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[2015] ZAWCHC 89
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One Stop Financial Services (Pty) Ltd v Neffensaan Ontwikkelings (Pty) Ltd and Another (20028/14) [2015] ZAWCHC 89; 2015 (4) SA 623 (WCC); [2015] 4 All SA 88 (WCC) (17 June 2015)
THE
HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case
No: 20028/14
DATE:
17 JUNE 2015
In
the matter between
ONE
STOP FINANCIAL SERVICES (PTY)
LTD
..........................................................
APPLICANT
And
NEFFENSAAN
ONTWIKKELINGS (PTY)
LTD
..........................................
FIRST
RESPONDENT
THE
CRL
TRUST
...................................................................................
INTERVENING
CREDITOR
Coram
:
ROGERS J
Heard:
2 JUNE 2015
Delivered:
17 JUNE 2015
JUDGMENT
ROGERS
J:
Introduction
[1]
The applicant (‘OSF’) applies
for the provisional liquidation of the respondent (‘Neffensaan’).
The application
is opposed by an intervening creditor, the CRL Trust
(‘CRL’). The only matter in dispute is OSF’s locus
standi
as a creditor. OSF asserts three claims: (i) a claim of R1,35
million in terms of a suretyship signed by Neffensaan on 2 March 2011
(‘the suretyship’) for money advanced by OSF to the
Molco Development Trust (‘Molco’) in terms of
a written
agreement of the same date (‘the Molco loan agreement’);
(ii) a claim of R150 000 for money lent
by OSF to
Neffensaan in terms of a loan agreement dated 24 December 2011 (‘the
first Neffensaan loan agreement ’);
(iii) a claim of
R233 420 for money advanced by OSF to Neffensaan in terms of a
loan agreement dated 5 March 2012 (‘the
second Neffensaan loan
agreement’).
[2]
Neffensaan has at all material times had
three directors, namely Messrs HS Coetzee, AS Moller and R Bock, to
whom I shall refer
by their surnames. The suretyship and the two
Neffensaan loan agreements were purportedly signed on Neffensaan’s
behalf by
Moller, who also signed the Molco loan on Molco’s
behalf. Coetzee signed the first Neffensaan loan agreement as a
witness.
It can be accepted on the evidence that he knew of and
approved the suretyship and the loan agreements. If the suretyship
and loan
agreements are enforceable against Neffensaan, the amounts
in question fell due on 9 May 2011 (the suretyship), 31 January 2012
(the first loan agreement) and 30 April 2012 (the second loan
agreement).
[3]
Discussions took place during the latter
part of 2013 and during 2014 regarding the settlement of Neffensaan’s
indebtedness
under the suretyship and loan agreements. Neffensaan was
represented in these discussions by Moller and Coetzee.
[4]
The application for provisional liquidation
was launched on 7 November 2014. Neffensaan filed a notice of
opposition. On 14 November
2014 the application was postponed to 12
March 2015 for hearing on the semi-urgent roll. During December 2014
and March 2015 there
were further settlement discussions in which
Bock for the first time participated. Bock, apart from being a
director of Neffensaan,
is one of CRL’s trustees. With the
failure of these discussions, Neffensaan withdrew its opposition
(this may have been because
of the untenable position in which Moller
and Coetzee found themselves) but CRL brought an application for
leave to intervene to
oppose. On 12 March 2015 CRL was granted leave
to intervene and the application for provisional liquidation was
further postponed
to 2 June 2015. The order granted leave to CRL to
file supplementary opposing papers by 10 April 2015. CRL failed to do
so. OSF
filed its replying papers on 11 May 2015. On 21 May 2015 CRL
belatedly delivered supplementary opposing papers. OSF did not object
or seek leave to file a supplementary reply. OSF was represented at
the hearing by Mr Woodland SC and CRL by Ms Buikman SC.
The
legal approach
[5]
In an opposed application for provisional
liquidation the applicant must establish its entitlement to an order
on a prima facie
basis, meaning that the applicant must show that the
balance of probabilities on the affidavits is in its favour (
Kalil
v Decotex (Pty) Ltd
1988 (1) SA 932
(A)
at 975J-979F). This would include the existence of the applicant’s
claim where such is disputed.
[6]
Even if the applicant establishes its claim
on a prima facie basis, a court will ordinarily refuse the
application if the claim
is bona fide disputed on reasonable grounds.
The rule that winding-up proceedings should not be resorted to as a
means of enforcing
payment of a debt the existence of which is bona
fide disputed on reasonable grounds is part of the broader principle
that the
court’s processes should not be abused. In the context
of liquidation proceedings, the rule is generally known as the
Badenhorst
rule from the leading eponymous case on the subject,
Badenhorst
v Northern Construction Enterprises (Pty) Ltd
1956 (2) SA 346
(T) at 347H-348C, and is generally now treated as an
independent rule not dependent on proof of actual abuse of process
(Blackman
et al
Commentary on the
Companies Act
Vol 3 at 14-82 –
14-83). A distinction must thus be drawn between factual disputes
relating to the respondent’s liability
to the applicant and
disputes relating to the other requirements for liquidation. At the
provisional stage, the other requirements
must be satisfied on a
balance of probabilities with reference to the affidavits. In
relation to the applicant’s claim, however,
the court must
consider not only where the balance of probabilities lies on the
papers but also whether the claim is bona fide
disputed on reasonable
grounds; a court may reach this conclusion even though on a balance
of probabilities, based on the papers,
the applicant’s claim
has been made out (
Payslip Investment
Holdings CC v Y2K Tec Ltd
2001 (4) SA
781
(C) at 783G-I). However, where the applicant at the provisional
stage shows that the debt prima facie exists, the onus is on the
company to show that it is bona fide disputed on reasonable grounds
(
Hülse-Reutter & Another v HEG
Consulting Enterprises (Pty) Ltd
1998
(2) SA 208
(C) at 218D-219C).
