REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA
(NORTH GAUTENG, PRETORIA)

CASE NO:19428/11
						      DATE:  4/4/2014

(1)	REPORTABLE: YES / NO
(2)	OF INTEREST TO OTHER JUDGES: YES/NO
(3)	REVISED. 

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                   DATE	        SIGNATUR

In the matter between:

PIETER HENDRIK STRYDOM  N.O.			                     1st Plaintiff
 
JOHN RODERICK GRAEME POLSON N.O.			          2nd Plaintiff

LOUIS STRYDOM N.O.						           3rd Plaintiff

DEON MARIUS BOTHA N.O.					           4th Plaintiff

TIRHANI SITOS DE SITOS MATHEBULA N.O.		           5th Plaintiff

SEAN CHRISTENSEN N.O.					            6th Plaintiff		
GAIL LLYN WARRICKER N.O.				                      7th Plaintiff

ALTRON GROUP PENSION FUND                                                   8th Plaintiff

and

JOHAN HENDRIK BAKKES					       1st Defendant
LOUIS KOTZE VENTER						      2nd Defendant
LIESL MARÉ						                  3rd Defendant
BHEKAMA SWAZI MSHIZOBOMVU                                            4th Defendant
GERHARDUS JOHANNES VAN ZYL                                          5th Defendant
HANS JURGENS BRITS						     6th  Defendant
JOHANNES GERHARDUS DU TOIT                                           7th  Defendant
DERREK JOHN ELLERBECK		                                      8th  Defendant
SIYABONGA GQOLI                        				     9th  Defendant                                                                   
FREDERICK VERMAAK	          					   10th  Defendant
LUCAS WILLEM VILJOEN             				   11th  Defendant                          
DESRÉ PATON							   12th  Defendant                          
ANNA JACOBA VAN HEERDEN				               13th Defendant
MARK DAVID ARENDSE		                                               14th Defendant
RYAN MARK BOTHA					              15th  Defendant
DAVID THOMAS OOSTHUIZEN                                                 16th Defendant
VINCENT REVOR SMITH                                                            17th Defendant
ERNEST PHILIPPUS SEVENSTER		                          18th Defendant
NSALO FINANCIAL SERVICES (PTY) LTD                               19th Defendant
MARTINA CORNELIUS BAKKES                                              20th Defendant
MARICIA BAKKES                                                                      21st Defendant
REZANNE BAKKES                                                                   22nd Defendant
_____________________________________________________________
JUDGMENT
____________________________________________________________________

MURPHY J

1.	The eight plaintiffs initially instituted action against twenty two 	defendants for various orders in terms of section 424 of the Companies 	Act 61 of 1973 (“the old Companies Act”) and/or section 218 of the 	Companies Act, 71 of 2008 (“the new Companies Act”) and for 	judgment against those defendants personally for the debts of 	Corporate Money Managers (Pty) Ltd (“CMM”) and ten other entities 	who were associated or connected with CMM in a collective investment 	scheme and 	securitisation arrangements which have failed and 	brought about substantial losses for the investors in the scheme.

2.	On 3 April 2009, the collective investment scheme, CMM Cash 	Management Fund (“CMF”) was closed by its manager, Ayanda 	Collective Investment Solutions Ltd (“Ayanda”) and pursuant to an 	investigation conducted by the Financial Services Board (“FSB”), the 	financial services regulator, CMM, CMF and their associated 	companies were placed under provisional curatorship by an order of 	this court on 28 April 2009. The order was confirmed and made final on 	18 June 2009. On account of CMM having been the provider of funds 	to the Allegro group of companies (consisting of Allegro Bridging (Pty) 	Ltd (“Allegro Bridging”), Allegro Holdings (Pty) Ltd, Allegro Bridging 	House (Pty) Ltd and Allegro Group Investments (Pty) Ltd) a close 	relationship existed between CMM and Allegro. As will be explained 	more fully in due course, Allegro Bridging appears in many instances to 	have been the originator of assets in the property development sector 	in which CMM invested on behalf of its clients. On 15 October 2009 the 	order of curatorship was extended to include the Allegro group of 	companies under the curatorship of the companies.
3.	At the date of the curatorship, 28 April 2009, CMM’s liability to 	investors stood at approximately R1,152 billion. Cash and cash 	equivalents under control of CMM at that date amounted to 	approximately R100 million. Many of the investors have lost their life 	savings as a result of the failure of the scheme. The curators have 	since their appointment been engaged in the recovery of the investors’ 	funds. They anticipate that the ultimate recovery on behalf of the 	investors will in all probability amount to no more than 25% of the 	capital invested.

4.	Section 424(1) of the old Companies Act provides:

“When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.”

5.	Section 218(2) of the new Companies Act provides:

“Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

6.	The first, second and third plaintiffs are the curators of the whole of the 	business of providing financial services and of managing a portfolio of 	assets of the CMM, its associated entities and the Allegro group of 	companies. The fourth and fifth plaintiffs are the joint liquidators of 	Dunrose Trading 160 (Pty) Ltd, (“Dunrose”) a company which in broad 	terms was involved in certain investments made by CMM and Allegro. 	The sixth and seventh plaintiffs are the joint liquidators of Amalgum 	Investments 102 (Pty) Ltd (“Amalgum”), a shareholder in Dunrose. The 	eight plaintiff is Altron Group Pension Fund, an investor in CMF.

7.	The trial of the action has been set down before me from 17 March 	2014 until 23 May 2014. At the commencement of the proceedings I 	was informed by counsel for the plaintiffs, Mr Terblanche SC, that the 	plaintiffs had been able either to settle the action or have withdrawn it 	against most of the defendants, while other have consented to 	judgment. These defendants were directors and shareholders in 	various companies in the CMM and Allegro group of companies. Only 	four defendants are continuing to defend the action. They are: Mr 	Johan Bakkes, (“Bakkes”) the first defendant, the managing director of 	CMM and a director of various of the other companies, who allegedly 	either controlled those companies or at least participated in the 	carrying on of their business; Nzalo Financial Services (Pty) Ltd, 	(“Nzalo”) the nineteenth defendant, the majority shareholder of CMM, 	the shares in which were beneficially held and controlled by Bakkes 	and his wife through the Betterknow Trust, and the ultimate holding 	company of various entities associated with CMM; Mrs Maritha Bakkes, 	the twentieth defendant, the wife of Bakkes, a trustee of the Betterknow 	Trust and a director of Nzalo; and Mr Vincent Smith, the seventeenth 	defendant, a director of CMM Corporate Finance (Pty) Ltd (“Corpfin”), a 	company associated with CMM of which Bakkes was a co-director.

The application for separation in terms of rule 33(4)

8.	After counsel had presented his opening address at the 	commencement of the trial, the plaintiffs made application in terms of 	rule 33(4) for an order that certain questions be decided separately 	from the other issues of the trial. As part of their case against the 	defendants that the business of the various companies was carried on 	recklessly or with the intent to defraud the creditors or for a fraudulent 	purpose, the plaintiffs allege that certain conduct of the defendants in 	the scheme of investment devised and pursued by them involved 	contraventions of provisions of the legislation forming part of the 	regulatory framework. Various companies in the CMM group issued 	promissory notes over a three to four year period in an aggregate 	amount of approximately R1 billion, with the consequence that 	substantial funds of the CMF, the collective investment scheme 	managed by CMM, were invested in such promissory notes. The four 	questions the plaintiff wishes to be decided separately relate to the 	legality of those investments.

9.	The first question is whether the promissory notes issued by the 	entities referred to in the paragraph 1.1 of the unamended notice of 	motion of the application in terms of rule 33(4) were legal commercial 	paper. The entities referred to are six private limited companies falling 	within the CMM group and Thunderstruck Investments 15 (Pty) Ltd. 	The six companies in the CMM group are: Miro Capital (Pty) Ltd, Four 	Rivers Trading 307 (Pty) Ltd, Regent Group Capital (Pty) Ltd, 	Escascape Investments (Pty) Ltd, CMM Corporate Finance (Pty) Ltd 	and CMM Finpro (Pty) Ltd. For reasons which I  will elucidate later I 	granted an amendment with agreement of the parties deleting 	paragraph 1.1.5 of the notice of motion with the result that the plaintiffs 	no longer seek determination of the questions in relation Corpfin at this 	stage of the proceedings.

10.	The second question is whether the issue of the promissory notes by 	these entities against the acceptance of money from the general public 	constituted “the business of a bank” in contravention of the Banks Act.

