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[2015] ZAWCHC 44
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Basfour 121 CC v M & R Interior Concepts and Others (12872/09) [2015] ZAWCHC 44 (22 April 2015)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case
No: 12872/09
DATE:
22 APRIL 2015
In
the matter between:
BASFOUR
121
CC
......................................................................................................................
Plaintiff
And
M
& R INTERIOR CONCEPTS
CC
............................................................................
First
Defendant
(Registration
Number: 2003/029423/23)
ANTHONY
JACOBUS MEYER (in
sequestration)
................................................
Second
Defendant
BRIAN
GEORGE RODFORD (in
sequestration)
.....................................................
Third
Defendant
JUDGMENT
DELIVERED ON 22 APRIL 2015
BOQWANA,
J
Introduction
[1]
On 26 June
2009 the plaintiff instituted a damages claim for breach of contract
against the defendants, for payment in the amount
of R2149 464.31
with interest at the rate of 15.5%, claiming against the defendants
jointly and severally. Judgment was granted
against the first
defendant on 13 June 2014. I deal with the circumstances leading to
the separation of the claim and the granting
of the judgment against
the first defendant more fully below.
[2]
The plaintiff
had entered into a building contract with the first defendant for
alterations and reconstruction of a private residence,
owned by the
plaintiff, during the period of April
2008
and September 2008
.
The plaintiff
seeks the court to effectively lift the corporate veil in respect of
its claim against the second and third defendants,
and hold them
personally liable, jointly and severally in respect of the first
defendant’s obligations to the plaintiff.
[3]
At the
commencement of the trial the defendants were legally represented by
counsel, Ms Fitzpatrick instructed by Adriaans Attorneys.
The
plaintiff had led evidence for over 10 days when the trial was
postponed
sine
die
. The
matter was then scheduled for 30 May 2014 in order for the parties to
discuss further conduct of the trial. Prior to that
date, Ms
Fitzpatrick informed me that she and the attorneys could no longer
represent the defendants.
They
subsequently withdrew from the matter.
On
30 May 2014, there was no appearance for the defendants. The
plaintiff’s legal representatives submitted proof that they
had
served the notice of set down to the first defendant’s
registered address, which property appeared to be vacant at the
time.
The court directed that the matter be postponed to 13 June 2014 and
that service be effected once again by way of substituted
service,
amongst others.
[4]
On 13 June 2014 there was again no
appearance by the defendants. I was satisfied that the plaintiff had
complied with the directions
of the Court regarding service of the
notice of set down pertaining to that date.
[5]
T
he
Court was made aware by the plaintiff’s counsel that the second
and third defendants were provisionally sequestrated on
30 April 2014
and that due to the provisional sequestration the present action
against the second and third defendants had to be
stayed in terms of
section 20(1) (b) of the Insolvency Act No. 24 of 1936
[1]
(‘the
Insolvency Act&rsquo
;).
[6]
The Court
directed that the trial proceed against the first defendant only and
postponed the plaintiff’s action against the
second and third
defendants
sine
die.
[7]
The
first defendant was a defaulter by failing to appear when the trial
was called.
[2]
In
terms of Rule 39 (1) of the Uniform Rules of Court:
‘
(1)
If, when a trial is called, the plaintiff appears and the defendant
does not appear, the plaintiff may prove his claim so far
as the
burden of proof lies upon him and judgment
shall
be given accordingly, in so far as he has discharged such burden.
Provided that where the claim is for a debt or liquidated demand
no
evidence shall be necessary unless the court otherwise directs.’
[8]
Further
evidence was led on behalf of the plaintiff against the first
defendant only for the purposes of finalising its claim and
in
particular the quantification thereof. Having listened to the
evidence and Mr Hack who appeared for the plaintiff, the court
granted judgment in favour of the plaintiff against the first
defendant
in the following terms:
8.1 Payment of
R2 149 464.31 (two million one hundred and forty nine
thousand four hundred and sixty four rand and thirty
one cents);
8.2 Interest from 4
March 2009 to date of payment at the rate of 15.5% per annum;
8.3 Costs to stand
over for later determination;
8.4 The hearing of
the claim of plaintiff against the second and third defendants is
postponed.
[9]
The matter was
set down to 31 October 2014 for hearing of the claim against second
and third defendants, following a notice given
on behalf of the
plaintiff in terms of
section 75
of the
Insolvency Act. It
was
thereafter postponed to
28 November
2014
following
an agreement between the parties, after a request from the Trustees
of the insolvent estates of the second and third defendants.
The
Trustees delivered their notice of intention to defend the matter on
25 November 2014.
[10]
On 28 November
2014, the Trustees applied for the postponement of the matter on the
basis that they needed to ascertain whether
to defend the matter. The
Trustees placed on record as representing the insolvent estates of
the second and third defendants were
Stephen Malcolm Gore, Helgard
Muller, Meiring Terblanche and Yunus Aboo Baker Ismail. The matter
was accordingly postponed to 12
December 2014. It is apparent from
the affidavit in support of the application for postponement filed by
the Trustees that the
second and third defendants were finally
sequestrated on 12 June 2014.
[11]
On 12 December
2014, Counsel for the Trustees, Ms Adhikari, indicated that the
Trustees would defend the claim against the second
and third
defendants. The plaintiff commenced with the leading of its evidence
against the second and third defendants. The matter
was adjourned to
09 February 2015 for further hearing. Prior to that date, I was
notified by Ms Adhikari, accompanied by Mr Hack
for the plaintiff
that the Trustees no longer wished to pursue their opposition.
A
notice of withdrawal of opposition was accordingly served on 02
February 2015.
[12]
Action against
the second and third defendants continued unopposed. Further evidence
was led by the plaintiff until it closed its
case.