The facts
[7]
CRL opposes the application on the basis
that Moller and Coetzee were not authorized to sign the suretyship
and loan agreements
on behalf of Neffensaan. It appears that during
July 2007 CRL sold a property in Paarl to Neffensaan for a price of
R6 million.
Part of the purchase price was to be satisfied by an
issue of shares by Neffensaan to CRL. The shareholding in Neffensaan
is regulated
by a subscription agreement dated 31 July 2007.
Following implementation Neffensaan’s shares were to be held as
follows:
63,12% by
Kruismansbaai
Ontwikkelings (Pty) Ltd (‘Kruismansbaai’),
being an entity represented by Moller; 26,24% by CRL, 0,71% by Molco
(represented
by Moller) and 4,965% each by two other persons. It
appears that Neffensaan’s business was to develop the property
in Paarl
with a view to erecting residential dwellings and selling
subdivided erven.
[8]
The subscription agreement includes the
following provisions: (i) The shareholders were forthwith to
take steps to alter Neffensaan’s
memorandum and articles of
association so as to reflect the provisions of the subscription
agreement. In the meanwhile, and in
the event of conflict, the
subscription agreement was to prevail (clause 7). (ii) Each
shareholder holding more than 20 shares
is entitled to appoint one
director (clause 9 – only Kruismansbaai and CRL so qualified).
(iii) A quorum for a directors’
meeting is two, one of
whom must be a director appointed by Kruismansbaai and one of whom
must be a director appointed by CRL (clause
10). (iv) Resolutions
of directors must, in order to be valid, be approved by a majority of
the directors present at a meeting
(clause 13.1). (v) A
resolution signed by all the directors shall be valid and effective
as if it had been adopted at a duly
convened meeting (clause 13.2).
(vi) Save for the authority granted to Moller to purchase
the Paarl property on Neffensaan’s
behalf, none of the
directors, shareholders, officers or employees of Neffensaan has
authority to bind Neffensaan to resolutions
or transactions of the
kind listed in clause 13.9, and the directors and shareholders are
prohibited from taking steps to propose,
authorise or permit the
company to become bound by any such resolution or transaction unless
it has received the unanimous prior
written approval of all the
shareholders. (vii) Among the matters listed in clause 13.9 are
‘the incurring of long-term
debts, other than loan finance to
execute the development of the property’, and the issuing of
guarantees or suretyships
‘of any unusual nature’.
[9]
The Molco loan agreement required
suretyships to be furnished by Neffensaan, Moller and Coetzee. The
agreement recorded that the
Paarl property had been sold by
Neffensaan in terms of an agreement dated 9 December 2010. Molco was
required to procure a letter
of undertaking from the conveyancing
attorneys for payment of the sum of R1,35 million to OSF against
transfer. (There is no evidence
in the papers regarding this alleged
sale. It is clear that no such transfer occurred.)
[10]
The first Neffensaan loan agreement
required Moller, Coetzee and Molco to furnish suretyships. Whether
they did so does not appear.
Attached to the agreement is what
purports to be a resolution of Neffensaan’s directors passed at
a meeting held at Paarl
on 24 December 2011 that the company borrow
the money in question and that Moller be authorized to negotiate the
terms and sign
all documentation. The purported resolution was signed
by Moller and Coetzee. Also attached to the agreement is a resolution
of
Molco’s trustees authorising Moller to negotiate and sign
the suretyship. This resolution, again signed by Moller and Coetzee,
bears the typed date 24 December 2011 but the handwritten date 24
December 2012. (One can infer from the latter resolution that
Moller
and Coetzee were Molco’s trustees.)
[11]
No resolutions were attached to the second
Neffensaan loan agreement.
[12]
In each of the contracts signed by Moller
he warranted his authority to represent Neffensaan.
[13]
Bock says that he had no knowledge of the
Molco loan agreement, the suretyship and the Neffensaan loan
agreements until after the
launching of the liquidation application.
Those transactions were not considered at any meeting of the
directors and there was
no resolution signed by all three directors
authorising the transactions. The transactions were not approved by
Neffensaan’s
shareholders.
[14]
OSF, which was represented in the relevant
transactions by Mr JN Basson (‘Basson’), does not
challenge these facts directly.
Basson makes reference, in his
replying affidavit, to the settlement discussions of December 2014
and March 2015, stating that
Bock did not dispute Neffensaan’s
indebtedness. In the supplementary answering affidavit Bock objects
to evidence about the
settlement discussions, adding that they were
directed at a commercial solution to the advantage of all parties and
that at no
stage did he admit Neffensaan’s liability.
[15]
Since the discussions were admittedly
without prejudice, I do not think evidence as to what Bock did or did
not dispute is admissible.
Mr Woodland submitted that in
sequestration proceedings a creditor is entitled to rely on without
prejudice discussions to establish
that the debtor committed an act
of insolvency in the form of an acknowledgment of an inability to pay
his debts, and he referred
me in that regard to the recent judgment
of the Supreme Court of Appeal in
Absa
Bank Ltd v
Hammerle
Group
(Pty) Ltd
[2015] ZASCA 43
where the
court, on grounds of public policy, considered that this exception
should be extended to cases of liquidation where there
has been an
admission of insolvency (para 13). In that particular case, however,
the court appears to have relied not an admission
of insolvency but
on an admission of liability, which was relevant as an interruption
of prescription (paras 14-15). The admission
was not made in the
course of settlement negotiations (para 14).
[16]
We are not concerned in the present case
with an alleged admission of an inability to pay debts. Whatever the
position may be where
there is an express admission of insolvency or
liability in the context of settlement discussions (in
Hammerle
an ‘unequivocal admission’), it would be going very far
to allow evidence of without prejudice negotiations so as to
draw an
inference that a participant tacitly admitted the indebtedness. In
order to ascertain whether a tacit acknowledgment could
be inferred
one would need have details of the whole discussion. This would be
contrary to the underlying rationale for the privilege.