11.	The third question is if in the event of the court finding that the 	promissory notes were issued in contravention of the Banks Act, 	whether the promissory notes qualified as “approved assets” under GN 	1503 of 2005 as determined and promulgated by the Registrar of 	Collective Investment Schemes under sections 40 and 46 of the 	Collective Investment Schemes Control Act 45 of 2002. These 	provisions permit the Registrar to determine securities or classes of 	securities that may be included in a portfolio of collective investment 	schemes as well as the manner in which and the limits and conditions 	subject to which securities or classes of securities may be included in a 	portfolio of a collective investment scheme.

12.	The fourth question which the plaintiffs want separately decided is 	whether the investments by the CMF and the clients of CMM in the 	promissory notes were authorized by or were in breach of the approved 	mandate or any variation thereof. CMM was granted authorisation by 	the Registrar of Financial Service Providers under section 8 of the 	Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS”) 	to render financial services as, inter alia, a Category II financial service 	provider, specifically to provide services in terms of a mandate granting 	it discretion regarding the choice of financial products. In terms of the 	provisions of the Notice on Codes of Conduct for Administrative and 	Discretionary Financial Service Providers of 2003, promulgated in 	terms of the Act, a discretionary financial service provider must obtain 	a signed mandate from a client. The content of the mandate and 	approval thereof is prescribed by the Code. The mandate must initially 	be approved by the Registrar, and the financial service provider may 	not amend the approved mandate substantially without the prior written 	approval of the Registrar.

13.	In their plea the defendants plead that the promissory notes were legal 	commercial paper, that they were approved assets and complied with 	GN1503.

14.	The plaintiffs contend that the named entities were not permitted legally 	to issue promissory notes or to receive deposits in contravention of the 	Banks Act, read with the so-called Commercial Paper Notice GN2172 	of 14 December 1994 and the Exemption Notices GNR681 of 4 June 	2004 and GN2 of 1 January 2008 promulgated in terms of the Banks 	Act. These statutory instruments designate certain activity as not 	falling within the meaning of the “business of a bank” in the Banks Act 	and stipulate the legal conditions relating to the issue of commercial 	paper in general and by special-purpose institutions for the purpose of 	a securitisation scheme.

15.	The plaintiffs submit that if it is found that the promissory notes were 	not legal paper, were not approved assets and were issued in 	contravention of the Banks Act and in breach of the mandate, such 	conduct would at the very least establish that the business of the 	various companies was carried out recklessly as contemplated in 	section 424 of the old Companies Act. There is obvious merit in that 	submission. The purpose of the statutory instruments making up the 	regulatory framework governing commercial paper is to provide 	safeguards and protection to investors. The investment in commercial 	paper that is not legal, or not subject to regulatory protection, 	invariably will disclose a choice by those responsible to ignore 	prudential safeguards.

16.	Moreover, if the questions are decided against the defendants it will 	mean that certain of the defendants were involved, as managers and 	shareholders, in the unlawful issue by the entities of promissory notes 	to CMM, the manager of the collective investment scheme. Such 	conduct would be in contravention of section 4 of the Collective 	Investment Schemes Control Act 2002 which provides that the 	manager of a collective investment scheme must avoid conflict 	between the interests of the manager and the interests of an investor. If 	the issuing of the promissory notes was illegal, the conflict of interests 	would be exacerbated in that the defendants would be shown to have 	participated in illegal activity to their own advantage to the 	disadvantage of the investors. This too, it is argued, would amount to 	the reckless carrying on of the business of CMM. Again, the 	submission has merit.

17.	On this basis, the plaintiffs submitted that the separate determination of 	the four questions could be decisive of the whole case. At the very 	least, a separate determination of these issues, should they be decided 	in favour of the plaintiffs, will have a material bearing on the nature and 	extent of the evidence to be adduced by the plaintiffs and will 	significantly shorten the proceedings.

18.	At the end of the day, the defendants did not vigorously oppose the 	application for separation. The advantages of separately determining 	the four questions are self-evident, for the reasons stated by the 	plaintiffs. They are in the main legal issues based on a limited factual 	foundation which can be conveniently decided before other evidence is 	led. Their determination will assist the parties in their choices regarding 	the nature and ambit of the other evidence which they may wish to 	lead. Accordingly, I granted an order in terms of prayers 1 and 2 of the 	application for separation that the four questions be decided separately 	before any other evidence be led. The plaintiffs closed their case on 	the separated questions without leading any evidence. The defendants 	led the evidence of Bakkes who was cross-examined over four court 	days.

The background: the CMF collective investment scheme and investment in securitisation

19.	Before dealing with the four separated questions, it will be useful to 	sketch the background and to refer to certain aspects of the investment 	and securitisation schemes involved. The evidence in this regard is 	incomplete and has not been presented in a comprehensive fashion. 	The intention of the plaintiffs is to present expert testimony in this 	regard during the main trial. It is nonetheless possible to provide a 	broad outline by drawing on the evidence of Bakkes, documentary 	evidence admitted during his testimony and the common cause facts.

20.	CMM was an authorized financial service provider (“FSP”) in terms of 	FAIS. It was controlled by Bakkes, Louis Venter (the erstwhile second 	defendant), Liesl Mare (the erstwhile third defendant) and Nzalo. FAIS 	regulates the business of rendering financial advice and intermediary 	services to clients in respect of a wide range of financial products by 	financial firms. It covers the activities of investment managers, 	investment advisors, insurance brokers, financial planners and financial 	advisors. These providers are referred to in the Act collectively as 	“financial service providers”. FAIS enacts a comprehensive regulatory 	framework applying to FSPs, including the grant of authorisation to act 	as an FSP, the duties of FSPs and codes of conduct. CMM was 	registered as an FSP by the Registrar of FSPs with effect from 30 	September 2004 and was granted authority to render financial services 	as a Category I, Category II and Category III FSP. Category I FSPs are 	financial advisers and intermediaries who may not use discretion in the 	rendering of financial services. Category II FSPs are those who may 	render intermediary services in terms of a mandate granting to the FSP 	discretion regarding the choice of financial products. Category III FSPs 	are investment administrators specialising mainly in bulking collective 	investments on behalf of clients.

21.	CMM was involved in the establishment of CMF, a collective 	investment scheme regulated by the Collective Investment Schemes 	Control Act, 45 of 2002 (“CISCA”), in 2003 and 2004. A collective 	investment scheme is a scheme in pursuance of which members of the 	public are invited or permitted to invest money or other assets in a 	portfolio and having done so hold a participatory interest in a portfolio 	of the scheme through shares, units or any other form of participatory 	interest. The investors in the scheme share the risk and the benefit of 	investment in proportion to their participatory interest in a portfolio. In 	other words, funds from various investors are pooled for investment 	purposes with each investor sharing proportionally in the benefits and 	risks attached to the underlying assets.

22.	CMF was a collective investment scheme in securities as defined in 	section 39 of CISCA, being “a scheme the portfolio of which consists, 	subject to this Act, mainly of securities”. CISCA does not define the 	term “securities”, but such are commonly understood to include shares, 	preference shares, bonds, debentures, futures, options, warrants and 	various money market instruments.

23.	Section 40 of CISCA provides that the Registrar may determine 	securities or classes of securities that may be included in a portfolio of 	a collective investment scheme in securities. In terms of section 46, the 	Registrar may determine the manner in which and the limits and 	conditions subject to which securities or classes of securities may be 	included in a portfolio as well as different manners, limits and 	conditions for different securities or classes of securities or different 	portfolios of a collective investment scheme in securities. Section 41(1) 	provides that no person other than a company which has been 	registered as a manager and its authorised agent may administer any 	collective investment scheme in securities. And section 85(1) provides 	that a manager may not sell or offer for sale any participatory interest in 	a portfolio of a collective investment scheme unless at the time of such 	offer the portfolio included assets in the manner, within the limits or on 	the conditions determined by the Registrar. Non-compliance with 	section 85(1) is an offence in terms of section 115(b) of CISCA. In 	addition, in terms of section 109(1)(a), any person who contravenes or 	fails to comply with any provision of CISCA is liable to any other person 	for any loss or damage suffered by that person as a result of such 	contravention or failure.

