Subject index outline

Held that section 81(1)(e) provides for the winding up of a solvent company if a shareholder has applied, with leave of the Court, for an order to wind up the company on the grounds that the directors of the company are acting in a manner that is fraudulent or otherwise illegal, or the company’s assets are being misapplied or wasted.

Fraud is defined in our common law as: “unlawfully making, with the intent to defraud, a misrepresentation which causes actual prejudice or which is potentially prejudicial to another”.

The discretion to be exercised in terms of section 81 is a very broad discretion and the onus of satisfying the court that the directors acted fraudulently or illegally is an evidential onus that requires an applicant to place sufficient evidence before a court that the grounds exist.

Considering all the allegations and the responses of the directors, the Court was satisfied that in a number of instances misrepresentations were made and that there is a real likelihood that the investors relied on these misrepresentations when they invested. It being likely that the misrepresentations could have caused prejudice to those acting upon it, the Court found that the applicants had shown that they were entitled to an order in terms of section 81(1)(e).

STANDARD BANK OF SOUTH AFRICA v A-TEAM TRADING CC 2016 (1) SA 503 (KZP)
Business rescue — Liquidation proceedings already initiated — Scope of suspensive provision — Whether encompassing application for provisional liquidation — Conflicting views on issue highlighted — Court finding that application for business rescue suspending application for liquidation — Companies Act 71 of 2008, s 131(6).

Section 131(6) of the Companies Act 71 of 2008 provides that '(i)f liquidation proceedings have already been commenced by or against the company at the time an application [for an order commencing business rescue proceedings] is made…, the application will suspend those liquidation proceedings until the court has (a) adjudicated upon the application; or (b) the business rescue proceedings end, if the court makes the order applied for'.

Before Standard Bank's present application for the provisional liquidation of A-Team could be heard, an application for an order placing it under business rescue was brought in a neighbouring division. A-Team argued that the business rescue application had the effect of suspending the liquidation application, thus barring the present court from granting it, while Standard Bank argued that it was not the liquidation application that was suspended by s 131(6), but the process that would follow upon its granting. This interpretation would, argued Standard Bank, serve to deprive those who ran the company of control of the business until the company was placed under supervision or the winding-up commenced. There were conflicting High Court decisions on the issue.

Held

Section 131(6) had to be interpreted in the light of the purpose of business rescue, which was to avoid, where possible, the liquidation of the company (paras [4] – [5]). A distinction had to be made between the proceedings leading up to a winding-up order and the winding-up process itself (para [10]). Liquidation proceedings, like eviction proceedings, were commenced by the launching of an application. That the proceedings would come to an end if the application were dismissed did not mean that the application did not constitute liquidation proceedings (para [12]). Moreover, the notion that a business rescue application should not suspend an application for the winding-up of a company because the activities of those who ran it ought to be curbed, was not consonant with the purpose of business rescue (para [14]). Since the winding-up was suspended, the liquidator would also be prevented from running the company, and this hiatus would continue until the court adjudicated on the business rescue application, by which time there might be no basis for a rescue plan (para [16]). The interpretation suggested by Standard Bank was neither sensible nor supported by the wording of s 131(6) (para [16]). Hence the business rescue application suspended the application for the liquidation of A-Team (para [21]). So ordered.

Avantech Ltd v Fryer and Another (70750/14) [2016] ZAGPPHC 49 (5 February 2016)

Sequestration application- employee misappropriated money-unliquidated claim-Badenhorst rule applied¹⁰

AVANTECH LIMITED (Applicant) is part of a group of Companies owned by Zambian Cuturi family, registered and conducting its business in the Republic of Zambia. Mr Carlo Cuturi, the deponent in both Applicant's founding and replying affidavit, is one of its Directors.

1^st and 2^nd Respondents, both of whom South African citizens, are married to each other out of community of property. It appears from the papers filed of record that the order sought in this application is in respect of 1^st Respondent only. It is undisputed that 1^st Respondent is the owner of two immovable properties situated within this court's area of jurisdiction.