OSF did not
claim to be entitled to provide evidence of what was discussed. In
the context of without prejudice discussions, there
is a world of
difference between an express acknowledgment and an inference from
silence. Parties may often, for purposes of attempting
to reach
settlement, put aside any discussion of the underlying merits. A
participant may not even have fully explored the merits
or taken
legal advice thereon.
[17]
In his supplementary answering affidavit
Bock says that Moller has admitted to him that he did not have the
necessary authority
to conclude the transactions but is unwilling to
provide an affidavit to this effect. Bock expresses surprise, given
what he claims
to be the close relationship between Basson and
Moller, that OSF has not procured an affidavit from Moller.
[18]
I am certainly not able to find, on the
probabilities, that Bock is lying and that he knew of and approved
the suretyship and the
two loan agreements. Put differently, OSF has
not proved on a balance of probability, on the affidavits, that
Moller had actual
authority to conclude the transactions in question.
At very least, his actual authority is bona fide disputed on
reasonable grounds.
Is
Neffensaan bound by the suretyship?
[19]
This being so, it is necessary to address
Mr Woodland’s submission that Neffensaan is barred, by virtue
of the
Turquand
rule and
s 20(7)
of the
Companies Act 71 of 2008
, from relying
on Moller’s supposed lack of authority. Since the new
Companies
Act only
came into force on 1 May 2011,
s 20(7)
would only be of
potential application to the two loan agreements. The validity of the
suretyship needs to be assessed with reference
to the law as it stood
prior to the coming into force of the new Act.
[20]
Bock erroneously referred to the
subscription agreement as Neffensaan’s memorandum of
incorporation. Despite a suggestion
from the bench, neither side
placed before me the company’s memorandum and articles of
association. I thus do not know whether
Neffensaan’s
shareholders caused its memorandum and articles to be brought in line
with the subscription agreement. It was
common cause in argument that
a third party dealing with a company is not to be treated as having
constructive notice of an agreement
such as the subscription
agreement. (For convenience in what follows I shall refer to a
company’s founding document simply
as the articles. This should
be read as including its memorandum under the old Act or memorandum
of incorporation under the new
Act.)
[21]
The precise scope of the
Turquand
rule has given rise to much debate. Its source lay in the fact that
persons dealing with a company were taken to have constructive
notice
of its articles, since the articles are a public document. This
constructive notice could potentially operate adversely
to a third
party, because in seeking to evade liability the company might point
to some provision of its articles with which there
had not been
compliance. In
The Royal British Bank v
Turquand
(1856
)
6 El & Bl
327 it was held that a third
party was bound to read the company’s articles but no more. If
he finds in the articles that
the directors are not prohibited from
performing a transaction but rather given the power to do so subject
to condition, a third
party is not bound to investigate whether there
was compliance with the condition, since this is an internal matter
which a third
party could not typically be expected to know. In
Turquand
itself
the directors were authorized to borrow money on bond subject to
shareholder approval. The authority of the shareholders
was regarded
as a ‘condition’, ie a matter of internal management.
[22]
In
Mahoney v
East
Holyford
Mining
Co
(1875) LR 7HL 893 the rule was
stated as being that a third party is bound to take notice of the
‘external position’
of the company. Beyond this, however,
the company is taken to have all the powers and authorities which, by
its articles, it appears
to possess, so that everything the directors
do with reference to ‘indoor management’ is their own
concern and is known
only to them.
[23]
The
Turquand
rule forms part of our law and is not
limited to trading corporations (
The
Mine Workers’ Union v Prinsloo
1948 (3) SA 831
(A) at 844-849;
Nieuwoudt
& Another v Vrystaat Mielies (Edms) Bpk
2004
(3) SA 486
(SCA) para 8). (It may observed, in passing, that similar
problems of lack of authority can arise in relation to persons to
whom
the
Turquand
rule
would not apply, eg a person conducting business as a sole proprietor
or a partnership or an association without a public constitution.
As
appears from the judgment of Nienaber JA in
Glofinco
v Absa Bank Ltd t/a United Bank
2002
(6) SA 470
(SCA), there is still in such cases a presumption of
regularity which protects a third party from being prejudiced by
internal
limits on the purported agent’s authority of which the
third party could not reasonably have been aware, a proposition which
the learned Judge of Appeal described as ‘a principle as old as
the law of agency itself’ and which he traced back
to Justinian
(para 17). It may be that many of the cases decided in our law with
reference to
Turquand
could
as readily have been explained on the basis of this ancient
principle. Indeed, the
Turquand
rule
could be viewed simply as a specific instance of the general
principle; it seems to have been so regarded by the House of Lords
in
Morris v
Kanssen
1946 AC 459
at 474-475.)
[24]
The leading authority of more recent
vintage in England is
Freeman and
Lockyer (a firm) v Buckhurst Park Properties (
Mangal
)
Ltd & Another
[1964] 1 All ER 630
(CA). I have also found assistance in
Northside
Developments (Pty) Ltd v Registrar-General
[1990] HCA 32
;
(1990) 170 CLR 146
,
confirming in Australia the exposition of the law in
Freeman
(see in particularly Brennan J paras
5-18, Dawson J paras 14-20 and 31 and Toohey J para 4). In South
Africa the leading kindred
cases include
Wolpert
v Uitzigt
Properties Pty Ltd &
Others
1961 (2) SA 257
(W) and
Tuckers
Land and Development Corporation (Pty) Ltd v
Perpellief
1978 (2) SA 11
(T).
[25]
I
think it will be found, from an analysis of these and other leading
authorities, that the
Turquand
rule
is simply an adjunct, in the context of companies and other entities
with constitutions available to the public, of the law
on ostensible
authority, which is in turn a particular form of estoppel by
representation. (In
Northside
Developments
supra
Brennan J said
[1]
that Diplock
LJ’s lucid exposition in
Freeman
of the general principles of estoppel ‘provides the framework
within which the specifically “indoor management”
cases
are to be placed’.)
