The
plaintiff seeks an order in terms of section 318(1) of the Companies
Act [Chapter 24:03] for the defendant to be declared jointly and
severally liable with Foldaway Investments (Pvt) Ltd for all the
debts of Foldaway Investments
(Pvt) Ltd to the plaintiff. The provision reads as follows;
“Responsibility
of directors and other persons for fraudulent conduct of business
(1)
If, at any time it appears that any business of a company was being
carried on -
(a)
Recklessly; or
(b)
With gross negligence; or
(c)
With intent to defraud any person or for any fraudulent purpose;
the
court may, on the application of the Master, or liquidator or
judicial manager, or any creditor of or contributory to the company,
if it thinks it proper to do so, declare that any of the past or
present directors of the company, or any other persons who were
knowingly parties to the carrying on of the business in the manner or
circumstances aforesaid, shall be personally responsible, without
limitation of liability, for all or any of the debts or other
liabilities of the company as the court may direct.”
In
short, the provision simply states that if a company director, or any
other person, carries on the business of a company fraudulently,
recklessly, or with gross negligence he or she can be held personally
liable for the debts of the company.
In
casu, it is a fact that the defendant was the director of Foldaway
Investments (Pvt) Ltd. It is also a fact that the plaintiff and
Foldaway Investments (Pvt) Ltd used to conduct business together. The
plaintiff, which is into cattle marketing, auctioning, and trading
would sell cattle to Foldaway Investments (Pvt) Ltd through a credit
facility agreement the parties had entered into. It is not in dispute
that as the parties transacted, Foldaway Investments (Pvt) Ltd fell
into debt, and, pursuant to the debt, the plaintiff instituted legal
proceedings against Foldaway Investments (Pvt) Ltd for the recovery
of its money. It succeeded and obtained judgment, by consent, in
HC12769/12.
Now,
the plaintiff wants the defendant in the present matter declared
jointly and severally liable for the same debt as it avers that the
defendant, in conducting the business of Foldaway Investments (Pvt)
Ltd, he did so fraudulently or with the intent to defraud it.
Alternatively, he conducted the business of Foldaway Investments
(Pvt) Ltd recklessly or with gross negligence.
In
instituting the present legal proceedings against the defendant, as
the Director of Foldaway Investments (Pvt) Ltd, the plaintiff made
averments, in its declaration, to the effect that in late 2012 the
defendant, in carrying on the business of Foldaway Investments (Pvt)
Ltd, acted fraudulently or with intent to defraud the plaintiff and
other creditors in that he began to dissipate the movable assets of
Foldaway Investments (Pvt) Ltd so as to frustrate the enforcement of
its (plaintiff's) claim in contempt of the order by consent entered
into in case number HC12769/12. The plaintiff further averred that
the defendant went on to cause bogus legal proceedings to be
instituted by Foldaway Investments (Pvt) Ltd against it in case
numbers HC13926/12 and HC546/13 purely as a ruse to delay further
enforcement of the admitted claim. The plaintiff further averred
that, in the circumstances, the defendant deliberately misled it as
regards Foldaway Investments (Pvt) Ltd's capacity and intention to
pay thereby inducing the plaintiff to grant Foldaway Investments
(Pvt) Ltd credit.
In
the alternative, the plaintiff averred that the defendant conducted
the business of Foldaway Investments (Pvt) Ltd recklessly or with
gross negligence by continuing to incur liabilities and encumber its
assets in circumstances in which there were no reasonable prospects
of satisfying the debts.
In
his plea, the defendant denied carrying on the business of Foldaway
Investments (Pvt) Ltd recklessly or with gross negligence as alleged.
He also denied that he misled the plaintiff with regards to Foldaway
Investments (Pvt) Ltd's capacity and intention to pay. He said that
he made some payments towards clearing the debt of Foldaway
Investments (Pvt) Ltd to the plaintiff. He further averred that it
just happened that Foldaway Investments (Pvt) Ltd ran into some
serious financial and viability problems and was placed under
judicial management. He averred that on the contrary, it is the
plaintiff which, at one time, acted with fraudulent intent and malice
when it induced Foldaway Investments (Pvt) Ltd to register a Notarial
General
Covering
Bond
in its (plaintiff's) favour on the promise that it would supply
Foldaway Investments (Pvt) Ltd with beasts on credit only for it (the
plaintiff) to renege on the undertaking.
