Bellingan v Clive Ferreira & Associates CC and Others

• Jurisdiction: South Africa
• Judge: Tuchten AJ
• Judgment Date: 13 May 1997
• Citation: 1998 (4) SA 382 (W)
• Docket Number: 96/29339
• Hearing Date: 20 March 1997
• Counsel: AR Gautschi for the applicant LN Harris for the first to ninth and eleventh to thirteenth respondents No appearance for the tenth respondent
• Court: Witwatersrand Local Division

Tuchten AJ:

This application arises from certain interrelated agreements entered into by a partnership called Prime Timbers, some of which were with Prima Bank Ltd, now in receivership. The partners of Prime Timbers enjoyed a close commercial relationship with Prima Bank. The third respondent was one of its directors, the I second respondent was its general manager and Mr J A Bellingan, who died on 5 July 1992, was the chairman of its credit committee.

The applicant is the widow of the late Mr Bellingan and the executrix testamentary in his deceased estate and brings this application in her capacity as such. All the respondents with the exception of the tenth respondent were partners in Prime Timbers. J

Tuchten AJ

During the late 1990s the view was held in certain circles that substantial benefits could be derived from the A provisions of the Income Tax Act 58 of 1962 by taxpayers who involved themselves in farming ventures and particularly in those ventures which involved the establishment of plantations.

Section 11(a) of the Income Tax Act provides that there shall be allowed as deductions from the income of a B person 'expenditure and losses actually incurred in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature'. Section 26(1) of the Income Tax Act provides that the 'taxable income of any person carrying on pastoral, agricultural or other farming operations shall, insofar as it is C derived from such operations, be determined in accordance with the provisions of this Act but subject to the provisions of the First Schedule'. Section 15(1)(a) of the First Schedule to the Income Tax Act provides as follows:

'In the determination of the taxable income of any farmer there shall be allowed as a deduction - D

(a)

any expenditure incurred by such farmer during the year of assessment in respect of the establishment and maintenance of plantations;

. . . .'

Section 16 of the First Schedule defined 'plantation' to mean 'any artificially established tree as ordinarily understood . . .'. E

The papers suggest that the most attractive feature of the benefits which some taxpayers believed would accrue to them under such a scheme was that the expenditure incurred in respect of the establishment and maintenance of a plantation could be claimed in whole as a deduction from taxable income without any provision for expenditure of a capital nature as contemplated in s 11(a). Schemes were accordingly devised in terms of which F the expenditure incurred far exceeded the capital actually applied to the scheme.

With these - as it was believed - potential tax benefits in mind, the deceased and 13 other named persons concluded a written partnership agreement during February 1991. One of the partners was called GAC G Computer Bureau Services (Pty) Ltd. In 1993 this partner changed its name to GAC Timber and Farming (Pty) Ltd; in the same year it was liquidated. Its liquidator does not wish to be joined as a party in this application and abides any order I may make. It was conceded by Mr Gautschi, who appeared for the applicant, that the present tenth respondent with the same name is not the company which entered into the partnership agreement. H The applicant seeks no order against the tenth respondent. The remaining respondents, ie the first to ninth and eleventh to thirteenth respondents, were all partners in Prime Timbers.

Certain of the provisions of the partnership agreement are relevant to the present dispute and I quote them below:

'3

Constitution of partnership I

3.1

The partners hereby constitute the partnership with effect from the commencement date upon the terms and conditions set out in this agreement. . . .

3.2

As from the commencement date

3.2.1

profits of the partnership shall be divided; J

Tuchten AJ

3.2.2

losses of the partnership shall be borne: A

by the partners in the shares set out in appendix 1.

4

Business

4.1

The partnership shall initially conduct the business of timber farming and all matters pertaining thereto. B

4.2

Nothing in this agreement shall preclude any partner from conducting timber farming outside the partnership.

4.3

The partners shall use their best endeavours to

4.3.1

expand the farming activities of the partnership on the property with a view to enhancing the profitability of the partnership; and

4.3.2

maintain all improvements on the property in a proper state of repair. C

5.

Funding of the partnership

5.1

The partners shall use their best endeavours to finance the activities of the partnership

5.1.1

primarily through partners' contributions and loans or other financial assistance to the partnership from financial institutions or other third parties.