24.	On 4 December 2005 the Registrar caused to be promulgated 	GN1503, which is the determination of securities, classes of securities, 	assets or classes of assets that may be included in a portfolio of a 	collective investment scheme in securities and the manner in which 	and limits and conditions subject to which securities or assets may be 	so included. It will be recalled that the third question to be determined 	is whether the promissory notes qualified as approved assets in terms 	of GN1503.

25.	Section 68 of CISCA requires the manager of a collective investment 	scheme to appoint either a trustee or a custodian for its collective 	investment scheme, which will typically be a bank or a long-term 	insurance company. That appointment is made in terms of a “deed” 	defined in section 1 of CISCA to mean “the agreement between a 	manager and a trustee or custodian, or the document of incorporation 	whereby a collective investment scheme is established and in terms of 	which it is administered ….” The trustee has a plethora of duties 	imposed upon it by section 70 of CISCA. They include ensuring that 	the transacting in and pricing of participatory interests are in 	accordance with CISCA and that the dealings and administration of the 	scheme are in accordance with acceptable market practice, the law, 	the deed and appropriate auditing and accounting practice. It has a 	duty to report non-compliance to the Registrar. Section 71 provides 	that for the purposes of CISCA any money or other assets received 	from an investor and an asset of a portfolio are regarded as being trust 	property for the purposes of the Financial Institutions (Protection of 	Funds) Act 28 of 2001, and a manager, its authorised agent, trustee or 	custodian must deal with such money or other assets in terms of 	CISCA and the deed and in the best interests of investors.

26.	The circumstances in which CMF came into existence were described 	by counsel in his opening statement. There is a measure of complexity 	to the contractual arrangements which will no doubt be elucidated in 	expert testimony. Suffice it to say that CMF appears to have been born 	out of the mCubed Unit Trust Scheme established by mCubed Unit 	Trust Management Company Ltd (“mCubed”), acting as manager, and 	ABSA Bank Limited (“ABSA”) appointed as trustee and custodian. That 	deed provided that the scheme may consist of one or more portfolios 	established by a supplemental deed. ABSA was empowered to refuse 	to accept as part of the assets of a portfolio any asset which did not 	comply with the requirements of the deed or a supplemental deed. On 	16 April 2004, mCubed entered into a contract with CMM as the 	portfolio manager which permitted CMM to manage portfolios under the 	supervision of mCubed. A few days before this agreement, ABSA and 	mCubed entered into a supplemental deed for the purpose of 	establishing a portfolio to be known as CMM Cash Management Fund, 	that is CMF. The Registrar approved the supplemental deed on 28 	April 2004. In 2006 mCubed became Ayanda, which remained the 	manager of CMF, while CMM continued as the portfolio manager.

27.	The supplemental deed describes CMF as a specialist portfolio with an 	investment policy which seeks to provide investors with a level of 	income in excess of that offered by money market portfolios, while 	maintaining a high degree of liquidity and capital preservation. 	Counsel’s opening address quotes the following extract from the 	supplemental deed:

“To achieve this objective, the securities to be included in the CMF portfolio will comprise a combination of assets in liquid form and securities of an interest bearing nature, including loan stock, debentures, debenture stock, debenture bonds, unsecured notes, preference shares, financial instruments and any other non-equity securities which are considered consistent with the portfolio’s primary objective and that the CISCA Act or the Registrar may from time to time allow, all to be acquired at fair market value. Any fixed income security to be included in the portfolio will typically have a maximum term to maturity of three years and a weighted average term to maturity of 180 days.”

28.	In mandates approved by the Registrar and concluded between CMM 	and its clients, being investors in CMF, CMF is described as a “low risk 	South African cash management fund”. It is also stated that the CMF 	aims to outperform the relevant money market benchmark over the 	medium term at low levels of risk within the money market asset class. 	Exhibit X1-22 is the investment management agreement between 	CMM and Teba Bank, one of its investors. The annexed mandate 	(Exhibit X13) includes the following statement of investment policy:

“All investments shall be restricted to interest rate instruments including:

2.1 Fixed interest rate instruments;
2.2 Variable interest rate instruments;
2.3 Commercial paper;
2.4 Preference shares;
2.5 Convertible debentures;

provided that where any investment is made in commercial paper, preference shares or convertible debentures, the prior written consent of Teba Bank is required.”

	Moreover, it is common cause that in terms of the trust deed and the 	supplemental trust deed CMF is a “non-equity securities” portfolio as 	contemplated in Chapter VII of GN1503 and consequently is subject to 	the investment limits and conditions determined by the Registrar in that 	chapter.

29.	CMM from time to time distributed marketing material to potential and 	existing investors soliciting investment in CMF. In general terms the 	material aimed at creating the impression that CMF was a unit trust 	fund with the same benefits of a call account. Investors were told that 	they could earn fixed deposit rates while the money was available on 	call. The investment was described as low risk and regulated by 	CISCA, the FSB and ABSA, and would be made strictly in accordance 	with a standardized mandate approved by the FSB and in accordance 	with GN1503.

30.	CMM attracted large and numerous investments from investors as a 	result of the attractive interest rates, the immediate availability of funds 	and the supposedly regulated environment. As mentioned, by the time 	CMM was placed under curatorship the amount invested in CMF was 	approximately R1,152 billion. It is common cause that at the time of the 	closure of the fund the majority of the money invested via CMM was 	not actually pooled and held in CMF but had been disaggregated and 	was held in “segregated portfolios” on behalf of individual clients, the 	legality of which is questionable. Many of the funds invested in both 	CMF and in the segregated portfolios were invested in promissory 	notes issued by special purpose vehicles, securitisation institutions, 	which were established by CMM. It is these investments which are the 	subject matter of the inquiry mandated by the four questions separated 	in terms of rule 33(4).

31.	CMM’s move into the securitisation business related principally to two 	categories of underlying transactions: property development and 	factoring. To this end it set up so-called “special purpose vehicles” - 	SPVs. The SPVs are the companies referred to in paragraph 1.1 of the 	notice of motion in terms of rule 33(4). Miro Capital (Pty) Ltd (“Miro 	Capital”) and Four Rivers Trading 307 (Pty) Ltd (“Four Rivers”) issued 	promissory notes in relation to bridging loans for property development. 	Regent Group Capital (Pty) Ltd (“Regent”), which was previously Two 	Ships 427 (Pty) Ltd (“Two Ships”), issued promissory 	notes in relation 	to the provision of financing for factoring and trade finance by Regent 	Factors (Pty) Ltd. It is not clear from the limited evidence available in 	respect of which assets the other companies, Escascape Investments 	(Pty) Ltd (“Escascape”) trading as Sakha iBlokho, CMM Corporate 	Finance (Pty) Ltd (“Corpfin”) and CMM Finpro (Pty) Ltd (“Finpro”) 	issued promissory notes. Most probably they too related to property, 	factoring and trade finance debts. Thunderstruck Investments 15 (Pty) 	Ltd (“Thunderstruck”) issued only one promissory note to CMF which 	was later split into two smaller promissory notes allocated to specific 	investors.This note related to the purchase of a building by 	Thunderstruck.

32.	The specifics of the various securitisation arrangements will be 	elucidated in expert testimony presented in the trial. However, it is 	possible to describe their general characteristics with reference to 	certain documents admitted into evidence during Bakkes’ testimony. 	These include: a sale agreement between an originator of debt 	transactions and an SPV 	issuing the promissory note; a facility 	agreement between CMF (or other investors) represented by CMM and 	an SPV issuing promissory notes; a cession in security between the 	SPV and CMF (or other investors) represented by CMM; a legal 	opinion prepared by an attorney, Mr Paul Tindle, for Global Credit 	Rating Co. (Pty) Ltd (“GCR”), a rating agency, explaining certain 	aspects of the transactions for the securitisation of the trade 	receivables of the originator; and a transaction memorandum prepared 	by Via Capital (an FSP) regarding the “proposed securitisation of a 	pool of loans relating to the discounting of property sales receivables 	by Miro Capital, in conjunction with Corporate Money Managers and 	CIA Holdings”. It must be emphasised at this juncture, however, that 	the legal relationships and the structure described in the documents 	were not necessarily established or implemented in practice. From the 	evidence already adduced it is quite evident that the accounting 	treatment of the various transactions was frequently not in keeping with 	the envisioned contractual arrangements described in these 	documents. My purpose in outlining the proposed contractual 	arrangements is therefore merely to give a contextual background and 	overview without making any finding that the scheme 	encapsulated in 	the documents was implemented or followed in practice.

