REPORTABLE

IN THE HIGH COURT OF SOUTH AFRICA 
(WESTERN CAPE HIGH COURT, CAPE TOWN)
						
								Case No.: 5781/2010
In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

ALLAN WILLIAM WRIGHT					Respondent

and

									Case No: 6671/2010

In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

INA MOUTON							Respondent

and

									Case No: 6673/2010

In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

CHARLES JACOB VAN GREUNEN				Respondent

Judgment by 							M J Fitzgerald, AJ
For the Applicants						Adv. J A van der Merwe

							Cnr Carl Cronje Drive & Tyger
							Falls Boulevard. Tyger Falls
							BELLVILLE
								(Ref: H Botes/CLR/WF2038)

For the Respondents 					Adv. P van der Berg
Instructed by						Jordaan, Van Wyk 
								Stabilis Building 
								381 Main Road 
								SEDGEFIELD 
								(Ref: A Jordaan/W319)

Date(s) of Hearing					13 September 2010
Judgment delivered on			15 September 2010

REPORTABLE

IN THE HIGH COURT OF SOUTH AFRICA 
(WESTERN CAPE HIGH COURT, CAPE TOWN)
						
								Case No.: 5781/2010
In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

ALLAN WILLIAM WRIGHT					Respondent

and

									Case No: 6671/2010

In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

INA MOUTON							Respondent

and

									Case No: 6673/2010

In the matter between:
C F BESTER N.O. 						First Applicant
GAIRONESA DAVIDS						Second Applicant

and

CHARLES JACOB VAN GREUNEN				Respondent

judgment

FITZGERALD AJ:

Although in the notice of motion a rule nisi is sought counsel accepted that in effect the relief sought was final and the matter is to be adjudicated on that basis.

In each case that portion of an agreed loan of R1.66 million which was admittedly paid to each respondent in terms of written agreements of loan concluded on 5 August 2005 is claimed together with interest. The loan agreement in each case is annexed to the founding affidavit marked "CB5".

The company was finally wound up by this court on 12 November 2008 and the applicants are its duly appointed liquidators.

According to the founding affidavit of the first applicant the company formed part of the Genesis Group of companies which, to the deponent's best knowledge and belief, had conducted business as property developers since about 2004. The developments were mainly financed by way of investments received from members of the general public who invested in the various developments undertaken by the Genesis Group.

The Genesis Group's structure comprised of Genesis Development Partners which company was registered and incorporated in accordance with the provisions of section 21 of the Companies Act No. 61 of 1973 as amended ("the Act"). Genesis Development Partners held all the issued shares in Genesis Property (Pty) Limited which in turn held all the issued shares in Genesis Property Holdings (Pty) Limited. The latter company held the issued shares in or controlled various separate companies which owned the land which was to be developed by the respective companies. Silver Moon was one of these companies.
As staled above, the application is resisted only on the basis that the agreements referred to above, annexures "F" and "N" to the answering affidavit, have had the effect of extinguishing the indebtedness of each respondent to the company.

The concessions made by the respondents in relation to the invalidity of the loan agreement itself and the defence of prescription were correctly made, in my view.

It is common cause that on 3 August 2005 the directors of the company resolved and approved a loan in the amount of R 1,66 million to each of the respondents. Amounts less than the agreed amount of Rl,66 million were admittedly received by each respondent in terms thereof.

It is common cause that the Cedar Farm Development project was not finalised.
Respondents accept however in the event that it is found that no reliance can be placed upon the agreements concluded respectively on 14 December 2007 and 7 May 2008 that the amounts claimed in these proceedings are indeed due and payable.

1 now turn to consider each of the agreements, annexures "F" and "N" to the answering affidavit which, so it is contended, have the effect of extinguishing the liability on the parts of respondents to repay the loans admittedly made to them by the company.

In broad summary, annexure "F" provides for the purchase by the company and Cedar Falls Properties 30 (Pty) Limited ("Cedar Falls") of the 50 per cent shareholding held in each of them by various family trusts of the respondents.

It is common cause that for practical reasons registration of the transfer of the contemplated property did not take place.

An issue which arises from the conclusion of this agreement is whether it complied with sections 85 and 87 of the Act.

Sections 85 et seq of the Act depart from the previously applied capital maintenance rule and permit a company in the circumstances there postulated to acquire its own shares.

