravention
of Article 107 of the SMI Articles of Association,
in that no general
meeting was held, nor was any remuneration determined, as
contemplated in Article 107.
[122] However, in
view of the absence of proof that these payments were made to Manala,
Grancy is not entitled to relief under this
claim.
[123] With regard to
the SMI decision to oppose the relief sought by Grancy in the 2011
proceedings, I find it difficult to follow
why it should be regarded
as unlawful conduct. It was a decision taken by SMI when faced by the
2011 action, in which wide-ranging
relief was sought, also against
SMI. It seems to me that, at least initially, it was not unreasonable
for SMI to defend the action.
In my view, this leg of the claim
should also fail.
REMAINING RELIEF
SOUGHT IN 2010 AND 2011 ACTIONS
Procedural Matters
[124] There are two
procedural matters that I have to deal with before considering the
remaining relief. The first relates to a
memorandum of January 2009
and the second concerns a General Meeting of SMI held on 14 February
2011.
[125] The January
2009 memorandum was prepared by Gihwala and forwarded to Grancy in
anticipation of settlement discussions to take
place between the
parties. I do not wish to dwell unnecessarily on this issue, as my
conclusion is that, ex facie the document,
it was clearly intended to
facilitate a settlement and that it is inadmissible in evidence. It
was submitted on behalf of Grancy
that the memorandum itself contains
fraudulent statements designed to deceive Grancy, and to cause it to
settle on a manifestly
false basis, to its detriment. Therefore,
Grancy contends, it did not constitute a bona fide settlement offer
at all and should
not be regarded as a privileged document.
[126] In this
regard, it was submitted that the general rule that settlement
discussions should not be admissible in evidence, does
not apply, as
it would be contrary to public policy to consider the memorandum to
be privileged. I do not agree with this submission,
particularly in
view thereof that the settlement offer, made in the memorandum, does
not appear to me to be directly relevant to
an issue in the case. In
this regard reference can be made to Zeffert et al, The South African
Law of Evidence, 2nd edition, where
the following is said at 704:
“The fact that
an offer contains statements which are fraudulent and even criminal
does not in itself make it admissible,
but it may tend to show that
the offer was not made in good faith. If this is so , the offer will
not be privileged, but the court
will not investigate the matter
unless the bona fides of the offer or the commission of the crime or
fraud is directly relevant
to an issue in the case.”
[127] Mawji conceded
that he was not misled by anything in the memorandum. In fact, he
rejected the proposals made in the memorandum.
Nor has there been any
attempt to avoid the settlement agreement which was subsequently
reached in March 2009, and which was made
an order of court. In these
circumstances, plaintiffs have not shown that the statements made in
the memorandum are relevant to
an issue in the case.
[128] Counsel on
behalf of Grancy submitted that reliance is placed upon this
memorandum to prove a case against Gihwala under section
424 of the
1973
Companies Act. However
, this reliance, too, seems misplaced. The
content of the memorandum does not relate to any business of the
company, as required
in terms of
section 424
, but rather to a private
attempt to settle a dispute, i.e. the Spearhead dispute. I therefore
conclude that the memorandum of January
2009, is inadmissible in
evidence.
[129] This brings me
to the meeting of 14 February 2011, the transcript of which was
provisionally introduced in evidence, with
the issue of the
admissibility thereof to stand over for later determination. During
the course of the trial, it became clear that
Grancy does not place
any significant reliance on what was said at this meeting. As I
understood counsel for Grancy, the purpose
of introducing the
transcript would be to provide material for the cross-examination of
Gihwala. As Gihwala did not testify, the
transcript did not play any
role in the trial.
[130] For the sake
of completeness, I may state that, by their very nature, the
proceedings at an annual general meeting of a company
would not
normally be conducted without prejudice. I accordingly consider the
transcript to be admissible in evidence, save for
the part where a
topic is expressly raised or discussed on a without prejudice basis.
In this regard, the only affected part of
the transcript is to be
found at Bundle A 6446.21, where the issue of directors’ fees
was discussed on a without prejudice
basis.
[131] I therefore
find that, save for the discussion on the issue of directors’
fees, the transcript of this meeting is admissible
in evidence.
Books of Account and
Financial Statements
[132] The
documentary evidence, together with the evidence of Mawji and, in
particular, Greenbaum, paints a rather sad picture of
an ongoing
failure by SMI to keep proper books and records, whilst under the
stewardship of Gihwala and Manala. As submitted by
Grancy, it is
remarkable that, in a company which was to have but one asset (a 58%
shareholding in Ngatana), to date no accurate
or complete books of
account have been brought into existence.
[133] Instead,
several versions of conflicting revised financial statements,
ostensibly for the same period, have been drafted by
SMI’s
previous auditors, the tenth defendant. Thereafter it was necessary
to have another bookkeeper, Mr. Roomaney, reconstruct
SMI’s
books of account. These reconstructed books and records are,
strangely enough, at odds with the previous financial
statements and
books of account. This covers the period of time that SMI was under
the control of Gihwala and Manala as its directors.
[134] As pointed out
on behalf of Grancy, the following books of account and financial
records of SMI now exist:
134.1 One set of
audited annual financial statements, signed by the auditor and the
directors for the years ended 2006 to 2008 respectively.
134.2 Three sets of
unsigned draft annual financial statements for the year ended 28
February 2009.
134.3 Three sets of
unsigned draft annual financial statements for the year ended 28
February 2010.
134.4 Revised
unsigned annual financial statements, attaching to the working papers
of tenth defendant, as furnished to Grancy in
April 2013.
134.5 An alternate
set of (materially different) annual financial statements of SMI,
signed by the directors, but not the auditors,
for the years ended
2007 and 2008.
134.6 Another set of
financial statements for the 2006 financial year which was attached
to the account furnished by Gihwala, Manala
and the DGFT to Grancy in
May 2010.
134.7 The revised
books of account, for the years 2006 to 2010, and supporting
documentation thereto, prepared by Roomaney.
[135] The inadequacy
of these financial records were confirmed by Dr. Konar, an
independent auditor approached by Gihwala, who recorded
that “it
is patent that SMI’s annual financial statements for the
financial year
s 2006
,
2007
,
2008
and
2009
provide an inaccurate
account of the financial position of SMI, its shareholders and its
creditors”. Dr. Konar further opined
that “the financial
statements submitted are deficient in a number of respects…”.
[136] These findings
are confirmed by Greenbaum who, in addition, has identified many more
failings, which may, inter alia, be summarised
as follows:
136.1 The failure to
properly record Grancy’s contribution in the Spearhead
investment.
136.2 The consistent
failure by SMI to provide group annual financial statements and/or to
consolidate its financial statements
with those of Ngatana, its
subsidiary.
136.3 The failures
to disclose material information, such as the fact that the
shareholders in the Strand Property/Scarlet Ibis
project were in fact
parties related to Gihwala, being the DGFT and Gihwala’s wife.
136.4 The
unauthorised manner in which directors’ and surety fees
allegedly owing to Gihwala and Manala, were credited to
Manala and
the DGFT.