33.	In the documentation Miro Capital is defined and identified as the 	originator. It is common cause that Miro Capital issued numerous 	promissory notes to a value of more than R400 million. It accordingly 	seems in practice to have acted primarily as an SPV. Promissory notes 	were issued by Miro Capital before September 2007 to CMM and after 	September 2007 to Four Rivers purportedly as “back to back” 	promissory notes as security for those issued by Four Rivers. There 	are factual disputes in relation to the purposes of this arrangement 	which need not be resolved now. However, to avoid a confusion of 	roles, in the description that follows I have opted to analyse the 	transactions for the securitisation of the trade receivables with Allegro 	Bridging in the role of the originator. I assume for the 	purpose solely of 	elucidation (though there is no supporting documentary evidence to 	that effect before me at this time) that Allegro Bridging played the role 	of an originator similar to that assigned to Miro Capital in the written 	contracts included in Exhibit A and Exhibit X. I proceed on this 	assumption with confidence by reason of the fact that Bakkes testified 	that Allegro Bridging did indeed act as an originator, and the fact that 	the evidence of the arrangements overall supports that.

34.	A significant proportion of the funds of the investors in CMF and the 	segregated portfolios was invested through Four Rivers and Miro 	Capital, as SPVs, into property developments in the form of residential 	housing estates. Allegro Bridging provided so-called “bridging-finance” 	to borrowers usually for property developments at high rates of interest 	upto 4% per month. Allegro Bridging acquired funding from external 	sources, of which CMM was the most significant. The funding was 	channeled by CMM through the SPVs (after September 2007 mainly 	Four Rivers) utilising funds extracted from CMF. Often the loans 	provided by Allegro Bridging to developers were unsecured. Although 	the financing was referred to as “bridging finance”, the loans were 	actually often for long term periods and were at usurious rates. Few of 	the promissory notes could be redeemed at maturity resulting in them 	being “rolled” or re-issued in respect of the same or increased debt.

35.	The legal opinion of Mr Tindle describes a proposed securitisation 	transaction and its structuring. In terms of that scheme the originator 	(Allegro Bridging) would agree in a written sale agreement to sell to an 	SPV (Four Rivers) the claims or existing receivables (the amounts 	owing to it by the developers arising from the bridging loans) for an 	agreed purchase price payable in cash. Provision is also made for the 	sale of “future receivables”. A facility agreement would then also be 	concluded as part of the scheme. It is a tripartite agreement between 	the SPV, CMM and 	CMF or other segregated investors referred to 	collectively as “the 	Funders”. In terms of clause 2.3 of the facility 	agreement it is recorded that the Funders have agreed to grant Four 	Rivers (the SPV) a facility on which it may draw down funds from time 	to time in order to discharge the purchase price payable in respect of 	the receivables (purchased from Allegro). Clause 6 of the facility 	agreement deals with the issue of the promissory notes. It provides that 	to facilitate the draw down of funds under the facility, Four Rivers shall 	on each draw down, against payment of the amount of the draw down, 	deliver a corresponding promissory note to the Funders (CMF), and 	that each promissory note delivered would be required to relate to a 	separate receivable (being the debt purchased from the originator 	under the sale agreement), and would be drawn in favour of CMM or its 	nominee. Ownership of, and the risk and benefit attaching to each 	promissory note, would pass to CMF (or the other funder) upon 	payment of the draw down and delivery of the promissory note to 	CMM. In terms of Clause 8 of the facility agreement CMM was 	authorised to act as the agent of CMF and the funder in respect of 	whom it held a discretionary investment mandate.

36.	In addition to the sale agreement and the facility agreement, the 	securitisation scheme set out in the documentation further involved a 	management agreement in terms of which CMM as manager agreed to 	manage and administer the business of Four Rivers, the SPV. 	Although I have not had sight of such an agreement, it appears from 	Tindle’s opinion that CMM would manage the SPV to ensure the 	effective implementation of the securitisation programme. In the course 	of managing the business of the SPV, CMM would collect or procure 	the collection of the receivables (the amounts payable by the 	developers ceded as accounts receivable to the SPV by means of the 	sale agreement) and would procure the amounts so collected to be 	deposited directly into a bank account maintained by or on behalf of 	Four Rivers with either Standard Bank, Nedbank, FNB or ABSA. As 	security for the amounts owing to CMF and the other funders in respect 	of the promissory notes, Four Rivers (the SPV) ceded to CMF or the 	other Funders in securitatem debiti all its rights to the bank account into 	which the collections would be deposited. In this way ownership of the 	receivables was intended to vest in the SPV which was in turn ceded in 	securitatem debiti to CMF.

37.	The description of the securitisation transactions, as I have said and 	repeat with emphasis, is derived from the agreements and legal 	opinion. There is no evidence before me that these documents 	submitted by Tindle to GCR ever formed the basis of contractual 	relationships between the various role players. On the contrary, there 	are indications in the evidence adduced thus far that the transactions 	involving CMM, Allegro and the SPVs probably did not proceed in 	practice in accordance with the prescriptions of the different 	agreements. The extent of compliance or deviation and the legal 	consequences of the conduct of the parties in that regard is a matter to 	be determined in the light of additional evidence. My purpose in 	describing the proposed scheme is merely to provide insight into its 	potential workings. However, it must be kept in mind, the scheme was 	described by Tindle to GCR for the purpose of obtaining ratings under 	CISCA.

38.	The plaintiffs intend to demonstrate that the securitisation programme 	was a high risk investment in dodgy assets. They claim that the 	originated debt of the developers was self-evidently too risky. They 	plan to lead evidence showing that the developers were inexperienced, 	did not qualify for loans from banks or reputable financial institutions, 	did not invest their own money in the developments, used the funding 	obtained from the SPVs to settle old debt and rarely furnished 	adequate security to either the originator or the SPV. The plaintiffs say 	therefore that the developments were doomed to fail and that almost all 	of them have in fact failed, as could have been expected in the face of 	unsurious and punishing interest rates of 4% per month which made 	profitability impossible, especially because what was supposedly 	bridging finance was in fact long term lending. The defendants deny 	the plaintiffs allegations and maintain that the assets were profitable 	but that they are victims of the 2008 financial crisis and the subsequent 	bad administration of the assets by the curators.

39.	Against this factual background, it is now possible to consider the 	legality of the issue of the promissory notes by the SPVs and the 	investment in them by CMM on behalf of CMF and the investors in the 	segregated portfolios.

The first and second question: are the promissory notes “legal commercial paper” issued in contravention of section 11 of the Banks Act?

40.	The first question to be determined is whether the promissory notes 	issued by the companies listed in paragraph 1.1 of the notice of motion 	were “legal commercial paper”. The second question, being whether 	the issue of promissory notes against the acceptance of money from 	the public constitutes “the business of a bank” in contravention of the 	Banks Act, is related to and overlaps with the first question. Should I 	find that the promissory notes were not “legal commercial paper” and 	were not issued lawfully, it will follow that the companies carried on the 	business of a bank in contravention of the Banks Act.

41.	Section 11 of the Banks Act provides:

“(1) Subject to the provisions of section 18A, no person shall conduct the business of a bank unless such person is a public company and is registered as a bank in terms of this Act.

(2) Any person who contravenes a provision of subsection (1) shall be guilty of an offence.”

42.	“The business of a bank” is defined in extensive detail in section 1 of 	the Act. The primary elements of the definition are located in 	paragraphs (a) and (b) of the definition which read:

(a)	the acceptance of deposits from the general public (including persons in the 	employ of the person so accepting deposits) as a regular feature of the 	business in question;

(b) 	the soliciting of or advertising for deposits …”

43.	The term “deposit” is also defined in some detail. The essential 	relevant part of the definition reads:

“deposit”, when used as a noun, means an amount of money paid by one person to another person subject to an agreement in terms of which –

(a) an equal amount or any part thereof will be conditionally or unconditionally repaid, either by the person to whom the money has been so paid or by any other person, with or without a premium, on demand or at specified or unspecified dates or in circumstances agreed to by or on behalf of the person making the payment and the person receiving it; and

(b) no interest will be payable on the amount so paid or interest will be payable thereon at specified intervals or otherwise,

notwithstanding that such payment is limited to a fixed amount or that a transferable or non-transferable certificate or other instrument providing for the repayment of such amount mutatis mutandis as contemplated in paragraph (a) or for the payment of interest on such amount mutatis mutandis as contemplated in paragraph (b) is issued in respect of such amount;”

44.	The definition of “the business of a bank” in the Banks Act excludes 	certain activities from falling within the primary definition. Paragraph 	(cc) of the definition has particular relevance. It excludes the following 	from the definition:

“any activity of a public sector, governmental or other institution, or of any person or category of persons, designated by the Registrar, with the approval of the Minister, by notice in the Gazette, provided such activity is performed in accordance with such conditions as the Registrar may with the approval of the Minister determine in the relevant notice.”