[26]
Where a person (X) who believes that he has
contracted with a company can prove that the company’s
representative (Y) had
actual authority to conclude the transaction,
neither ostensible authority, nor its companion the
Turquand
rule, need be called in aid. The
representative, Y, may however lack actual authority and usually the
want of authority can be traced
in one way or another to the
company’s articles. The implicated provisions in the articles
may be of several different kinds,
for example: (i) a provision
placing a transaction of a particular kind altogether outside Y’s
authority (case 1); (ii) a
provision making Y’s actual
authority in relation to specific types of transactions subject to
compliance with a condition
(for example, the approval of
shareholders), and the condition has not been met (case 2); (iii) a
provision under which authority
might have been, but was not in fact,
delegated to Y or was delegated subject to restrictions (case 3);
(iv) a provision under
which the company could have appointed
directors or a managing director but did not in fact do so in
circumstances where certain
persons were nevertheless allowed to
operate as its de facto directors or its de facto managing director
(case 4). Case 4 may be
regarded as a sub-species of case 3. This
fourfold division is not exhaustive but provides a sufficient basis
for the discussion
which follows.
[27]
In any of these four cases, X may wish to
meet a defence of want of actual authority by replicating that the
company is estopped
from denying Y’s authority (that is to say,
that Y had ostensible authority). Estoppel in the form of ostensible
authority
rests on a representation made by the company that Y had
authority, in reasonable reliance on which X altered his position in
some
way (see
South African Broadcasting
Corporation v Coop & Others
2006
(2) SA 217
(SCA) paras 63-65 and cases there discussed). However, in
invoking ostensible authority in the context of a company, X has the
disadvantage that, because the company’s articles are a public
document, knowledge of its contents are imputed to him. So
the
company might contend that, because X had constructive knowledge of
the implicated provisions of the articles, he could not
reasonably
have assumed Y to have the authority in question. In case 1, X should
have been aware that Y could never bind the company
to a transaction
of the kind in question. In the other three cases, X could not
reasonably have assumed Y to have the authority
in question without
investigating whether the condition had been met (case 2) or whether
and on what terms there had been a delegation
(case 3) or whether the
directors or managing director had properly been appointed (case 4).
[28]
Where X needs to invoke ostensible
authority,
Turquand
may
ameliorate the effect of constructive notice in cases 2, 3 and 4 but
not in case 1. In case 1, the bar in the articles to Y’s
authority being absolute, constructive notice of the articles is
fatal to X’s invocation of ostensible authority (cf
Freeman
at 637G).
Turquand
cannot help X because there is no
internal step which could have made Y’s authority complete and
the fulfilment of which X
was entitled to take for granted. In cases
2, 3 and 4, however,
Turquand
holds
that X is not bound to investigate whether the condition was
fulfilled or the power of delegation exercised or exceeded or
the
appointment properly made. Provided he is acting in good faith (ie
does not know of the non-compliance and knows of no particular
circumstances putting him on inquiry), he may assume that the
condition has been met or the power of delegation exercised and
observed or the appointment duly made. Accordingly, and if he has
otherwise proved the facts necessary to establish ostensible
authority, X’s reliance thereon will not be defeated by his
constructive knowledge of the articles coupled with non-fulfilment
of
the condition (case 2) or the non-exercise of the power of delegation
or the non-observance by Y of its limits (case 3) or the
absence of
due appointment of directors or of a managing director (case 4).
[29]
What is important to emphasise is that X
must still prove the facts establishing ostensible authority.
Although I have referred
to Y as an individual, the company’s
representative for purposes of ostensible authority might be several
persons or the
whole board of directors. In case 2, authority might
vest in the board subject (for example) to shareholder approval in
relation
to specific kinds of transactions (
Turquand
was such a case). Since a company’s
board usually has full authority to conduct its affairs and because
the shareholders generally
leave the conduct of the company’s
affairs to the board and thus hold the board out as the company’s
representative,
X will ordinarily be acting reasonably by assuming
that the board has authority. And since
Turquand
does not require X, unless he is put on
notice, to investigate whether any condition to which the board’s
authority in a given
instance may be subject has been fulfilled, the
case for ostensible authority is obvious, indeed so obvious that one
would tend
to explain the outcome solely with reference to the
Turquand
rule.
But on analysis X in such a case would succeed because of the board’s
ostensible authority – this must be so,
because on the assumed
facts the board would not have had actual authority, given
non-compliance with the condition. (As
Mahoney
illustrates, a company may through its
shareholders represent that the board of directors or the persons
operating as the company’s
de facto directors have authority.
See also
Rolled Steel Products
(Holdings) Ltd v British Steel Corporation & Others
[1968]
Ch 246
(CA) at 295G-296A.)
[30]
Where, however, Y is a single director
rather than the full board, the requirements for ostensible
authority, as distinct from the
ameliorating effects of
Turquand
,
require more careful attention. Whereas the board can usually be
assumed to have full authority (even if, in relation to specific
types of transactions, subject to a condition), the same cannot
necessarily be assumed in the case of a single director.
[31]
Where the company’s articles permit
the board to appoint one of their number as a managing director, the
person so appointed
may reasonably be assumed to have delegated
authority to conduct transactions within the usual scope of a
managing director’s
authority. If the company, through its
board, holds Y out as its managing director, X may reasonably assume
that Y has all the
usual authority of a managing director. It may
transpire that the board never actually resolved to appoint Y as
managing director
or that in so appointing him the board restricted
his authority in some way, but unless X has been put on notice in
regard to such
matters he is not obliged, merely because of his
constructive notice of the articles, to investigate whether a
resolution appointing
Y as managing director was properly adopted or
what the precise terms of the delegated authority were – these
are ‘indoor
management’ matters which, in accordance with
Turquand, X cannot be expected to investigate. In such instances, the
board’s
holding out of Y as the company’s managing
director is the representation which founds Y’s ostensible
authority and
on which X can, despite Y’s lack of actual
authority, rely. Examples of successful reliance on ostensible
authority in these
circumstances include
Biggerstaff
v Rowatt’s
Wharf Ltd
[1896]
2 Ch 93
,
Clay Hill Brick and Tile Co Ltd
v Rawlings
[1938] 4 All ER 100
and
Freeman
.
