Mcubed International (Pty) Ltd and Another v Singer and Others NNO

• Jurisdiction: South Africa
• Judge: Streicher JA, Brand JA, Mhlantla JA, Leach AJA and Bosielo AJA
• Judgment Date: 11 March 2009
• Citation: 2009 (4) SA 471 (SCA)
• Docket Number: 118/08
• Hearing Date: 17 February 2009
• Counsel: PBJ Farlam for the appellants. E Fagan for the respondents.
• Court: Supreme Court of Appeal

Brand JA:

[1] This appeal arises from a claim in delict for pure economic loss B resulting from alleged misrepresentations made in a contractual context. The two appellants, mCubed International (Pty) Ltd and mCubed Life Ltd, are companies in the same group. I propose to refer to them both as'mCubed', save where differentiation becomes necessary. The three respondents are cited in their capacities as the trustees of the Leon John C Singer Family Trust (the Trust). The first respondent (Singer) is the settler and driving force behind the Trust while the second respondent is his accountant and the third respondent his attorney.

[2] As will soon appear in more detail, the Trust entered into an investment contract with mCubed Life on 19 March 2002, pursuant to D advice given by an employee of mCubed International. Emanating from the investment contract, the Trust instituted an action for damages against both companies in the Cape High Court. But, as I have said, its claim was not founded in contract, but in delict. As the factual basis for its delictual claim, the Trust relied on two different misrepresentations in the alternative: one before and one after the conclusion of the investment E contract. Its main claim, which relied on a misrepresentation prior to - and allegedly giving rise to - the contract, comprised of two parts, to wit, a loss of capital in an amount of R3 884 958,53 and damages resulting from interest paid by it on money borrowed to make the investment, in the sum of R3 881 017,47. F

[3] The alternative claim, based on a misrepresentation subsequent to the conclusion of the contract, was again comprised of the same two elements, but for lesser amounts. In this instance it claimed R2 547 122,80 for loss of capital and R3 558 435,69 for interest as damages. At the trial two witnesses, namely Singer and his financial G adviser, Mr Carl Liebenberg, testified on behalf of the Trust. No witnesses were called on behalf of mCubed. The court a quo (Manca AJ) dismissed the main claim and granted the alternative claim, but in respect of the capital loss only. This gave rise to an appeal by mCubed against the judgment in favour of the Trust and a cross-appeal by the Trust against the dismissal of its main claim as well as the dismissal of its H claim for interest as damages on the alternative basis. Both the appeal and the cross-appeal are with the leave of the court a quo.

[4] Singer is what is known in banking circles, so I gather, as a'high net-worth individual'. In August 2001 - which I find a convenient I chronological starting point - his investments were mostly in immovable property. All and all, his property portfolio, which he held in his own name and in the names of various entities under his control, had been conservatively valued by his bank, FirstRand, at about R76 million. The advice from his accountant and his auditor was, however, that he should divert some of his assets offshore. This advice was given at a time when J

Brand JA

A the Rand was in sharp decline against other currencies, including the United States Dollar. According to statistics presented to Singer at the time, the Rand had depreciated against the US Dollar over the preceding five years by 17 % and experts in the field predicted that the same type of devaluation could continue for at least the next five years.

B [5] Singer raised the possibility of offshore investments with Liebenberg, who was employed at the time by Origin Merchant Bank, a private banking division of FirstRand Bank, specialising in'high net-worth clients'. At Liebenberg's suggestion, contact was made with mCubed. In the event, Singer took an initial amount of R1 million offshore by means C of an mCubed Life policy in the name of the Trust. This happened towards the end of August 2001. Singer thereafter discussed with Liebenberg the possibility of investing considerably greater funds. The amount he mentioned in this regard was between R35 million and R50 million. Liebenberg again contacted mCubed. In due course he D arranged a meeting for 20 September 2001 with Mr David Cosgrove, an employee of mCubed International who specialised in offshore investments. In anticipation of the meeting, Liebenberg sent Cosgrove a letter outlining Singer's intentions with regard to offshore investments and setting out the nature of the advice that was being sought from mCubed.