Applicant seeks an order for the compulsory sequestration of 1^st Respondent's estate in terms of the provisions of the Insolvency Act 24 of 1936 on the basis that 1st Respondent has, as Applicant's employee, misappropriated a large sum of money from applicant and also that he has committed an act of insolvency.

It is common cause that during January 2013, Applicant employed 1^st Respondent as its Chief Financial Officer (CFO). It is further common cause, albeit for different reasons, that 1^st Respondent abruptly left his employment during February 2014 and returned to South Africa with his family.

The eight claims of misappropriation of funds relied upon by Applicant are that, as CFO of the Company, 1^st Respondent transferred monies to the tune of approximately R5 million from Applicant's bank account into the accounts of persons or entities residing or conducting businesses in South Africa, to whom 1st Respondent had a connection. That the transactions concerned were done without the knowledge and consent of the company's Directors.

In Kleinhans v van der Westhuizen NO 1970 (2) SA 742 (A) at G it was held that a liquidated claim means a claim whereof the amount is fixed either by agreement, or an order of court or otherwise. The court went further to state on page 745 at H that:

"Although claims for damages (delictual or contractual) are generally are generally in the nature of unliquidated claims, this is so only when (as is usually the case) the monetary value thereof is not already determined, or likely to be capable of determination with ease and expedition. In every case where the monetary value is determined, or is capable of easy and expeditious determination, the claim is (or should be) regarded as liquidated"

It appears from Applicant's founding affidavit that the investigation into the company's financial affairs was still ongoing as at the time this application was lodged. I am however satisfied that the claim is capable of easy determination and is therefore a liquidated claim despite the fact that the claim is basically a claim for damages. In any event, the locus standi of Applicant is not in dispute.

Although Respondent admits that the money referred to in this matter was received on his behalf by persons or entities nominated by him, he disputes the allegations by Applicant that he has misappropriated the said money. Counsel for 1^st Respondent argued that this fact creates a dispute of fact between the parties and that this application should be dealt with according to the so called Badenhorst rule-(Badenhorst v Northern Construction Enterprises (Pty) Ltd 1956 (2) SA 346 (T) where it was stated that where a respondent disputes his or her liability on bona fide grounds, it is improper for an applicant to seek to recover a disputed debt by sequestration proceedings rather than by usual action procedure.

In line with the decision in Badenhorst (supra) I find that it is improper for Applicant to try and recover a disputed debt by way of application proceedings as this is clearly an abuse of process

For this reason I make the following order:

1. Application for compulsory sequestration against 1^st and 2^nd Respondents' estates is dismissed with costs.

2. In the event of a need for Applicant to bring sequestration application after finalization of successful action proceedings, it might be necessary to supplement the instant sequestration application papers.

Mbethe v United Manganese of Kalahari (Pty) Ltd (42213/2014) [2016] ZAGPJHC 8 (11 February 2016)

Companies Act 2008-Derivative action-section 165(5) of the Companies Act, 2008 ”)

This is an application in terms of section 165(5) of the Companies Act, 2008 (“the Act”) to institute a derivative action in the name of the respondent, United Manganese of Kalahari (Pty) Ltd, in terms of a demand made by the applicant, Lazarus Mbethe, in terms of subsection (2), which the respondent has refused to comply with as contemplated in subsection (4) (b) (ii).

This has, in and of itself conferred upon the applicant, as a director and Chairman of the respondent, locus standi to approach the Court in terms of subsection (5) as contemplated in subsection (2) (b).

However, the applicant insists that in bringing the application he does so, not do so only in his capacity as Chairman and a director of the respondent, but also in his representative capacity as Chairman and director of Majestic Silver Trading 40 (Pty) Ltd (“MST”), its majority shareholder and as Chairman and director of Pitsa Ya Setshaba Holdings (Pty) Ltd (“PYS”), and as a trustee of the Kalahari Community Trust (“KCT”), both indirect shareholders of the respondent, for whose benefit the respondent was allegedly formed. However, no resolution to this effect was produced and it is of some significance that neither PYS nor the Trust have themselves leveled the complaints against the management of the respondent which is the subject matter of the current demand, nor are they parties to the current proceedings which have been launched in the applicant’s name. The applicant thus, only has locus standi to bring the current proceedings in his capacity as a director of the respondent dealt with below.

