Case No 11220
| Jurisdiction | South Africa |
| Judge | Satchwell J |
| Judgment Date | 10 August 2005 |
| Citation | 2005 JDR 1156 (JSpCrt) |
| Docket Number | 11220 |
Satchwell J:
Introduction:
This appeal by the taxpayer raised questions concerning the purpose, nature, and import of restraint of trade agreements.
This taxpayer entered into three agreements with his employer which he identifies as 'restraint of trade' agreements. For concluding the first such agreement in 1992 he was paid the sum of R350 000, for concluding the second such agreement in 1996 he was paid the sum of R1, 25 million and for concluding the third such agreement in 1998 he was paid the sum of R3 million.
Revised additional assessments were raised by the Commissioner (for the 1996 and 1998 years) against the taxpayer on the basis that the aforesaid sums paid were of an income nature and taxable. The Commissioner's case is that these restraint payments were not genuine in nature. The appellant taxpayer contends that these restraint payments were genuine, of a capital nature and not taxable.
At the hearing, the taxpayer gave evidence. By agreement between the parties, a bundle of documents was handed up on the basis that they are what they purport to be. The Commissioner led no witnesses and attempted to introduce into evidence certain information pertaining to the demise of and the liquidation of the D group [1].
Background to employment of taxpayer :
The taxpayer, with commerce and law degrees, was employed by B (Pty) Ltd, initially as a sales representative and ultimately as the National Sales Manager. Throughout his employment with B, he was engaged in the field of medical products.
He was exposed to a wide range of processes and products over a period of approximately ten years. In C, where there was a factory, he learned about adhesives, swabs and dressings; in the Transvaal he managed the portfolio of medical products and learned about sourcing,
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pricing and tendering; in the United States of America he underwent courses and gained expertise in drapes, gowns and disinfectants, haemostasis products and wound dressings. He accessed new technology for developing different types of bandages; he developed the" pack and tray" business; he launched gowns and set up manufacturing for products such as bandages, swabs and jellies. In the United States he gained further knowledge on filter medias, face masks, disinfectants, solutions and learned more about drapes and gowns; he visited manufacturers and observed the processes. He established contacts within B and throughout the world as regards sources, supplies, pricing and tendering. His knowledge included the training of sales persons; creation, development and implementation of strategies; adjustments to products and development of new products. He was well acquainted with the customer base for medical products and had a wide range of contacts in all fields applicable to this area of commercial enterprise.
Whilst employed at B, the taxpayer identified D (Pty) Ltd as a potential acquisition. He targeted both D and E of which D held the lucrative agency. He ensured that B competed with their products, undercut them on price and challenged them on tenders. His opinion was that he ensured that B acquired business at the expense of D and accordingly "inflicted severe damage" on D. Notwithstanding approaches to acquire D, the result was an approach by D for the taxpayer to join that company. This he eventually did in 1992 as Marketing and Sales Director for the E division of D.
Employment of taxpayer at D:
A package was negotiated between the taxpayer and D which provided for a basic monthly salary, a reimbursive entertainment allowance, participation in a "sales incentive program" in terms whereof quarterly bonuses were paid, a Christmas bonus approximate to a 13th cheque, further discretionary special bonuses and a car allowance. On joining D, the taxpayer was allocated a significant shareholding in the D Share Trust on certain terms and conditions. Additional shares were to be made available to him at the discretion of the Board of Directors. Over the approximately seven years of his employment with the D group the basic salary, allowances and bonuses increased considerably.
The taxpayer exercised his share options as and when he was entitled. His evidence was that he considered his remuneration package to be "good" but because "I opted for more and more stock options" he considered himself to be in receipt of an "exceptional package". "As a general package, and with the stock options available, my remuneration was better than in the industry". As the years passed, the taxpayer took up all share options available to him and kept the shares. According to the taxpayer, the increase in the D share price meant that "my wealth increased dramatically". He estimated that by 1996 his D shareholding was valued at approximately R5 million and by 1998 at approximately R12 million and, prior to the liquidation of D, in the region of R25 million.