E [6] At the meeting of 20 September 2001 Singer was accompanied, inter alia, by Liebenberg, as well as his accountant and his auditor. Cosgrove then in essence advised those present that:

(a)

mCubed Life still had'asset swop capacity', which is the colloquial term for the foreign direct-investment allowance granted by the F Reserve Bank to life-insurance companies.

(b)

Singer (or an entity nominated by him) could make an investment through a Rand-denominated linked endowment policy issued by mCubed Life.

(c)

mCubed Life would then convert the Rands received into US Dollars, G utilising its asset swop capacity.

(d)

The US Dollars would then be used by mCubed to purchase an offshore life policy - referred to as a SelectLife policy - issued by an overseas company in the mCubed group, which would in turn invest the money offshore.

H [7] After the meeting it was pointed out to Singer by his auditor that mCubed Life was not one of the major life-insurance companies and that Singer should therefore be wary of the risks inherent in mCubed Life's insolvency. At a further meeting held on 11 October 2001, with essentially the same individuals present, Singer raised this problem with I Cosgrove who immediately suggested a revised version of the structure that he previously proposed. Essential to his revised proposal was the introduction of an offshore trust as a so-called special-purpose vehicle (the SPV). Instead of mCubed Life acquiring the SelectLife policy, as envisaged in the original version, mCubed Life would invest the US Dollars in the SPV. The SPV would then acquire the SelectLife J policy, which would then be ceded to the investor, ie Singer or the entity

Brand JA

nominated by him, in securitatem debiti, thus giving the investor protection A against the loss of the R10 million investment in the event of mCubed's insolvency.

[8] Cosgrove's revised proposal found favour with Singer and his advisors. After a somewhat lengthy delay, Singer, on 19 March 2002 invested R10 million, which was then described as the first tranche B of a larger investment with mCubed Life. As a quid pro quo, the Trust was issued with ten linked endowment policies of R1 million each. The reason why ten policies were issued instead of one for R10 million, is of no consequence in the present context. The application for the policies accompanying the investment pertinently stated that the funds were 'to C be invested in the SPV and subsequent structure as per the agreed proposal'. The application then recorded 'the agreed proposal' essentially as follows:

(a)

The Trust was nominated by Singer as the entity that made the R10 million investment and mCubed Life would issue the ten D endowment policies of R1 million to the Trust.

(b)

mCubed Life would convert the R10 million into US Dollars and invest the Dollars in an offshore SPV, to be known as the Samson Shield Trust.

(c)

The Samson Shield Trust would in turn apply for and be issued a SelectLife policy, with Singer as the life insured, for the Dollar E equivalent of R10 million.

(d)

The Samson Shield Trust, acting through its trustees, would cede the SelectLife policy to the Trust in securitatem debiti to provide the Trust with security against the loss of the R10 million investment, in the event of mCubed Life's insolvency. F

[9] The R10 million so invested was borrowed by the Trust from Singer who in turn borrowed it from a newly created trust, the Dalezbro Trust, who in its turn borrowed it from FirstRand Bank as part of a tax structure devised by Singer's financial advisors. According to Singer, he had an agreement with the other trustees that the Trust would pay him G interest at the rate paid by the Dalezbro Trust to FirstRand Bank. The R10 million so borrowed by the Trust was paid to mCubed Life. In return, mCubed issued the Trust with the Rand-denominated endowment policies and then converted the Rands into US Dollars. Other than that, the investment structure agreed upon was not implemented. mCubed did not invest the Dollars with the Samson Shield Trust. H Instead, it applied for and was issued with a SelectLife policy in its own name for the US Dollar equivalent of R10 million, which at that time was USD865 800,67. Since the Samson Shield Trust did not own the life policy it could not - and...