The applicant is one of the largest producers of manganese ore in the world. The applicant was formed as a Special Purpose Vehicle for Black Economic Empowerment purposes, which was a precondition for the granting of the prospecting and ultimately, mining rights to the respondent on 10 March 2008.

The shares in the respondent were allocated in the ratio 51% to 49% between a local company, Majestic Silver Trading 40 (Pty) Ltd (“MST”) with BEE objectives, and a Russian based company, Renova Manganese Investments Ltd (“Renova”), that was tasked to establish and run the mining operations. With a view to benefiting the local  Kuruman community and to achieve its BEE objectives,  the KCT was founded by the applicant and MST’s majority shareholding in the respondent was in turn allocated to:

5.1.           Samancor Manganese-38%

5.2.           Chancellor House Minerals Resources -27%

5.3.           PYS- 27%

5.4.           KCT- 8%

With assets of this magnitude, attempts have been made to skim off the profits generated by the respondent through management and other contracts, leaving little, in relative terms, for the benefit of the community for whose benefit KCT was formed. Indeed, there is no evidence of any dividends having been declared to the trust to date, despite profits having been made. Amongst these contracts are the extremely lucrative iron ore crushing contracts awarded to mobile operators which form the subject matter of the current application. 

In order to conduct its mining operations the respondent requires to crush the ore-bearing rock and commenced the construction of a fixed crushing and screening plant which was designed to handle the entire projected production of ore-bearing rock. However, whilst this plant was being built and thereafter, to absorb increased demand, the respondent elected to employ a number of mobile crushing and screening contracting companies to perform this task on a month to month basis.

One of such companies was Zastrospace, which was employed and retained, it is conceded, not for commercial reasons but to further broad BEE objectives and to benefit the some 27 local communities that it purportedly represented. Indeed it is averred that the Zastrospace contract has always been considered as an initiative to benefit local communities and it is conceded that it was not “an arm’s length” transaction in the strict commercial sense.

The preservation of the Zastrospace contract, worth several millions of rands, which was allegedly terminated for commercial reasons due to the decrease in demand for iron-ore, is an overriding motivation for the current application, as I will demonstrate below.

It is averred that Roelofse’s proposed management fee of 30% was disclosed to the respondent in the business plan presented by him to Mr Danie Lourens (“Lourens”), then in charge of the respondent. However, ultimately, this management fee was not claimed by Roelofse personally and instead, was claimed through his management company.

During the period of the Zastrospace contract, Cytopix earned approximately R 10.8 million as a management fee (but at least in excess of R 7 million on the basis of the applicant’s argument that its gross turnover was R 23 million and not R32 million.) Although the averment is made that part of the 30% went to projects in Kuruman, there is no evidence of this. Its wage bill, including that of its managing director, Roelofse was R 365 508.33 per month of which it can safely assumed that Roelofse, quite apart from his interest in Cytopax, got the lions share. Its expenses, apart from its management fee, were minimal spending only R 11 000 per month on diesel and R8000 per month on administration expenses. It can, thereofore, also be safely be assumed that much of its R 5 million in expenses largely was earned by way of salary by Roelofse.

This in itself is a story to tell. Although the respondent has insisted that there is nothing sinister in its termination of the Zastrospace contract as it was terminated purely for commercial reasons, its   crushing contract with AMC was not terminated although its rates were only marginally lower than Zastrospace which had applied for and been granted an increase in its rates. Indeed, the applicant was under the misapprehension that the AMC contract had replaced the Zastrospace contract. It would seem also that attempts were made to ex post facto  justify the termination of the Zastrospace contract by querying the 30% management fee earned by Cytopix and requesting details of the projects it allegedly benefitted. It is of marked significance that those terminating the contract did not purport to do so on anything other basis than on commercial grounds.