[32]
There may be other types of executive
positions, whether held by a director or an employee, which carry
with them a representation
of an authority usual to that type of
position (for example a financial director or branch manager) and to
whom similar principles
would apply (see
Glofinco
supra paras 14-15).
[33]
Outside of these cases, however, X is not
ordinarily entitled to assume that an individual director has
authority to represent the
company (
Wolpert
at 267H-268A;
Tuckers
Land and Development Corporation
at
15E;
Northside Development
para
31 per Dawson J). X may be able to prove that, in relation to the
specific transaction, the board held Y out as having authority
to
represent the company. But the mere fact that the company’s
articles permit the board to delegate authority to a single
director
does not entitle X to assume that any director with whom he deals has
been the recipient of delegated authority (see
Nieuwoudt
supra para 22;
Northside
Development
para 15 per Brennan J). To
prove ostensible authority, X must establish some representation made
by the company (usually its board)
that Y was authorized to represent
it. It must be remembered that although X is fixed with constructive
knowledge of the articles,
he often will not in fact have knowledge
of their content and will thus not usually be able to claim that he
placed any reliance
on the articles. Even if X does have actual
knowledge of the articles, the fact that the board could have
delegated the power to
Y does not constitute a representation by the
company (represented by its board) that it
has
delegated the power to Y. For ostensible authority to exist
there must be a representation by the company, quite apart from
its
articles, that Y has authority to represent the company. In
Freeman
the court explained that this was the
reason why, despite the existence in the articles of a power of
delegation, the claimants
failed in
JC
Houghton & Co v
Northard Lowe
and Wills Ltd
[1927] 1 KB 246
,
Kreditbank Cassel GmbH v Schenkers
Ltd
[1927] 1 KB
826
and
Rama Corporation Limited v
Proved Tin and General Investments Ltd
[1952]
1 All ER 554.
[34]
In
Freeman
Willmer LJ approved the following as a
correct statement of the law in this regard (at 640C-E, citation of
authority omitted):
‘
If
the articles merely empowered the directors to delegate to an officer
authority to do the act, and the officer purported to do
the act,
then – (a) if the act is one which would ordinarily be
beyond the powers of such an officer, the plaintiff
cannot assume
that the directors have delegated to the officer power to do the act;
and if they have not done so, the plaintiff
cannot recover; …
But (b) if the act is one which is ordinarily within the power
of such an officer, then the company
cannot dispute the officer’s
authority to do the act, whether the directors have or have not
actually invested him with the
authority to do it…’.
[35]
Diplock LJ, in his judgment in
Freeman
,
considered it desirable, in explaining the earlier cases, to ‘restate
[the law] on a rational basis’ (644B). He proceeded
to
distinguish between actual and ostensible authority, concluding at
646B-C:
‘
If
the foregoing analysis of the relevant law is correct, it can be
summarised by stating four conditions which must be fulfilled
to
entitle a contractor to enforce against the company a contract
entered into on behalf of the company by an agent who had no
actual
authority to do so. It must be shown: (a) that representation
that the agent had authority to enter on behalf of the
company into a
contract of the kind sought to be enforced was made to the
contractor; (b) that such representation was made
by a person or
persons who had “actual” authority to manage the business
of the company either generally or in respect
of those matters to
which the contract relates; (c) that he (the contractor) was
induced by such representation to enter into
the contract, ie that he
in fact relied on it; and (d) that under its memorandum or
articles of association the company was
not deprived of the capacity
either to enter into a contract of the kind sought to be enforced or
to delegate authority to enter
into a contract of that kind to the
agent’.
[36]
Diplock LJ said that in those cases where
the contractor had succeeded the company, usually represented by its
board, had made a
representation by permitting the purported agent to
act in the management of the company’s business. By contrast,
in
JC Houghton
,
Northard Lowe
,
Kreditbank Cassel
and
Rama
Corporation
,
where the contractors failed, the contractors had advanced a more
ambitious (or novel) argument. Diplock LJ said (at 647B—F)
that
they were
‘
…
all
cases where the contract sought to be enforced was not one which a
person occupying the position in relation to the company’s
business, which the contractor knew that the agent occupied, would
normally be authorized to enter into on behalf of the company.
The
conduct of the board of directors in permitting the agent to occupy
that position, on which the contractor relied, thus did
not of itself
amount to a representation that the agent had authority to enter into
the contract sought to be enforced, ie condition
(a) was not
fulfilled. The contractor, however, in each of these three cases
sought to rely on a provision of the articles, giving
to the board
power to delegate wide authority to the agent, as entitling the
contractor to treat the conduct of the board as a
representation that
the agent had had delegated to him wider powers than those normally
exercised by persons occupying the position
in relation to the
company’s business which the agent was in fact permitted by the
board to occupy. Since this would involve
proving that the
representation on which he in fact relied as inducing him to enter
into the contract comprised the articles of
association of the
company as well as the conduct of the board, it would be necessary
for him to establish, first, that he knew
the contents of the
articles (ie that condition (c) was fulfilled in respect of any
representation contained in the articles) and,
secondly, that the
conduct of the board in the light of that knowledge would be
understood by a reasonable man as a representation
that the agent had
authority to enter into the contract sought to be enforced, ie that
condition (a) was fulfilled.’
(There do not appear
to be any cases in which a claimant has successfully established
ostensible authority along the lines reflected
in this passage.)