Taxpayer contribution to D expansion:
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The taxpayer gave evidence of a most impressive period of experience gained, information acquired, contacts met and innovations introduced during his period with the D group.
The taxpayer attended a vascular congress in Chicago where he met surgeons who were responsive to D products; in Arizona he was introduced to the manufacturing processes of certain products; in Boston he was exposed to the range of products marketed by E and was exposed to the gauze business. He came to understand how business was undertaken in the United States of America which made the relationship between E USA and D easier. He introduced systems as well as a new marketing and sales approach within D; he poached key sales persons from B to join D and replaced the entire sales force; he procured the transfer of a Hong Kong supplier of gauze and swabs at excellent pricing from B to D. He put together a strategic 5 year plan for D. In Germany he attended an Exhibition at which he made certain introductions and acquired certain agency business; he met colleagues with contacts in other countries, such as India, where D was thereafter able to source supplies at competitive prices; he observed manufacturing businesses of E. He developed valuable contacts within Europe as regards both processes and products which enabled him to determine whether these could be reproduced in South Africa. When D was in dire straits in 1992 he initiated and implemented a plan for saving the company which involved using his gauze sourcing out of China to undercut B and F in South Africa, cleaning out inventory at different D warehouses; and increasing the sales line several million Rand above forecast. In France he attempted to obtain an agency for syringes, needles and IV catheters, and in so doing received training, with the result that the award was made to D because he had the necessary technical expertise in these products. On the basis of products with which he had worked at B, he developed a product for D. Recipes for the manufacture of hospital packs were developed in the make up of which sourcing of components was critical. An important F tender was secured. He identified H as a potential acquisition. Through extensive travels through the USA and Germany he acquired new products for D. While visiting the USA he approached I and acquired the agency for surgical sutures for South Africa, underwent an extensive training program himself, recruited sales people exclusively for I in South Africa, and after a tough battle acquired R20 million in business which had formerly been done by B.
After discussions with J in France, it was decided to find a local manufacturer for certain products and accordingly K (Pty) Ltd (K) was acquired. With the expansion of the consumables side of D business, the appellant moved technical products, such as IV catheters, gloves, syringes etc. into K. The Vacutainer acquisition was housed in K; glove manufacturing was set up in K; product management was set up in K. Specific tenders were bid for out of K.
The relationship which the appellant had developed with E in Boston was such that he was able to "pick the plums" from the E product list and market them in South Africa and eventually he proposed the idea of a joint venture company which was formed in 1995/1996 in which D had a 49% shareholding. The appellant was appointed managing director of E
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He visited approximately eleven E manufacturing facilities in the USA and Mexico and was familiar with the entire range of E products.
The dramatic expansion of the D Group is set out in two documents attached to the 1998 Annual Report. This correlates with the evidence of the witness. D was formed in 1985 following a management buy-out of the South African operations of E, then the medical division of L. D was listed on the Johannesburg Stock Exchange in 1987. From turnover of R1.2 million in 1986 it reached R456 million in 1998.
Restraints of trade:
The taxpayer entered into three agreements which he submits are all Restraints of Trade: the first on joining D and the two subsequent documents in the course of his continuing employment. The three documents are identical in structure and virtually identical in content. The taxpayer testified that these had been prepared by the accountants and were "standard agreements" used by the Company.
Parties
The 1992 agreement was entered into between D and the taxpayer whilst the 1996 and 1998 agreements were entered into between K (Pty) Ltd and the taxpayer. The latter two agreements were signed by the taxpayer both in his capacity as a Director of K ('the Company') and in his capacity as 'the employee'.
Structure and content
Each agreement commences with the same preamble:
"WHEREAS:
The employee is employed in a senior position by the Company...
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