It was not seriously disputed before me that at all material times the company was not solvent as contemplated by section 85(4). Indeed clause 10.3.3 of annexure "F" confirms such insolvency in rcspecl of investors. This clause reads:

Moreover, it is apparent from paragraph 77 of the replying affidavit that by December 2007, the liability of the company to investors was in excess of R42 million. The company, moreover, then had no assets other than the immovable properties which it had sold to Cedar Falls. It is, however, common cause that Cedar Falls never made the initial payment of RI2 981 000,00 in terms of the relevant purchase agreement.

Payment in this case was the transfer of the property. Counsel for the respondents sought to suggest that the provisions of section 86 of the Act somehow rendered legal an illegal payment in respect of an acquisition of shares in contravention of section 85(4).

I do not agree. Section 86 provides for the directors of a company who, contrary to the provisions of section 85(4), allow the company to acquire shares issued by it, to be jointly and severally liable to restore to the company any amount so paid and not otherwise recovered by the company.

The provision of a further remedy against defaulting directors does not. in my view, render legal a payment otherwise said to be illegal because of non compliance with section 85(4) of the Act.

By reason of the view 1 take of this matter in relation to the effect of these agreements, it is probably unnecessary also to determine the effect of the alleged implementation of the agreements concluded b y the parties thereto on 14 December 2008 and 7 May 2008, annexures "F" and "N" lo the answering affidavit.

It is difficult to consider in what way the company has so performed. All that it did was become a party, first, to an unenforceable loan agreement and thereafter to a share buy back agreement in terms of which, vis-a-vis the respondents, it gave up for no benefit a substantial claim against its directors.

Given, moreover, the fact that the knowledge of its directors is not in the circumstances postulated, attributable to the company, it is difficult, in any event, to characterize its participation as proper performance.

1 point out first that in terms of annexure "F'\ the company and Cedar Falls purported to acquire the shares held in each of them by the Trusts.

Moreover, in terms of clause 7 thereof, the seller was to deliver to the purchaser, inter alia, a duly signed cession of all loan accounts of the seller (i.e. the trusts) in the company and Cedar Falls. No cession by the respondents of their personal loan accounts, if any, was required in terms of clause 7 or at all, notwithstanding the reference in clause 5 to the purchase as well of the loan accounts in the name of the respondents.

It was, however in this regard, conceded by counsel for the respondents, correctly in my view, that the debit loan account of the respondents in the company could not be ceded in this way to the company.

In any event, I do not sec how the so-called sale of shares agreement can have the effect of extinguishing the loan indebtedness of the respondents to the company. A mere perusal thereof, in my view, shows that this agreement docs not, either expressly or tacitly, provide therefor.
Further, in ray view, the reliance upon annexure "N" is equally misplaced.

In terms of this agreement, the company purported to sell to Proud Heritage Properties 146 (Pty) Limited ("Proud Heritage") the property described as Erf 22988 George.

Clauses 1.1, 1.2, 1.3 and 1.4 thereof refer, in turn, to the four agreements concluded on 14 December 2007 (including annexure "F") in terms of which the trusts sold their respective shareholding inter alia to the company.

Clauses 1.5, 1.6, 1.8 and 1.9 of annexure "N" read respectively as follows:

"1.5 And whereas the said companies, namely Cedar Falls, Spring Forest, Golden Rewards and Silver Moon are in terms of the agreements referred to in 1.1 to 1.4 collectively indebted to the Trust in the amount of R2 307 147,00.

1.6 And whereas Silver Moon, Cedar Falls, Spring Forests and Golden Rewards in terms of this agreement hereby agree that Silver Moon assumes full liability for the due payment in terms of the agreements referred to in 1.1 to 1.4.

