Summary judgment – piercing of corporate veil

CIV. CASE NO. 675/98

In the matter between

PETER RONALD COOPER N.O. PLAINTIFF

(As Liquidator of Growth Trust Corporation)

VS

D.B.O INVESTMENTS (PTY) LTD DEFENDANT

Coram S.B. MAPHALALA

For Plaintiff MR. L. KHUMALO

For Defendant MR. S. NKOSI

JUDGEMENT

(17/10/2000)

This is an application for summary judgment, which is resisted by the defendant. The plaintiff issued summons against the defendant in his capacity as a liquidator for Growth Trust Corporation Limited (GTC), claiming payment of the sum of E313, 200-00.

It is set out in the particulars of claim that in or during August 1997, the plaintiff lent and advanced an amount of E313, 200-00 to the defendant, at the defendant’s special instance and request, upon terms as are contained in the facility letter, signed by both plaintiff and defendant, dated 16th August 1995. A copy of the facility letter is annexed to the papers marked “A”. The material express terms agreed upon were that:

The defendant has filed an opposing affidavit in which it denies the allegation that it does not have a good and bona fide defence to the plaintiff’s claim, and set out at great length the history of the matter and the defence it seeks to advance for the court to find in its favour.

I find it imperative to also outline these facts, as this matter is an inherently complex one with voluminous papers filed on both sides. Further counsel filed exhaustive Heads of Arguments. They were equally lengthy in their submissions spanning three days.

The defendant through the affidavit deposed by one Beverly Reid outlines the sequence of events as follows. On or about March 1995, the Growth Trust Corporation Ltd duly represented by Dug McClean invited the defendant duly represented by her to enter into a franchise agreement with the Corporation and run a cinema business in Manzini under the business style Maxi Movies. The growth Trust Corporation portrayed the cinema business as a very good business with a potential to make high profits. Mr. McClean showed her a business plan, which had been made by the Corporation after conducting a business study.

It appeared to her that the business plan appeared to be a very good business. According to her the Growth Trust Corporation made an undertaking to assist in providing the following finance to establish the cinema business support services in the form of marketing the business, supplying the movies, training the staff in cinema operations, maintaining the equipment and assist in the accounting and business procedures. The plaintiff confirmed that they would supply the movies, which would be of high quality and would be the latest movies thus ensuring attendance at the movie house. On the strength of the representation made by the Growth Trust Corporation about the cinema business the defendant entered into the business. On the 31st March 1995, she signed a letter awarding the defendant a Maxi Movie franchise licence.

Following a number of discussions between the Corporation and the defendant on the 2nd August 1995, a franchise agreement was entered into between the parties for purposes of setting up and running the cinema business the Growth Trust Corporation Ltd was the master franchise holder, franchiser and the defendant was the franchisee. The agreement was to operate for a period of sixty calendar months from the date of signature. In most discussions held at the time and thereafter she was with one Mr. Ali of M & I Investments (Pty) Ltd.

In terms of the franchise agreement the main obligations of Growth Trust Corporation Ltd are as follows:

She deposed that for the purposes of establishing the value of the equipment, fixtures and fittings of the cinema business she utilised the company that initially fitted the cinema Signlines (Pty) Ltd to make a valuation of the cinema. The value of some of the equipment, fixtures and fittings as installed new is E20, 961-00. For purposes of the plaintiff’s claim she had requested Panasonic of Johannesburg to give her a verbal quote on the protection equipment as new. Panasonic had stated that its estimated value is E48, 000-00 now. She submits that the actual amount spent by Growth Trust Corporation is approximately the amount of E69, 000-00 and not the figure of E313, 000-00 as claim. The sum of money used to set up the business was greatly exaggerated by the Corporation in order to make profits from the defendant. The value of the equipment fixtures and fittings bought by the Corporation is far less than the money the Corporation allegedly used on their behalf. Defendants avers that it was repaying its loan with the Growth Trust Corporation. The total amount the defendant has paid to the Corporation is the sum of E203, 844-99. No receipts were received. The monies were paid by stop order and cheques as per the schedule annexed marked “C”. The defendant disputes the amount claimed by the plaintiff in that the latter failed to issue statements to the defendant for the loan account. That since October 1995, the defendant has not received statements from Growth Trust Corporation for the loan account, showing as to how much has been paid and what was the balance outstanding.