[37]
In
Tuckers
Land and Development Corporation
Nestadt
J (as he then was) distinguished between corporate representation by
the board, by the managing director/chairman, and by
any other person
such as an ordinary director or branch manager or secretary. In the
first two instances (the board or the managing
director/chairman) the
company would usually be bound because, unless the articles otherwise
decreed, they would be taken to have
authority to bind the company
(ie have at least ostensible authority). All acts of internal
management or organisation on which
the exercise of the authority was
dependent could, in terms of
Turquand
,
be assumed by a bona fide third party to have been properly and duly
performed (at 15C-D). In relation, however, to the third
instance
(for example, a single director) Nestadt J said (at 15E-H):
‘…
Here
a third party is not automatically entitled to assume that such
person has authority and the company is not precluded from
repudiating liability on the ground that he had no authority to bind
it. To hold the contrary would deprive a company of the rights
which
any natural principal would have of denying the allegation that a
particular person is his agent. The application of the
Turquand
rule in this sphere is limited. It only comes into operation once the
third party has surmounted the initial hurdle not present
in cases
[of representation by the board or managing director/chairperson] and
proves that the director or other person purporting
to represent the
company had authority. Once this is proved then, if the actual
exercise of such authority is dependent upon some
act of internal
organisation, such can, by a bona fide third party, be assumed to
have been completed. But in dealing with the
type of person in
question the other contracting party cannot use the
Turquand
rule to help him surmount the hurdle mentioned.’
(When Nestadt J
spoke in this passage of proof that the director ‘had
authority’, he was including ostensible authority,
as is
apparent from 14D-15A.)
[38]
In
Northside
Development
supra Brennan J expressed
the matter thus (paras 12-13, my emphasis):
‘
[12] The
indoor management rule is really a presumption of regularity…
The presumption is no more than a presumption
of fact. Whence does it
arise? It arises from the likelihood that a company has given to its
officers and agents the authority
needed to carry on its business and
to act for its benefit
within the limits
of the authority which officers and agents in their respective
positions would ordinarily possess
. The
presumption might reasonably be made when the officers or agents of a
company engaged in a transaction for the purpose of
a company’s
business or otherwise for the benefit of the company and the
transaction is one that officers or agents in their
respective
positions would ordinarily be expected to have the company’s
authority to undertake…
[13]… To
found an estoppel as to the authority of an officer or agent who is
engaged in a transaction for the purposes of
the company’s
business or otherwise for the company’s benefit and who is
purporting to exercise an authority which
an officer or agent in that
position would ordinarily be expected to have, the mere carrying on
of the company’s business
with officers and agents performing
particular functions on its behalf and in its interest is a
sufficient representation by the
company. Although such
representations by the company seem a slender foundation on which to
build an estoppel, the indoor management
rule treats them as
sufficient unless the party relying on the rule is put on notice to
enquire into the authority of the officers
or agents to do what they
did in the transaction.
The slenderness of the foundation enhances
the importance of the qualification
. In transactions other than
those engaged in for the purposes of a company’s business or
otherwise for the benefit of the
company,
and in transactions
where the officer or agent has purported to exercise an authority
over and beyond the authority which an officer
or agent in that
position would ordinarily be expected to possess, a party seeking to
bind the company by estoppel must rely on
particular representations
of authority made by the company
– that is, by officers or
agents of the company having actual or ostensible authority to make
those representations.’
[39]
In the same case Dawson J said (para 19):
‘
In
other words, the indoor management rule only has scope for operation
if it can be established independently that the person purporting
to
represent the company had actual or ostensible authority to enter
into the transaction. The rule is thus dependent upon the
operation
of normal agency principles; it operates only where on ordinary
principles the person purporting to act on behalf of
the company is
acting within the scope of his actual or ostensible authority..’
[40]
In an equally trenchant passage, Toohey J
stated the position as follows (para 4):
‘
But
where the question is whether an officer of the company has authority
to bind the company by his actions, the context moves
from one of
indoor management to one of agency and the ordinary rules of agency
then come into play. The indoor management rule
is in effect a
concession to the outsider in dealing with a company; it does not
confer authority on an officer of the company
to enter into a
contract where that authority does not otherwise exist. Authority
must actually exist to enter into the transaction
in question or it
must be found in principles of agency, as in the concept of
ostensible authority. This place for the operation
of agency
principles in the affairs of companies was made clear by
Freeman
…’.
[41]
In short,
Turquand
only comes to X’s aid once he
has, subject only to the implications of his constructive knowledge
of the articles, made out
a case for ostensible authority. Having
done so, X cannot then be non-suited only because, by virtue of his
constructive knowledge
of the articles, he should have made enquiry
into the fulfilment of a condition (case 2) or the existence and
terms of Y’s
delegated authority (case 3) or the formal
appointment of directors or the managing director (case 4). Thus in
Wolpert
supra
Claassen J, after setting out four categories of company
representatives and distinguishing between actual, implied and
ostensible
authority (at 265D-267A), said that that
Turquand
could be invoked ‘if any one of
the enumerated agents had contracted with the third party, but there
was still an act of internal
organisation not completed in order to
complete the necessary authority’ (at 267B-C).
[42]
I return now to the facts of the present
case. Because neither side adduced evidence of Neffensaan’s
articles, the question
of constructive knowledge and the related
Turquand
rule
do not arise. The issue is solely one of ostensible authority without
the refinements which constructive knowledge and
Turquand
bring to such an enquiry.
[43]
One does not know in the present case
whether the articles as at March 2011 included a power on the part of
the directors to delegate
their authority to one of their number. If
the articles did not include such a power, OSF would fail for that
reason alone, because
OSF must be taken to have been aware that one
or two directors did not on their own have, and could not be given,
authority to
enter into the suretyship.