Evidence
against the first defendant
[13]
Before I deal with the claim against
the second and third defendants, it is perhaps important to outline
in brief the facts and
the evidence which was led resulting in the
granting of the judgment against the first defendant.
[14]
Extensive evidence was led by
Gary
Nathan (‘Nathan’), Neil Sachs (‘Sachs’),
Douglas Richard Sparks (‘Sparks’) and Nicholas
Taylor
(‘Taylor’)
on behalf of
the plaintiff against the first defendant.
Evidence consisted of a substantial body of documentary evidence
contained in exhibits comprising,
inter
alia,
emails,
quotations, invoices, spreadsheets, payments, expert reports, and
building plans.
[15]
Nathan testified regarding an
agreement that the plaintiff had with the first defendant in terms of
which the first defendant would
carry out alterations and renovations
to the plaintiff’s immovable property situate at 15 Blair Road,
Camps Bay (‘the
property’).
[16]
At the time
the contract was concluded the plaintiff was represented by Nathan
and his wife, Sharin Nathan, and the first defendant
was represented
by Anthony Meyer, the second defendant.
Sharin
Nathan is the sole member of the plaintiff. The plaintiff was however
mainly represented by (Gary) Nathan at all material
times, in all
dealings regarding the execution of the contract with the first
defendant and its representatives. The second and
third defendants
were at all relevant times members of the first defendant.
[17]
The first
defendant was also contracted to render architectural and/or drafting
services in accordance with written quotations.
Such quotations
contained the initial scope of work and services and the remuneration
to be paid to the first defendant.
[18]
It was alleged
by the plaintiff that the first defendant expressly, alternatively
impliedly, or alternatively tacitly, agreed: to
perform the work in a
professional and proper workmanlike manner to completion; to use the
materials suitable for the purpose of
the works and free of defects;
and/or that the works would be fully operational and/or usable for
the purpose for which it was
intended upon completion of the work.
[19]
Nathan
testified that the first defendant commenced work on or about March
2008. It however breached its obligations during late
December 2008
and /or January 2009 by simply abandoning the site and ceasing to
carry out any further work. Despite demand from
the Nathans on behalf
of the plaintiff, it refused to complete the work as agreed.
[20]
The first
defendant breached its obligations further by not providing the
drawing details, and by failing to execute the work or
render
services in a professional or a proper workmanlike manner as agreed
between it and the plaintiff. The work it did up to
the point it
ceased to work was found to be defective resulting in the plaintiff
incurring huge costs to complete the building
and repair the defects.
Other additional costs were incurred including costs of alternative
accommodation.
The first defendant
refused to remedy its breach.
[21]
Nathan led the
Court through various quotations, variations to the scope of work,
emails written between him and the representatives
of the first
defendant, amongst others, including a certain Paul Johnston, and one
Richard Lane (‘Lane’) during the
course of 2008 and 2009.
Such emails outlined the agreement as quoted, payments that had been
made in terms of the quote, and additional
payments made upon demand
from Meyer and Johnston. Furthermore, such emails revealed changes to
the plans and the fact that Nathan
was frustrated due to lack of
progress and that he had to pay sub-contractors that had not been
paid by the first defendant and
that the first defendant had
abandoned the site refusing to continue with the construction work or
rectify the defects that were
identified. Discussions regarding the
proposed renovations started in October 2007 but the quote was only
obtained from the first
defendant in April 2008. The parties agreed
on a fixed price of R 4 210 768.00 made up of the initial
contract sum of R 2 499 800.00
and an additional sum of
R1 710 968.00. Performance of all the items was included in
the fixed price. The scope of work
was varied by agreement and the
contract sum was increased by R 411 603.71. Certain works
were further omitted by agreement
reducing the contract sum by
R699 703.79. The final contract sum that the plaintiff would
have to pay was R 3 922 667.92.
The first defendant’s
representatives kept asking for more money despite payments that had
already been made and without
showing any progress on the
construction site. These requests for more money were made
after the final price was agreed upon.
[22]
The plaintiff
had paid a total sum of R 3 017 120.00 to the first
defendant and a sum of R145 000.00
to a
sub-contractor, Lane, which totalled R 3 162 120.00 at the
time of the breach of contract. The plaintiff would have
to pay the
sum of R 1 919 527.31 to the replacement contractor as the
cost necessary to complete the work that the first
defendant failed
to complete. The total cost to plaintiff was R 5 081 647.31.
[23]
The plaintiff
suffered damages in the amount of R 2 149 464.31. The
amount claimed by the plaintiff represented cost of
completion of
work, cost of remedying the defects, overpayment, additional costs
and costs occasioned by the delay resulting in
plaintiff incurring
costs for leasing alternative accommodation.
[24]
The expert
witnesses, being Sachs, Sparks and Taylor, gave a clear and
comprehensive account on the nature of the claim and on how
it was
calculated and quantified. Sachs, an architect, testified about the
nature of the incomplete and defective work requiring
completion
and/or rectification. He gave evidence regarding items that had to be
completed and remedial work that needed to be
done on defective work
that he observed with Sparks.
[25]
Sparks, a
quantity surveyor, gave evidence about the cost of various individual
items requiring completion and/or rectification
and confirmed the
accuracy of the calculations set out in the plaintiff’s
particulars of claim based on fair and reasonable
costs of labour and
material in 2009.
[26]
Taylor, a
chartered accountant, testified that the amount claimed in respect of
the alternative accommodation was fair and reasonable
in and during
2009.
[27]
I was
satisfied with all the evidence led on behalf of the plaintiff and
granted judgment in favour of the plaintiff against the
first
defendant in terms of Rule 39 (1) of the Uniform Rules of Court.
