S v Hepker and Another

• Jurisdiction: South Africa
• Judge: Hiemstra J
• Judgment Date: 31 August 1972
• Citation: 1973 (1) SA 472 (W)
• Court: Witwatersrand Local Division

Hiemstra, J.:

The two accused are standing trial on eight charges, which G all flow from large business transactions conducted during 1963 and 1964. Seven of the charges are fraud and one is theft, alternatively fraud. There are also alternative charges of contravention of sec. 86 bis (2) of the Companies Act, 46 of 1926 and one of contravention of sec. 135 (3) of the Insolvency Act, 24 of 1936.

The origin of the accused's predicament is that they tried to purchase H and expand an empire of companies without investing any money of their own. In fact they had none. The idea was to finance the purchase of the shares in the companies by bonding the assets of the companies to the utmost limit, and to use the borrowed money not only to pay the most pressing commitments, but also - along an indirect route - to pay for the shares wholly or in part. They hoped that the two companies they had acquired in this way, namely National Gelatine and Glue (S.A.) (Pty.) Ltd., and Silverton Tannery Ltd., would produce sufficient trading profits to work off the debts and to rectify whatever

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may have been irregular. If indeed there had been adequate profits, the schemes would most probably have succeeded.

The profits, however, did not materialise, largely because National Gelatine suffered from a chronic state of illiquidity. Disaster came in A 1965, when National Gelatine was liquidated and Silverton Tannery was repossessed by the sellers in terms of a provision to that effect in the original agreement of sale.

A major contributing cause of the collapse was the fact that accused No. 2, de Jager, was at the crucial time under the shadow of a criminal prosecution, which not only distracted his attention and took up a large B sum of money for his defence, but ended in his imprisonment at a stage when his advice was sorely needed. He was never formally appointed as a director because of the impending prosecution but, according to the State case, he was the driving force behind all the activities. The defence case also presented Hepker as an uncomprehending puppet on a C string, or otherwise kept in the dark despite his nominal position of managing director.

There was such a pressing need for ready cash, not only for business purposes but also for de Jager's defence, that extraneous plans had to be adopted. These form the basis of further charges of fraud and theft.

The main reason why the acquisition of Silverton Tannery ended in D failure was that a plan to raise money by issuing additional shares could not get off the ground. There was a balance of R224 000 out-standing on the purchase of the Silverton Tannery shares, but the money could not be found. The attempt to place additional shares itself forms the subject-matter of a fraud charge.

E There are two main counts of fraud which are basic to the whole State case, in the sense that they set the stage for subsequent events which also led to criminal charges. The first two counts relate to the acquisition, firstly, of National Gelatine and, secondly, of Silverton Tannery Ltd., without the outlay of personal funds. In the end no one suffered loss strictly as a result of the acquisition schemes as such, and the case will in essence be an exercise in defining whether certain F conduct is fraud or amounts to legitimate business practice.

The position of directors who knowingly and for their own purposes act against the interests of the companies under their control, will loom large in the array of facts.

G Before dealing with individual counts it is necessary to define the position of accused No. 2. He was never a director of any of the companies, but he was without a doubt the driving force behind all the transactions. There is ample evidence to substantiate this. Maritz, a co-director, and Heunis, a very capable manager, were quite explicit about this. If there should be individual counts where he played a minor H part, I will deal with his position separately. Otherwise he was plainly an accomplice in the fullest sense of the word, and unless otherwise stated, all actions herein ascribed to accused No. 1 must be regarded also as the actions of accused No. 2. His culpability and complicity do not depend upon his having been a director. The fact that he could with a common purpose control events, is the element relied upon. That he was not formally a director was a sham. In practice he was in control of the

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situation. His position was the same as that described in the S. v De Jager and Another, 1965 (2) SA 616 (AD) at p. 623A, where the Court said of two directors who had ostensibly resigned:

'De Jager and Shaban continued to control the company and occupied the position of directors and fell within the definition of 'director' in A sec. 229 of the Companies Act.'

