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IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 31733/2015

NOT REPORTABLE

NOT OF INTEREST TO OTHER JUDGES

REVISED

13/6/2018

In the matter between:

EMVELO HOLDINGS (PTY) LTD                                                           FIRST APPLICANT

FG EMVELO ENERGY (PTY) LTD                                                   SECOND APPLICANT

KAROSHOEK (PTY) LTD                                                                      THIRD APPLICANT

and

FG POWER GMBH                                                                                       RESPONDENT

JUDGMENT

NICHOLLS J:

[1] This is an application for rescission of judgment. In September 2015, the respondent, FG Power GmbH, a company incorporated according to the laws of Germany, issued summons against the three applicants, Emvelo Holdings (Pty) Ltd, FG Emvelo Energy (Pty) Ltd and Karoshoek (Pty) Ltd. The latter are all South African companies.

[2] On 13 January 2016 default judgment was granted against the applicants in the following terms:

“It is ordered that:-

1. 60 percent of the issued shares in the Second Defendant (FG Emvelo Energy (Pty) Limited) is transferred into the name of the Plaintiff (FG Power GMBH).

2. 60 percent of the issued shares in the Third Defendant (Karoshoek (Pty) Limited) is transferred into the name of the Plaintiff (FG Power GMBH).

3. Failing the transfers as set out in paragraphs 1 and 2 within 30 (thirty) days of service hereof, payment by the First, Second and Third Defendants, jointly and severally, the one paying the others to be absolved, of the sum of €1 608 383.50 together with interest thereon at the rate of 9% per annum from the 11^th of September 2015 to date of payment in full.

4. The First, Second and Third Defendants jointly and severally, the one paying the other to be absolved pay the costs of suit on a party and party scale. 

[3] The application for rescission was launched in April 2016. No explanation is proffered for the delay in bringing the matter before court. The basis of the rescission is that “the court erred in granting the order … was misled in granting the order and that there is sufficient cause for the rescission thereof.”

[4] The deponent to the founding affidavit, Mr Phatisani Ndebele, does not describe his relationship to the applicants. However, according to the particulars of claim, he represented the applicants when they concluded the three agreements on which the respondent’s case is based. The first is the Heads of Agreement which the respondent concluded with the first and second applicants on 16 November 2011. The second and third are identical Shareholders’ Agreements, both concluded on 14 December 2014. One is between the respondent and the first and second applicants. The other Shareholders’ Agreement is concluded between the respondent and the first applicant and a third entity described as Pacific Breeze Trading (Pty) Ltd.

[5] The particulars of claim allege that in terms of the Heads of Agreement the first applicant would procure 60% of the shares in the second applicant for which the respondent would lend sums of money from time to time to the applicants. The respondent would also loan money to the first applicant to procure the incorporation of a new land owning company in which the respondent would own 60% of the shares. The money was alleged to be repayable if the respondent did not receive the shares, alternatively on demand. Pursuant to the two Shareholders’ Agreements signed on 14 December 2014 the first applicant would, as soon as possible after the date of signature, transfer the 60 % share it owned in the second and third applicants to the respondent. Despite the respondent paying €1 608 383.50 to the applicants, the first applicant did not transfer 60% of the shares in the second and third applicants to the respondent.

[7] The applicants state that the application is brought in terms of Rule 42(1) (a) on the grounds that the order was erroneously sought and erroneously granted, alternatively under the common law. It is trite that for a rescission in terms of the common law to succeed, an applicant has to show ‘good cause’. This is not a requirement under Rule 42(1)(a). The court has a wide discretion in determining and evaluating ‘good cause’. For this reason there has been a reluctance to formulate an exhaustive definition of what amounts to ‘good cause’.[1] An explanation for the default must be furnished, sufficiently detailed to enable the court to assess the motives and conduct of the applicant. The other requirement is that there must be a bona fide defence.

[7] Mr Ndebele submits that he has a bona fide defence on the following grounds. Firstly, the particulars of claim are excipiable. Secondly, the matter should have been referred to arbitration in terms of the peremptory provisions of the shareholders’ agreement. Thirdly, the respondent did not pay the applicant the sum of €1 608 383.50 and misled the court by applying for default judgment in that amount. A fourth defence of prescription was abandoned.