Claim
against the second and third defendants
[28]
The
plaintiff claimed that the second and third defendants were
personally liable for the damages suffered by the plaintiff in that
they infringed various provisions of the Close Corporations Act
[3]
(‘the Act’). Firstly, they have failed to keep proper
accounting records as required by section 56 of the Act. Secondly,
they failed to cause financial statements to be made out and are
therefore in violation of section 58 of the Act. Thirdly, they
have
failed to have an accounting officer in terms of section 59 of the
Act and are therefore liable in terms of section 63 of
the Act.
Fourthly, they have conducted the business of the first defendant
recklessly, fraudulently and with gross negligence and
are therefore
liable in terms of section 64 (1) of the Act. Fifthly, they have
grossly abused the separate juristic personality
of the first
defendant and are therefore liable in terms of section 65 of the
Act.
Evidence
against second and third defendants
[29]
Nathan was
called as an expert witness to give evidence on behalf of the
plaintiff against the second and third defendants. I raised
an issue
of whether Nathan’s evidence could be viewed as being objective
for the reason that he was involved in all dealings
on behalf of the
plaintiff with the defendants, was attached to the plaintiff, had an
interest in the matter and also gave evidence
on behalf of the
plaintiff in the claim against the first defendant.
[30]
Mr Hack’s
response was that the evidence that Nathan gave was exclusively in
regard to hard and cold facts which was supported
by documentary
evidence consisting of, amongst others, bank statements. This
documentary evidence was the result of his personal
investigations. A
firm of forensic accountants, Accounts-at-Law, assisted the plaintiff
in putting the data collected by Nathan
into a spread sheet. Mr
Hack submitted that the Court was able to come to its own conclusions
on the facts and the law as
they were presented; it need not rely on
Nathan’s opinions. He submitted that the opinions to be formed
are not of a technical,
scientific or abstract nature, they are
matters of commercial practice and law. The issue was about the
second and third defendants’
non-compliance with the law. I am
satisfied with Mr Hack’s response.
[31]
Nathan’s
evidence in short was as follows. He holds a BSc degree in Computer
Science. He is currently a Chief Executive Officer
at Oro Africa
Limited. He has extensive experience and knowledge in corporate
governance, company and business management procedures,
reading and
understanding of financial statements, banking transactions,
identification of movement of assets and liabilities from
financial
records and in matters relating to the Value Added Tax (VAT) and
other taxation laws and procedures applicable to individuals
and
corporate entities. He actively participated in all preparations for
trial. He identified documents that were required to be
discovered by
the defendants during numerous requests.
[32]
He personally
analysed documents in exhibit E and consulted Accountants –at–Law,
with whom he conducted investigations
into the conduct of the first
defendant. The data search related to the first defendant, its
members, accounting officer, bookkeeper
and the property renovations
or improvements. They reviewed 22 months of bank statements for
the first defendant from January
2007 to October 2008, various email
correspondence, certain Nedbank payment confirmations, supplier
invoices, the corporation founding
statements, accounts receivables,
annual general meeting minutes, provisional tax and VAT returns, the
VAT application, the Tomar
Trust lease agreement, a list of
properties and equipment and pleadings relating to the matters.
Failure
to keep the books
[33]
As regards the
second and third defendants’ failure to keep proper books of
account, Nathan testified that the first defendant
had never had
accounting records since its inception in 2003. The plaintiff filed
numerous applications for discovery of various
accounting documents.
The defendants failed to respond until an application to strike out
the defence was brought. The defendants
responded by saying they did
not have the documents requested in their possession except for two.
A question was posed in the plaintiff’s
request for further
particulars whether the first defendant provided the second and third
defendants with remuneration and, if
so, what the amount and the
nature thereof were. The answer given was that the second and third
defendants’ sources of finance
were profits derived from
contracts undertaken by the first defendant; they were members of the
first defendant; the first defendant
did not provide regular
remuneration but merely profits realised at the conclusion of the
contract and that the sums were irregular
and varied.
[34]
Upon the
plaintiff filing an application to compel compliance in terms of Rule
35(7), the defendants filed an undated and unsigned
affidavit. Ten
documents were provided. The first eight documents are referred to as
minutes and further annual meetings of members
for the period of 2003
up to 2010. According to the plaintiff, although purporting to have
been created and signed in successive
years, they appear
ex
facie
to
have all been manufactured at one time. Nathan testified that
the documents are false and they contain information regarding
alleged financial statements and appointment of financial officers
which is untrue. The documents titled
Consolidated
Income and Expenditure Statement Extracted for Legal Purposes
purporting to be for the years 2008 and 2009
are
false because they are not extracted from any financial statements.
After many years of either being evasive, not telling the
truth or
manufacturing evidence, the defendants finally admitted during the
trial, upon being asked by the court to answer, that
the financial
records or books of accounts requested did not exist.
[35]
Section 56
provides,
inter
alia
, as
follows:
‘
56.
Accounting records
(1)
A corporation shall keep in one of the official languages of the
Republic such accounting records as are necessary fairly
to present
the state of affairs and business of the corporation, and to explain
the transactions and financial position of the
business of the
corporation, including-
(a)
records showing its assets and liabilities, members' contributions,
undrawn profits, revaluations of fixed assets and amounts
of loans to
and from members;
(b)
a register of fixed assets showing in respect thereof the respective
dates of any acquisition and the cost thereof, depreciation
(if any),
and where any assets have been revalued, the date of the revaluation
and the revalued amount thereof, the respective
dates of any
disposals and the consideration received in respect thereof: Provided
that in the case of a corporation which has
been converted from a
company in terms of section 27, the existing fixed asset register of
the company shall be deemed to be such
a register in respect of the
corporation, and such particulars therein shall be deemed to apply in
respect of it;
(c)
records containing entries from day to day of all cash received and
paid out, in sufficient detail to enable the nature of the
transactions and, except in the case of cash sales, the names of the
parties to the transactions to be identified;
(d)
records of all goods purchased and sold on credit, and services
received and rendered on credit, in sufficient detail to enable
the
nature of those goods or services and the parties to the transactions
to be identified;
(e)
statements of the annual stocktaking, and records to enable the value
of stock at the end of the financial year to be determined;
and
(f) vouchers
supporting entries in the accounting records.’