Defendant further detailed at some length how the business commenced and how the plaintiff acted its part of the franchise agreement. The long and short of defendant story in this regard is plaintiff failed to comply with the provisions of the franchise agreement. As a direct consequence the business lost its customers as they could only show videos obtained from local shops. These were of a very poor quality resulting in minimal attendances.

Plaintiff was then put under liquidation and this resulted in a complete breakdown of the franchise agreement. The defendant alleges that the Growth Trust Corporation is therefore in serious breach of the agreement and has also defrauded the defendant of a substantial amount of money being the difference between what defendant paid and the actual value of the equipment and fittings that were installed.

The defendant further alleges that the plaintiff further breached the franchise agreement in that it failed to supply the defendant with the movies that had been advertised for screening. When it supplied the movies they were delivered very late and were of very poor quality. This resulted in poor attendances at the cinema in turn spiralling into a situation where money would have to be pumped into the business from defendant’s personal savings. The situation got so bad that defendant had to seek facilities from sister companies just to keep the cinema going and to pay rentals, staff salaries and other fixed costs. The net result has been an overdraft exceeding E40, 000-00.

Defendant states that plaintiff did not maintain the equipment of the cinema. Plaintiff did not train the defendant’s staff to operate the Maxi Movies Cinema business. This resulted in failure to run the business efficiency and meant that the staff complement was too high leading to high costs. Plaintiff failed to provide the defendant with accounting and business strategies for purposes of running the cinema business efficiently and keeping proper books of account. As a result of that the defendant had serious problems in running the business.

As a result of the breach of the franchise agreement the defendant’s business could not make profits as projected in the business plan. The estimated losses and damages suffered by the defendant as a result of the Growth Trust Corporation’s breach of the franchise agreement is estimated at E400, 901-00.

All in all defendants submit that the defendant has a good defence and a counter-claim against the plaintiff.

The defendant made an application to file a further affidavit and this was contested by the plaintiff. The matter was argued before me on the 16th April 1999, where the court subsequently found in favour of the plaintiff and disallowed the reception of a further affidavit. A full judgement was subsequently handed down in this regard.

The matter then appeared before me for full arguments on the merits on the summary judgement application. As I have alluded to earlier the parties filed exhaustive Heads of Arguments and their submissions were long.

The Plaintiff as represented by Mr. Khumalo submitted that the claim is based on annexure “A” being the facility letter signed by both parties, which embodies the terms of the loan. Defendant does not deny the terms and the facility letter and does not refer to it at all. The closest the defendant comes to addressing the matter of the loan is by denying that the amount was E313, 200-00, asserting that it was E69, 000- 00. Mr. Khumalo punched holes in this allegation in that defendant do not refer to the amount as that of the loan, but as an amount spent by Growth Trust Corporation. Defendant approximates this amount and has no proof of its allegation. Defendant does not state it as the loan in terms of the facility letter but that it comes as money spent in terms of the franchise agreement (with another party). Defendant makes no connection at all between this amount (whether E313, 200-00 or E69, 000-00) and the amount of the loan in terms of the facility letter. Lastly defendant does not deny that it was lent and advanced the amount stated in the facility letter.

Mr. Khumalo further argued that the allegation by the defendant that it has repaid E203, 844-99 to Growth Trust Corporation is fraught with difficulties. Firstly, defendant alleges the mechanism to have been in terms of a “stop order” but provides no evidence thereof. Secondly, defendant attaches annexure “C”, being some unexplained compilation or schedule, the author and purpose of which is not explained. Thirdly, defendant provides no evidence of bank confirmation of the stop order and the accounts that were debited and correspondence credited in terms thereof.

If defendant admits the money loaned to it to be the one that the defendant repaid, it has a duty to prove such repayment in this event that the plaintiff alleges non-payment.

