Heffer v Rapoo

• Jurisdiction: South Africa
• Judge: Wunsh J
• Judgment Date: 10 February 1998
• Docket Number: 10230
• Court: Transvaal Income Tax Special Court
• Hearing Date: 10 February 1998
• Citation: 1999 JDR 0461 (TSpCrt)

Wunsh J:

In this appeal there is no real dispute about the facts which are established by the evidence of the taxpayer and that of A, called as a witness by the Commissioner for the South African Revenue Service (who, whether acting in that name or previously as the Commissioner for Inland Revenue, (shall

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call "the Commissioner") and the documents placed before the Court.

The appellant, who was a professional B, sought means of earning an income other than from his career which was drawing to a close. He was approached by C and D two businessmen in whom he unfortunately reposed his confidence to, as he saw it, invest R250 000 in the E. He borrowed money from a bank on the security of mortgage bonds over his house and a townhouse to finance the investment. The appellant thought he was acquiring a 10% interest in the club with a fixed initial return. Although he did not articulate it to C and D, he hoped that, when he eventually retired, he would be actively employed in the club. The club was owned by a close corporation, F ("the corporation"), in which the appellant never acquired a member's interest. The loan granted to him by the bank required him to give it as additional security inter alia a pledge of 10% of the share capital of G.

That is the company in whose favour the cheques for his loan of R250 000 were made out. He

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never received a certificate for any shares in G either.

A and four others ("the investors"), who did not know of the appellant's involvement, invested large sums in G, which was to acquire the club. Disenchanted and frustrated by the poor management of the club and the lack of information and documentation from C and D, the investors, one after another, decided to withdraw from the investment. Some repayments were made to them. They were to be released from suretyships of the corporation's indebtedness under a mortgage bond. When A enquired from the mortgagee whether the sureties had been released, he learned that the bond has been repaid, that the property had been mortgaged to another bank and that the proceeds of the loan had been paid to C and D.

Monies had also been borrowed from club members. Pressure was exerted on C and D with regard to what was still owed to the investors and in 1991 an agreement was signed in terms of which the five investors and H took over the members' interests in the corporation (which had been held as to one-half each by C and D as consideration for which

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they took over the sellers' debts as sureties of the bond (even though it had been repaid) and amounts owing by the sellers to:

"3.1.2 each creditor listed on annexure "B" in favour of whom either seller has prior to the effective date, concluded a written Deed of Suretyship on behalf of the corporation, subject to (the) condition that the purchasers shall take over (any) amount owed to Trust Bank of Africa Ltd by either seller in the manner set out herein totalling a maximum of R160 000,00."

A says it was an oral condition of para 3.1.2 that liability to a creditor would be assumed and paid only if the funds in question were owed by the corporation for goods which had been supplied or services which had been rendered to it. In this way about R211 000 was paid to trade creditors. For a reason which will

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emerge later, the appellants name was on Annexure "B" (which was not available in the proceedings). He was not paid because the investors and H were not satisfied that his claim arose out of money of which the corporation had had the benefit.

In payment of his loan the appellant made out three cheques for R200 000, R30 000 and R20 000 on 26 April, 26 May and 20 September 1989 respectively. His debt to the bank for the monies he borrowed to make the investment was repayable by instalments of "+ - R6 764" per month and finance charges at 3,79% p.a. were to be levied on the amount of the loan from the date of its formal grant, 5 April 1989, until he received the money he had borrowed after which the interest rose to 21% per annum. (This was apparently later reduced to 18,99%) Prompted by Mr Van Rensburg, the appellant said that that event had occurred in January or February 1990, but this does not square with the bank's statement to the appellant to which I refer later. A term of the loan from the bank was that:

"the aforementioned finance charge rate and

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instalments applicable to the loan are subject to alteration by written notice to this effect by the Bank."