136.5 The numerous
breaches of both the 1973
Companies Act and
the 2008
Companies Act.
136.6 The
material
differences between, and patent errors pertaining to, the calculation
and recording of the values of loan accounts, allegedly
owing by SMI
to the DGFT, Gihwala and Manala.
136.7 The
conflicting characterisations of the amount of R225 000-00, credited
to Gihwala and Manala, which was variously referred
to in SMI’s
financial statements as “legal fees”, “fees”,
“promoter’s fees” and
“promotions fees”.
[137] The fact that
Roomaney had to reconstruct SMI’s books of account, underscores
the failure, not only of SMI, but, in
particular Gihwala and Manala,
in their capacity as directors, to ensure that accurate books and
records were kept. An additional
worrying factor is that, on the same
day that the audited financial statements of SMI for the year ending
February 2007, were signed
by Gihwala, Manala and the auditors,
Gihwala and Manala signed duplicate financial statements, similar in
most respects to the
original financials, but for the fact that both
Gihwala and Manala were now credited with R3 million each as
directors’ remuneration.
These duplicate financials were,
notwithstanding numerous requests by Grancy for the production of all
relevant documentation,
only made available by way of discovery in
these proceedings in May 2013.
[138] All of this
underscores the fact that, at all relevant times, SMI and Gihwala and
Manala have failed to ensure that such accounting
records, as are
necessary fairly to present the state of affairs and business of SMI,
were kept. (See section 284 of the 1973
Companies Act and
sections 28
and 29 of the 2008
Companies Act). The
evidence clearly shows that
Gihwala and Manala, if not party to such failure, at the very least
failed to take reasonable steps
to secure compliance with this
requirement. This constituted gross negligence in the execution of
their duties as directors of
SMI.
[139] In view of the
aforesaid, I conclude that Grancy has shown that it is entitled to
the relief sought in regard to the books
of account and financial
statements of SMI.
Failure to account
to Grancy
[140] As I have
indicated earlier, Grancy experienced ongoing difficulties in
obtaining relevant information and documentation from
Gihwala and
Manala, regarding the affairs of the joint venture. It has to be
borne in mind that, at all material times, the relevant
information
has been in the sole purview of Gihwala and Manala, but,
notwithstanding repeated requests, they have failed to make
such
information available to Grancy.
[141] Grancy
eventually resorted to the use of legal means when its requests for
information were disregarded by Gihwala and Manala.
This led to
litigation in the form of an application in this court, which, as I
have mentioned earlier, was settled, and on 9 March
2009, Gihwala,
Manala and the DGFT were ordered to render a full and proper account
in relation to the initial investment of the
joint venture.
[142] Grancy was
thereafter provided with a one page statement of account, which it
considered to be inadequate, but its request
that it be supplemented,
was refused. This led to a further application in this court by
Grancy to compel these defendants to furnish
an improved account.
[143] The
application was opposed, but on 15 April 2010, Binns-Ward J ordered
the defendants to furnish an improved account, after
finding that the
previous account was “woefully inadequate”.
[144] The relevant
defendants delivered a further account, which Grancy still considered
to be inadequate. Grancy brought yet another
application to compel
the delivery of a proper account, which was also opposed. The matter
ultimately culminated in the Supreme
Court of Appeal (in 2014)
referring the adequacy of the account, to be debated through a curial
procedure. It should be borne in
mind that the aforesaid litigation
merely concerned the adequacy of the accounting pertaining to the use
of Grancy’s initial
contribution. Similar difficulties have
been encountered when Grancy attempted to ascertain any information
regarding the state
of SMI and its investment. Repeated requests for
the opportunity to inspect and take copies of SMI’s books of
account and
financial statements, were not responded to. This
conduct, as explained earlier, led to the cancellation of the
February 2005 agreement
by Grancy.
[145] Subsequent to
the cancellation of the February 2005 agreement, the annual financial
statements of SMI for the years ended
2006, 2007 and 2008 were made
available to Grancy, but access to the books and records of SMI was
refused. Further requests by
Grancy for the production of
documentation relating to SMI and the joint venture, have not been
complied with. A conspectus of
the evidence as a whole, shows that
Grancy is justified in submitting that, at every level, and in every
conceivable manner, Gihwala,
Manala, SMI and the DGFT have failed to
make the relevant books and records available to Grancy. All attempts
to gain proper access
to such information have been obstructed, even
in the face of court orders.
[146] In view of the
aforesaid, it follows that Gihwala and Manala are in breach of the
February 2005 agreement, as it was always
envisaged that Grancy would
be entitled to all information relevant to its own investment; to SMI
and to the joint venture. I conclude
that Grancy has made out a case
for the rendering of a full and proper statement of account, as
sought in the particulars of claim,
in both the 2010 and 2011
actions. I should add that, in my view, Grancy has clearly shown
that, on the principles enunciated in
Doyle and Another v Fleet
Motors PE (Pty) Ltd
1971 (3) SA 760
(AD), it is entitled to such
accounts and relief ancillary thereto. I find that the parties
involved and accordingly liable for
the rendering of the statements
of account, are Gihwala, Manala, the DGFT and SMI.
[147] It may be that
some of the relief granted in this regard, will have been overtaken
by the substantive relief to be granted
in this consolidated action,
as well as the relief granted in the other proceedings to which I
have referred. However, that should
not present a problem, as a
statement of account should then be rendered taking into account any
relevant orders made herein and
in the other proceedings.
Delinquency
declaration
[148] As mentioned
earlier, Grancy seeks the disqualification of Gihwala and Manala, as
directors, in terms of sections 218 and
219 of the 1973
Companies
Act. Upon
reflection, I have concluded that Grancy is not entitled to
this relief. The reason is that these sections were repealed with
effect
from 1 May 2011, and the transitional provisions in Schedule 5
to the 2008
Companies Act, do
not preserve the continued operation of
sections 218
and
219
after 1 May 2011, unless proceedings had
commenced in a court in respect of the same conduct before 1 May
2011.
[149] The amendment
to Grancy’s pleadings in terms of which this disqualification
declaration is sought under sections 218
and 219 of the 1973
Companies Act, was
only effected during the course of the trial, well
after 1 May 2011. It follows, in my view, that proceedings in respect
of conduct
which could serve as a basis for such a disqualification
declaration, had not commenced prior to 1 May 2011. Therefore,
disqualification
under the 1973
Companies Act cannot
be sought in the
2010 or 2011 action. Grancy will accordingly have to rely on the
provisions of section 162 of the 2008
Companies Act, for
relief of
this nature, i.e. a delinquency declaration.
[150] Before dealing
with Grancy’s claim based upon section 162 of the 2008
Companies Act, I
have to consider the constitutional challenge raised
by Gihwala and Manala.
The Constitutional
Challenge
[151] In their
amended pleas in the 2011 action, both Gihwala and Manala have
challenged the constitutionality of the delinquency
provisions of the
2008
Companies Act. In
particular, they contend that section 162 (5)
(c) of the 2008
Companies Act is
unconstitutional, in that:
151.1 The wide
scope, inflexible application and severe consequences thereof violate
the constitutional rights of directors to dignity
and to freely
practise their trade, occupation or profession (sections 10 and 22 of
the Constitution, 1996).