Mr. Khumalo further attacked the rest of defendant’s affidavit, from paragraph 17 to paragraph 24 as irrelevant in that reference is made to non-performance by a franchiser in terms of a franchise agreement. Further reference is made to damages sustained as a result of non-delivery of material and services by the franchiser. Furthermore, consequently it is sought to establish a “counter claim” which is ill advised in this event that the defaulting franchiser is GTCC not Growth Trust Corporation, and is therefore a company different from the claimant.

In the result, plaintiff’s claim as set out in the declaration is totally uncontested and should succeed.

The alleged omission of the words “proprietary” or “limited” in the name of GTCC in the franchise agreement is irrelevant to the claim of Growth Trust Corporation.

The claim is based on a facility letter and the monies lent and advanced by Growth Trust Corporation, not GTCC. That GTCC entered into a franchise agreement with defendant and its name in that franchise agreement with defendant was incomplete is irrelevant. Defendant should have known in each case that it was contracting with two separate entities; the names are clearly different in the documents involved.

That both companies were owned by SBGT and the defendant was invited by SBGT to enter into a franchise agreement with GTCC or that the defendant confused the three entities (SBGT, GTC and GTCC) in making payments does not alter the law regarding separate personalities of the three institutions so clearly demonstrated in terms of the certificates of incorporation and the transaction document used. Further, it does not make one entity the same as the other, and does not justify the piercing of the corporate veil.

Mr. Khumalo further argued that the separateness of the company from its owner, shareholder, director or member is clearly dealt with in a number of decided cases. I was referred to the cases of Salomon vs Salomon and company (1897) AC 22 (HL), Dadoo Limited and others vs Krugersdorp Municipal Council 1920 A.D. 530, JTR Gibson’s South African Merchantile and Company Law at page 287, Mandrassa Anjuman Islamia vs Johannesburg Municipal Council 1919 A.D. 439.

Mr. Khumalo further argued that separate existence of a company has been disregarded only in a few cases, even then on the basis of certain special circumstances and not on any known articulated principle. He directed the court to Company Law, 4th ED by Cilliers and Benade on the examples of circumstances and cases in which the corporate veil is known to have been pierced at pages 14 and 15. The learned authors could only formulate factors that justify the application of the economic entity approach as the only common ground or common principle upon which this corporate existence may be disregarded, as there are no other known common factors or common grounds. These grounds are: If the necessary degree of control evident is in such a manner that the relationship between the companies in the group is that of holding company and a wholly owned subsidiary. Where the subsidiary is subservient to the holding company. This cannot be inferred in the present case where nothing whatsoever may justify any inference of subsidiary/holding company relationship between GTC and GTCC. Further if there may be an identity and “community of interest” between the holding and subsidiary company in the group.

He argued further that this also may not arise in the present case where there is no evidence of a group company arrangement, and no company between the two may be said to be the subsidiary of another.

If by isolating each holding company and subsidiary it would in law lead to an unjustifiable inequity. This may not apply, as no company is the holding company or the subsidiary of another as between GTC and GTCC. If creditors and shareholders would be prejudiced where the economic entity approach will result in a group (of companies) is held liable as one entity for the debt of one of its constituent subsidiaries. The fact that between GTC and GTCC does not arise a group of companies made of a holding company and constituent subsidiaries makes this factor completely inapplicable. Mr. Khumalo argued that in the circumstances there would be no justification whatsoever to pierce the corporate veil or in any other manner and under any other circumstances deal with GTC as if it was the same as GTCC. Any claim or counter-claim the defendant may have against GTCC has no reference or bearing whatsoever to and on the claim of GTC against the defendant. For the claim that GTC has proved against the defendant and which defendant has not contested, no counterclaim has been alleged or set out.

Mr. Nkosi argued in contra. His opening remarks were that the court in this matter is faced with the task to decide whether the defendant has a bona fide defence against summary judgement.

Essentially his arguments are two pronged. The first leg of his argument is that the independent identity of the three companies (SBGT, GTC and GTCC) was fraudulently concealed. The defendant was led to believe that there was no distinction between SBGT, GTC and GTCC. Consequently nearly all the loan repayments were made to one entity namely SBGT under the impression that GTC and SBGT were one. This is evidenced by annexure “C” of the opposing affidavit. Therefore, although the repayments were made to SBGT, the relationship of the three companies made the repayment effective to GTC.

