Commercial Union Insurance Co of SA Ltd v Wallace NO; Santam Insurance Ltd v Afric Addressing (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Streicher JA, Nugent JA and Mlambo AJA
• Judgment Date: 19 September 2003
• Counsel: J Newdigate SC (with him J Rogers) for the appellants. S P Rosenberg for the respondents.
• Docket Number: 249/2002
• Court: Supreme Court of Appeal

Nugent JA:

[1] On the evening of Sunday 13 November 1994, a fire engulfed a warehouse at Blackheath, on the Cape Peninsula, and destroyed the contents. Some of the goods that were destroyed belonged B to a company known as Press Supplies Ltd (Press Supplies) and some belonged to an associated company known as Afric Addressing (Pty) Ltd, which traded under the name Afric Mail Advertising (AMA).

[2] Both companies were insured against the risk of fire under separate policies of insurance issued by Commercial Union Insurance Co C of South Africa Ltd (Commercial Union) and Santam Insurance Ltd (Santam), respectively. (Press Supplies was insured by Commercial Union and AMA was insured by Santam.) Both insurers declined to meet the claims of their respective insured and they were sued in separate actions. (Press Supplies was, by then, in liquidation and was represented by the liquidator.) The actions were tried together in the Cape High Court by Thring J, who upheld the claims of both insured but D granted the insurers leave to appeal to this Court. He also granted AMA leave to cross-appeal against part of his order relating to interest.

[3] In the Court a quo, many issues were raised and pursued with undiscriminating vigour but it is necessary to deal with E only two of them for they are decisive of this appeal. Before turning to those issues, however, it is convenient first to set out in some detail the background against which the claims arose.

[4] AMA and Press Supplies were subsidiaries of DZ Investment Holdings Ltd (formerly known as Press Supplies Holdings Ltd) which was, F in turn, controlled by Mr D Zandberg. A further subsidiary in the group was a company known as Funny Paper (Pty) Ltd (Funny Paper).

[5] AMA's business, initially, was the assembling of bulk mail, but its business later expanded to include litho-printing and G specialised packaging. Its main business premises were situated at Airport Industria near Cape Town airport. It also leased two 'mini-factories' in an adjacent complex known as Ruco Park. Zandberg's daughter and her husband, Mrs L Mentz and Mr H Mentz, were executive directors of AMA. Mr B Potgieter was its financial manager. H

[6] Press Supplies was a supplier of machinery and equipment to the printing industry. It shared the premises of AMA at Airport Industria but its main trading branch was at Selby, Johannesburg. Mrs Mentz was a director of Press Supplies. Its Johannesburg branch manager was Mr S Rogers and its financial manager (also located in Johannesburg) was Mr M Thompson. (Thompson had died by the time this matter came to trial.) I

[7] Funny Paper's business, initially, was the importing in bulk of wrapping paper and related materials, which it would convert into saleable form by cutting and packaging, and the products would then be J

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distributed for sale through retail outlets. (That category of its merchandise will be referred to in this judgment as the converted A products or the converted stock, as the case may be.) Later, it expanded its product range to include a variety of manufactured products such as paper serviettes, paper plates, paper cups, stationery, bows and ribbons, which it, similarly, imported. (That category of merchandise will be referred to in this judgment as the B imported products, or the imported stock.) The main branch of Funny Paper was at Selby, Johannesburg, where it shared the premises of Press Supplies. It had smaller branches in Durban and Cape Town. In Cape Town, it leased a unit in the Ruco Park complex for the storage of its merchandise. Thompson, the financial manager of Press Supplies, was C also the financial manager of Funny Paper.

[8] Press Supplies formerly sold both heavy and light machinery, but in 1990 it sold its heavy machinery division, leaving it with only its three light machinery divisions. In March 1993, it sold those remaining divisions to High Tech Graphics (Pty) Ltd, a company within D the Hoechst group of companies (I will refer to the company as 'Hoechst').

[9] The transaction was dependent upon the fulfilment of various conditions precedent, including the conclusion by Hoechst of contracts of employment with certain key personnel of Press Supplies and the acquisition by Hoechst of various key agencies that were then held by E Press Supplies. Subject to the fulfilment of those conditions, Hoechst purchased from Press Supplies the business of its three divisions as a going concern, together with certain assets relating to each division, including specific stock.