151.2 It affords the
court no discretion to refrain from granting a delinquency
declaration or to shorten the duration thereof.
To that extent, the
section deprives a court of its power to fashion an appropriate
remedy and thus violates the separation of
powers.
151.3 Insofar as the
section may be held to operate with retrospective effect to conduct
that took place before the effective date
of the 2008
Companies Act,
namely
1 May 2011, it imposes a post facto punitive regime that
restricts directors’ rights to practise their chosen trade or
occupation
and thus violates the rule of law, thereby exacerbating
the infringement of sections 10 and 22 of the Constitution, whilst
also
violating the right to equality (section 9 of the Constitution).
[152] Having had
regard to the written and oral submissions on behalf of Grancy,
Gihwala, Manala and the 12th defendant (“the
Minister”),
I intend, firstly, to consider the background, objectives and impact
of section 162 of the 2008
Companies Act, and
then to determine the
following issues:
152.1 Does
section
162
(5) (c) apply retrospectively to conduct perpetrated by directors
prior to 1 May 2011?
152.2 If so, does
such retrospective operation violate the rule of law and/or does it
constitute an unjustifiable limitation of
the rights of Gihwala and
Manala under section 9 of the Constitution?
152.3 Does the
alleged wide scope, inflexible application, lack of discretion and
severe consequences of section 162 (5) (c), constitute
an
unjustifiable violation of Gihwala and Manala’s rights to
professional freedom and dignity under sections 22 and 10 of
the
Constitution?
Background,
objectives and impact of section 162 of the 2008
Companies Act
[153
] The background
and objectives of the 2008
Companies Act are
conveniently dealt with
in a policy paper published by the Department of Trade and Industry
and published in GG26493 of 23 June
2004, as well as in the
Memorandum on the Objects of the Companies Bill, 2008.
[154] These
documents show that section 162 of the 2008
Companies Act was
introduced with the following objectives in mind:
154.1 A need was
identified for greater protection of the public and investors against
the conduct of unscrupulous company directors.
Such directors are to
be eliminated, not only to prevent losses to investors, but also to
boost confidence in the South African
Regulatory System in order to
attract investment and stimulate growth.
154.2 In order to
achieve the objectives, it was necessary, in the first place, to
define the rights, duties and obligations of
directors in the 2008
Act itself, and not rely on ill-defined common law rights, duties and
obligations.
154.3 It was further
necessary to provide an effective enforcement mechanism for those
harmed by the conduct of rogue directors.
The threat of criminal
prosecution proved to be an ineffective deterrent. It became
necessary to add an array of administrative
and civil remedies to the
2008 Act, aimed at deterring directors from abusing their office and
eliminating those found guilty of
improper conduct from operating in
South Africa.
[155] Section 162
contains one such civil remedy. As explained by the Minister, the
innovative aspect of section 162 (5) is not
that grounds for
disqualification have been expanded considerably from what they were
before, nor that the periods of disqualification
are necessarily
longer. The innovation lies therein that section 162 introduces a new
civil remedy for those harmed by the conduct
of delinquent directors.
[156] I now turn to
the provisions of section 162 which are relevant for purposes of the
present debate. Section 162 (2) provides
for, inter alia, a
shareholder of a company to apply to court for an order declaring a
person delinquent or under probation if
the person is a director of
that company or, within the 24 months immediately preceding the
application, was a director of that
company. The application may be
brought where any of the circumstances contemplated in section 162
(5) (a) to (c) apply. Whilst
subsections 5 (a) and (b) relate to
individuals serving as directors when already prohibited from so
doing, subsection 5 (c) relates
to what can be termed “substantive”
abuses of office.
[157] Section 162
(5) (c) provides that a court must declare a person a delinquent
director if such individual, while a director-
157.1 grossly abused
the position of director;
157.2 took personal
advantage of information or an opportunity, contrary to section 76
(2) (a) (which provides that a director of
a company must not use the
position of director, or any information obtained while acting in the
capacity of a director, to gain
an advantage for the director, or for
another person other than the company or a wholly-owned subsidiary of
the company; or to
knowingly cause harm to the company or a
subsidiary of the company);
157.3 intentionally,
or by gross negligence, inflicted harm upon the company or a
subsidiary of the company, contrary to section
76 (2) (a);
157.4 acted in a
manner-
(aa) that amounted
to gross negligence, wilful misconduct or breach of trust in relation
to the performance of the director’s
functions within, and
duties to, the company; or
(bb) contemplated in
section 77 (3) (a), (b) or (c). (These subsections cover conduct such
as a director acting on behalf of a company
despite knowing that
he/she lacked the authority to do so; acquiescing in the carrying on
of the company’s business despite
knowing it was conducted
recklessly, with gross negligence or with intent to defraud any
person or for any fraudulent purpose or
being a party to an act or
omission by the company despite knowing that the act or omission was
calculated to defraud a creditor,
employee or shareholder of the
company or had another fraudulent purpose).
[158] A delinquency
declaration under section 162 (5) (c) may be made subject to any
conditions the court considers appropriate
and subsists for seven
years from the date of the order, or such longer period as determined
by the court at the time of making
the declaration. In terms of
subsections 162 (11) and (12), a person declared delinquent in terms
of 162 (5) (c), may apply to
court at any time more than three years
after such declaration, to suspend such order of delinquency and
substitute an order of
probation, which the court may grant if
satisfied that the conditions attached to the original order have
been complied with and,
effectively, where there is a reasonable
prospect that the applicant would be able to serve successfully as a
director of a company
in the future.
[159] Section 69 (8)
(a) of the 2008
Companies Act, provides
that a person is disqualified
to be a director of a company if a court has declared such person to
be delinquent in terms of
section 162.
The real effect of a
declaration of delinquency is accordingly disqualification from the
office of director.
Does
section 162
(5)
(c) apply retrospectively to conduct prior to 1 May 2011?
[160] Section 224
(1) of the 2008
Companies Act, states
that the 1973
Companies Act “is
hereby repealed, subject to subsection (3)”. Subsection (3)
provides that the repeal of the 1973
Companies Act, does
not affect
the transitional arrangements, which are set out in Schedule 5 to the
2008
Companies Act. From
this it follows that the provisions of the
1973
Companies Act, have
effectively been repealed, subject to the
transitional arrangements found in Schedule 5 to the 2008
Companies
Act.
[161
] Item 7 (7) of
Schedule 5 to the 2008
Companies Act, provides
as follows:
“A right of
any person to seek a remedy in terms of this Act applies with respect
to conduct pertaining to a pre-existing
company and occurring before
the effective date, unless the person had commenced proceedings in a
court in respect of the same
conduct before the effective date”.
[162] Section 162 of
the 2008
Companies Act, resorts
under Part B of Chapter 7 of the Act,
which deals with “rights to seek specific remedies.”