On hearing about the termination of the Zastrospace contract, on 21 July 2014, the applicant, as Chairman of the respondent, instructed the company secretary to suspend the holding of all committee meetings as they were unlawful in so far as they were presided over by Ramaite who was not a Board member, and were allegedly rogue, making decisions which they could not validly make without Board approval which were merely rubber-stamped by the Board. Insisting that this would have effectively hamstrung the respondent’s business which was conducted through the delegation by the Board of its powers to committees, this instruction was ignored by Kriek, Louw and Raimate.

This prompted the applicant, through his attorneys, to propose that the issue of rogue committees be addressed at Board level at a meeting to be scheduled. This was dismissed out of hand by the respondent’s attorney,which left the applicant little alternative but to address a statutory demand in terms of section 165 (2) of the Act to the respondent on 22 October 2014, which is the subject matter of the current application.

The analysis of the law to the facts must be preceded by an analysis of the demands sought to be enforced. Five demands have been made essentially aimed at:

preventing the conducting of the business of the respondent through rogue committees and any persons other than Board members serving and voting on any matter to be decided by such committees ;

suspending: the holding of all committee meetings by Kriek and Raimaite ;

suspending Kriek as CEO pending an investigation of several complaints leveled against him including his decision to termintate the Zastrospace contract and retain AMC which was not BEE compliant; and

investigating the consultancy agreement with Pangolin CC of which Lourens was the sole member;

  precluding Ramaithe, as a non Board member, from  sitting on any committees where it was prescribed that such be comprised of only Board members; and

       interdicting Raimate from purporting to act as a deputy CEO when he has not been appointed as such;

       reinstating the Zastrospace contract, alternatively declaring its termination unlawful and of no force and effect.

          A proper analysis of the statutory demands against the aforementioned factual matrix demonstrates that, although dressed up in the noble cause of promoting good corporate governance and the upliftment of the Kuruman community, it is essentially all about the retention of the Zastrospace contract . It was only after the purported termination of this contract by way of committee that such committees have become the subject of complaint by the applicant in the interests of good corporate governance. Needless to say the Court approaches such concerns with some cynicism, as it does the respondent’s ex post facto concerns about the community to justify its termination of such contract.

REQUIREMENTS FOR THE STATUTORY DERIVATIVE ACTION

39. The relevant portions of Section 165 provide:

Interpreting the section ( in light of the aspects underlined by me), it is apparent that in terms of subsection (1), section 165 has  replaced the  common law derivative action with a statutory derivative action.

41.            Locus standi is conferred upon a shareholder or a director to serve a statutory demand upon a company (section 165(2)(a) and (b)) to commence or continue legal proceedings, or to take related steps provided that it can be established that this is to protect the legal interests of the company.

42.            However, a person other than a director or shareholder may also make such a demand with leave of the Court if it can be established that it is either necessary or expedient to do so to protect that person’s (not the company’s) legal right ( section 165 (2) (c))

43.            On receipt of the demand, the company  on whom it is served has a number of options. It can either:

43.1.        apply to Court within 15 business days to set aside the demand   (section 165 (3)); or

43.2.        appoint an independent and impartial person or committee to investigate whether the demand is valid and whether to comply with  the  demand would be cost expedient and in the best interests of the company  and to report to the Board thereon within 60 business days, or such longer time that the Court, on application, may allow (section 165 (4)(a) read with subsection (b)).

44.            On receipt of such a report the company may either:

44.1.         comply with the demand ( section 165(4)(i)) ; or

44.2.        serve a notice refusing to comply with the demand (section 165(4) (ii)).

The South African statutory derivative action has been substantially influenced by that in Australia, Canada and England.  The leading Australian case of Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583, quoted with approval in Mouritzen v Greystone Enterprises (Pty) Ltd2012 (5) SA 74  at paragraph [51], laid down that there are two interrelated questions in determining good faith. First, the applicant must honestly believe that a good cause of action exists and that it has a reasonable prospect of success.  As  a converse of this, the applicant must also show that the application is not brought for a collateral purpose. In this respect, the requirements of good faith in subsection (5) are a corollary of the requirements of bad faith in subsection (3) where not only must it ne shown that the demand is frivolous and vexatious, but also that it is without merit.  The merits of the demand are thus a crucial aspect of the requirement of good faith and the absence thereof.