[36]
I
am satisfied that there is no evidence to show that any accounting
records were kept as required by section 56 of the Act. As
was stated
in
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others
[4]
,
‘The accounting records are required in terms of the Act
‘fairly to present the state of affairs and business of the
corporation and to explain the transactions and financial position of
the business of the corporation.’’
[5]
The failure to meet such requirements is borne out by the roundabout
and evasive conduct of the defendants when requested to discover
further documents. It can indeed be concluded that the ‘
Consolidated
Income and Expenditure Statement Extracted for Legal Purposes’
purporting
to be for the years 2008 and 2009 presents a fabrication as it is not
supported by any financial statements and in certain
respects
contradicts bank statements.
No accounting
officer
[37]
In
regard to the non-compliance with sections 59 read with 63(h)
[6]
of the Act, Nathan testified that despite fraudulent attempts by the
defendants to make it appear as if there was an accounting
officer,
in reality there has never been an accounting officer since at least
1 March 2007. Although Adele Candance Kirsten’s
name was
given to the Companies and Intellectual Property Registration Office
as that of the first defendant’s accounting
officer when it was
first registered, there is no evidence that duties of an accounting
officer were ever performed. Kirsten herself
confirmed in her
resignation letter that the duties of an accounting officer were
never performed. Furthermore, Nathan received
a letter dated 6 June
2007 from CIPRO during his investigations purporting to come from
Mitton & Co accepting appointment as
accounting officer since
inception of the close corporation. Mitton & Co is a trading name
for a sole practitioner, Stephen
John Heiberg, who practises as a
registered accountant and auditor. Heiberg denied ever meeting with
the first and second defendants
or having had any dealings with the
administration affairs of the first defendant.
[38]
It is submitted on behalf of
plaintiff that the only conclusion to be drawn about the document is
that it was done fraudulently.
Carrying
on business of corporation recklessly, with gross negligence or
fraudulently
[39]
As
regards section 64 (1)
[7]
of the
Act, which provides that members are personally liable for the
obligations of the corporation if they knowingly carried
on the
business of the close corporation recklessly, with gross negligence
or fraudulently, Nathan made the following submissions:
Firstly, the
second and third defendants, amongst others, submitted nil returns
for payment of provisional tax for the period of
2003 to 2008. This
was notwithstanding the fact that the first defendant was busy with a
number of projects as it appears from
the accounts receivables.
In respect of one year where it appears that tax was allegedly paid
was 2009, the tax return was
based on
entirely
fictitious figures in the so-called Consolidated Income and
Expenditure Statement Extracted for Legal Purposes.
[40]
Secondly, the
consolidated income and expenditure statement showed huge expenditure
for travel and telephone expenses, being R137
026.00 and R116 676.00
respectively. It also recorded a huge cost for directors’
emoluments in the amount of R440 000.00
in spite of the fact
that a close corporation has no directors and the defendants had
stated
in their reply to the
requests for further particulars t
hat
the members received no remuneration. They stated that: ‘
The
First Defendant does not provide regular remunerations merely profits
realised at the conclusion of the contract
’.
[41]
When
the defendants were requested to give full particulars of
remuneration, including monthly or weekly payslips and IRP5s provided
to employees, as well as PAYE forms filed in terms of the Income Tax
Act
[8]
, the defendants’
reply was that these documents are not relevant because all work was
subcontracted. However, Nathan identified
direct payments made to 14
people at R599 741 for the periods of 1 January 2007 to 20
October 2008.
[42]
Thirdly, the defendants have
defrauded SARS in respect of VAT, having issued VAT invoices and
recovered VAT when the first defendant
was not registered as a VAT
vendor. On 14 October 2008, they issued an invoice to the
plaintiff for payment of R81 878.00
together with VAT of
R11 462.92. They only applied for VAT on 13 March 2009 but
collected VAT at the time when the first defendant
was not registered
for VAT. In addition to that the defendants also defrauded SARS in
respect of PAYE. They alleged that they had
no employees but that all
the work was done by subcontractors. The bank statements, however,
showed payments in the form of ‘salary’.
It should then
be concluded that the first defendant paid employees but failed to
pay PAYE to SARS.
Abuse of
juristic personality
[43]
In regard to
section 65 of the Act, the plaintiff alleges that the second and
third defendants abused the separate juristic personality
of the
first defendant in a manner that can be described as egregious and
appalling. Nathan testified that the second and third
defendants
represented themselves to the plaintiff as ‘builders’;
however, from the evidence gathered from the first
defendant’s
website and records from the Deeds Office, the second and third
defendants were in the business of buying and
selling property. They
did not buy property so they could add value to it and to accrue
profit over the years; they bought properties
to renovate or
otherwise improve them and quickly re-sell them at a substantial
profit. From this it appears that the second and
third defendants
created the first defendant with one goal in mind, namely, to use it
to carry out building work, therefore saving
them from employing
independent builders or paying for the building work. Nathan gave
evidence regarding the acquisition, value,
improvements and selling
of these properties. He analysed the bank statements that were
discovered and the deeds office records
regarding properties acquired
and expenses incurred to renovate and /or improve them and when those
properties were sold and for
what amounts. The costs of these
renovations were not paid by the second and third defendants, who
took all the profits, but by
the first defendant. The second and
third defendants made profits at the expense of the first defendant.
They each made between
R14 million and R15 million over the last ten
years whilst impoverishing the first defendant and its creditors in
the process.