Section 162 clearly provides
a specific remedy, to have a director of
a company declared delinquent. What item 7 (7) conveys, is that the
right to seek a remedy
under section 162 applies with regard to
conduct pertaining to a pre-existing company and occurring before the
effective date.
The only qualification is to be found with regard to
circumstances where the applicant had commenced proceedings in a
court in
respect of the same conduct before 1 May 2011.
[163] In my view,
the wording of item 7 (7) is unambiguous and its meaning is clear,
namely, that, in an application under section
162 of the 2008
Companies Act, past
conduct of the relevant director may be taken
into account, unless proceedings in respect thereof had already been
commenced before
the effective date. Such interpretation does not, in
my opinion, lead to any absurdity.
[164] I am, in any
event, in agreement with the submission on behalf of Grancy, that
item 7 (7) does not, in fact, create true retrospectivity
and
therefore does not implicate any presumption against retrospectivity.
It does not attempt to visit unlawfulness upon previously
lawful
conduct. It simply attaches prospective consequences to previously
unlawful conduct in the interest of protecting the public
and
maintaining appropriate standards of corporate governance.
[165] The Minister
contends that item 7 (5) of Schedule 5 to the 2008
Companies Act,
read
with Item 7 (7), justifies the conclusion that
section 162
(5)
(c) is not intended to apply to pre-1 May 2011 conduct. This
interpretation is in direct conflict with the clear, unambiguous
and
unqualified wording of item 7 (7). In any event, items 7 (5) and 7
(7) have different objectives and subject matter. As explained

earlier, item 7 (7) deals with remedies under the 2008
Companies Act.
A
delinquency declaration is one such remedy. Item 7 (5), on the
other hand, deals with provisions of the 2008
Companies Act relating
to the duties, conduct and liability of directors.
[166] The Minister
places specific reliance on item 7 (5) (a), which reads as follows:
“Despite
anything to the contrary in a company’s Memorandum of
Incorporation, the provisions of this Act respecting
the duties,
conduct and liability of directors apply to every director of a
pre-existing company as from the effective date.”
The duties, conduct
and liability of directors are dealt with in sections 76 and 77 of
the 2008
Companies Act. The
purpose of item 7 (5) is revealed in the
context of related provisions of the 2008
Companies Act. Item
4 (4)
of Schedule 5, states that, from 1 May 2011 to 30 April 2013, if
there is a conflict between a provision of the Act and a
provision of
a pre-existing company’s Memorandum of Incorporation, the
latter provision prevails, except to the extent that
Schedule 5
provides otherwise.
[167] As submitted
on behalf of Grancy, item 7 (5) is precisely the item which provides
otherwise. It makes it clear that the provisions
of the Memorandum of
Incorporation in respect of the matters specified in item 7 (5) (a)
to (d), will not prevail over inconsistent
provisions of the 2008
Companies Act during
the aforementioned two year period. The purpose
of item 7 (5) is clearly to expand, not restrict, the application of
the 2008
Companies Act. It
caters for the fact that certain of the
company finance and governance provisions in the 2008
Companies Act,
are
so significant that they ought not to be overridden by the
Memorandum of Incorporation, even during the two year transition
period.
There is no hint at all in item 7 (5) that its inclusion was
intended to limit item 7 (7). In any event, as stated earlier, items

7 (5) and 7 (7) have different objectives and subject matter. Item 7
(7) deals with remedies under the 2008
Companies Act, which
item 7
(5) does not purport to do.
[168] I therefore
find that, contrary to the submission on behalf of the Minister, item
7 (5) does not limit item 7 (7), and that
the latter, in fact, serves
to afford Grancy the right to institute delinquency proceedings in
terms of section 162 of the 2008
Companies Act, against
Gihwala and
Manala in respect of their pre- 1 May 2011 conduct.
[169] This
conclusion is underscored by recent case law decided under section
162 (5) of the 2008
Companies Act. In
this regard reference can be
made to Msimang NO v Katuliiba and Others
[2013] 1 ALL SA 580
(GSJ);
Lobelo v Kukama [2013] ZAGPJHC 137 (31 May 2013) and Cape Empowerment
Trust Ltd v Druker 2013 JDR 1360 (WCC). In all of
these cases some of
the conduct relied upon for delinquency declarations in terms of
section 162
(5) (c), pre-dated 1 May 2011.
Is
section 162
(5)
(c) unconstitutional by virtue of its retrospective application?
[170] The consensus
is that, in order to determine whether
section 162
(5) (c), applied
retrospectively, is inconsistent with the rule of law and the right
to equality, one needs to compare the 2008
Companies Act with
the
1973
Companies Act. Gihwala
concedes that, “if it can be said
that directors are faced with a similar sanction for similar conduct
under both the 1973
and 2008 Act”, then it would be “difficult
to argue” that the section violates the right to equality and
the
rule of law.
[171] At the outset,
I should state that I believe that the correct approach is to limit
comparison between the two regimes to the
parts of section 162 (5)
which Gihwala and Manala are alleged to have contravened, i.e.
section 162 (5) (c). However, Gihwala and
Manala contend that the
constitutional validity of this statute should be determined
objectively, inter alia, by having regard
to the whole of section 162
(5), including those parts which they are not alleged to have
contravened. In this regard they place
reliance on De Reuck v DPP,
WLD
[2003] ZACC 19
;
2004 (1) SA 406
(CC) at para. 85, where the court held that:
“This court
has, however, repeatedly made plain that the subjective position of a
particular applicant is irrelevant to the
determination of the
validity of a statutory provision; a statutory provision is
objectively either valid or invalid”.
[172] Similarly, in
Ferreira v Levine NO & Others; Vryenhoek and Others v Powell NO
and Others
1996 (1) SA 984
(CC) the court said the following at para.
26:
“The
subjective positions in which parties to a dispute may find
themselves cannot have a bearing on the status of the provisions
of a
statute under attack. The Constitutional Court, or any other
competent Court for that matter, ought not to restrict its enquiry
to
the position of one of the parties to a dispute in order to determine
the validity of a law. The consequences of such a (subjective)

approach would be to recognise the validity of a statute in respect
of one litigant, only to deny it to another.”
[173] However, the
fact that the constitutional validity of a statutory provision is
determined objectively, does not mean that
Gihwala and Manala are
entitled to challenge parts of section 162 (5) which are not applied
to them. As pointed out on behalf of
the Minister, the only basis on
which they have standing to challenge section 162 (5), is in their
own interest, as envisaged in
section 38 (a) of the Constitution.
They only have such an interest in respect of section 162 (5) (c),
being the subsection applied
to them. In this regard reference can be
made to Poswa v MEC for Economic Affairs, Environment and Tourism,
Eastern Cape
2001 (3) SA 582
(SCA) at paras. 21-22.
[174] In Poswa the
complaint was directed only against para. (a) of the relevant
legislation. In argument Poswa also attempted to
rely on para. (b) of
the legislation, which did not apply to his case. The Supreme Court
of Appeal found that he could not do so,
as para. (b) had no direct
application to his situation. By contrast, in both De Reuck and
Ferreira, the attacks were only directed
against the provision of the
relevant legislation which had direct application to the situation of
each of them.
