Strydom NO and Others v Bakkes and Others

• Jurisdiction: South Africa
• Judge: Murphy J
• Court: Gauteng Division, Pretoria
• Citation: 2014 (4) SA 29 (GP)
• Counsel: FH Terblanche SC (with KW Lüderitz SC and HR Fourie) for the plaintiffs. MM Snyman for the first, nineteenth and twentieth defendants. Seventeenth defendant in person.
• Docket Number: 19428/11

Murphy J: C

[1] The eight plaintiffs initially instituted action against 22 defendants for various orders in terms of s 424 of the Companies Act 61 of 1973 (the old Companies Act) and/or s 218 of the Companies Act 71 of D 2008 (the new Companies Act), and for judgment against those defendants personally for the debts of Corporate Money Managers (Pty) Ltd (CMM) and ten other entities who were associated or connected with CMM in a collective investment scheme and securitisation arrangements which have failed and brought about substantial losses for the investors in the scheme. E

[2] On 3 April 2009 the collective investment scheme, CMM Cash Management Fund (CMF), was closed by its manager, Ayanda Collective Investment Solutions Ltd (Ayanda). Pursuant to an investigation conducted by the Financial Services Board (FSB), the financial services F regulator, CMM, CMF and their associated companies were placed under provisional curatorship by an order of this court on 28 April 2009. The order was confirmed and made final on 18 June 2009. On account of CMM having been the provider of funds to the Allegro group of companies (consisting of Allegro Bridging (Pty) Ltd (Allegro Bridging), G Allegro Holdings (Pty) Ltd, Allegro Bridging House (Pty) Ltd and Allegro Group Investments (Pty) Ltd), a close relationship existed between CMM and Allegro. As will be explained more fully in due course, Allegro Bridging appears in many instances to have been the originator of assets in the property-development sector in which CMM invested on behalf of its clients. On 15 October 2009 the order of curatorship was H extended to include the Allegro group of companies under the curatorship of the companies.

[3] At the date of the curatorship — 28 April 2009 — CMM's liability to I investors stood at approximately R1,152 billion. Cash and cash equivalents under control of CMM at that date amounted to approximately R100 million. Many of the investors have lost their life savings as a result of the failure of the scheme. The curators have since their appointment been engaged in the recovery of the investors' funds. They anticipate that the ultimate recovery on behalf of the investors will in all probability amount to no more than 25% of the capital invested. J

Murphy J

A [4] Section 424(1) of the old Companies Act provides:

'When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court B may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.'

C [5] Section 218(2) of the new Companies Act provides:

'Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.'

[6] The first, second and third plaintiffs are the curators of the whole of D the business of providing financial services and of managing a portfolio of assets of the CMM, its associated entities and the Allegro group of companies. The fourth and fifth plaintiffs are the joint liquidators of Dunrose Trading 160 (Pty) Ltd (Dunrose), a company which in broad terms was involved in certain investments made by CMM and Allegro. E The sixth and seventh plaintiffs are the joint liquidators of Amalgum Investments 102 (Pty) Ltd (Amalgum), a shareholder in Dunrose. The eighth plaintiff is Altron Group Pension Fund, an investor in CMF.

[7] The trial of the action has been set down before me from 17 March 2014 until 23 May 2014. At the commencement of the proceedings I was F informed by counsel for the plaintiffs, Mr Terblanche SC, that the plaintiffs had been able either to settle the action or have withdrawn it against most of the defendants, while other have consented to judgment. These defendants were directors and shareholders in various companies in the CMM and Allegro group of companies. Only four defendants are G continuing to defend the action. They are Mr Johan Bakkes (Bakkes), the first defendant, the managing director of CMM and a director of various of the other companies, who allegedly either controlled those companies or at least participated in the carrying-on of their business; Nzalo Financial Services (Pty) Ltd (Nzalo), the nineteenth defendant, the majority shareholder of CMM, the shares in which were beneficially H held and controlled by Bakkes and his wife through the Betterknow Trust, and the ultimate holding company of various entities associated with CMM; Mrs Maritha Bakkes, the twentieth defendant, the wife of Bakkes, a trustee of the Betterknow Trust and a director of Nzalo; and Mr Vincent Smith, the seventeenth defendant, a director of CMM Corporate Finance (Pty) Ltd (Corpfin), a company associated with I CMM, of which Bakkes was a co-director.