	The Registrar referred to is the Registrar of Banks, who is an officer or 	employee of the South African Reserve Bank designated by it to 	perform the functions assigned to the Registrar in terms of the Act.

45.	On 14 December 1994 the Registrar promulgated GN2172 in 	GG16167 (“the Commercial Paper notice”) in which, acting in terms of 	paragraph (cc) of the definition, he designated the activity in paragraph 	2 of the Schedule of the notice, and which is performed in accordance 	with the conditions set out in paragraph 3 of the Schedule, as an 	activity that does not fall within the meaning of “the business of a 	bank”. Paragraph 2 of the Schedule defines the excluded designated 	activity as:

“The acceptance of money from the general public against the issue of commercial paper in accordance with the conditions set out in paragraph 3.”

46.	The Commercial Paper notice defines commercial paper to mean:

“(a) any written acknowledgement of debt irrespective of whether the maturity thereof is fixed or based on a notice period, and irrespective of whether the rate at which interest is payable in respect of the debt in question is a fixed or floating rate; and

(b) debentures or any interest-bearing written acknowledgement of debt issued for a fixed term in accordance with the provisions of the Companies Act, 1973 (Act No 61 of 1973,

but does not include bankers’ acceptances;”

	Promissory notes accordingly constitute commercial paper as defined.

47.	Paragraph 3 of the Commercial Paper notice subjects the issue of 	commercial paper to numerous conditions. In the event that 	commercial paper is issued not in accordance with the conditions, such 	issue of commercial paper will not fall within the designated activity 	excluded from the definition and will accordingly constitute “the 	business of a bank” and will be illegal in terms of section 11 of the 	Banks Act unless the issuer is a public company and is registered as a 	bank; or unless the issuer can avail itself of other defences, for 	instance that the issue of the paper did not constitute the acceptance of 	deposits from the general public as a regular feature of its business 	and falls outside the scope of the prohibited activity on that account.

48.	The conditions set out in paragraph 3 of the Commercial Paper notice 	are detailed. Those relevant to this matter may be summarized as 	follows:-

48.1 	Commercial paper may only be issued or transferred in 		denominations of R1 million or more.

48.2 	Commercial paper may be issued only by a listed 			company or one that holds marketable net assets that 		exceeded R100 million at least 18 months prior to the 			proposed issue, or any other juristic person authorised by 		the Registrar in writing, unless the instruments are:

48.2.1 listed on a recognised finanancial exchange; or
48.2.2 endorsed by a bank; or
48.2.3 issued by the central government; or
48.2.5 backed by an explicit central government guarantee.		
48.3	The commercial paper issuer must be the ultimate 			borrower of the money obtained from the general public, 		or if the issuer is a company, only a wholly owned 			subsidiary or a holding company of the issuer may borrow 		money.

48.4	 The funds to be raised through the issue of commercial 		paper, may only be used for the purpose of acquisition by 		the ultimate borrower of operating capital and may not, 		(except when issued by the central government), be 			applied for the granting of money, loans or credit to the 		general public.

48.5 	No market may be made in unlisted commercial paper 		issued for a period of longer than 5 years, and 				commercial paper may not be used by means of market 		making therein or in any other manner, to obtain 			overnight funding.

49.	Promissory notes are governed and regulated by the Bills of Exchange 	Act 34 of 1964. In terms of section 100 of that Act nothing in the Act 	shall affect or restrict any law relating to banks or companies. All the 	conditions contained in the Commercial Paper notice accordingly apply 	to promissory notes.

50.	On 4 June 2004, the Registrar of Banks promulgated GNR681 in 	GG26415 (“the first exemption notice”) in which he designated the 	activity set out in paragraph 2 of the Schedule, and which is performed 	in accordance with the conditions set out in paragraphs 4 to 16 of the 	Schedule, as an activity that does not fall within the meaning of “the 	business of a bank”. The notice is complex, but there is no need to 	examine all of its terms and provisions. The designated activity is the 	acceptance by a special-purpose institution of money from the general 	public against the issue of commercial paper by it, in respect of either a 	traditional or a synthetic securitisation scheme. The first exemption 	notice was repealed and substituted by “the second exemption notice”, 	GN2 GG30628 on 1 January 2008. The securitisation arrangements at 	issue in the present matter constitute a traditional securitisation 	scheme, defined in the exemption notice to be a scheme whereby a 	special purpose institution issues commercial paper to investors and 	uses the proceeds of such issue to obtain assets; and makes 	payments primarily in respect of paper so issued from the cash flows 	arising or the proceeds derived from the assets transferred to such 	special purpose institution by an originator.

51.	In order for the issue of commercial paper by a special purpose 	institution in a traditional securitisation scheme to fall outside the scope 	of “the business of a bank”, there must be compliance with the 	conditions in the notice, most importantly paragraph 13 of the first 	exemption notice and paragraph 14 of the second exemption notice, 	the latter being a re-enactment of the latter in exactly the same terms. 	Paragraph 14 of the second exemption notice reads:

“(1) Conditions relating to the issue of commercial paper

(a) Notwithstanding anything to the contrary contained in the Commercial Paper Notice, a special-purpose institution may issue commercial paper only for purposes of a traditional or synthetic securitisation scheme in accordance with the conditons specified in items (b) and (c) below.

(b) The commercial paper-
(i) shall be issued or transferred only in minimum denominations equal to or greater than an initial principal value of R1 million, unless the commercial paper is-
(A) listed on a licensed financial exchange;
(B) endorsed by a bank;
(C) issued for a period of longer than five years; or 
(D) backed by an explicit national Government guarantee;
(ii) shall be issued only by a juristic person authorised in writing by the Registrar to issue commercial paper pursuant to a traditional or synthetic securitisation scheme, in accordance with the provisions of this Schedule and subject to such further conditions as the Registrar may determine in such written authorisation.

(c) A special-purpose institution issuing commercial paper pursuant to a traditional or synthetic securitisation scheme shall publish a disclosure document relating to the said issue of commercial paper, which disclosure document, as a minimum, shall contain the information prescribed in paragraph 16 of this Schedule.

52.	Paragraph 16 of the second exemption notice and paragraph 15 of the 	first exemption notice impose strict disclosure requirements. Paragraph 	16(1)(a) provides:

“Investors in a traditional or synthetic securitisation scheme shall be made aware that the instruments in which they invest do not represent deposits in a bank, but that the instruments are subject to investment risk, including possible delays in repayment and loss of income and principal amounts invested, and that the institution that acts in a primary role and its associated companies and, when the institution that acts in a primary role is a bank, any other institution within the banking group of which such a bank is a member, do not guarantee the capital value or performance of the instruments issued by the special-purpose institution.”

	Paragraph 16(2) requires that a special purpose institution shall issue a 	disclosure document to investors containing important information 	including: the total amount of commercial paper to be issued by the 	special purpose institution, whether or not the particular issue of 	commercial paper is listed; a description of the assets transferred or 	purchased as collateral, or the premiums received that will be utilised 	for the payments by the special-purpose institution in respect of the 	commercial paper issued, as well as other information related to 	liquidity, risk and compliance.

53.	When Mr Snyman, counsel for the defendants, closed his case on the 	separated questions, he made the concession, on behalf of his clients, 	that Four Rivers, Two Ships and Escascape did not have the authority 	in writing of the Registrar to issue commercial paper pursuant to a 	securitisation scheme as required in terms of paragraph 14(1)(b)(ii) of 	the second exemption notice and paragraph 13(1)(b)(ii) of the first 	exemption notice. On the basis of that concession alone it is possible 	therefore to find that the commercial paper issued by these three 	companies was not legal commercial paper and that they had hence 	contravened the Banks Act by conducting the business of a bank. 	However, in the interests of completeness, and as I am required to 	consider the conduct of the other companies, it will nonetheless be 	useful to review the common cause facts and the evidence of Bakkes 	regarding the securitisation schemes.