Count I:

The first count relates to the purchase of all the shares in National Gelatine and Glue, a company trading at Silverton, Pretoria. This B company was associated with Silverton Investments (Pty.) Ltd., which owned the land on which National Gelatine was operating its factory. The shares in Silverton Investments were also bought, and this provided the key to the riddle how one can buy a factory without money. The State's case is that, in the pursuit of their purpose, they made a series of misrepresentations which amounted to fraud.

C The two accused conceived the idea of buying National Gelatine and developing it into a flourishing business. The manner in which they set about it was the following: They approached one of the shareholders, Robinson, and through him obtained options from all the other shareholders in National Gelatine to buy their shares. The price at D which the shares were offered was the net asset value, namely R166 216. This included the shares in Silverton Investments, for which no separate price was stated. The former shareholders were anxious to sell and co-operated fully. In due course an associate called Chiddy was introduced. He gave evidence and it appeared he was not an accomplice.

E The purchase price was to be paid by discharging in cash a total of R80 048 owing to the former shareholders by National Gelatine, and furthermore by giving promissory notes for the balance of R86 168. To find the money the following was done: A bond for R180 000 was raised over the fixed property belonging to Silverton Investments. This money was applied as follows:

Repayment of bond owing by Silverton Investments to
Apex Building Society	R50 416
Raising fee and insurance	R9 500
Interest for first three months	R2 711
Loan to National Gelatine	R117 373
	R180 000

The sum of R117 373 lent to National Gelatine was applied by that company as follows:

Repayment to former shareholders of loans made by H them to National Gelatine	R80 048
Reduction of National Gelatine's overdraft with Bank of Athens	R37 325
	R117 373

The next step was that National Gelatine bought all the shares which Hepker and Chiddy held in Silverton Investments for R127 100. In

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that way Hepker and Chiddy became creditors of National Gelatine in an amount of R127 100. This amount was credited to them in an account which in the trial was called the Hepker-Chiddy loan account. It was hoped that National Gelatine in course of time would earn sufficient profits A to discharge its debt to Hepker and Chiddy. The money so derived from National Gelatine would be used to pay the balance of the purchase price of the shares to the former shareholders.

The State contended that various misrepresentations were made in the course of the process. These were the following:

[The learned Judge dealt with the facts and continued]:

It was suggested by the State, and it forms part of the second B alternative count, that part of the bond money was used to pay for the shares. That is a reference to the R80 048 paid to the former share-holders in respect of their loan accounts with National Gelatine. The payment of these loan accounts was indeed part of the consideration C for the shares, and assisted the buyers in getting favourable terms for paying the balance but, from another point of view, it was liquidation of a debt owed by the company which would in any event have had to be discharged from the company's funds. I do not see anything fraudulent in that payment out of the bond money. The loan accounts of the former shareholders were not specially created to form a channel through which D payment could be made for the shares out of company funds. They were loans which might as well have been owing to an independent creditor.

[The learned Judge dealt with the facts and continued]:

The next alleged misrepresentation relates to the purpose of and E necessity for the acquisition of the shares in Silverton Investments by National Gelatine.

This transaction is really the body and soul of the first charge. It was at the heart of the grand strategy employed for the acquisition of a trading company without expending any money. The State case in this regard is that the transaction was not meant to benefit National F Gelatine, but was meant to convert that company into a debtor to Hepker and Chiddy, so that profits could be siphoned off to them, ostensibly in payment of the indebtedness, but ultimately really to provide money with which to pay the former shareholders.

It is settled law that directors can be guilty of a fraud upon their own G company, if they put through a transaction with ulterior motives, to the detriment of the company. A person can perpetrate a fraud upon a company by making a false representation to the board with intent to deceive the company even if all the members of the board are aware of its falsity. This rests upon the legal nature of a company, which in law H is a...