The
plaintiff's evidence
Mark
Robert Hayter (Mr Hayter) was the sole witness for the plaintiff. His
evidence was as follows:
He
is the Executive Director of the plaintiff with the responsibility of
running the affairs of the plaintiff in a General Manager's
position. Initially, well before 2004, there was an entity called CC
Sales which was in the business of selling cattle. Foldaway
Investments (Pvt) Ltd (Foldaway) was its client which was buying
cattle from it on a credit facility arrangement. In 2004, Mr Hayter
took over the running of CC Sales with Foldaway as an already
existing client. In 2007, there was a management buy-out in CC Sales
as some shareholders, who were retired, sold their shares. This
resulted in the incorporation of the plaintiff trading as CC Sales
that same year. The plaintiff continued with Foldaway Investments
(Pvt) Ltd as its client enjoying the same credit agreement Mr Hayter
found in place when he took over management of CC Sales in 2004. Mr
Hayter said that over the years the challenge they had had with the
credit agreement with Foldaway was that there had been moments of
delayed payments but payments would be made. He said that in dealing
with Foldaway Investments (Pvt) Ltd the plaintiff only dealt with the
defendant and no other representative from Foldaway Investments (Pvt)
Ltd. Mr Hayter said that the plaintiff regularly updated the credit
agreement between the parties as it did with all its clients who
enjoyed the credit facility. He produced a copy of the latest credit
agreement the parties signed on 20 October 2010. In that agreement
Foldaway Investments (Pvt) Ltd was represented by the defendant who,
in filling in the details of the purchaser, wrote 'Foldaway
Investments t/a Zim Halaal Meats'.
The
said agreement was produced as an exhibit.
Mr
Hayter said that with the adoption of the multi-currency system, the
plaintiff decided to upgrade its security system. It thus asked for
security from its clients who were benefitting from the credit
facility arrangement. To that end, the defendant was requested to
provide assets of value which he himself indicated to valuers
appointed by the plaintiff. Pursuant to that, a valuation report was
compiled on 28 July 2011 bearing the name Zim Halaal Meats (Pvt) Ltd
instead of Zim Halaal Meats which is the trade name of Foldaway
Investments (Pvt) Ltd. Mr Hayter said that the description of Zim
Halaal Meats, as a (private)
limited company, was a mistake. He said that when the valuation of
the assets was done, the defendant held out to the plaintiff that the
assets belonged to Foldaway Investments (Pvt) Ltd since the name Zim
Halaal Meats was just a trade name.
The
valuation report was produced as an exhibit.
The
witness said that under the direction of the defendant, Foldaway
Investments (Pvt) Ltd then approved the registration of a Notarial
General
Covering
Bond
over its assets in September 2011 and the registration was duly done
by the plaintiff's lawyers. The Notarial
General
Covering
Bond
was produced as an exhibit. It contains the usual covenants against
the alienation of the encumbered assets. Meanwhile Foldaway
Investments (Pvt) Ltd had accumulated huge arrears on its account.
The parties had mutually agreed that Foldaway Investments (Pvt) Ltd
was to settle the debt first before it could be allowed to buy on
credit again.
Mr
Hayter does not believe that after the registration of the bond
Foldaway Investments (Pvt) Ltd bought cattle again because of the
outstanding arrears. Foldaway Investments (Pvt) Ltd had gone over the
limit of the terms of the credit agreement which had deadlines for
payments. A statement showing the arrears of Foldaway was produced.
It shows that as at 1 February 2012, Foldaway Investments (Pvt) Ltd
owed US$94,633=70. By 25 September 2012 some payments had been made
and the debt stood at US$66,996=78. It is at that time that the
plaintiff sued Foldaway Investments (Pvt) Ltd in 2012, under case
number HC11213/12, for the recovery of US$66,996=78. Before the
matter had been determined, the plaintiff learnt that Foldaway
Investments (Pvt) Ltd was disposing of its assets in violation of the
covenants in the Notarial
General
Covering
Bond
to the prejudice of the plaintiff's security interests. The
plaintiff learnt of this from one Daniel Benjamin Palmer, a former
General Manager of Foldaway Investments (Pvt) Ltd, who advised it
that Foldaway had sold a T35 lorry in August 2012 and that all the
other assets were being offered for sale.
The
plaintiff therefore sought an interdict, in October 2012, under
HC12769/12, restraining this conduct.