Presumably (there was no evidence on this, apart from what can be gleaned from a statement of account given to the appellant by the bank, being the one to be referred to later) the bank would vary the rate in accordance with any changes in bank rates of interest and the appellant stood to benefit from any reduction in that rate. On 2 February 1990 the corporation signed an acknowledgement of debt in favour of the appellant for R250 000 and stamp duty and bond registration costs of R3 070,70, reflecting finance charges of R157 713,90, being at a rate of 21% per annum. This was to be repaid by 60 monthly instalments of R6 846,41 from 28 February 1990 to 30 January 1995. The appellant did not explain the cash flow benefit to him of the differential in the monthly payments of only some R82,00. A document handed in by the Commissioner's representative was a copy of a letter from C and D to the appellant, dated 22 November 1990 and confirming the following:

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"1. you lent and advanced to us the sum of R250 000.00 (TWO HUNDRED AND FIFTY THOUSAND RAND);

2.

in order to do so, you obtained a loan from Boland Bank in the sum of R250 000,00 repayable over a period of 60 (SIXTY) months at the rate of R6 764,00 (SIX THOUSAND SEVEN HUNDRED AND SIXTY FOUR RAND) per month;

3.

as security for repayment of the aforesaid amount, you mortgaged your home situate at I.

4.

We also signed as sureties for repayment of the loan aforesaid;

5.

as at date hereof, there is an amount of R211 408.89 (TWO HUNDRED AND ELEVEN THOUSAND FOUR HUNDRED AND EIGHT RAND

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AND EIGHTY NINE CENTS) due and owing on the loan; together with arrears in the sum of R10 328,45 (TEN THOUSAND THREE HUNDRED AND TWENTY EIGHT RAND AND FORTY FIVE CENTS).

6.

At the meeting referred to above, it was agreed that:-

we would continue making payment of the monthly repayments of R6 764,00 referred to above directly to Boland Bank, until such time as the loan referred to in paragraph 3 above has been paid by us.

7.

in the event of us failing to pay any instalment on due date, the full amount will immediately become due, owing and payable and you will be entitled to proceed against us for payment of the then outstanding balance of the loan;

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8.

as security for repayment of the loan aforesaid, F shall bind itself as surety and co-principal debtor with ourselves in favour of yourself.

9.

you will be given a 10% (TEN PERCENTUM) members interest in F and we shall arrange for our auditors to do the necessary in this regard."

C and D signed as sureties. The figures were not explained. Whatever may have been promised, nothing was paid to the appellant. He also did not at this stage, or later, receive the 10% member's interest in the corporation. The appellant said that no payments had been or were thereafter made in reduction of the R250 000 and that despite the word "continue" in para 6, no payments had been made directly to the bank. In November 1992 the appellant issued a provisional sentence summons against the corporation, based on the acknowledgement of debt. This was opposed. The answering affidavit, signed by A, including the

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following:

"4. It is my submission that the Defendant is also not indebted to Plaintiff on the basis that:

4.1

the two signatories on behalf of defendant on the Acknowledgement of Debt have not been granted the authority to sign the Acknowledgement of Debt. I could not find any secretarial book or other documentation containing a resolution or decision by Defendant to enter into the money lending transaction with Plaintiff reflected in the acknowledgement of debt;

4.2

...

5.

After diligent search I could not find any documentary or other proof that an amount of

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R250 000,00 was ever received by Defendant from Plaintiff. It is my submission that if any money was ever received by the said C and D the members of Defendant on the 2nd day of February 1990, such money was used by them in their personal capacities and never received by Defendant."

The appellant did not proceed with the action nor did he explain why provisional sentence proceedings were instituted on the acknowledgement of debt despite its having been apparently superseded by the letter agreement of 22 November 1990.

The sad end to the tale, apart from the Commissioner's refusal to allow the appellant the deduction of interest of R153 567 which he says he had incurred under his borrowing from the bank in the 1991 and 1992 years of assessment ("the years of assessment"), is that the appellant lost his R250 000 or a major part of it and the mortgaged properties were sold by him to enable him to pay his

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debt to the bank.

In his tax returns for the years of assessment, prepared by his then accountant, the appellant reflected the following:

	1991	1992
	R	R
INCOME
(No interest	-	-)
Rent	7 800	7 800
Investment Income	20 089	17 603
Gross income as B	260 546	201 504
Expenses of profession	60 717	71 842
(no interest shown)	-	-
Expenses against rental	4 532	3 791

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