The second prong of Mr. Nkosi’s submission is that the court has discretion not to grant summary judgement even where the requirements of Rule 32 are complied with. He submitted that from the multiplicity of documents that defendant signed with the various entities, a reasonable possibility exist that an injustice will be done to the defendant if judgement is granted.

These are the issues before me. I have considered the matter very carefully. It appears to me that there is a connection between the three entities. Mr. Nkosi seems to be correct in his submission that these entities are basically one and the same. There is a relationship between SBGT, GTC and GTCC. These are intertwined. I further agree with him on his legal exposition that a full inquiry is to be conducted to determine the relationship of each entity and this can only be done in triad. It appears to me that there is a defence advanced by the defendant. The defence is that there was a franchise agreement, which was entered into between the defendant and one of the three entities. According to that agreement equipment for the movie business was purchased by monies, which were advanced by the plaintiff to one of the other two entities. The defendant it would appear never even received a cent of the loan advanced in terms of annexure “A”. The defendant did not receive any money but certain equipment, which was purchased on its behalf. This equipment was purchased by one of the companies and it is not clear which one. Further plaintiff also agrees that they will pay directly to the vendor or supplier and not to the defendant directly. The defendant is querying the value of the equipment bought on its behalf by one of the three entities. It becomes confusing when one look at plaintiff’s replying affidavit and the annexures at page 134, 135 and 136 of the Book of Pleadings (PRC4, PRC5 and PRC6). These are purportly withdrawal slips which plaintiff claims are evidence of cash withdrawal by defendant.

Plaintiff agrees at page 134 paragraph 11 that plaintiff would pay certain suppliers for services rendered. Plaintiff agrees that they would pay directly to the vendor not to the defendant. Under these circumstances it would be manifesty unjust to require the defendant to pay the amount is annexure “A” without determining the exact extent the defendant is indebted to the plaintiff.

The denial by the plaintiff that it had nothing to do with the matter after it had granted the loan is inexplicable. It appears rather strange that when the franchise agreement is brought plaintiff tries very hard to distance itself from it. The franchise agreement was signed prior to the incorporation of GTCC. I tend to agree with Mr. Nkosi that these issues are to be brought before trial. Much play was made by the other side that defendant has not advanced hard facts to properly resist summary judgement. With the greatest of respect to the plaintiff the defendant is required to only prove a bona fide defence. In this regards I cite the case of Maharaj vs Barclays National Bank Ltd 1976 (1) S.A. 416 where Corbett JA had this to say:

“While the defendant need not deal exhaustively with the facts and the evidence relied upon to substantiate them, he must at least disclose his defence and the material facts upon which it is based with sufficient particularity and completeness to enable the court to decide whether the

affidavit discloses a bona fide defence”.

The learned judge went further to say:

“At the same time the defendant is not expected to formulate his opposition to the claim with the precision that would be required of a plea, nor does the court examines it by the standards of pleading (see Estate Potgieter vs Elliot 1948 (1) S.A. 1084 © at 1087”).

It appears to me that there is a nexus between GTC and SBGT.

Finally, it is my considered view that it cannot be said with certainty that the defendant is indebted to the plaintiff in the amount reflected in the loan agreement in view of the circumstances of the case. The circumstances in which a court will grant summary judgement are fully considered in Herbstein and Van Winsen the Civil Practice of the Superior Courts in South Africa, 4th ED, 434 and Nathan, Barnett and Brink Uniform Rules of Court 3rd ED, 190. It has been stated and stressed that the remedy for summary judgement is an extra ordinary and very stringent one in that it closes the door to the defendant and that it will only be accorded to a plaintiff who has, in effect, an unanswerable case. It appears to me from the totality of the facts and submissions presented before me that defendant ought to be granted leave to defend the matter.

Costs to be costs in the cause.

S.B. MAPHALALA

JUDGE

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