[10] The stock that was then being held by Press Supplies F (mainly machinery, but also associated spares and accessories) was separated into three categories for purposes of the transaction. Machinery and other stock in category A was acquired outright by Hoechst at its cost price, as reflected in the accounts of Press Supplies. Machinery and other stock in category B (which was referred to in the agreement as 'the unsold marketable stock') was retained by Press Supplies. Press Supplies was entitled to sell those goods for its G own account, subject to certain restrictions, but Hoechst undertook not to acquire identical goods from alternative sources if they were still available from Press Supplies. Machinery and stock in category C (which was referred to in the agreement as the 'redundant machinery and H stock') was altogether excluded from the transaction and remained the property of Press Supplies.

[11] The agreement contemplated that Hoechst would lease from Press Supplies a portion of the Selby premises and, for reasons that I were not explored in the evidence, Press Supplies undertook to transfer to the Selby premises those items of machinery and stock in categories B and C that were then in Cape Town.

[12] Needless to say, the effect of the transaction was to bring the trading activities of Press Supplies to an end - the whole of its trading business J

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had been disposed of as a going concern, its key personnel had been employed by Hoechst and it had disposed of A its key agencies - but it was left with a substantial amount of stock that Hoechst was unwilling to purchase.

[13] The financial position of Press Supplies was already deteriorating at the time the business was sold and this was attributed in the evidence, at least partly, to rumours of the impending sale. Not B surprisingly, its financial statements for the following year (upon which its auditors did not express an opinion) reflect that, at 30 June 1994, it was insolvent. After writing off moneys that had been advanced to an associated company, its accumulated loss was over R5,5 million and its current liabilities exceeded its current assets by more than R1,5 million. Bearing in mind that the company was no longer C actively trading, there was clearly no prospect of a recovery and, ultimately, it was placed in liquidation.

[14] I turn now to the affairs of AMA and Funny Paper. In about the middle of 1993 (shortly after Press Supplies sold its business to D Hoechst), Funny Paper appointed a certain Mr G Starkowitz, an experienced marketer of paper products, as its sales and marketing director. At that time, Funny Paper's business was confined to importing bulk materials (mainly gift-wrap paper) and converting it for resale. Soon after the appointment of Starkowitz, it expanded its E product range to include the imported products that I have described. Funny Paper was, at that time, under financial strain. Its audited financial statements as at 30 June 1993 reflect an accumulated loss of over R3 million and its net current assets amounted to little more than R650 000. F

[15] The appointment of Starkowitz and the extension of its product range failed to reverse the fortunes of the company. On the contrary, although its turnover increased substantially during the following years so did its accumulated loss, which was almost R5 million by 30 June 1994. Its current liabilities at that date exceeded its current assets by more than R2,5 million and it was G dependent upon its associated companies, and its bank, to meet its operating expenses. At 30 June 1994, Funny Paper owed its bank about R1 million (a debt for which AMA had bound itself as surety) and it owed AMA R712 402.

[16] In about June 1994, Starkowitz left the employ of Funny Paper. By then, a company known as Constantia Greetings (Pty) Ltd H (Constantia) had shown an interest in purchasing Funny Paper in order to acquire its machinery. At about that time, AMA decided to take over some of Funny Paper's stock in settlement of the debt that was owing to it. Although the transaction was finalised only in about September 1994, it was treated for accounting purposes as having occurred on 30 June 1994. I

[17] Funny Paper's stock at 30 June 1994 had been counted for purposes of the financial statements and was valued at about R1,2 million. Most of the stock was held in Johannesburg (about R1,04 million) with the remainder in Durban (about R141 000) and Cape J

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Town (about R78 000). The stock was reflected in a compendious stock-sheet A that was summarised to reflect the stock in various categories at the various branches.

[18] The person who was responsible for implementing the transaction on AMA's behalf was Mrs Mentz. Mr Leisching, the auditor of Funny Paper, said in evidence that the proposed transaction was B discussed at a meeting in Johannesburg with Zandberg and that Zandberg then telephoned Mrs Mentz and asked her to visit Johannesburg in order to examine the stock. He said that she did so the following day. The evidence of Mrs Mentz was rather different. She said that she did not see the stock before the transaction was approved and that she only C examined samples of the stock that were sent to her in Cape...