[8] The question of the incorrect payment will be dealt with first as it is on this point that the applicants argue that Rule 42 applies.

[9] In its particulars of claim the respondent alleges that it paid the applicants €1 608 383.50. Despite payment and in breach of the agreements, the applicants failed to transfer any of the shares into the name of the respondent. In its answering affidavit the respondent attaches a schedule of payments allegedly made to the applicants which make up the full amount of €1 608 383.50. The first observation to make is that according to the respondent’s schedule, approximately €618 500 is paid by or on behalf of an entity described as “Frogress”. The letter of demand dated 28 October 2014 and addressed to Mr Ndebele as “the director” of the first applicant, is said to be on behalf of the respondent FG Power GmbH and Frogress GmbH, both German companies. The demand is for the sum of €1 009 788.88 on behalf of the respondent and the sum of €598 594.67 on behalf of Frogress. This presumably makes up the €1 608 383.50 claimed in the alternative in the particulars of claim.

[10] The applicants allege that only an amount of R7 019 997 was paid when the respondent had undertaken to pay R5.5 million and R8.5 million to the second and third applicants respectively, a total of R14 million.  Accordingly, it is argued that the respondent only partially complied with its obligations and the applicants were entitled not to transfer the shares. What is clear is that even on the respondent’s version the amount owing by the applicants to the respondent is €1 009 788.88 and the balance of €598 594.67 is owing to Frogress who are not a party to these proceedings. In these circumstances there can be no doubt that paragraph 3 of the court order is incorrect.

[11] The applicants sought to argue that because there is an error in the amount claimed this means that the rescission falls within Rule 42. However, the ambit of the rule is limited to procedural matters, not matters of substantive law.[2] It cannot be said that because the court was wrong in the amount it awarded, the order was erroneously sought and erroneously granted. A court cannot sit as a court of appeal on its own judgment, nor can it review its own judgment. Once a court has pronounced a final judgment or order, it has no authority to correct or alter this except in specific and limited circumstances.[3]

[12] Therefore the rescission cannot be brought in terms of Rule 42 but must fall within the purview of the common law. In the context of a rescission of judgment in terms of the common law, the Constitutional Court[4] has set out the following requirements which the applicants must meet: (a) give a reasonable explanation for their default; (b) show that the rescission application is brought bona fide; and (c) show that they have a bona fide defence, including a prima facie case on the merits

[13] The first hurdle for the applicants is to provide a satisfactory explanation for the default. Mr. Ndebele states that he first became aware of the court order on 27 or 28 February 2016 when he was at the office catching up on administrative work over the weekend. He apparently has a small office which he does not attend on a regular basis as he travels extensively and runs his business primarily via email and telephone. It would appear that his small staff complement is extremely incompetent. His receptionist, after first denying that the she received the summons, confirmed that she had received it but decided to not bring the summons to Mr. Ndebele’s attention. Similarly, his personal assistant did not consider the court order of sufficient importance to inform Mr. Ndebele about it, and merely left it on his table where it remained for several weeks.

[14] After becoming aware of the summons, Mr. Ndebele only consulted with his attorneys more than a week later and with counsel more than 16 days later. The application for rescission was launched on 6 April 2016. The lackadaisical attitude of the applicants and their legal representatives is surprising in light of the far reaching consequences of the order. According to Mr. Ndebele his real concern was the submitting of tenders which seemed to take precedent over all else, but most certainly over legal processes.

[15] The explanation for the delay is unsatisfactory. However, where a poor explanation is provided, a good defence may compensate. As stated by Jones J in Smith v Saambou Bank Ltd[5]:

“The explanation for the delay in each case is weak. So also the explanation of each applicant for allowing judgment to be taken against him in the first place, which affects the bona fides of the applications for rescission (Grant v Plumbers (Pty) Ltd 1949 (2) SA 470 (O); HDS Construction (Pty) Ltd v Wait 1979 (2) SA 298 (E) at 300F-301C; De Witts Auto Body Repairs (Pty) Ltd v Fedgen Insurance Co Ltd 1994 (4) SA 705 (E)). In these circumstances the strength of the applicant's defence on the merits of the case becomes crucial. Condonation will be granted and rescission will be ordered only if the applicants can satisfy me that the defence they wish to raise on the merits if the matter goes to trial has reasonable prospects of success. If it is a weak defence the applications have little chance of succeeding. See, for example, Zealand v Milborough 1991 (4) SA 836 (SE) 838D-.E where the following guideline appears: a measure of flexibility is required in the exercise of the Court's discretion [to grant rescission]. An apparently good defence may compensate for a poor explanation (Harms Civil Procedure in the Supreme Court 313 (K6)), and vice versa." The question, then, is whether I am realistically able to conclude that the applicants have ''an apparently good defence".