Foldaway
Investments (Pvt) Ltd, under the directions of the defendant,
consented to the relief sought on 9 November 2012. Foldaway
Investments (Pvt) Ltd simultaneously consented to judgment for the
debt under HC11213/12 and the parties entered into a payment plan
which Foldaway Investments (Pvt) Ltd subsequently failed to honour.
Pursuant
to this, on 13 November 2012, the plaintiff instructed the Deputy
Sheriff to go to 10 Craster Road Southerton, Harare and attach, in
execution, the assets which had been registered under the Notarial
General
Covering
Bond.
When that happened, the defendant caused the Deputy Sheriff to launch
interpleader proceedings under HC546/13 based on an allegation that
the attached assets did not belong to Foldaway Investments (Pvt) Ltd
but to Zim Halaal Meats which he claimed to be a separate entity from
Foldaway Investments (Pvt) Ltd.
In
the affidavit, the defendant stated that Zim Halaal Meats was in fact
his own trading name in his personal right whilst on the other hand
he was the director of Foldaway Investments (Pvt) Ltd. Mr. Hayter
said that it was the first time the defendant mentioned that Foldaway
Investments (Pvt) Ltd and Zim Halaal Meats were distinct entities
which traded amongst themselves with each entity having its own
portfolio of assets registered in its name. It was stated that
Foldaway Investments (Pvt) Ltd was in the business of cattle ranching
and procuring livestock for slaughter for Zim Halaal Meats. In that
affidavit the defendant went on to say that the property of Zim
Halaal Meats could therefore not be attached to satisfy the judgment
of Foldaway Investments (Pvt) Ltd.
The
affidavit was produced as an exhibit.
Mr
Hayter said that this was surprising because all along, throughout
their dealings over the years, Foldaway Investments (Pvt) Ltd had
always traded as Zim Halaal Meats. However, the inter-pleader
proceedings were later abandoned, on 4 February 2013, when the then
defendant's legal practitioners, Kadzere, Hungwe and Mandevere
wrote to the Deputy Sheriff asking him to withdraw them on the basis
that the decision to bring those proceedings had been based on an
erroneous representation of facts on the part of the defendant.
The
letter to that effect was produced as an exhibit.
Mr
Hayter said that just before abandoning the interpleader proceedings
in February 2013, the defendant had caused Foldaway Investments (Pvt)
Ltd to be placed under provisional judicial management in January
2013 under HC13926/12. The provisional judicial management order
stayed all proceedings and execution against Foldaway Investments
(Pvt) Ltd assets.
The
order was produced as an exhibit.
Considering
this measure to be an insincere ploy to avoid or delay the
enforcement of Foldaway Investments (Pvt) Ltd's obligations, the
plaintiff successfully opposed confirmation of that order on 25
September 2013.
The
order discharging the provisional order was produced as an exhibit.
Just
days later, and in October 2013, the defendant caused Foldaway
Investments (Pvt) Ltd to apply, again, for its provisional judicial
management. It obtained another provisional judicial management order
on 30 October 2013 under HC8502/13. The order was granted without the
knowledge of the plaintiff. Foldaway Investments (Pvt) Ltd never
moved for the confirmation of this order until it lapsed.
Mr
Hayter testified that throughout the process of judicial management
there was no clarity from the successive provisional judicial
managers, or from the defendant, as regards the whereabouts of the
assets. The correspondences that the plaintiff's legal
representative wrote to the second provisional judicial manager
enquiring about the whereabouts of the assets were produced as
exhibits. He said that after the interdict had been granted, in
November 2012, the plaintiff was never given an opportunity to
inspect the assets by the defendant yet the Notarial
General
Covering
Bond
entitled the plaintiff to inspect the assets at any time. He said
that he went to the place where the assets were supposed to be but he
was not allowed to see them.
Mr
Hayter was subjected to rigorous cross examination by counsel for the
defendant. However, counsel for the defendant was very confusing in
the manner he asked his questions. Initially, he sounded like
the defendant was in agreement with the plaintiff that the assets
that had been registered under the Notarial
General
Covering
Bond
belonged to Foldaway Investments (Pvt) Ltd. It was even suggested to
Mr. Hayter that the registration of the bond did not leave any assets
for Foldaway Investments (Pvt) Ltd to operate and that the bond had
gone further than Foldaway Investments (Pvt) Ltd had intended as it
left it incapacitated to operate. Later on, counsel for the defendant
shifted goal posts and attempted to demonstrate that Foldaway
Investments (Pvt) Ltd and Zim Halaal Meats were two (2) separate
entities and that the assets that had been registered under the
Notarial
General
Covering
Bond
belonged to Zim Halaal Meats and not to Foldaway Investments (Pvt)
Ltd.