54.	With regard to all of the companies (except Corpfin), the common 	cause facts establish that they all issued promissory notes which 	constituted commercial paper. The ultimate borrower of the money 	advanced against the issue of the promissory notes was not the 	relevant SPV, nor did the SPV receive the money as operating capital. 	In the final analysis, the money extracted from CMF found its way to 	the debtors (developers) of Allegro Bridging or those of Regent and 	Escascape. The capital of the loans was advanced to persons who 	constituted the “trade receivables” of the originators. The promissory 	notes were not issued in denominations of R1 million or more. And, 	most importantly, none of the companies had the written authorisation 	from the Registrar of Banks to issue commercial paper.

55.	Bakkes made important concessions during his testimony regarding all 	of the companies. In relation to Miro Capital he admitted that it had 	acted as an SPV and that it had issued promissory notes. It appears to 	have acted as an SPV until at least October 2007, but still issued 	promissory notes after that. Bakkes claimed that the promissory notes 	issued after October 2007 were not issued to CMF but were issued by 	Miro Capital to Four Rivers as “back to back” security. His evidence is 	contradicted by Exhibit X1 which is a promissory note dated 27 June 	2008 issued by Miro Capital to CMM. Miro Capital was part of the Four 	Rivers structures. Prior to October 2007 the funds on-lent to the Allegro 	developers would exit CMF through the issue of Miro Capital 	promissory notes. Miro Capital was rated BB- (non-investment quality) 	in March 2007. During October 2007, Miro Capital promissory notes 	were “converted” to become Four River promissory notes upon 	implementation of the Four Rivers structure. Miro Capital issued 	promissory notes to the value of approximately R434 million. Prior to 	March 2007, Miro Capital did not have a rating, and was accordingly 	not investment grade. Bakkes admitted in evidence that Miro Cpital did 	not have the authority of the Registrar of Banks to issue promissory 	notes and did not intend to seek a listing of any kind. He accepted that 	the promissory notes of Miro Capital constituted commercial paper. 	Four Rivers took over the business of Miro Capital in October 2007, by 	which date Miro Capital had issued promissory notes for approximately 	R128 million. Bakkes acknowledged that CMM has a claim against 	Miro Capital for the face value of the promissory notes issued by Miro 	Capital in favour of CMM or bearer.

56.	Four Rivers, as just stated, took over the book of Miro Capital in 	October 2007 and began to issue promissory notes from that date, 	mainly if not exclusively in favour of CMM or bearer, in respect of 	money advanced and used to acquire receivables from Allegro 	Bridging. Four Rivers thus received money from the investors in CMF, 	represented by CMM. At the closure of the CMF, Four Rivers owed 	approximately R699 million to CMM in respect of the promissory notes 	it had issued. Four Rivers, Bakkes admitted, also did not have the 	written authority of the Registrar of Banks to issue commercial paper. 	When Four Rivers was brought into the picture it was a shelf company 	purchased by the management team that structured the securitisation 	programme in order to serve as the securitisation vehicle. Four Rivers 	was created and set up by CMM acting in concert with Allegro Bridging 	with the specific purpose of providing bridging finance facilities to 	developers for the development of properties. CMM was the only 	investor in Four Rivers’ investment instruments. However, any person 	in South Africa could invest in Four Rivers through the agency of CMM. 	In terms of the facility agreement it was “the Funders” (CMF and other 	investors) grant the facility, acquire ownership of the promissory notes 	and take the risk, which seems mostly to have been the case in 	practice as well. CMM was the authorised agent of the investors. This 	means that any member of the public could through the agency of 	CMM invest in Four Rivers’ promissory notes. CMM advertised for 	investments and CMM investors in CMF were members of the general 	public.

57.	Bakkes made similar concessions and admissions in relation to 	Regent/Two Ships and Escascape. These two companies also issued 	promissory notes to CMM or bearer which also constituted commercial 	paper, and did so without the written authority of the Registrar. Bakkes 	specifically admitted that Regent/Two Ships and Escascape were 	securitisation vehicles. He admitted also that members of the public 	could invest in Regent/Two Ships promissory notes.

58. 	The evidence regarding the issue of promissory notes by Finpro is less 	comprehensive. Initially, Bakkes was of the view that Finpro had not 	issued promissory notes. However, when presented with a promissory 	note issued by Finpro to bearer in the amount of R450 000 on 25 July 	2008 he conceded that Finpro did in fact issue promissory notes and 	later that Finpro had no authorisation to issue commercial paper from 	the Registrar of Banks. It is not clear whether Finpro acted as a 	securitisation vehicle. The promissory note of 25 July 2008 	issued to 	bearer intimates that Finpro accepted money from the general public 	against the issue of a promissory note without complying with the 	Commercial Paper notice. There is evidence that the Finpro promissory 	notes issued to CMM approximated a value of R93 million in March 	2009.

59.	The evidence in relation to Corpfin is not straightforward. In his plea 	Bakkes admitted that Corpfin issued promissory notes against the 	receipt of money. During cross-examination Bakkes was referred to an 	affidavit he filed in another proceeding, Annexure G2 File H2(b) to the 	Van Romburgh report. In it he stated:

“CMM Corporate Finance (“Corpfin”) authorised the managing director to commence with the operation of building a bridging finance book. This book grew to a volume and size of about R25 million. The bridging loans would be granted in accordance with all the Acts pertaining ….. These bridging loans and the security held against them would serve as assets for CMM Corporate Finance. Against these assets CMM Corporate Finance would issue promissory notes in terms of the law pertaining.”

	The accounting records analysed and reported on by van Romburgh 	indicate that Corpfin was indebted to CMM in the amount of 	approximately R20 million in April 2009. The version in Bakkes’ 	affidavit equates Corpfin with a SPV in a securitisation programme 	similar to the one in which, for example, Four Rivers participated. It 	amounts to an admission that Corpfin issued promissory notes as a 	securitisation vehicle and is accordingly consistent with the admission 	by Bakkes in his plea. During cross-examination regarding Corpfin, 	counsel put it to Bakkes that CMM engaged directly in bridging finance 	in relation to assets originated by Corpfin. Bakkes denied this saying 	that CMM never invested directly in bridging finance because it used a 	securitisation vehicle for that. He then identified Corpfin as that 	securitisation vehicle in question, which, he added, was later reversed 	into Escascape. He went on to confirm that Corpfin was a securitisation 	vehicle which issued promissory notes in which CMM invested. Bakkes 	further admitted that Corpfin did not have the written authorisation of 	the Registrar of Banks. Consequently, Corpfin too did not fall within the 	designated activity in the exemption notices and thus, on this evidence, 	conducted the business of a bank.

60.	However, it also emerged during the cross-examination of Bakkes that 	the curators have not been able to locate any promissory notes issued 	by Corpfin. They have inferred that they were issued from the 	accounting entries in the Hi-Port accounting system of CMM.

61.	Bakkes was also cross-examined by the seventeenth defendant, Mr 	Vincent Smith (“Smith”), about the Corpfin promissory notes. He then 	directly contradicted his earlier testimony and his plea. Smith asked 	him whether the Corpfin board, of which they were both members, had 	ever agreed to issue promissory notes. Bakkes replied: “I was under 	the impression that Corpfin did not issue promissory notes on their own 	balance sheet”. Bakkes further agreed with the proposition put to him 	by Smith that he (Smith) had never agreed to being a party to the 	issuing of promissory notes by Corpfin. Smith did not testify in the 	separated hearing. After reserving judgment on the separated 	questions, and after considering the issue, but before making any 	ruling, I requested counsel to address me on whether I was required to 	make a credibility finding in relation to Bakkes in order to determine 	whether on a balance of probabilities Corpfin had indeed issued 	promissory notes. The plaintiffs opted at that moment to seek an 	amendment to paragraph 1 of the notice of motion deleting any 	reference to Corpfin, with the result that the separated questions in 	relation to Corpfin will be decided at a later stage of the trial after there 	has been further evidence.