[175] Turning to the
comparison between the 1973 and 2008 regimes, I believe that it is,
firstly, important to reiterate that the
main change brought about by
section 69 (8) (a), read with section 162, of the 2008
Companies Act,
is
the introduction of a new civil remedy in respect of conduct which
was also unlawful under the 1973
Companies Act. In
this regard, I
have to agree with the submission on behalf of the Minister, that it
is not unfair for a director to face removal,
in terms of a new and
more effective enforcement procedure, for conduct which was unlawful
at the time when it was committed. In
particular, it is clear that
all the categories of conduct provided for in section 162 (5) (c) of
the 2008
Companies Act, would
have been covered by section 219 (1)
(c) (ii) of the 1973
Companies Act (dealing
with the disqualification
of a director).
[176] Section 219
(1) (d) of the 1973
Companies Act, also
provided for the removal of a
director once a declaration had been made under section 424 (1) of
the Act. The latter section dealt
with personal liability of a
director where he/she had carried on the business of a company
recklessly or with the intent to defraud
creditors or for any
fraudulent purpose. In Tsung and Another v Industrial Development
Corporation of South Africa Limited and
Another
2013 (3) SA 468
(SCA)
at para. 31, the court held that the carrying on of the business of a
company recklessly, means carrying it on by conduct
which evinces a
lack of any genuine concern for its prosperity. Again, it is clear
that all the conduct listed in section 162 (5)
(c) of the 2008
Companies Act, would
fall under the description of conduct which
evinces a lack of genuine concern for the relevant company’s
prosperity.
[177] With regard to
the severity of the respective sanctions, the 1973
Companies Act did
not set minimum or maximum periods of removal. The 2008
Companies Act
provides
that a declaration of delinquency subsists for a minimum
period of seven years, although the person concerned may, at any time
more than three years after the date of the order, apply to have the
order suspended and substituted with an order of probation.
[178] As pointed out
on behalf of the Minister, a comparison of the severity of the
respective sanctions under the two Acts, cannot
really be made in the
abstract, but should rather be done on a case-by-case basis. However,
insofar as the sanctions of the two
regimes may be compared, it is
significant that, although the 2008
Companies Act provides
for a
declaration of delinquency to last for at least three years, a court,
under the 1973
Companies Act, had
the power to disqualify a director
for whatever period the court deemed fit, with the affected
ex-director being entitled to apply
to court to set aside the
operation of such an order.
[179] Furthermore,
in terms of the 1973
Companies Act, a
disqualification order under
section 219
would result in the relevant person being disqualified
from any involvement in the management of a company. Under the 2008
Companies Act, conversely
, the declaration of delinquency only
affects the impugned individual’s position as a director or as
a prescribed officer.
It therefore appears that, in certain respects,
the sanction under the 2008
Companies Act is
less severe than under
the 1973
Companies Act.
[180
] More
important, however, is the fact that the sanctions imposed under the
2008
Companies Act, simply
reflect the seriousness of the
transgressions set forth in
section 162
(5) (c), which transgressions
concern substantive abuses of office, including the fraudulent,
reckless and/or grossly negligent
carrying on of the business of a
company. In my view, a comparison between the two regimes,
necessarily leads one to the conclusion
that there is no merit in the
submission that section 162 (5) (c) of the 2008
Companies Act,
applied
retrospectively, is inconsistent with the rule of law. As far
as the alleged violation of the right to equality is concerned, it
is
correctly pointed out on behalf of the Minister, that this is merely
a repetition of the same argument in a different form.
If the conduct
was already unlawful and cause for disqualification under the 1973
Companies Act, then
there can be no arbitrary differentiation.
[181] I therefore
find that section 162 (5) (c) of the 2008
Companies Act, is
not
unconstitutional by virtue of its retrospective application.
Is
section 162
(5)
(c) unconstitutional in that it infringes upon directors’
constitutional rights under sections 10 and 22 of the Constitution?
[182] Again, the
analysis is to be limited to section 162 (5) (c) of the 2008
Companies Act. Gihwala
and Manala have no interest in a finding
whether or not any of the other subsections in
section 162
(5), are
unconstitutional.
[183] The challenge
launched by Gihwala and Manala in this regard, is that
section 162
(5) (c) is unconstitutional by virtue of the fact that it is
overbroad; that it does not confer a discretion upon the court to

decide whether or not a director should be declared delinquent and
that it does not confer a discretion upon the court to determine
the
period of the declaration of delinquency.
[184] As I
understood the argument on this part of the challenge, Gihwala and
Manala contend that
section 162
(5) (c) infringes upon the doctrine
of separation of powers, as well as their constitutional rights to
professional freedom (section
22 of the Constitution) and human
dignity (section 10 of the Constitution).
[185] I agree with
the submission that the contention that the section is overbroad,
effectively collapses into the second prong
of the attack, i.e. that
the section is unconstitutional because it does not confer a
discretion to the court on whether or not
to declare a person to be a
delinquent director. The reason why it is contended that the section
is overbroad, is precisely because
it does not confer a discretion
regarding an order of delinquency in certain instances.
[186] Turning to the
relevant substantive constitutional challenges raised by Gihwala and
Manala, I firstly deal with the alleged
separation of powers (as an
element of the rule of law) violation. In this regard Manala argues
as follows:
“We submit
that it is inimical to the rule of law- in particular, the separation
of powers- for the legislature to compel
the judiciary to impose a
punishment that disregards the individual circumstances of a case or
which is disproportionate to the
misconduct at issue.”
[187] In this regard
reliance is placed on the judgment of the Constitutional Court in S v
Dodo
[2001] ZACC 16
;
2001 (3) SA 382.
Whether this judgment is helpful, is debatable,
as it dealt with the test adopted by the Constitutional Court in
criminal sentencing
matters. Be that as it may, it, in any event,
appears from paragraph 34 of Dodo that the question whether there is
sufficient discretion
in legislation, is to be determined with
reference to the Bill of Rights. In the result the relevant inquiry
in regard to the alleged
infringement of the separation of powers
principle, is whether section 162 (5) (c) of the 2008
Companies Act,
is
inconsistent with Gihwala and Manala’s constitutional rights
as enshrined in sections 10 and 22 of the Constitution.
[188] During
argument it became clear that the main attack of Gihwala and Manala
upon the constitutional validity of section 162
(5) (c), is based
upon section 22 of the Constitution. In this regard there is
consensus that section 22, in this instance, relates
to the right to
practise a profession and not the right to choose a profession. From
this it follows that, as section 162 (5) (c)
merely regulates the
right to practise the profession of a director, the only question is
whether such regulation is rational.
[189] Dealing,
firstly, with the lack of a discretion regarding an order of
delinquency, the question is whether it is rational
to eliminate a
person from serving as a director for a period of time, on the basis
that he or she was guilty of conduct falling
within the categories
specified in section 162 (5) (c). This, in turn, involves an analysis
of the specified categories of conduct.