Mr
Hayter maintained that the defendant had been negligent in that he
had disposed of assets that had been tendered to the plaintiff as
security under the Notarial
General
Covering
Bond.
Mr Hayter maintained that he went to Foldaway Investments (Pvt) Ltd
premises on a number of occasions and did not find the assets. As at
the time of the trial, the plaintiff did not know where these assets
were as the defendant was not forthcoming with information about
their whereabouts.
The
defendant's evidence
The
defendant was the sole witness for his case. His evidence was as
follows:
He
was a director of Foldaway Investments (Pvt) Ltd, which, at the time
of trial, was now under liquidation. The other director was Margaret
Ncube. Zim Halaal Meats is a separate entity wherein he is into
partnership with other people. Zim Halaal Meats has its own directors
and assets which it acquired between 1998 and 2008. Foldaway
Investments (Pvt) Ltd was incorporated in 2007 and it does the
purchasing of cattle for Zim Halaal Meats whose business is to sell
meat for the purpose of catering for the Moslem Community. He said
that since the marketing of the meat was done under Zim Halaal Meats
it is the name that became publicly known, and, as such, people refer
to him personally as Zim Halaal Meats hence people confuse Zim Halaal
Meats as Foldaway Investments (Pvt) Ltd. Foldaway is an abattoir that
purchases cattle for slaughtering. Throughout the years, Foldaway
Investments (Pvt) Ltd was trading with the plaintiff for the supply
of cattle.
He
was in agreement with Mr Hayter that Foldaway Investments (Pvt) Ltd
accumulated a debt on its credit account with the plaintiff which
amounted to $96,000= when trading stopped in 2011. When trading
stopped he was still in charge of Foldaway Investments (Pvt) Ltd. The
defendant stated that Mr Hayter then approached him and said that due
to policy change in its trading, the plaintiff now required security
to the value of $150,000=. Mr Hayter then asked what assets they had
and he told Mr Hayter that they had movable assets. Mr Hayter
indicated that he wanted to register a bond on those assets and once
that was done Foldaway Investments (Pvt) Ltd could continue trading
with the plaintiff. The defendant said that he was agreeable to that
arrangement. He said that the plaintiff then sent a valuer to view
and value the assets at No.10 Craster Road, Southerton. He said that
since it was Foldaway Investments (Pvt) Ltd which was trading with
the plaintiff it was Foldaway Investments (Pvt) Ltd which was
registering the bond. Thereafter, the bond was registered over
movable assets worth US$116,460=. He said that all these assets,
which included motor vehicles, belonged to Zim Halaal Meats, but he
did not make this clear to Mr Hayter since he had said that the
defendant should just list whatever property he used. He said that as
the director of Foldaway Investments (Pvt) Ltd he authorised the
registration of the bond by the plaintiff's legal practitioners. He
said that the plaintiff never requested to register a bond against
Zim Halaal Meats. The defendant said that after the bond had been
registered Foldaway Investments (Pvt) Ltd continued to trade and to
make payment towards the debt of US$96,000= but stopped after paying
US$48,000= because it had employed one Daniel Benjamin Palmer as the
General Manager. He was negligent in handling the company's
affairs, and, at the same time, Foldaway Investments (Pvt) Ltd's
supply chain had been cut off by the plaintiff. There was no option
but to place the company under judicial management as a way of trying
to resuscitate it. The plaintiff never lodged its claim with the
judicial manager. The defendant sated that he never at any time sold
any of the assets he had mortgaged as security to the plaintiff.
He
denied that he was negligent or that he acted fraudulently.
He
said that he had traded with the plaintiff for almost 20 years, and,
as such, he had no reason to behave in such a manner. He said that
when Foldaway
Investments (Pvt) Ltd was
placed under judicial management its assets were handed over to the
provisional judicial manager. He admitted that Foldaway
Investments (Pvt) Ltd was
placed under provisional judicial management on two occasions. Now it
is under liquidation. He said that the assets in question are now
under the possession of the liquidator.