62. 	Thunderstruck issued three promissory notes against acceptance of 	money from CMM to finance the acquisition of an immovable property 	in Meyersdal in March-April 2008. Thunderstruck was not a 	securitisation vehicle. The acquisition was initially financed by a single 	promissory note of R15 million which was then split into two different 	promissory notes. Thunderstruck had no authorisation from the 	Registrar of Banks to issue commercial paper. Bakkes conceded that 	the money used by Thunderstruck was a long-term loan and was not 	operating expenses. He further admitted that when the promissory note 	was split into two it was allocated to two investors in CMF who were 	members of the public. On these facts it can be accepted that 	Thunderstruck accepted money from the general public against the 	issue of commercial paper and did not comply with the conditions in 	paragraph 3 of the Commercial Paper notice. In particular, because it 	was not a listed company or a listed company with a net asset value 	exceeding R100 million it required the written authorisation of the 	Registrar of Banks in terms of paragraph 3(1)(b)(iii) of the Commercial 	Paper notice, which it did not have. In consequence, the Thunderstruck 	promissory notes were not legal commercial paper in the sense that 	they fell within the ambit of the exemption. However, as Thunderstruck 	issued only one promissory note, which was subsequently split into 	two, it cannot be said, (and it was conceded by the plaintiffs in 	argument) that Thunderstruck accepted deposits as a regular feature of 	its business, within the meaning of the definition of the business of a 	bank. Hence, Thunderstruck did not contravene the Banks Act by 	issuing the promissory note to finance the property acquisition.

63.	Prior to the defendants making concessions in relation to Four Rivers, 	Regent/Two Ships and Escascape, they put forward a possible 	defence that the various companies did not accept deposits from the 	general public and for that reason they did not conduct the business of 	a bank as defined and hence did not contravene section 11 of the 	Banks Act. In light of the concessions, the defence falls away in 	relation to those three companies. For the reasons which immediately 	follow the defence is of no avail to the other companies either. The 	definitions of 	“general public” and “public” in the Banks Act are not 	inclusively descriptive or comprehensive. According to the definitions 	“general public” does not include a bank and the “public” includes a 	juristic person. The words “general public” in their ordinary connotation 	mean 	the members of the community at large, in the sense of natural 	persons – Commissioner of Inland Revenue v Plascon Holdings Ltd 	1964 (2) SA 464 (A) at 470E-F. The inclusion by the Banks Act of 	juristic persons within the meaning of “public” means that all members 	of the 	community at large, including juristic persons, are members of 	the general public as envisaged by the Banks Act. As explained earlier, 	the promissory notes issued by the companies were issued in favour of 	CMM or bearer. It is common cause that CMM acted as an authorised 	agent for the investors in the pool of CMF and the individual investors 	in the segregated portfolios. Some 870 investors invested in 	promissory notes in this fashion. The SPVs who were controlled by 	Bakkes and persons associated with him accordingly solicited and 	accepted through CMM investments from the general public against 	which 	deposits they issued the promissory notes.

64.	 The moneys advanced to the SPVs on behalf of the investors by CMM 	constitute deposits as envisaged in the definition of deposit in section 1 	of the Banks Act in that they were “an amount of money paid by one 	person to another person, subject to an agreement in terms of which 	an equal amount…. will be conditionally or unconditionally repaid (and) 	… interest will be payable thereon … notwithstanding that such 	payment is limited to a fixed amount or that a …. instrument providing 	for the repayment of such amount …. is issued in respect of such 	amount”. There is no doubt that the acceptance of money against the 	issue of a promissory note falls within the definition.

65.	Bakkes readily conceded that the investors whose money CMM 	invested in the segregated portfolios were members of the general 	public, as was CMM itself and CMF and those who had participatory 	interests in it. He also admitted that any member of the public could 	invest in CMF and give CMM a mandate to invest in cash 	management. He furthermore accepted that the issuing of promissory 	notes by Regent/Two Ships, and therefore by implication the other 	SPVs, would constitute the taking of deposits and that if deposits were 	taken from the general public as a regular feature of the company’s 	business it would constitute the business of a bank. He also admitted 	that authorisation from the Reserve Bank was required to conduct the 	business of bank, or from the Registrar of Banks, to benefit from the 	securitisation exemption notices.

66.	There is accordingly no doubt that the commercial paper issued by the 	SPVs, namely Miro Capital, Four Rivers, Regent Group Capital/Two 	Ships, Finpro and Escascape was not legal commercial paper in the 	sense that the activity of issuing it fell outside the definition of a 	business of a bank. There is equally no 	question that these companies 	solicited and accepted deposits from the general public as a regular 	feature of their business. In the result, the promissory notes issued by 	them were not legal commercial paper and the issue of the promissory 	notes against the acceptance of money from the general public 	constituted “the business of the bank”, which business they conducted 	in contravention of section 11 of the Banks Act. For the reasons I have 	already stated, the same cannot be said of Thunderstruck. 

The third and fourth questions: contravention of GN1503 and the breach of mandate

67. 	I turn now to the questions regarding the contravention of GN1503 and 	breach of the mandate. In terms of clause 3 of the CCM-client 	investment mandate, referred to as an investment management 	agreement for cash management between CMM and the client, 	approved by the Registrar and the FSB, CMM was authorised by the 	client to withdraw such monies and/or to sell units to make payment in 	accordance with the client’s instructions and/or to invest all funds on 	behalf of the client in assets and under the strategy as set out in 	Clause 16 of the mandate, being the clause specifying the investment 	guidelines. “Assets” are defined for the purposes of the mandate in 	clause 1.10 to include such money market instruments, bonds, unit 	trusts and investment instruments deemed appropriate by CMM. 	Clause 16.1, as mentioned earlier, identifies the nature of the 	investment as “a low risk South African cash management fund”, and 	states that the CMF aims to outperform the relevant money market 	benchmark over the medium term at low levels of risk within the money 	market asset class.

68.	Clause 16.8 and 16.9 of the mandate deal with general and specific 	investment contracts respectively. Clause 16.8 reads:

“CMM will invest on behalf of the client only in assets or underlying funds that invest in Rand-denominated and investment grade South African investment instruments. CMM may at times use fixed income derivatives …. within the risk parameters set out below.”

69.	Clause 16.9 deals with the risk parameters and the specific investment 	constraints in two distinct tables. The first table governs the aggregate 	exposure to rating classes. Of particular relevance is the fact that the 	table limits the aggregate exposure to long term class ratings AAA, AA, 	A and BBB corporate debt combined to a maximum of 25% of the fund. 	The table expressly records that investment in instruments with a rating 	lower than BBB is “not permitted”. The second table relates to specific 	investment constraints as regards the exposure to any single 	institution. The exposure to any single institution with an AAA, AA, A 	and BBB corporate debt rating is limited to “an absolute maximum” of 	5% of 	the fund.

70.	GN1503 contains additional specific investment constraints in relation 	to collective investment schemes, and Chapter VII thereof governs 	non-equity securities. Annexure B of GN1503 deals with the national 	rating scales of rating agencies, including Global Credit Rating, 	(“GCR”) the agency involved in this matter. In terms of clause 25 of 	GN1503 read with Annexure B, the maximum permissible percentage 	inclusion per instrument or issuer as a percentage of the market value 	of the assets comprising the portfolio is: 20% in respect of instruments 	with a long-term GCR rating of A+, A or A-; and 5% in respect of 	instruments in respect of instruments with a long term GCR rating of 	BBB+ or BBB. No investments may be made in instruments with a 	long-term GCR rating lower than BBB. Clause 25(b) read with clause 	3(10) of GN1503 indicates that unlisted non-equity securities can only 	be included in a portfolio if they are rated by one of the rating agencies 	identified in Annexure B. Investment in unrated promissory notes by a 	collective investment scheme is therefore prohibited. Clause 25(b)(ii) 	prohibits inclusion of commercial paper rated A- to A+ in excess of 20% 	or rated BBB to BBB+ in excess of 5%, while clause 3(10) provides that 	unlisted non-equity securities may be included in a portfolio in the 	manner and on the conditions determined in Clause 25, only if they 	are 	rated. By clear implication unrated, unlisted non-equity securities 	(including, by definition, commercial paper) may not be included in a 	portfolio.

71.	Bakkes conceded under cross examination that to the extent that any 	investment by the CMF in promissory notes exceeded the 20% 	threshold, this would constitute a breach of GN1503. Bakkes also 	conceded that CMM was not authorised, either in terms of GN1503 or 	the mandate, to invest on behalf of CMF or on behalf of specific 	investors in unlawfully issued commercial paper. That concession 	alone, taking into account my findings that the issue of the promissory 	notes did not fall within the exempted designated activity in the 	Commercial Paper notice and the exemption notices, and furthermore 	was in contravention of section 11 of the Banks Act, is tantamount to 	an admission that investment in the promissory notes was not 	permissible in terms of GN1503 and in breach of the investment 	mandate.