A perusal of these
categories, shows that all of them deal with instances of serious
misconduct, constituting gross abuses of the
position of a director
of a company.
[190] There is, in
my view, no doubt that the elimination of a person from serving as a
director for a period of time, for conduct
falling within any of the
categories of conduct stipulated in section 162 (5) (c), is not an
irrational response.
[191] As indicated
earlier, section 162 (5) (c) is, in my opinion, rationally related to
its objectives. It is necessary to eliminate
rogue directors from
operating in South Africa to protect investors, as well as to boost
confidence in the South African Regulatory
System in order to attract
investments and stimulate growth.
[192] In considering
whether a lack of discretion with regard to the period of the order
of delinquency, renders section 162 (5)
(c) unconstitutional, it is,
once again, necessary to consider whether the purpose of prescribing
a minimum period for an order
of delinquency, is rational.
[193] Firstly, in
this regard, it has to be borne in mind that the prescribed
declaration of delinquency for a period of seven years,
is
ameliorated by the discretion of the court to make the declaration
subject to any conditions the court considers appropriate,
as well as
the affording of a discretion to the court to suspend the order and
substitute same with an order of probation, at any
time more than
three years after the original order had been made.
[194] The purpose of
prescribing minimum periods for an order of delinquency, is obviously
to ensure that the objectives of the
legislature, as set out above,
are met by removing unscrupulous directors in order to protect
investors. Further objectives would
be to ensure greater consistency
in the application of section 162 and to ensure that the section has
a sufficient deterrent effect.
[195] I therefore
agree with the contention that, to achieve these objectives, a
minimum period of delinquency of three years, is
rational, given that
a delinquent director can hardly contend that he or she will be able
to demonstrate “satisfactory progress
towards rehabilitation”
in a shorter period than three years.
[196] I therefore
conclude that, also in regard to the lack of a discretion with regard
to the period of the order of delinquency,
section 162 (5) (c) is
rational and does not infringe upon Gihwala and Manala’s
constitutional rights, in particular the
rights enshrined in section
22 of the Constitution.
[197] With regard to
the alleged infringement of the right to dignity, I have to agree
with the submission on behalf of the Minister,
that it is difficult
to understand how the human dignity and integrity of a person can be
affected by his or her removal as director,
on valid and substantial
grounds as set out in section 162 (5) (c) of the 2008
Companies Act.
If
this were to be the case, then it would be virtually impossible
for shareholders to remove rogue directors because such a removal

would inevitably affect the directors’ dignity and integrity.
[198] However, as
explained by the Minister, the real difficulty with reliance on human
dignity in the present matter, is that it
runs contrary to the
principle of subsidiarity. This principle requires that norms of
greater specificity should be applied to
the resolution of disputes
before norms of greater abstraction. In the case of the right to
dignity, this translates into a rule
that a specific right giving
effect to a particular aspect or application of the general right to
dignity, should be invoked in
preference to reliance on the general
right. In the present matter the more specific right is the
professional freedom right which
should be invoked in preference to
the general right to dignity. See Nokotyana v Ekurhuleni Metro
Municipality
2010 (4) BCLR 312
(CC) at para 50.
[199] In view of the
aforesaid, I conclude that the provisions of
section 162
(5) (c) do
not infringe upon Gihwala and Manala’s constitutional rights
under sections 10 and 22 of the Constitution.
[200] I now proceed
to consider whether Grancy is entitled to the delinquency
declarations sought in these proceedings. I should
mention that, in
seeking this relief, Grancy sought to rely only upon the conduct
cited in the 2011 action. However, as I understand
the provisions of
item 7(7) of Schedule 5 to the 2008
Companies Act, Grancy
will also
be entitled to rely upon the conduct cited in the 2010 action.
Particularly so, as relief of this nature had not been
sought under
the 2010 action, save for the belated amendment in terms of which
relief was sought under sections 218 and 219 of
the 1973
Companies
Act. I
have, in paragraph 149 above, held that such relief was not
validly introduced under the 2010 Act, as the amendment was only
effected
after 1 May 2011. It follows, in my view, that Grancy is
entitled to also rely on the conduct cited in the 2010 action,
insofar
as it may be relevant to the delinquency declarations sought
in the 2011 action.
[201] It follows
that Grancy is entitled to rely upon the following conduct of Gihwala
and Manala. I firstly deal with the 2011
action:
201.1 The unlawful
payment of R2,75 million to each of them as directors’ fees.
201.2 The unlawful
payment of R1 114 539-00 to each of them as surety fees.
201.3 The unlawful
loan of R1 976 523-34 to Manala.
201.4 The failure to
ensure that such accounting records as are necessary fairly to
present the state of affairs and business of
SMI, were kept.
[202] In addition,
Grancy may also rely on the following conduct of Gihwala and Manala,
cited in the 2010 action:
202.1 The
unauthorised crediting of themselves with promotion fees of R225
000-00.
202.2 The
unauthorised payment of their personal legal fees in an amount of
R300 000-00.
202.3 The
unauthorised loan of R2 million to Manala.
202.4 The
unauthorised investment of R2 million in Strand/Scarlet Ibis.
[203] When regard is
had to the above conduct of Gihwala and Manala, it is clear that they
have grossly abused their positions as
directors of SMI. What the
evidence shows, is that they have taken personal advantage of
information or opportunities at their
disposal, in their capacity as
directors of SMI, to gain advantages for themselves. Their conduct
constituted repeated unlawful
misappropriation of funds involving
substantial amounts.
[204] The conduct of
Gihwala and Manala with regard to the initial investment made in
terms of the February 2005 agreement, was
commented on by the Supreme
Court of Appeal in Grancy Property Ltd v Manala and Others, supra, by
referring to “multiple
allegations of malfeasance and moral
turpitude, which assertions… have to be accepted as correct”.
[205] What
aggravates the matter, is the continued failure and refusal on the
part of Gihwala and Manala to allow Grancy access
to information and
documentation, relating to their management and control of the
investment and the affairs of SMI. To date hereof,
they have not yet
provided Grancy with anything close to a full and complete
accounting. Also, the manner in which they failed
to ensure that
proper books of account of SMI were kept, justifies the conclusion
that they had set out on a course of conduct
with only their
interests in mind and, in this manner, carried on the business of SMI
in a reckless and/or grossly negligent manner.
[206] When their
conduct is evaluated objectively, it is abundantly clear that it
falls far short of the standard of a reasonable
director. The
inescapable conclusion is that they were, at all material times,
consciously aware of their wrongdoings, but persisted
regardless of
the consequences thereof, repeatedly perpetuating instances of
unlawful conduct with the aim of benefiting only themselves.
This was
done at the expense of Grancy and SMI, to whom, fiduciary duties were
owed.
[207] In view of the
aforesaid, I have to agree with the submission on behalf of Grancy,
that this court has, in the face of the
uncontested evidence
pertaining to such serious misconduct, no option but to declare
Gihwala and Manala delinquent directors, thus
guarding the public
against such unscrupulous directors. In view of their conduct, set
out in detail above, they are simply no
longer fit to hold the office
of director or to be entrusted with the fiduciary responsibility of
managing corporate entities.