. . . D

8

Rights and obligations of partners

8.1

All partners shall at all times

8.1.1

display the highest degree of goodwill towards the others in all matters related to the partnership;

8.1.2

avoid a conflict between the interests of the partnership and his own interests, which shall be E subservient to those of the partnership;

. . .

9

Termination

9.1

The partnership shall terminate automatically upon . . . the death, of any partner. F

9.2

In the event of the partnership being terminated at any time in terms of 9.1 on account of . . . the death of a partner (''the withdrawing partner''), the remaining partners may, at their election, succeed to the withdrawing partner's share of the assets and liabilities of the partnership in proportion to their participation in the partnership. . . .' G

Appendix 1 to the partnership agreement lists the proportion, expressed as a percentage, in which each partner was to share profits and losses.

The partnership agreement also made provision for certain definitions. I quote those which are relevant below:

'2.1.1

''the establishment agreement'' means the agreement between Prime Timbers and Uni-Farm Planting and H Management (Pty) Ltd;

2.1.3

''the lease'' means the agreement of lease between Prime Timbers and North-Berg Properties (Pty) Ltd;

2.1.6

''the property'' means a portion of the farm known as Kleinrivier in the district of Riversdal, Cape Province'.

The establishment agreement in question was concluded between Prime Timbers and Uni-Farm Planting and I Management (Pty) Ltd ('Uni-Farm') on 26 February 1991 and required Uni-Farm to establish a timber plantation on the property for a consideration of R320 000 payable on signature of the establishment agreement. Uni-Farm is controlled by the thirteenth respondent. J

Tuchten AJ

On 27 February 1991 Prime Timbers concluded a management agreement with CCG Management Services A (Pty) Ltd ('CCG') in terms of which Prime Timbers appointed CCG as manager of its business at a remuneration of R300 per hour escalating annually. CCG was also entitled to recover disbursements made on behalf of Prime Timbers together with a handling fee. CCG is controlled by the sixth respondent, who signed the management B agreement on behalf of CCG and deposed to the main answering affidavit on behalf of the respondents. The management agreement authorised CCG to conclude 'the loan agreement', 'the promissory note' and 'the pledge', which were defined in clauses 2.1.8, 2.1.12 and 2.1.13 respectively of the management agreement to mean C

' ''the loan agreement'' to be entered into by and between the partnership and Prima [Bank] whereby funds will be advanced to fund the partnership's obligations in respect of the establishment agreement';

'an unconditional promise to pay made by the partnership in favour of Prima [Bank] which shall in aggregate be in an amount equivalent to the capital advanced together with interest thereon in respect of the advance which is the subject of D the loan agreement';

and

'an agreement whereby certain assets of the partnership are pledged as security for the payment of the promissory E note'.

The loan agreement itself was concluded between Prime Timbers and Prima Bank on 27 February 1991. The loan agreement provides for Prima Bank to lend Prime Timbers R320 000 and for the loan to carry interest at 17,5% per annum compounded monthly and be utilised to finance Prime Timbers' obligations in respect of a plantation and farming venture. Clause 3 of the loan agreement reads as follows: F

'3

The facility

3.1

The lender hereby undertakes to lend and advance the facility to the borrower upon the terms and conditions of this agreement. The facility will be utilised by the borrower to finance its obligations in respect of a plantation farming venture. G

3.2

The borrower shall draw down the facility in one lump sum on 27 February 1991 for payment in terms of 3.1.

3.3

The indebtedness of the borrower to the lender in terms of this agreement shall be evidenced by a promissory note made by the borrower on the date of draw down in terms of 3.2, which note shall be in the form of appendix 2 hereto and shall in aggregate be equivalent to the capital of the loan together with the H interest thereon for the entire period of the loan, and be payable on the final maturity date.'

The interest rate applicable to the loan was defined in clause 2.1.5 of the loan agreement to mean '17,5% per annum, compounded monthly'. Clause 4 of the loan agreement provided as follows: I

'4

Interest

Interest at the interest rate will be calculated on the loan from the date of draw down thereof until the final maturity date. Notwithstanding anything to the contrary expressed or implied herein, the borrower shall, on draw down of the facility, incur an unconditional liability to pay the interest in full and accordingly J

Tuchten AJ

be liable to make payment of the interest calculated for the full period of the...