72.	The plaintiffs contend that besides breaching the mandate and 	GN1503 for non-compliance with the Banks Act, the investment in 	promissory notes issued by the various so-called SPVs contravened 	the provisions of both the mandate and GN1503 in other material 	respects. During the cross-examination of Bakkes, the plaintiffs relied 	upon CMM’s “Hi-Port” accounting system and the report compiled by 	its expert van Romburgh from that system and extensive source 	documentation. Bakkes conceded that the asset allocation can be 	determined from Hi-Port. He at times sought to challenge the 	conclusions taken from Prof van Romburgh’s expert report which were 	put to him, but put up no countervailing evidence. The plaintiffs have 	established on a balance of probabilities the value of both the 	investment funds in CMF under management by CMM from July 2006 	until closure on 3 April 2009 and the investment in promissory notes 	issued by the various SPVs throughout the period, from which it is 	possible to calculate the inclusion per instrument or issuer as a 	percentage of the market value of the assets under management.

73.	Miro began issuing promissory notes in August 2006 and continued to 	issue notes allocated to CMF until the end of September 2007. The 	value of these notes fluctuated between R24 172 947 and R128 165 	657 in the period, while their value as a percentage of the assets of the 	fund grew from 1,23% in August 2006 to 10,05% in September 2007. 	The percentage exceeded 5% for the first time in March 2007 and 	remained above that figure consistently until September 2007 when the 	value of the fund stood at R1,276 billion. Miro was not rated between 	August 2006 and March 2007. It was awarded a BB- rating by GCR in 	March 2007. Accordingly, the investment in these promissory notes 	offended the mandate and GN1503 in various respects. Firstly, the 	rating of Miro as BB- meant that investment in them was not permitted 	and prohibited in absolute terms in terms of both the mandate and 	GN1503. The investment exceeded the 5% limit in terms of clause 16.9 	of the mandate from March 2007 up to and including September 2007. 	At the time of closure of the fund, Miro promissory notes (including 	those issued to Four Rivers) amounted to R433 148 947, representing 	37,59% of the value of the funds under management.

74.	Four Rivers received an A- rating from GCR in September 2007. GCR 	downgraded this rating in January 2009 to BB because of a 	“fundamental shift in the underlying risk profile of the product offering” 	because the SPV did not generate sufficient cash flows to fully redeem 	the promissory notes at maturity resulting in the need for the notes to 	be rolled over at maturity. It recognised that the cash flow problem was 	a consequence of the discounting of property proceeds for developers 	having changed “from a short dated bridging product to longer dated 	property development finance”. GCR further down graded Four River to 	CCC in March 2009.  It expressed concern about non-compliance with 	legal covenants and noted that steps had not been taken to address 	the sizeable mismatch between assets and liabilities and other 	concerns in its earlier downgrade report.

75.	The investment in Four Rivers promissory notes breached and 	contravened the provisions of the mandate and GN1503 in various 	respects. The investment exceeded the 5% exposure to a single 	institution and issuer from inception until closure, moving from 10,19% 	in October 2007 to 57,07% in March 2009. In so far as Four Rivers was 	rated A- until January 2009, and total exposure to A- corporate debt 	was limited by the mandate to 25% and to 20% by GN1503, the 	investment in Four Rivers breached the mandate from August 2008 	when the investment represented 28,97% of the assets in CMF and 	remained in breach until the end of December 2008 when the 	percentage grew to 39,76%. It contravened GN1503 from May 2008. 	As from January 2009, Four Rivers was rated BB and therefore the 	investment was prohibited in terms of both the mandate and GN1503. 	The percentage grew in the period January 2009 until April 2009 from 	41,66% to 57,17%.

76.	The first investment in Two Ships/Regent was made in January 2008. 	Regent/Two Ships was only rated by GCR in July 2008, when it was 	awarded an A-rating. In April 2009 CMF held R106 779 874 in 	Regent/Two Ships promissory notes, representing 22,91% of CMF 	assets. The investment exceeded the 5% exposure to a single 	institution or issuer from February 2008 until the closure of the fund. 	Every investment in these notes in the six months before the company 	was rated in July 2008 was prohibited in terms of both the mandate 	and GN1503, being an investment in unrated commercial paper. As at 	July 2008, that exposure amounted to R103 942 634, representing 	9,6% of the fund invested in unrated promissory notes. The investment 	in A- rated corporate debt in the period from July 2008 exceeded the 	20% threshold of GN1503 for February 2009 (22,52%) and March 2009 	(22,91%). Thus, while the investment was within the threshold of 20% 	between 2008 and January 2009, it exceeded the 5% threshold of the 	mandate in that time. But Four Rivers and Regent/Two Ships combined 	in any event exceeded the 25% aggregate exposure to corporate debt 	permitted by the mandate.

77.	The companies Finpro, Corpfin and Escascape were never rated by 	GCR. Consequently, every and any investment made in promissory 	notes issued by these entities was not permitted in terms of the 	mandate and GN1503. The aggregate amount of these promissory 	notes at 3 April 2009 was R247 851 995,19 representing an exposure 	of 21,42% of the funds under management. As stated, the dispute 	about whether or not Corpfin issued promissory notes remains 	unresolved. The plaintiffs have not uncovered any promissory notes 	issued by Corpfin and the evidence in that regard is incomplete. Should 	it be found that Corpfin did indeed issue promissory notes, for reasons 	just stated, Corpfin being unrated, any investment in them would be in 	breach of the mandate and GN1503. The accounting records disclose 	entries in the amount of R20 643 760 being in respect of Corpfin 	promissory notes unpaid at April 2009, representing 1,78% of the fund. 	Likewise, the investment in the Thunderstruck promissory note of 	R15 030 000 was in breach of the mandate and GN1504 for the same 	reason. It too was unrated.

78.	With regard to costs, I see no reason why the costs of the hearing in 	relation to the separated questions should not follow the result.

79.	In the premises, I make the following declaratory orders:

1.	The issuing of promissory notes by the following entities:
1.1 Miro Capital (Pty) Ltd;
1.2 Four Rivers Trading 307 (Pty) Ltd;
1.3 Regent Group Capital (Pty) Ltd t/a Two Ships 427 (Pty) Ltd;
1.4 Escascape Investments (Pty) Ltd t/a Sakha iBlokho; 
1.5 CMM Finpro (Pty) Ltd; and
1.6 Thunderstruck Investments 15 (Pty) Ltd
	did not fall within the activity designated by the Registrar of 	Banks in paragraph 2 of the Schedule to GN 2172 of 	Government Gazette 16167 of 14 December 1994, or in 	paragraph 2 of the Schedule to GNR681, Government Gazette 	26415 of 4 June 2004, or in paragraph 2 of the Schedule to 	GN2, Government Gazette 30628 of 1 January 2008, and hence 	such promissory notes were not legal commercial paper as 	contemplated in paragraph 1 of the notice of motion in terms of 	rule 33(4) filed by the plaintiffs on 18 March 2014.

2.	The issue of promissory notes, against the acceptance of 	monies, by the entities referred to in paragraphs 1.1, 1.2, 1.3, 	1.4 and 1.5 of this order, constituted “the business of a bank” as 	defined in section 1 of the Banks Act 94 of 1990 and was in 	contravention of section 11 of that Act.

3.	The investment by Corporate Money Managers (Pty) Ltd of the 	funds of the CMM Cash Management Fund and that of its 	investor clients in the promissory notes issued by any or all of 	the entities referred to in paragraph 1 of this order was in 	contravention of the provisions of GN1503, Government Gazette 	28287 of 4 December 2005 and in breach of the investment 	mandate approved by the Registrar and/or the Financial 	Services Board or any variation thereof.

4.	The 1st, 17th, 19th and 20th defendants are ordered to pay the 	costs of the proceedings in relation to the determination of the 	questions separated in terms of rule 33(4), jointly and severally, 	the one paying the other to be absolved, such costs to include 	the costs attendant upon the employment of three counsel.

JR MURPHY
JUDGE OF THE HIGH COURT

Representation for the Applicants:

Counsel:			Adv FH Terblanche SC
				Adv. KW Lüderitz SC
				Adv HR Fourie			
Instructed by Attorneys:	Roestoff & Kruse	

Representation for 1st  19th  & 20th  Defendants:  

Counsel:			Adv MM Snyman						
Instructed by Attorneys:	EY Stuart Inc.	

Representation for 17th Defendant:	In person