In view of their persistent serious
misconduct, I believe that this is not a case where I should consider
imposing conditions limiting
the application of the declarations of
delinquency.
[208] I have had
regard to the instances in which our courts have issued declarations
of delinquency under the 2008
Companies Act (see
the cases cited in
para. 169 above). A reading thereof shows that declarations were on
occasion granted in circumstances where
the conduct of the relevant
directors was far less serious than that of Gihwala and Manala, and
often of a technical nature. As
submitted on behalf of Grancy, the
conduct of Gihwala and Manala dwarfs that which has previously
resulted in delinquency and is
such that it must result in
unqualified declarations of delinquency.
Application to
appoint independent directors to the board of SMI
[209] In Grancy
Property Ltd v Manala and Others, supra, the Supreme Court of Appeal
substituted an order made by this court, declaring
that the order
appointing independent directors to the board of SMI, will operate
pending the finalisation of the 2011 action,
unless the court, in the
present matter, determines otherwise.
[210] Having regard
to the evidence placed before the court in this trial, it is clear to
me that, until Grancy is provided with
a full and proper accounting,
including proper books and records of SMI and details of any and all
transactions, and are paid all
amounts due to it, SMI, as the vehicle
through which the parties made the Spearhead investment, should
remain under objective and
independent oversight.
[211] I accordingly
agree that, in this regard, the order of this court, as substituted
by the Supreme Court of Appeal on 10 May
2013, should be extended on
the basis set out hereunder.
COSTS OF SUIT
(EXCLUDING THE COSTS OF THE CONSTITUTIONAL ISSUE)
[212] The general
rule is that costs follow the result. Having regard to my findings
above, and the orders made, it is clear that
Grancy has had
substantial success in this matter. It should therefore be entitled
to its costs.
[213] I have at the
outset indicated that the second plaintiff was no more than an agent
of, and investment adviser to, Grancy,
and that it is not entitled to
any relief sought in the actions. It therefore has no entitlement to
a costs order in its favour.
[214] The defendants
have submitted that there is room for a departure from the general
rule as to costs, particularly having regard
to the manner in which
Grancy conducted this litigation. In this regard reference has been
made to the voluminous documentation
introduced by Grancy, the
majority of which was not utilised in the trial.
[215] In my view,
the defendants’ submission that a special costs order should
therefore be granted in their favour, does
not take sufficient
account of the reasons why the documentation was so voluminous. In
particular, Grancy anticipated that Gihwala,
Manala and Narotam would
be testifying and that at least one opposing expert witness was to be
called. In addition, SMI was opposing
the relief sought and Manala
and SMI were advancing counterclaims. Much of the documentation was
included in the various bundles
by Grancy, in anticipation of the
cross-examination of these witnesses and to address the variety of
issues to be decided by the
court. It was only on the eve of the
trial that SMI elected to abide the court’s decision, and on
the seventh day of the
trial that Manala abandoned his counterclaim.
Also, it was only at the end of Grancy’s case that the
defendants confirmed
that no witnesses would be called on their
behalf.
[216] In the
circumstances, I find that Grancy was justified in producing the
various trial bundles and that no special costs order
can be
sustained on this basis.
[217] Grancy seeks a
costs order against Gihwala, Manala and the DGFT, jointly and
severally. The lion’s share of the relief
in the consolidated
action is granted against Gihwala and Manala, jointly and severally,
but this does not, in my view, mean that
no costs order should be
made against the DGFT. It should be borne in mind that the evidence
shows that the DGFT is, effectively,
the alter ego of Gihwala. As
appears from the evidence, the DGFT did not only make payments on
behalf of Gihwala under the February
2005 agreement, but it received
various benefits. At the outset, the shareholding in SMI, to which
Gihwala was entitled in terms
of the February 2005 agreement, was
registered in the name of the DGFT. The dividend payments
attributable to this shareholding
were also received by the DGFT.
Further payments made by SMI, were received by the DGFT and/or
Gihwala, such as the repaid amount,
promotion fees and legal fees.
Account should also be taken of the fact that directors’ fees
and surety fees paid to Gihwala,
were credited to the DGFT.
[218] In these
circumstances, I believe that it would be fair and just to hold the
DGFT liable, jointly and severally, with Gihwala
and Manala, for the
payment of Grancy’s costs.
[219] Grancy seeks
costs on a punitive scale. Having regard to the history of this
matter, in particular the conduct of Gihwala,
Manala and the DGFT, as
described in detail above, I believe that a punitive costs order on
the scale as between attorney and
client, including the costs of two
counsel (where employed), is justified. I am not persuaded that an
award of costs between attorney
and own client should be made. Such
an award has variously been described as “uitsonderlik”,
“very punitive”,
and indicative of “extreme
opprobrium”. See: Sentrachem Ltd v Prinsloo
1997 (2) SA 1
(A)
at 22D; Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd
[1995] ZASCA 53
;
1995 (4) SA 790
(A) at 807D; Cambridge Plan AG v Cambridge Diet (Pty)
Ltd
1990 (2) SA 574
(T) at 589 D.
[220] In my view
Grancy would not only be sufficiently compensated by an award of
attorney and client costs, but an award on the
higher scale would
negate the fact that the defendants have had some success in
defeating some of Grancy’s myriad of claims.
[221] Grancy also
seeks an order that Mawji be declared a necessary witness, as well as
an order that specified items of cost incurred
by him, are
recoverable. I have no doubt that he should be declared a necessary
witness, although the need for such a declaration
appears to have
fallen away. See Transnet Ltd v Witter
[2008] ZASCA 95
;
2008 (6) SA 549
(SCA).
However, as is customary, I will, ex abundanti cautela, make such a
declaration. I also have no doubt that Mawji’s
costs attending
the trial and any consultations held in South Africa, including
travelling, subsistence and accommodation costs,
should be
recoverable. However, apart from recommending the payment thereof, I
do not intend making a specific order in this regard,
as it would be
tantamount to the court usurping the function of the taxing master.
See Transnet Ltd and Another v Witter, supra,
at para. 19.
[222] Furthermore,
Grancy seeks an order that Mawji’s costs relating to security
arrangements, be paid by the defendants.
I believe that the question,
whether costs of this nature should be allowed as part of attorney
and client costs, should be answered
by the taxing master and not by
the court. In any event, I do not have sufficient information as to
the nature and extent of this
expense, to enable me to come to a
decision on this issue.
[223] As far as
Grancy’s expert witness, Mr. HJ Greenbaum, is concerned, I
believe that his full professional attendance fee,
including his
qualifying fees, should be recoverable.
[224] With regard to
its legal representation, Grancy asks the court to order the payment
of the travelling, subsistence and accommodation
expenses of its
attorneys and second counsel. These attorneys and counsel are
Johannesburg based and attended the trial in Cape
Town. I believe
that this, too, is a matter which should be decided by the taxing
master. The question is whether these costs are
reasonable in the
context of an award of attorney and client costs. On the information
before me, I am unable to pronounce on this
issue. But, in any event,
it appears to me that, if I were to do so, I would be usurping the
function of the taxing master.