[16] The question here too must be whether the applicants apparently have “an apparently good defence”. The applicants’ argument is that the Heads of Agreement were superseded by the shareholders’ agreements which from thence governed the relationship between the parties. Therefore, the written Heads of Agreement which gave rise to the obligation to repay the monies was of no force and effect. Further, once it is accepted that the Shareholders’ Agreements are the relevant documents, the respondent was obliged to give proper notice in terms of the breach clause, which it failed to do.

[17] These arguments are not without some merit. Clause 18 of the heads of agreement states:

“These HOA constitute the entire agreement between the parties in regard to the subject matter dealt with herein, until such time as it is replaced by either or both the definitive agreements referred to in clause 14.”

[18] Clause 14 refers to the Shareholders’ Agreements referred to in clause 9 which in turn states that it is the intention of the respondent and the first applicant to enter into a Shareholders’ Agreement to record their relationship with the second applicant. A reading of the two documents indicates that, prima facie, the Heads of Agreement were replaced with the Shareholders’ Agreements.

[19] As regards the notice required, Clause 30 of the Shareholders Agreement contains a breach clause obliging the aggrieved party to give the defaulting party 21 days written notice to remedy the breach.  The respondent’s attorney sent a letter of demand which does not purport to be a notice in terms of the shareholder’s agreement. It is demand for the payment within 14 days for  €I 009 788.88 and €598 594.67 in terms of “the loan agreement”. This also amounts to an arguable defence.

[20] Finally, the applicants raise the issue of arbitration. Clause 32 of the Shareholders’ Agreement contains an arbitration clause and provides that:

“32.1 Save as otherwise expressly provided in this Agreement, should any dispute arise between any of the parties in regard to:-

32.1.1 the interpretation of;

32.1.2 the effect of;

32.1.3 the parties respective rights and obligations under;

32.1.4 a breach of;

32.1.5 the termination of; or

32.1.6 any matter arising out of the termination of this agreement,

that dispute shall be decided by arbitration in the manner set out.”

[21] The applicants contend that the arbitration clause is peremptory. On the other hand the respondent argues that clause 32 read with clause 30 entitles the respondent to make an election to go to court or proceed by way of arbitration. Further, that the applicants should have invoked the arbitration provisions when they received the letter of demand. Instead they totally ignored it. Be that as it may, this too is a defence worthy of consideration.

[22] Notwithstanding the poor explanation for the default, I am of the view that applicants have a bona fide defence which should be adjudicated upon by a court.  In these circumstances it is in the interests of justice that the rescission be granted. The second requirement that the application for rescission is bona fide has also been met. Although the applicants may have exhibited extreme negligence in attending to this matter, there is no evidence that the default was willful.[6]

[23] Where the applicants have been successful, the general rule is that costs follow the result. The applicants seek costs if the matter is opposed. However, since 1924 our courts have been of the view that a defendant “has to pay for the privilege of being reinstated against a judgment.”[7] In view of the applicants’ lackadaisical attitude, I have no hesitation in finding that they should bear the costs. After all it was their conduct that necessitated this application.

In the result I make the following order:

1. The order of this court dated 13 January 2016 is rescinded.

2. The applicants are to pay the costs of this application. 

 

 

____________________________
C.H.NICHOLLS
JUDGE OF THE HIGH COURT

GAUTENG LOCAL DIVISION, JOHANNESBURG

 

Appearances

Counsel for the First, Second

and Third Applicants: Adv. A Steenekamp

Instructing Attorneys: Hogan Lovells South Africa Inc

Counsel for the Respondent: Adv. AD Wilson

Instructing Attorneys: Spellas Lengert Kuebler Braun (SLKB) Inc

Date of hearing: 22 May 2018

Date of judgment: 13 June 2018

 

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