1.8 And whereas the Trust ceded transfer in terms of a cession agreement their right, title and interest in and to the due payment for the shares sold as referred to in 1.1 to 1.4 to Proud Heritage. It is hereby agreed that Cedar Falls, Spring Forest, Golden Rewards and Silver Moon are not a party to the said cession agreement and the Trust and Proud Heritage being a party to the said cession agreement hereby indemnify Cedar Falls, Spring Forest, Golden Rewards and Silver Moon from any damages or loss that said companies may suffer due to any reason arising from said cession agreement".
Payment of the purchase price payable by the company to Proud Heritage is regulated by clause 4.1 of annexure "N". This reads as follows:

"4.     PAYMENT OF THE PURCHASE PRICE

4.1 It is hereby agreed between Silver Moon and Proud Heritage that on date of registration of transfer of the property, the debts referred to in the preamble shall be set off the one against the other, both parties on such date releasing the other from due payment of such debts and neither shall have any liability towards the other for payment or for performing in terms of any obligation attaching to payment of the said amounts".

A perusal of clause 4.1 makes it immediately clear, however, that it is only the debts referred to in the preamble which were to be set off, namely only those amounts payable to the trusts.

Nowhere in annexure "N" is there to be found any reference to the setting off or extinction of the debts owing by the respondents to the company in terms of their respective loan agreements.

As staled above, notwithstanding this alleged common intention, I am not persuaded that the agreements relied upon by respondents have the effect for which they contend. This, in my view, is apparent from a proper construction thereof.

In any event, the applicants* response to paragraph 25.29 of the answering affidavit of Wright, referred to above, is instructive. More particularly, first applicant in paragraph 136 of his replying alfidavit stales as follows:

"136. The agreements were simply an attempt to give effect to their initial scheme of syphoning off investors' funds upfront, before the development of the properties had even commenced. By 'writing off the loans, Silver Moon was simply further divesting itself of its assets, being the claims against the directors to the obvious detriment of its creditors'*.

In this regard, it is common cause that the funds obtained by the company to effect payment to the respondents of the alleged loans emanated from funds invested by members of the general public in the company and/or Cedar Falls in the belief that the latter companies would develop the erven registered in the name of the company. The erven were, of course, not developed by the company.

Given that fact, it seems to me mat funds so invested were not used for their intended purpose but were used, up front, and apparently in the expectation that the development would be profitable, to pay the respondents the alleged loans. As stated above, such use arguably constitutes theft and/or a fraud on the investors and other creditors of the company.

In this regard, counsel for the respondents fairly conceded that a material aspect of annexures "F" and "N" was the attempt to relieve the respondents from liability in respect of their admitted loan account indebtedness.

In the premises, I am on this basis also disinclined to come to the assistance of the respondents given that the funds from which the loans emanated were intended to be used not for their personal benefit but rather for the development of the erven owned by the company. Indeed, the company received no benefit at all from the loan to its directors. Accordingly, and given the fact that the company was subsequently wound up without these erven being developed, it follows that the funds were inappropriately used by the respondents in breach of their fiduciary duties towards the company.

In light of the conclusions to which I have come I do not consider it necessary fully to deal with the further contentions asserted by the applicants to refute what is alleged to be the effect of the two agreements now relied upon by the respondents.

These include the contentions that:

1. the buy back agreement upon which the respondents rely in support of the contention that the debts were "written off', annexure "F" and the purported set-off or cession agreement, annexure "N" both sought to vary the terms of the loan agreement. Clauses 15.1 to 15.4 of the loan agreement provides that any amendment or variation thereof should be in writing and signed by both parties. No proof of compliance with these clauses was adduced; and

2. the share buy back agreement, annexure T" contained a suspensive condition to the effect that the purchaser also enter into sale of share agreements in respect of Spring Forest Trading 27 (Pty) Limited and Golden Rewards 240 (Pty) I limited on or before the signature date. Respondents have also not established that this condition was satisfied.

In the circumstances it follows that the relief sought by the applicants should be granted.

With regard to the question of costs, it was submitted by counsel for the applicants that the allegations in the affidavits of the respondents have been exposed as false in circumstances where each respondent must have known that the averments asserted by them were not true.

In the premises a special costs order is sought by the applicants.

I cannot, fairly, in these circumstances make a definitive finding relative to the alleged falsity of the allegations made by the respondents in their respective answering affidavits.

(b)     Respondent is directed to pay interest on the aforesaid amount at the rate of 15.5 per cent a tempore

(c)     Respondent is directed to pay the costs of the application.

(b)     The respondent is further directed to pay interest thereon at the rate of 15.5 per cent a tempore morae.

(c)     The respondent is directed to pay the cost of this application.

(a)	
(b)	
(c)	

						

15 September 2010