[44]
If
it be assumed, however, that the articles did include a power on the
part of the directors to delegate their authority, there
is no
evidence that OSF was aware of that power and relied upon it. On the
contrary, OSF’s representative, Basson, says in
the replying
affidavit that OSF was at no stage aware of the terms of Neffensaan’s
articles. Without actual knowledge of
the articles, OSF could not
even begin to mount a case for ostensible knowledge along the lines
sketched by Diplock LJ at 647B-F
of
Freeman
(and
see also
Big
Dutchman (South Africa) (Pty) Ltd v Barclays National Bank Ltd
1979
(3) SA 267
(W) at 284H-285A). In any event, and as I have observed,
there are no cases where the mere existence of a power of delegation
has
been held to entitle a third party to treat a purported
representative as the recipient of delegated authority. OSF has
nowhere
in its papers alleged facts to show that Moller and/or
Coetzee had ostensible authority to conclude any particular types of
transactions.
It is not said that either of them was held out as the
managing directors of OSF or conducted all its business with Bock’s
knowledge and acquiescence. No mention of ostensible authority is
made at all in the papers. Basson states no more than that OSF
acted
in good faith and under the impression that Moller, as a director of
Neffensaan, was duly authorized to conclude the suretyship
and the
loan agreements.
[2]
For the
rest, Basson invokes the
Turquand
rule.
[3]
[45]
Needless to say, a representation by Moller
and Coetzee themselves as to their authority would not suffice. In
order to bind the
principal, the representation founding the
ostensible authority must proceed from the principal, not the
purported agent (
Glofinco
supra
paras 12-13). Nor does it matter, if such be the case, that
Neffensaan’s articles stated that two directors would
constitute
a quorum for meetings of the board. If the articles
followed the subscription agreement, one of those two directors would
have
had to be a CRL appointee. In any event, a company is not bound
by the act of a lesser number of directors than the full board
merely because they would have constituted a quorum (see
Legg
& Co v Premier Tobacco Co
1926 AD
132
at 139).
[46]
This is a sufficient basis for concluding
that OSF has failed, on the affidavits, to show on a balance of
probability that Moller
had ostensible authority to sign the
suretyship on Neffensaan’s behalf. It is thus unnecessary to
decide what the position
would be if Neffensaan’s articles had,
by March 2011, been amended to accord with the subscription
agreement. In that event,
OSF would be fixed with constructive notice
that suretyships of an unusual nature could not be concluded except
with the unanimous
prior written approval of the shareholders. It
could be argued that clause 13.9 is not an authority in favour
of the directors
subject to a condition but rather a provision
placing authority in the shareholders acting unanimously (in which
case
Turquand
would
not apply). Alternatively, it could be said that a third party with
notice of that provision could reasonably be expected
to make some
enquiry as to the existence of the unanimous approval of the
shareholders, since it is an unusual requirement. But
conceivably
Turquand
could
apply to overcome the absence of shareholder approval, provided
Moller otherwise had ostensible authority to represent the
company.
[47]
Of course, clause 13.9 only applies to
suretyships ‘of any unusual nature’. The papers do not
deal with the commercial
purpose of the loan taken out by Molco and
the related suretyship signed by Neffensaan on 2 March 2011. On the
face of it, it seems
unusual for a company to stand surety for a loan
taken out by an entity having a 0,71% shareholding in the company and
it is not
apparent how the furnishing of the suretyship could have
advanced Neffensaan’s business.
[48]
In argument Mr Woodland said that even if
Neffensaan was not contractually bound by the transactions, OSF would
have an enrichment
claim. That argument has no bearing on the
suretyship.
Is
Neffensaan bound by the loan agreements?
[49]
The Neffensaan loan agreements were
concluded after the new
Companies Act came
into force. In terms of
s 19(4)
of the new Act the rule that a third party is fixed with
constructive notice of a company’s articles has been abolished.
This is subject to
s 19(5)
, which retains constructive notice in
relation to a company whose memorandum includes restrictive
conditions as contemplated in
s 15(2)(b)
and/or (c) to which
attention has been prominently drawn in accordance with
s 13(3)
and where the company has included the letters ‘RF’ in
its name. Neffensaan has not been shown to be a RF company.
[50]
Sections 20(7)
and (8) of the Act read as
follows:
‘
(7) A
person dealing with a company in good faith, other than a director,
prescribed officer or shareholder of the company,
is entitled to
presume that the company, in making any decision in the exercise of
its powers, has complied with all of the formal
and procedural
requirements in terms of this Act, its Memorandum of Incorporation
and any rules of the company unless, in the circumstances,
the person
knew or reasonably ought to have known of any failure by the company
to comply with any such requirement.
(8) Subsection
(7) must be construed concurrently with, and not in substitution for,
any relevant common law principle
relating to the presumed validity
of the actions of a company in the exercise of its powers.’
[51]
Section 20(7)
has been regarded by
some as a codification of the
Turquand
rule (Davis et al
Companies
and Other Business Structures in South Africa
2006
at p 42). Other writers have pointed out that the abolition in
general of the principle of constructive notice has made
the
retention of the
Turquand
rule largely unnecessary, because the rule was only ever an
amelioration of the ramifications of constructive notice (Katz
Governance under the Companies Act
2010
Acta Juridica
248
at 252-253; Delport
Companies Act 71 of
2008
and the ‘Turquand’ Rule
2011
THRHR
135-138).
Katz suggests that the
Turquand
rule
has been retained in
s 20(7)
to deal with constructive notice in
relation to RF companies. Delport points out that the retention of
the
Turquand
rule
may also come to the aid of a third party who has actual notice of a
non-RF company’s articles. Delport also mentions
possible
differences in the scope of the
Turquand
rule and its supposed codification in
s 20(7).
[52]
If
s 20(7)
is a codification of
Turquand
,
s 20(8)
might be thought to be a puzzling provision. However, I
do not think that its existence justifies a strained interpretation
of
s 20(7).
It is more likely, in my view, that the lawmaker was
concerned that its attempts to formulate the
Turquand
rule in
s 20(7)
might not cover
the whole ground.
Section 20(8)
was thus added to foreclose an
argument that
s 20(7)
had inadvertently repealed any part of the
Turquand
rule.