The application for separation in terms of rule 33(4)

[8] After counsel had presented his opening address at the commencement of the trial, the plaintiffs made application in terms of rule 33(4) for J an order that certain questions be decided separately from the other

Murphy J

issues of the trial. As part of their case against the defendants that the A business of the various companies was carried on recklessly or with the intent to defraud the creditors or for a fraudulent purpose, the plaintiffs allege that certain conduct of the defendants in the scheme of investment devised and pursued by them involved contraventions of provisions of the legislation forming part of the regulatory framework. Various companies B in the CMM group issued promissory notes over a three- to four-year period in an aggregate amount of approximately R1 billion, with the consequence that substantial funds of the CMF, the collective investment scheme managed by CMM, were invested in such promissory notes. The four questions the plaintiff wishes to be decided separately relate to the legality of those investments. C

[9] The first question is whether the promissory notes issued by the entities referred to in para 1.1 of the unamended notice of motion of the application in terms of rule 33(4) were legal commercial paper. The entities referred to are six private limited companies falling within the D CMM group and Thunderstruck Investments 15 (Pty) Ltd. The six companies in the CMM group are Miro Capital (Pty) Ltd; Four Rivers Trading 307 (Pty) Ltd; Regent Group Capital (Pty) Ltd; Escascape Investments (Pty) Ltd; CMM Corporate Finance (Pty) Ltd; and CMM Finpro (Pty) Ltd. For reasons which I will elucidate later I granted an amendment with the agreement of the parties deleting para 1.1.5 of the E notice of motion with the result that the plaintiffs no longer seek determination of the questions in relation to Corpfin at this stage of the proceedings.

[10] The second question is whether the issue of the promissory notes by these entities against the acceptance of money from the general public F constituted 'the business of a bank' in contravention of the Banks Act 94 of 1990.

[11] The third question is, if in the event of the court finding that the promissory notes were issued in contravention of the Banks Act, whether the promissory notes qualified as 'approved assets' under GN 1503 of G 2005, as determined and promulgated by the Registrar of Collective Investment Schemes under ss 40 and 46 of the Collective Investment Schemes Control Act 45 of 2002. These provisions permit the Registrar to determine securities or classes of security that may be included in a portfolio of collective investment schemes, as well as the manner in H which and the limits and conditions subject to which securities or classes of security may be included in a portfolio of a collective investment scheme.

[12] The fourth question which the plaintiffs want separately decided is whether the investments by the CMF and the clients of CMM in the I promissory notes were authorised by or were in breach of the approved mandate or any variation thereof. CMM was granted authorisation by the Registrar of Financial Service Providers under s 8 of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) to render financial services as, inter alia, a Category II financial service provider, specifically to provide services in terms of a mandate granting it J

Murphy J

A discretion regarding the choice of financial products. In terms of the provisions of the Notice on Codes of Conduct for Administrative and Discretionary Financial Service Providers of 2003, promulgated in terms of the Act, a discretionary financial service provider must obtain a signed mandate from a client. The content of the mandate and approval thereof B are prescribed by the Code. The mandate must initially be approved by the Registrar, and the financial service provider may not amend the approved mandate substantially without the prior written approval of the Registrar.

[13] In their plea the defendants plead that the promissory notes were C legal commercial paper, that they were approved assets and complied with GN 1503.

[14] The plaintiffs contend that the named entities were not permitted legally to issue promissory notes or to receive deposits in contravention of the Banks Act, read with the so-called Commercial Paper Notice D GN 2172 of 14 December 1994 and the Exemption Notices GN R681 of 4 June 2004 and GN 2 of 1 January 2008 promulgated in terms of the Banks Act. These statutory instruments designate certain activity as not falling within...