The
defendant said that the allegation that was made by Daniel Benjamin
Palmer, that Foldaway
Investments (Pvt) Ltd was
selling the assets, were false. He said Mr Palmer was doing this
because he was a disgruntled former employee who had a score to
settle with him over how he was dismissed from employment.
Under
cross-examination, the defendant was asked if Zim Halaal Meats was a
private limited company and he initially said yes. He then changed
and said that it is a partnership with no directors.
He
denied the averments that had been made on his behalf, in his
application for absolution from the instance at the close of the
plaintiff's case, that Zim Halaal Meats is a common law
universitas. The defendant admitted that at Foldaway
Investments (Pvt) Ltd he
was the person who had been in charge although he had a manager who
reported to him. He said that at one time when he was dealing with
the plaintiff he was the single shareholder in the company although
some shares were later sold. He did not say when exactly he later
sold some of the shares. He admitted that Foldaway
Investments (Pvt) Ltd also
traded as Zim Halaal Meats and it was common knowledge that Foldaway
Investments (Pvt) Ltd traded
as Zim Halaal Meats. He said he controlled both entities.
He
changed his story and said that when the plaintiff asked for security
he indicated that Foldaway
Investments (Pvt) Ltd had
no assets but the plaintiff was welcome to value the assets that
Foldaway
Investments (Pvt) Ltd used.
As a result, the plaintiff used the assets of Zim Halaal Meats and
these are the same assets which were handed over to the judicial
managers to enable them to use for the resuscitation of Foldaway
Investments (Pvt) Ltd since
it had no assets of its own. These are the same assets that are now
under the possession of the liquidator. The defendant said that Zim
Halaal Meats was never closed….,.
The
next issue that needs to be determined is: Whether or not the
defendant should be declared liable for the debts of Foldaway
Investments (Pvt) Ltd to
the plaintiff in terms of section 318(1) of the Companies Act
As
I have already outlined above, the plaintiff made averments that the
defendant, as the director of Foldaway
Investments (Pvt) Ltd conducted
its business fraudulently or with intent to defraud it as a creditor.
Fraud
consists of unlawful making, with intent to defraud, a
misrepresentation which causes actual prejudice or which is
potentially prejudicial to another. See Ex
parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T).
The
plaintiff said that, alternatively, the defendant carried on the
business of Foldaway
Investments (Pvt) Ltd recklessly
or with gross negligence.
In
Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T) it was
held that recklessness implies the existence of an objective standard
of care that would be observed by a reasonable man in conducting the
business of the company in the particular circumstances. A departure
from that standard constitutes negligence. A more serious departure
constitutes gross negligence which is the same thing as recklessness.
In
casu, the plaintiff has been looking for the mortgaged movable
property from the time Foldaway
Investments (Pvt) Ltd was
placed under provisional judicial management in 2013 - and the
defendant has not been forthcoming with information as to its
whereabouts. It was only during trial, and during the defence case,
that the defendant said that the property is with the liquidator.
However, he did not lead evidence from the liquidator or adduce any
tangible evidence to prove this - it was just his word. There is
therefore no reason for the court to believe him. The plaintiff
cannot be faulted for concluding that the defendant disposed of this
property as he failed to account for the property. It appears that he
indeed disposed of the property. Disposal of property which is
mortgaged clearly breaches the terms of the Notarial
General
Covering
Bond
which prohibit the disposal of the property pending the discharge of
the plaintiff's claim.
It
is a wrongful deception which was done by the defendant on behalf of
Foldaway
Investments (Pvt) Ltd when
he knew very well that the judgment that was obtained by the
plaintiff in HC12769/12 had not been satisfied. The disposal of the
assets was done with the intention to defeat the enforcement of the
plaintiff's claim thereby resulting in financial loss to the
plaintiff. The plaintiff thus managed to show, on a balance of
probabilities, that the defendant, as the director of Foldaway
Investments (Pvt) Ltd,
acted fraudulently in conducting business with it. He should
therefore be held personally liable for the debts of Foldaway
Investments (Pvt) Ltd to
the plaintiff….,.
In
view of the foregoing l hereby order that:
1.
The defendant is liable, jointly and severally, with Foldaway
Investments (Pvt) Ltd for all the debts of that company to the
plaintiff, the one paying the other to be absolved.