[44]
Various examples of properties were
provided which were purchased and resold in the manner set out above.
One such example is
Erf 26670, commonly known as No.7 Low Street, Observatory, which was
purchased by the second defendant on 6
May 2005 from MFR Van Rooyen
at the price of R900 000. The cost to improve this
property was to the value of R24 181.72
which was paid by the
first defendant. These payments are reflected in the business account
1011 1077082 for the period of February
and September 2007. The
property was sold for R 1 830 000.00 to CEP McKee who took
transfer on 10 April 2008. The balance
in the bank account of the
first defendant at the time of transfer was R 7 889.28. Another
example is Erf 25825, known as
No. 31 Lytton Street Observatory,
which was bought by both the second and third defendants on 9
February 2006 from a Bank for the
amount of R795 000.00. The
costs of improvement were paid by the first defendant in the amount
of R28 075.04 for the
period of February 2007 to January 2008
and the property was sold at R1 270 000.00 to R G Sunkel.
Transfer took place
on 13 March 2008.
Other
examples investigated by Nathan and provided to the court demonstrate
a similar
modus operandi
.
[45]
In regard to
the project relating to the plaintiff’s property, the plaintiff
made payments to the first defendant. Examples
are payments made on
20 and 21 May 2008 in the amounts of R500 000.00 and R750 000.00
respectively. At that time the
balance in the bank account of the
first defendant as reflected by the bank statements was R 2243.46. On
21 and 22 May 2008 an
amount of R400 000.00 and R753 000.00
were debited to M*TT Ned Cons54212820008965669. The reason for this
transaction
is not stated. Numerous other transactions that were not
accounted for ensued. Comparison between inflows and outflows was
staggering.
The plaintiff paid another R 1 000 000.00
in September 2008, at that time the balance in the bank account of
the first
defendant was R 4457.06. Small amounts were identified
relating to the plaintiff’s property. Monies were
credited to
various account numbers, with reasons not stated and to
various projects owned by the second and third defendants. It appears
that
money was used to pay salaries, expenses and to subsidise other
projects and not for the material and labour required to build the
plaintiff’s property. This occurred whilst the first
defendant’s representatives kept demanding more money from the
plaintiff.
[46]
It is
submitted by Mr Hack that the conduct of the second and third
defendants was indeed typical of controllers of a corporate
entity
abusing its separate corporate identity for their own personal
advantage.
Discussion
[47]
The plaintiff
relies on various provisions of the Act in seeking a relief holding
the second and third defendants personally liable
for the first
defendant’s obligations. It relies on section 63(h), section 64
(1) and section 65.
[48]
In terms of section 63 (h) of the
Act:
‘
If
the office of accounting officer is vacant for a period of six
months, every member who at any time during that period is aware
of
the vacancy and who at the expiration of that period
is
still a member is liable for every debt of the cooperation incurred
during the existence of the vacancy, as well as for every
debt
incurred thereafter while the vacancy and his membership continues
.’
[9]
[49]
As
was found in
Airport
Cold Storage
supra,
‘It cannot be held that the mere reflection in the founding
statement of the name of someone as accounting officer
is sufficient
compliance with the provisions of the Act.’
[10]
Kirsten clearly stated that no accounting duties were performed, at
least from inception. Heiberg denied being an accounting officer
or
having performed any accounting work for the first defendant. In the
circumstances the provisions of section 59 read with section
63 (h)
were not complied with and therefore the provisions of section 63(h)
imposing personal liability would apply.
[50]
As regards section 64(1), I am
satisfied that the second and third defendants carried the business
of the first defendant recklessly,
with gross negligence and with
intent to defraud the plaintiff and other creditors in particular the
receiver of revenue.
[51]
In regard to the first submission,
it can be reasonably concluded that the second and third defendants
were not entirely truthful
to the receiver when submitting nil
returns for payment of provisional tax for all the years in question,
except for one year,
which return was also questionable, when
numerous projects were undertaken by the first defendant during that
period.
[52]
As
regards the second submission,
I
accept Nathan’s testimony to the effect that either the
defendants’ reply in the pleadings was a lie or the reference
to directors’ emoluments of R440 000.00 was made with the
intention to defraud the receiver of revenue of a significant
sum. I
am also persuaded by the submission that the two concepts (i.e.
profits and emoluments) are entirely incompatible. According
to
Nathan, emoluments are salaries or fees or benefit from employment or
office
[11]
deductible
before taxation. Profits payable to members are what remain after tax
and after the corporation has properly decided
what is available for
distribution. The payments to members out of profits accordingly can
never constitute expenses.
[53]
It was stated
by Nathan that for 2009 the defendants would have defrauded SARS in
the amount of between R500 000.00 to R800 000.00
and if
other years were included the amounts would run to
millions
of rands. I am satisfied that the
alleged gross profit of R 4680.00 does not appear to be correct. The
only reasonable conclusion to reach is that allegation is
fraudulent,
if one has regard to the R440 000.00 and the inflated travel and
telephone expenses.
[54]
If the defendants were correct that
the first defendant had no employees, then why would there be
payments made to certain individuals
and recorded as ‘Salary’.
The inescapable conclusion is that the defendants deliberately lied
in their replies for
further particulars or requests to discover
documents. They also failed to account for PAYE, VAT, UIF and other
statutory obligations
required when a corporation employs people.
Evidence also bears out that they recovered VAT whilst not registered
for VAT, thereby
defrauding the receiver.
[55]
It
has been held that
‘
the
object of the provision [s64] is not to create a joint and several
liability between the delinquent director [member] and the
company
[corporation] in the interests of creditors.
If
the company cannot pay
,
the creditor is entitled to claim from the director without having to
place the company in liquidation or under judicial management.
This
does not mean that the creditor has to excuss the company before
proceeding against the director only that
there
must be evidence of the company’s inability to do so
.’