[53]
One significant change brought about by the
abolition in general of constructive notice is that a company can now
be bound on the
basis of ostensible authority even where the articles
place authority on the matter in question completely beyond the
potential
scope of authority of the purported representative (my case
1 above). Because a third party would not be fixed with constructive
notice of this restriction (unless the company were an RF company),
the third party could potentially hold the company liable if
the
purported representative was held out by the company as having the
authority in question. However, this is a change flowing
from the
abolition of constructive notice and has nothing to do with
Turquand
or
s 20(7).
[54]
Whatever differences there might be between
Turquand
and
s 20(7)
, I do not think the new provision has brought about any
change in the law governing the circumstances in which a company can
be
held bound on the basis of ostensible authority. In the present
case it is difficult to see what scope there could be for
Turquand
or
s 20(7)
, given the absence of
evidence regarding the content of Neffensaan’s articles and
given in any event that OSF would not be
fixed with constructive
knowledge of the articles and that there is no evidence that OSF had
actual knowledge thereof.
[55]
However, if one assumes that the articles
contained at the relevant time a power of delegation in terms of
which the board could
have delegated to Moller and/or Coetzee the
authority to conclude loan agreements of the kind in question, and if
one assumes that
OSF had knowledge of this power,
s 20(7)
would
not in itself have entitled OSF to assume that the board had in fact
delegated the authority in question to Moller and/or
Coetzee any more
than the
Turquand
rule
would have entitled OSF so to assume. There is no indication that the
lawmaker, in enacting
s 20(7)
, intended to introduce so radical
a change to the legal position relating to ostensible authority. The
expression ‘formal
and procedural requirements’ in
s 20(7)
must, I think, be construed consistently with the
conventional scope of
Turquand
.
Where the board’s authority is qualified by a condition of
prior shareholder approval, the said condition could be regarded
as a
formal or procedural requirement. Where a person is, or is held out
to be, the company’s managing director, the precise
terms of
and restrictions on the authority delegated to the managing director
might be regarded as a formal or procedural matter.
In relation to an
ordinary director, however, the conferral of authority to bind the
company is not merely a formal or procedural
matter.
[56]
Another way of looking at this question is
by giving due weight to the requirement in
s 20(7)
that the
third party should have been dealing with the ‘company’.
The section does not state that the third party may
make any
assumptions when dealing with a purported representative per se. This
reinforces the view that in order for
s 20(7)
to apply the third
party must establish that he was dealing with someone who had actual
or ostensible authority to bind the company,
because only in those
circumstances can he say that he was dealing with the ‘company’.
This was the first of the two
fundamental questions Claassen J posed
in
Wolpert
:
‘When does one deal with or contract with a company?’ (at
265A). The answer he gave (at 265D-267A) was that one deals
with the
company when the latter is represented by a person having actual or
ostensible authority. Once the third party has established
the actual
or ostensible authority of the representative, he cannot be
non-suited because of non-compliance on the part of the
company with
some formal or procedural requirement which would have been necessary
to make the ostensible agent’s authority
complete.
[57]
It follows that Neffensaan would only be
bound by the loan agreements if Moller and/or Coetzee, who lacked
actual authority, had
ostensible authority to bind the company to the
agreements. As I have said, there is no evidence that Moller and/or
Coetzee were
held out as persons authorized to manage the company’s
affairs.
[58]
For this reason it is unnecessary to decide
what the position would have been if Neffensaan’s articles had,
by the time of
the conclusion of the loan agreements, been brought
into line with the subscription agreement. On the face of it, such
amendments
would have no effect as between OSF and Neffensaan, since
OSF would not have been fixed with constructive knowledge of the
amended
articles. Furthermore, short-term borrowings are not among
the restricted transactions listed in clause 13.9. The loans in the
present case were repayable within one to two months.
[59]
Mr Woodland submitted that if I concluded
that OFS had not prima facie established its contractual claims, I
should find that OSF
has shown, at least on a prima facie basis, that
it has a claim for repayment of the sums advanced on the basis of
unjustified
enrichment. A defence of non-enrichment is available even
where money has been received. The onus rests on the recipient,
however,
to prove that he was not enriched (
African
Diamond Exporters (Pty) Ltd v Barclays Bank International Ltd
1978
(3) SA 699
(A) at 709C-D and 713
in
fine
). The incidence of onus will
certainly assist OSF if and when it advances a claim based on the
condictio indebite. However, OSF
at no stage in the present
proceedings pleaded an alternative claim based on unjustified
enrichment. It was raised for the first
time in the heads of
argument. The incidence of onus makes it all the more important that
OSF should have pleaded unjustified enrichment.
In the particular
circumstances of this case, OSF could have done so in its replying
affidavit, since it may have had no reason
when launching the
application to anticipate the defence of lack of authority. Fairness
would then have dictated that CRL be entitled
to file a further set
of affidavits to deal with the enrichment claim. Neither Neffensaan
nor CRL has been called upon to answer
an enrichment case. There is
no evidence as to what became of the money paid to Neffensaan. I
cannot exclude the possibility of
a defence of non-enrichment.
Conclusion
[60]
For these reasons I conclude that OSF has
not established on a prima facie basis that it is a creditor of
Neffensaan. At very least,
its claims are bona fide disputed on
reasonable grounds. It is unnecessary to deal with the question of
prescription. Since OSF
persisted in its application after CRL filed
its answering papers, costs must follow the result.
[61]
I make the following order: The application
is dismissed. The applicant is directed to pay the costs of the
intervening creditor.
ROGERS
J
APPEARANCES
For
Applicant
Mr
GW Woodland SC
Instructed
by Edward Nathan Sonnenbergs
ENS
House, Loop Street
Foreshore,
Cape Town
For
Intervening Creditor
Ms
L Buikman SC
Instructed
by Geldenhuys Inc
Madriko
Building
Oostewaal
Street
Langebaan
c/o
Mauritz Briers & Associates
Room
201 Piazza, On Church Square
39
Adderley Street
Cape
Town
[1]
Para
8.
[2]
Para
27 record 187.
[3]
Paras
24-25 record 187.