155.         In Swanson v RA Pratt Properties Pty Ltd (supra), it was held that the applicant may be disbelieved if his proclaimed interest in the pursuit of the action is so unreasonable that no reasonable person in the circumstances of the applicant would hold such a belief. In this respect the first part of the test of good faith is not purely a subjective one, but has an objective element and is tied up with the requirement that the demands have merit and are in the interests of the company.

156.         In this resect, the requirement of good faith is also inextricably tied up with the other substantive requirements in the subsection. Where it is not shown that the proposed action has merit (in the sense that a legally cognizable cause of action exists), and is in the interests of the company , it would be harder for the applicant to satisfy the Court that the application is brought in good faith as no reasonable person would in such circumstances want to pursue such an action. Conversely, where the derivative action appears to have merit and is in the interests of the company, it would more readily be accepted that the applicant is acting in good faith unless there are objective circumstances to establish otherwise.

157.         But this does not mean that there is lesser threshold required to establish good faith than required to establish the other requirements of the section which must be established by the applicant on a balance of probabilities .

I accordingly make an Order as follows:

194.1.     The main application is dismissed with costs including the costs consequent upon the employment of two counsel. These costs do not include the costs of Badenhorst SC’s report.

194.2.     The costs of the interlocutory application to set aside the appointment of the respondent’s attorneys and Badenhorst SC and to strike out Badenhorst’s report are awarded to the applicant.

Investec Bank Limited v Le Roux (575/2014) [2016] ZAGPJHC 11 (11 February 2016)

Sequestration application- attorney’s estate- s.8 (b) of the Insolvency Act 24 of 1936-nulla bona return-immaterial that nulla bona six months old

This is an application for the provisional sequestration of the respondent’s, an attorney’s, estate on the basis of s.8 (b) of the Insolvency Act 24 of 1936, often simply referred to as a nulla bona return. The three main issues were whether an act of insolvency had been shown, whether the sequestration would be to the advantage of the respondent’s creditors, and whether the court should exercise its discretion in granting the relief sought.

The submission was that s.8(b) envisages two separate acts of insolvency; the first is committed when upon demand the debtor is not able to satisfy the judgment and is also not able to indicate sufficient disposal property to satisfy it. The second is committed when it appears from the return of service of the sheriff that he has not found sufficient disposal property to satisfy the judgment.

The applicant submitted that the respondent’s express admission of these matters precluded him from now attacking the return and the founding affidavit as not establishing an act of insolvency. Reliance was placed on the judgment of Heher JA in Wightman t/a JW Construction v Headfour (Pty) Ltd and Another[2008] ZASCA 6; ,2008 (3) SA 371 (SCA) at paragraph [13]. That paragraph deals with the effect of a bare denial in motion proceedings, and says that parties are bound to their affidavits.

In civil proceedings, be they action or application, the effect of an admission – certainly while it stands, and there was no application here to withdraw these ones – is that the court has no power to decide the issue. It has, by the parties’ agreement, not been placed before the court for its adjudication.

[15] This is not only the consequence of the accepted law of procedure, but also of statute. S.15 of the Civil Proceedings Evidence Act 25 of 1965 provides as follows:

“15  Admissions on record

It shall not be necessary for any party in any civil proceedings to prove nor shall it be competent for any such party to disprove any fact admitted on the record of such proceedings.”

[16] Two observations are necessary. The first is that this section obviously applies to factual admissions only, and not to admissions of matters of law. The second is that as regards matters of law, the pleadings in civil proceedings, be it action or application,[4] define the issues between the parties. 