[12]
(Own
insertion and emphasis)
[56]
In
Tsung
v Industrial Development Corporation of SA
[13]
the Supreme Court of Appeal held that in a case where a company is
‘hopelessly insolvent’, a causal link between the
fraudulent or reckless conduct, and the company’s liability to
pay its debt does not have to be established.
[57]
In the present
matter whilst judgment was granted against the first defendant in the
first instance, it has become apparent that
the first defendant would
be unable to pay the plaintiff’s debt as it has been stripped
off its assets by the second and
third defendants. Nathan
demonstrated from the first defendant’s bank statements that
were discovered and from other documentation
relating acquisition and
selling of properties by the second and third defendants, that they
used the first defendant to pay for
expenses relating to their
personal properties and to advance large sums of money to various
unaccounted accounts. There was no
evidence in the bank statements
showing that the first defendant had received any proceeds relating
to the properties sold nor
was it reimbursed for expenses it paid on
behalf of the second and third defendants. It is evident that the
first defendant did
not have assets to pay the plaintiff’s
claim. Secondly, the second and third defendants have been
sequestrated.
It was stated on
affidavits requesting postponements by the Trustees that the second
and third defendants were at one stage in Europe
and then in
Australia and could not be reached for trustees to obtain information
in order to investigate their financial affairs.
[58]
Turning to section 65. This section
provides as follows:
‘
65.
Powers of Court in case of abuse of separate juristic personality of
corporation
Whenever a Court on
application by an interested person, or in any proceedings in which a
corporation is involved, finds that the
incorporation of, or any act
by or on behalf of, or any use of, that corporation,
constitutes a
gross abuse of the juristic personality of the corporation as a
separate entity, the Court may declare that the corporation
is to be
deemed not to be a juristic person in respect of such rights,
obligations or liabilities of the corporation,
or of such member
or members thereof, or of such other person or persons, as are
specified in the declaration, and the Court may
give such further
order or orders as it may deem fit in order to give effect to such
declaration.’
[59]
Gross
abuse is not defined. In
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others
[14]
at paragraph 12 Griesel J held that:
‘
The
starting point is that veil piercing will be employed ‘only
where special
circumstances
exist indicating that it [i.e. the company or close corporation] is a
mere façade concealing the true facts’.
Fraud will
obviously be such a special circumstance, but it is not
essential. In certain circumstances the corporate veil
will also be
pierced ‘where the controlling shareholders do not treat the
company as a separate entity, but instead treat
it as their “alter
ego” or “instrumentality” to promote their private,
extra-corporate interests’:
‘
Although
the form is that of a separate entity carrying on business to promote
its stated objects, in truth the company is a mere
instrumentality or
business conduit for promoting, not its own business or affairs, but
those of its controlling shareholders.
For all practical purposes the
two concerns are in truth one. In these cases there is usually no
intention to defraud although
there is always abuse of the company’s
separate existence (an attempt to obtain the advantages of the
separate personality
of the company without in fact treating it as a
separate entity).’
[15]
[60]
Piercing
of a corporate veil is an exceptional procedure. In
Hulse-Reutter
and Others v Godde
[16]
the Court held as follows at paragraph 20:
‘
There
can be no doubt that the separate legal personality of a company is
to be recognised and upheld except in the most unusual
circumstances.
A court has no general discretion simply to disregard the existence
of a separate corporate identity whenever it
considers it just or
convenient to do so. (See
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others
[1995] ZASCA 53
;
1995 (4) SA 790
(A) at 803A-H).The circumstances in which a court
will disregard the distinction between a corporate entity and those
who control
it
are far from settled.
Much will depend on a close analysis of the facts of each case,
considerations of policy and judicial judgment.
Nonetheless what is,
I think, clear is that as a matter of principle in a case such as the
present there must at least be
some
misuse or abuse of the distinction between the corporate entity and
those who control it which results in an unfair advantage
being
afforded to the latter
.’ (Own
emphasis)
[61]
It is clear in my mind that most of
the properties that were said to be projects of the first defendant
were registered in the names
of the second and third defendants, in
their personal capacities either as individuals or as partners. Costs
for improvements of
these properties were paid by the first
defendant. There is also no evidence that any of the proceeds of
these sales of properties
went to the first defendant as I have
already indicated. Monies were transferred to various accounts which
were unaccounted for.
There are no records of any member loan
accounts.
[62]
In
conclusion Mr Hack once again referred to the decision of
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others,
which
was confirmed on appeal
[17]
,where
Griesel J held that:
‘
[52]
To summarise thus far, and having regard to the cumulative effect of
the evidence discussed above, I am driven to the conclusion
that,
although the defendants attempted to obtain the advantages of the
separate identity of the corporation, they operated the
business of
Sunset Beach as if it were their own and without due regard for, or
compliance with, the statutory and bookkeeping
requirements
associated with the conduct of the corporation’s business. When
it suited them, they chose to ignore the separate
juristic entity of
the corporation. In these circumstances, the defendants cannot now
choose to take refuge behind the corporate
veil of Sunset Beach
Trading in order to evade liability for its debts.’
[63]
The
same views were shared by the appeal court.
[18]
Similarly, the totality of evidence in this case leaves me with no
doubt that the second and third defendants used the separate
identity
of the first defendant to obtain its benefits, they operated the
business in total disregard of the statutory requirements
associated
with conducting a close corporation. They cannot hide behind the
first defendant’s separate identity in order
to escape
liability for the first defendant’s obligations. They failed to
come clean when they were required to provide necessary
documentary
evidence to prove that they were conducting the business in a lawful
manner. On many occasions they falsified or manufactured
evidence for
the purposes of complying with discovery requirements. Close scrutiny
and analysis of various documents by Nathan
clearly showed that the
second and third defendants’ conduct was not only
mala
fide
but was also unlawful.