[225] Finally,
Grancy seeks a costs order in its favour with regard to the
application for the amendment of its particulars of claim,
which
amendment I granted on 6 February 2014. I then ordered that the costs
of the application are reserved for later determination.
It will be
recalled that this relates to the introduction of a cause of action
based on sections 218 and 219 of the 1973
Companies Act. It
will also
be recalled that I have, upon reflection, come to the conclusion that
the amendment did not introduce a valid cause of
action based on
sections 218 and 219 of the 1973
Companies Act.
[226
] In view
thereof, and with the benefit of hindsight, it appears that Manala,
who opposed the application for amendment, did have
valid grounds for
his opposition. In these circumstances, I believe that it would be
fair and just to order that the costs of the
amendment application be
borne by Grancy.
THE COSTS OF THE
CONSTITUTIONAL ISSUE
[227] Grancy
contends that, in view of the unsuccessful constitutional challenge
raised by Gihwala and Manala, they should be held
liable, jointly and
severally, for the costs thereof. The rule in constitutional matters
is that an unsuccessful party is not ordinarily
ordered to pay costs,
lest litigants be discouraged from asserting their constitutional
rights. However, if the constitutional
challenge is frivolous or
vexatious, or in any other way manifestly inappropriate, the litigant
instituting same should not expect
that the worthiness of its cause
will immunise it against an adverse costs award. See Biowatch Trust v
Registrar, Genetic Resources
and Others
2009 (6) SA 232
(CC) at para.
24; Camps Bay Ratepayers’ and Residents’ Association and
Another v Harrison and Another
2011 (4) SA 42
(CC) at para. 76.
[228] In my view, it
cannot be said that the constitutional challenge was frivolous
or vexatious. It seems to me that the challenge
raised genuine
constitutional questions of broad concern regarding the delinquency
provisions of the 2008 Companies Act. In view
thereof, Gihwala and
Manala should not, as unsuccessful parties, be ordered to pay the
costs of the application. Seeing that this
involved constitutional
litigation between private individuals, I believe that no order as to
the costs of the constitutional challenge
should be made.
ORDERS
[229] In the result
the following orders are made:
A. Monetary relief
claimed in the 2010 action
1. The first and
second defendants are declared liable, jointly and severally, to pay
the following to first plaintiff:
(a) The amount of R2
051 833-34, together with interest thereon at the rate of 15,5% per
annum, calculated from 20 March 2007 to
date of final payment.
(b) The amount of
R69 750-00, together with interest thereon at the rate of 15,5% per
annum, calculated from 28 February 2006 to
date of final payment.
(c) The amount of
R93 000-00, together with interest thereon at the rate of 15,5% per
annum, calculated from 28 February 2009 to
date of final payment.
(d) The amount of
R620 000-00, together with interest thereon at the rate of 15,5% per
annum, calculated from 15 June 2009 to date
of final payment.
(e) The amount of
R620 000-00, together with interest thereon at the rate of 15,5% per
annum, calculated from 2 April 2007 to date
of final payment.
(f) The amount of
R213 789-57, together with interest thereon at the rate of 15,5% per
annum, calculated from 19 August 2009 to
date of final payment.
(g) The amount of
R326 740-00, together with interest thereon at the rate of 15,5% per
annum, calculated from 19 August 2009 to
date of final payment.
(h) The amount of
R165 660-60, together with interest thereon at the rate of 15,5% per
annum, calculated from 6 January 2010 to
date of final payment.
B. Monetary relief
claimed in the 2011 action
2. The first and
second defendants are declared liable, jointly and severally, to pay
the following to first plaintiff:
(a) The amount of
R852 500-00, together with interest at the rate of 15,5% per annum on
the amount of R1 705 000-00, calculated
from 8 April 2009 to 23
November 2010 and on the amount of R852 500-00, calculated from 23
November 2010 to date of final payment.
(b) The amount of
R345 507-09, together with interest at the rate of 15,5% per annum on
the amount of R691 014-18, calculated from
1 March 2008 to 23
November 2010, and on the amount of R345 507-09, calculated from 23
November 2010 to date of final payment.
(c) The amount of
R612 722-24, together with interest thereon at the rate of 15,5% per
annum, calculated from 24 June 2009 to date
of final payment.
C. Relief relating
to books of account and financial records
3. The first, second
and third defendants are ordered to deliver to first plaintiff,
within 30 days of this order, proper and full
books of account and
such accounting records as would be necessary fairly to present the
state of affairs and business of third
defendant, and to explain the
transactions and financial position of the business of third
defendant, for the period January 2005
to date of this judgment.
D. Statements of
account and ancillary relief
4.(a) An order is
granted in terms of prayers 6 to 8 of plaintiffs’ particulars
of claim in the action under case number 1961/2010,
against the
first, second and third defendants and the Dines Gihwala Family Trust
as represented by the fourth to eighth defendants.
The order is
granted in favour of first plaintiff and the said defendants are to
comply with prayer 6 within 30 days of this order.
(b) An order is
granted in terms of prayers 12 to 14 of plaintiffs’ particulars
of claim in the action under case number 12193/2011,
against the
first, second and third defendants and the Dines Gihwala Family Trust
as represented by the fourth to eighth defendants.
The order is
granted in favour of first plaintiff and the said defendants are to
comply with prayer 12 within 30 days of this order.
E. Delinquency
declaration
5. The first and
second defendants are declared delinquent directors as contemplated
in
section 162
(5) (c) of the
Companies Act 71 of 2008
.
F. Independent
directors of Seena Marena Investments (Pty) Ltd
6. It is ordered
that paragraphs 1 to 5 of the order of the Western Cape High Court
under case no. 12193/11, as substituted by the
Supreme Court of
Appeal under case no. 665/12 on 10 May 2013, shall operate until the
later of:
(a) the finalisation
of the statement and debatement of account procedure ordered in
paragraphs 4 (a) and (b) above;
(b) the payment of
all amounts which may be due to first plaintiff pursuant to such
procedure and any order granted under or in
respect of the action
proceedings under case numbers 1961/10 and 12193/11.
G. Costs
7. No order as to
costs is made in respect of the constitutional challenge.
8. The first
plaintiff is declared liable for the costs of the application for
amendment which were reserved on 6 February 2014,
including the costs
incurred by second defendant in opposing same.
9. Save for
paragraphs 7 and 8 above, the first and second defendants and the
Dines Gihwala Family Trust, represented by the fourth
to eighth
defendants, are declared liable, jointly and severally, for the
payment of first plaintiff’s costs of suit on the
scale as
between attorney and client, which costs are to include the
following:
(a) The costs of two
counsel, where employed;
(b) The attendance
fees and qualifying expenses of the expert witness, Mr. HJ Greenbaum;
(c) The reasonable
costs and disbursements, as allowed on taxation, incurred by first
plaintiff in respect of Mr. KI Mawji, who
is declared a necessary
witness.
P B Fourie, J