The next point is whether the return of service is stale. The facts are that the writ was served on 25 July 2013, and the application for sequestration was issued on 14 January 2014, nearly but not yet six months later. In their loose-leave publication Joffe at al, High Court Motion Procedure: A Practical Guide, LexisNexis, the authors say that where the nulla bona relied upon is older than six months, the applicant must provide proof that there has been no material alteration in the respondent’s financial position in the interim.

[23] The rationale for such a rule is not clear.  The arms-length creditor/applicant will have little access to or knowledge of the debtor’s affairs. And when the matter comes before the court the debtor will have had an opportunity to resist the application by, if it applies, showing that she or he has assets to satisfy the judgment. And if she or he does not have assets to satisfy the judgement, then the applicant’s difficult burden of showing no improved financial position would in any event have been discharged.

[24] Certainly the legislature in s.8(b) of the Insolvency Act did not require the nulla bona return to be younger than seven months; how then could the courts legitimately impose the limitation? The only explanation for the rule could be that it is simply a rule of practice, and adjunctive to another rule of practice, and not adjunctive to a statute, which in view of the constitutional separation of powers it could never be.

[25] One such explanation could be that it is only if the application is not served on the respondent, and a provisional order is thus sought without notice to the respondent, that such a requirement makes sense and, perhaps more importantly, could be imposed by a court. Then one rule of practice (younger than seven months) is imposed to ameliorate another rule of practice (no notice to the respondent in cases of nulla bona), and no issues of offending separation of powers arise. 

[26] In  Abell v Strauss, 1973 (2) SA 611 (W) at 613B, relied on by Joffe at al, Irving Steyn J dismissed an application based on a return that was “some seven months old” on the basis of dicta in Bhyat v Khurishi, 1929 TPD 896. I return to Bhyat below, but point out that MT Steyn J in Rodrew (ibid) at 139 B to C, also referred to by Joffe at al, in turn also referred to Bhyat.

[27] Bhyat was concerned with whether there had been justified reliance on s.8(g) of the Insolvency Act 32 of 1916, whereby an act of insolvency was committed when the debtor suspended payment of his or her debts. A provisional order had been obtained without notice to the respondent, and Feetham J remarked by the way that notice ought to have been given.  The judge dismissed the application however on the basis that neither the act of insolvency nor factual insolvency had been shown. There was no statement that a nulla bona return had a use-by date in this context.[6]

[28] The editors of the report, however, referred to Kennedy and Parr v Heiman Bros., an unreported case decided on 18 November 1929 in the TPD, in which Tindall, J had remarked that it had always been the practice in that division to give notice to the debtor of a sequestration application unless the petitioner was relying on a nulla bona return.

[29] It may be apposite to point out here that in this division the practice directive now requires personal service in all sequestration applications.[7]

[30] Importantly, however, that was not always the case. It was, until relatively recently, a practice of substantial vintage, as the unreported Heiman Bros. evidenced, that an application for a provisional order of sequestration based on a nulla bona return did not need to be served on the respondent.

[31] It was in this context that Boruchowitz, J, writing for a full court of this division in an unreported judgment, referred to by Mr Nel for the respondent, Seaways (Pty) Ltd t/a South African Express Line v Rubin (31419/2010)[2013]ZAGPJHC 118 (24 May 2013),  pointed out  that a nulla bona return, whether recent or not, is sufficient to establish an act of insolvency for the purposes of s.8(b) of the Insolvency Act.

[32] The learned judge, in my respectful view, relegated the whole issue of staleness of a nulla bona return to its rightful place: that it might be relevant in the exercise of the court’s discretion not to grant a provisional sequestration order.

[33] In this case, where there was personal service of the application for provisional sequestration on the respondent, and where his defence on the facts is that he has no assets at all, there appears to be no role at all for the potential staleness of the nulla bona return. The respondent, for the rule to have had any role, would have had to have argued that the applicant ought to have placed more recent evidence before the court to show that the respondent’s position had not changed from him having no assets. But the respondent has done so himself?

[34] It follows that in my view the argument concerning the potential staleness of the nulla bona return must fail. That leaves the issue of advantage to creditors, and exercise of discretion. I deal with them together.