[64]
The second and
third defendants did not keep proper accounting records, they did not
have an accounting officer, they paid monies
to individuals and
members whilst having claimed that the first defendant had no
employees, they charged VAT whilst not registered
as VAT vendor, they
failed to give evidence that they complied with statutory obligations
required of a person conducting a close
corporation and who is an
employer and they misrepresented their business to third parties such
as the plaintiff. In the true sense
they appeared to be ‘property
flipping’. They indeed abused the first defendant in their
personal acquisition and sale
of properties whilst using the first
defendant to fund renovation expenses with substantial amounts of
money.
[65]
Their conduct
explains why they kept asking for money from the plaintiff for the
continuation of the project, when items agreed
upon for the first
phase were not even constructed or completed. It is reasonable to
conclude that they used the monies received
from the plaintiff to
fund their other projects and grossly abused the first defendant’s
separate legal personality. Nathan’s
evidence was thorough,
clear and logical. It was in all respects supported by documentary
evidence. I have no reason to reject
it.
[66]
The Court is empowered to make a
declaration that the corporation is deemed not to be a juristic
person in respect of such rights,
obligations or liabilities of the
corporation when it finds ‘gross abuse’ of the juristic
personality of the corporation
as a separate entity.
[67]
A question I had in my mind was what
would be the effect of that declaration to the already existing
judgment granted against the
first defendant in favour of the
plaintiff. Having requested Mr Hack to address me on this issue I am
satisfied that due to the
first defendant’s inability to pay
the claim, the corporate veil can be lifted in terms of section 65 of
the Act.
[68]
In the circumstances, the plaintiff
is entitled to the order it seeks against the second and third
defendants that they be held
personally liable for the claim that the
plaintiff has against the first defendant. The second and third
defendants therefore should
be held liable jointly and severally to
the plaintiff for the amount claimed.
Costs
[69]
The issue of costs against the first
defendant stood over for later determination. If a declaration
deeming the first defendant
not to be a juristic person for the
purposes of the plaintiff’s claim in terms of section 65 is
made, a cost order against
the first defendant would be of no use.
Same applies if an order is made in terms of section 64 as it has
been held that this provision
does not create joint and severally
liability between the corporation and its members. It also seems to
me making an order only
in terms of section 63(h) would be too narrow
if one takes into account the various statutory infringements found
in this matter.
[70]
On the costs
aspect, the plaintiff seeks costs on an attorney and own client
scale. I have no doubt that the plaintiff has
made out a case
for a punitive cost order to be awarded against the second and third
defendants. That is demonstrated by the evidence
and findings above.
I
t appears that the presiding view
nowadays is that there is in fact no difference between the costs
awarded on a scale as between
attorney and client as opposed to a
cost order granted on scale between attorney and own client.
[71]
The
Supreme Court of Appeal
in
Thoroughbred
Breeders’ Association v Price Waterhouse
[19]
questioned
the existence of the difference between the two scales, but
was
reluctant to express ‘a firm view’ on whether an order as
between attorney and own client was a competent one, leaving
it for
future consideration by that Court. It however held in passing that
the full bench of this division had held a view in
Law
Society of the Cape of Good Hope v Windvogel
[20]
that an order for attorney and
own
client
costs is not appropriate since it is not generically different from
an order for attorney and client costs. It also acknowledged
that
there were contrary views in other divisions. It further noted that
the SCA appears to have accepted in principle,
in
Sentrachem
Ltd v Prinsloo
[21]
and
Cape
Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and
Others
[22]
,
but without pertinent consideration, that an order for attorney and
own
client
costs would in appropriate circumstances be competent.
[72]
A
decision that provides a thorough analysis on the question of costs
on the attorney and client scale
vis
a vis
an
attorney and own client scale is that of
A
ircraft
Completions Centre (Pty) Ltd v Rossouw and Others
[23]
.
The Court in that case examined the relevant case law that dealt with
this issue extensively and ultimately concluded that there
was in
fact no difference between the two scales
[24]
.
I
refer to paragraph 116 in particular where the Court held,
inter
alia
,
as follows:
‘
..
8.
Therefore, an order in the hybrid form that one party should pay the
costs of another 'taxed as between attorney and
own
client',
does not, as a matter of law, achieve anything more than an order in
the established form that one party should pay
the costs of another
'taxed as between attorney and client'. Equally, an agreement in the
hybrid form takes the matter no further
than an agreement to pay
'attorney and client' costs.
9.
For all of these reasons, a Taxing Master is obliged to act on an
order that one party is to pay the costs of another 'taxed
as between
attorney and
own
client' in exactly the same way as
he is obliged to act on an order that one party is to pay the costs
of another 'taxed as
between attorney and client'. As a matter of
law, there is no difference between them. Both orders are for a
taxation on the intermediate
basis in accordance with
Nel v
Waterberg Landbouwers Ko-operatieve Vereeniging
.
10.
It follows, in my respectful view, that, although costs are a matter
within the discretion of the Court, that discretion does
not extend
to the power of creating a new basis of taxation previously unknown
to the law. If any need for a new basis of taxation
should emerge (as
I do not think has occurred), it would be a matter for the
legislature, or perhaps the Rules board, to remedy.’
[73]
The
approach followed in the Aircraft decision was supported by the Land
Claims court in the judgment of
Quinella
Trading (Pty) Ltd and Others v Minister of Rural Development and
Others
[25]
.
[74]
I align myself fully with the
reasoning and hyphothesis followed by Stegmann J in the
Aircraft
Completion
case that as a matter of
law
, an order that
the defendants should pay the plaintiff’s costs 'taxed as
between attorney and own client' would
not achieve anything
more than an order in the established form that one party should pay
the costs of another 'taxed as between
attorney and client'.
[75]
In the result I make an order in the
following terms:
1.
In respect of the plaintiff’s claim
for payment in the amount of R2 149 464.31, it is declared
that in terms of
section 65
of the
Close Corporations Act 69 of 1984
,
M & R Interior Concepts CC is deemed not to be a juristic person.
2.
The second and third defendants are
declared to be jointly and severally liable to the plaintiff for the
debts incurred by the first
defendant to the plaintiff in the sum of
R2149464.31.
3.
Judgment is granted to plaintiff for the
payment of -
3.1 R2149464.31.
3.2 interest on the
aforesaid amount calculated from 4 March 2009 to date of payment at
the rate of 15.5% per annum.
3.3 costs of suit,
including all costs of qualifying experts, preparation and attendance
at court of plaintiff’s expert witnesses
and all costs of
interlocutory applications where costs stood over for later
determination, all costs on an attorney and client
scale.
N
P BOQWANA
Judge
of the High Court
APPEARANCES
FOR
THE PLAINTIFF
:
Adv B Hack
Instructed
by: Knowles Husain Lindsay Inc., Cape Town
FOR
THE FIRST, SECOND AND THIRD DEFENDANTS: No appearance
[1]
‘
20
Effect of sequestration on insolvent’s property
(1)
(b)
to stay, until the appointment of a trustee, any civil proceedings
instituted by or against the insolvent save such proceedings
as may,
in terms of section twenty-three, be instituted by the insolvent for
his own benefit or be instituted again the insolvent:
Provided that
if any claim which formed the subject of legal proceedings against
the insolvent which were so stayed, has been
proved and admitted
against the insolvent’s estate in terms of section forty-four
or seventy-eight, the claimant may also
prove against the estate a
claim for his taxed costs, incurred in connection with those
proceedings before the sequestration
of the insolvent’s
estate.’
[2]
See
Katritsis
v De Macedo 1966(1) 613 (AD
)
[3]
Act
No. 69 of 1984
[4]
2008
(2) SA 303 (C)
[5]
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others
supra
at para 31
[6]
Section
63 (h) states as follows:
‘
63.
Joint liability for debts of corporation
Notwithstanding
anything to the contrary contained in any provision of this Act, the
following persons shall in the following
circumstances together with
a corporation be jointly and severally liable for the specified
debts of the
corporation:...
(h)
where the office of accounting officer of the corporation is vacant
for a period of six months, any person who at any time
during that
period was a member and aware of the vacancy, and who at the
expiration of that period is still a member, shall be
so liable for
every debt of the corporation incurred during such existence of the
vacancy and for every such debt thereafter
incurred while the
vacancy continues and he still is a member.’
[7]
‘
64.
Liability for reckless or fraudulent carrying-on of business of
corporation
(1)
If it at any time appears that any business of a corporation was or
is being carried on recklessly, with gross negligence
or with intent
to defraud any person or for any fraudulent purpose, a Court may on
the application of the Master, or any creditor,
member or liquidator
of the corporation, declare that any person who was knowingly a
party to the carrying on of the business
in any such manner, shall
be personally liable for all or any of such debts or other
liabilities of the corporation as the Court
may direct, and the
Court may give such further orders as it considers proper for the
purpose of giving effect to the declaration
and enforcing that
liability.
(2)
Without prejudice to any other criminal liability incurred where any
business of a corporation is carried on in any manner
contemplated
in subsection (1), every person who is knowingly a party to the
carrying on of the business in any such manner,
shall be guilty of
an offence.’
[8]
Act
58 of 1962
[9]
See
the textbook,
Close
Corporation and Companies Service
,
edited by JJ Henning Volume 1 at page 6-9 paragraph 6.09, where this
was stated.
[10]
Airport
Cold Storage (Pty) Ltd v Ebrahim and Others
supra
at para 38.
[11]
Also
see
Concise
English Oxford Dictionary
,
11
th
Edition, Edited by Catherine Soanes and Angus Stevenson
[12]
See
Saincic
and Others v Industro-Clean (Pty) Ltd and Another
2009 (1) SA 538
(SCA) at 546 A – B. The Court was considering
section 424 of the Companies Act 61 of 1973 in this case but it held
that
for all intents and purposes that section was identical to
section 64
of the
Close Corporations Act. It
referred to
L
& P Plant Hire BK en Andere v Bosch en Andere
2002
(2) SA 662
(SCA) at paras 39 and 40
[13]
2013
(3) SA 468
(SCA) at para 26
[14]
2008
(2) SA 303 (C)
[15]
Joubert
(ed)
The
Law of South Africa (LAWSA)
(first
reissue) vol 4(1) para46
[16]
2001(4)
SA 1336 (SCA)
[17]
Ebrahim
and Others v Airport Cold Storage (Pty) Ltd
[2008] ZASCA 113
;
2008
(6) SA 585
(SCA). See
also
Ex Parte application of Gore NO and Others
2013 JOL 30155
(WCC)
for a comparison between section 65 of the Close Corporation Act
which requires ‘gross abuse’ and section 20(9)
of
the Companies Act which requires ‘unconscionable abuse’.
[18]
Ebrahim
and Others v Airport Cold Storage (Pty) Ltd
supra
at 590C; 592A; 592H to 593E .
[19]
2001
(4) SA 551
(SCA) 596E–I.
[20]
1996
(1) SA 1171 (C)
[21]
1997
(2) SA 1
(A) at 22B–D
[22]
[1995] ZASCA 53
;
1995
(4) SA 790
(A) at 807C–D
[23]
2004
(1) SA 123 (W)
[24]
In
doing so approving the Western Cape decision of
Law
Society of the Cape of Good Hope v Windvogel
[25]
2010
(4) SA 308
(LCC) at paragraph 33