Riteon Investments v Victor Wakatama and Korbes Mutandiro and Daniel Mandivazhira and Josiphati Sachikonye and Michael Wheedon

### Preamble
1
HH 743-18
HC 1712/17
---------


RITEON INVESTMENTS

versus

VICTOR WAKATAMA

and

KORBES MUTANDIRO

and

DANIEL MANDIVAZHIRA

and

JOSIPHATI SACHIKONYE

and

MICHAEL WHEEDON

HIGH COURT OF ZIMBABWE

MUSHORE J

HARARE, 24 September, 17 October & 9 November 2018

Civil trial- Application for absolution from the instance; Company Law- s 318 of the Companies Act-fraud, recklessness, negligence of Directors

D. Ochieng, for the plaintiff

I.E.G. Musimbe, for the 1st, 2nd, 5th defendants

C Damiso, for the 3rd defendant

R.G. Zhuwarara, for the 4th defendant

MUSHORE J: The plaintiff company, Rieton Investments (Private) Limited deals in the supply of horticultural products. The defendants, who were formerly directors in Southern Flowers (Pvt) Ltd, are being sued in their personal capacities by the plaintiff. The plaintiff is claiming payment of the sum of US$113,416-12 for goods it sold and delivered to Southern Flowers. The plaintiff’s claim against the defendants is predicated upon s 318 of the Companies Act [Chapter 24:03] which provides that company directors can be sued in their personal capacities for damages arising from the fraudulent, reckless and/or grossly negligent conduct in the carrying on of a business.

According to the plaintiff, sometime in 2009, Southern Flowers successfully applied for credit to procure greenhouse plastics of various widths and lengths, and also tape and mulch for its horticultural projects. The plaintiff delivered the greenhouse products to Southern Flowers as and when Southern Flowers placed orders for them during the months of November 2011 to July 2014.  The business arrangement was off to a good start. However eventually Southern Flowers started experiencing financial problems and fell into the arrears in payments, leading to its failure to regularly pay off its debt to the plaintiff. Plaintiff resorted to filing suit for the recovery of the arrears against Southern Flowers in case number HC 2952/15, and successfully obtained summary judgement in the amount of US$113,416-12 on the 13th May 2015.

Meanwhile, Southern Flowers had been placed under provisional liquidation on the 1st April 2015, and a final order for liquidation was granted by this court on the 1st July 2015.  The plaintiff is now suing all five defendants in their personal capacities as Directors in Southern Flowers in term of s 318 of the Companies Act [Chapter 24:03] claiming that their liability stems from the fact that the business of Southern Flowers (Private) Limited was carried out:

1.	With intend to defraud by the following conduct:-

(a) Diverting substantial loans which were meant for Southern Flowers to purposes unconnected to the business of SF;

(b) Deliberately misleading the plaintiff regarding its intention to pay its debts;

(c) Improperly giving the liquidator the impression that Southern Flowers

indebtedness to the plaintiff was US$27,500-00, wherein fact it is much more; and;

(d) Abusing the court by entering an appearance to defend in matter number

HC10494/14.

In the alternative plaintiff is claiming that the directors concerned carried out the business of the company:

2.  	Recklessly or with gross negligence:-

(a) By incurring or increasing Southern Flowers liabilities in unreasonable

circumstances;

(b) By the misapplication of funds, and

(c) a failure to maintain accurate books of account by grossly understating the company’s liability to the plaintiff.

All 5 defendants deny that they are personally indebted to the plaintiff. The 1st, 2nd and 5th defendant pleaded together, stating that they are not liable to the plaintiff because they did not deal with plaintiff or any of his representatives in a manner intended to mislead the plaintiff. They also averred that throughout the period stated by the plaintiff, they conducted business with the plaintiff with “the intention and hope that Southern Flowers would recover”. The 3nd defendant denies knowledge of Southern Flowers indebtedness to plaintiff and averred in his plea that, because he had ceased to become a Director in Southern Flowers on the 31st December 2010, he was no longer involved in the running of Southern Flowers at the material time. The 4th defendant denies all knowledge of the circumstances which led to Southern Flowers being indebted to the plaintiff and alleges that the plaintiff colluded with the 1st, 2nd  and 5th defendants  to transfer the debt from Flora Marketing (Private) Limited to Southern Flowers. Southern Flowers P/L used to known as Flora Marketing P/L.

The plaintiff called its Managing Director Mr Julian Royce Vant as its sole witness. Mr Vant testified that the plaintiff began dealing with Southern Flowers in 2009. He stated that in the beginning plaintiff used to deliver goods to Southern Flowers on a cash receipt basis, but that around December 2010, Southern Flowers began to struggle in meeting its obligations toward the plaintiff, which Mr Vant accepted was partly due to the country’s economic woes at that time. He testified that he made a conscious decision not to completely shut off supplies (such as greenhouse covering) to Southern Flowers as he appreciated that its crops could be damaged by catastrophic weather conditions, which in turn would have negatively affected Southern Flower's ability to service its debt. He also testified that he would only raise an invoice when he received money from Southern Flowers, so as to avoid paying Value Added Tax when plaintiff was not in funds.

Plaintiff introduced a bundle of documents which I marked as Exhibit “1”. Mr Vant stated that the defendants misrepresented to him that Southern Flowers had considerable assets which they could resort to selling in order to liquidate the Southern Flower’s debt to the plaintiff. 1st defendant and a certain Mr Gibbs of Southern Flower’s informed him that Southern Flowers owned land and shares in Euro port which they were willing to sell should it come to that. Also, at some stage of the progression of facts in this matter, the first defendant represented to plaintiff’s Mr Vant, that Southern Flowers was also able to remit amounts of US$4,500-00 per month to the plaintiff. This sum represented income which Southern Flowers earned from their sales of flowers to a certain company called Karuva. Altogether it would appear that the plaintiff trusted the defendants to keep to their word to make payments whenever Southern Flowers was able to. However with the benefit of hindsight, if such hindsight can be to one’s benefit, the trust which the plaintiff invested in Southern Flowers was eroded, because the parties have ended up in court over the whole credit business.

Mr Vant testified that the directors/defendants did not inform him about the liquidation of Southern Flowers, and that he had found out about the liquidation through the grapevine. Mr Vant testified that he became suspicious when he discovered that on the list of creditors of Southern Flowers in the liquidator’s report, Southern Flower’s indebtedness toward the plaintiff had been recorded as being US$27,500-00 where in actual fact the amount due to plaintiff US$113,820-26. Mr Vant believed that the defendants deliberately misrepresented the amount to the liquidator by minimising the amount due to the plaintiff, to plaintiff’s prejudice.

Mr Vant gave the impression of being an honest and forthright businessman. He was a reliable witness. He was consistent in his evidence.

He held his own under cross examination when he was defending his documentary evidence. The main gist of the cross-examination by the defendants ‘counsel was asking Mr Vant him to point to any conduct by the defendants which led him to gather that the defendants were involved as individuals, in dealings which caused the debt to remain unpaid. He was also tasked by the defendants’ counsel, why he had not taken care to protect the plaintiff by investigating if the defendant’s representations on the land ownership; share ownership and the like were genuine. His response was that “he did not want to personalise what happened between any individual”

Section 318 of the Companies Act reads as follows:-

“318 Responsibility of directors and other persons for fraudulent conduct of business

(1) If at any time it appears that any business of a company was being carried on—

(a) recklessly; or

(b) with gross negligence; or

(c) with intent to defraud any person or for any fraudulent purpose;

the court may, on the application of the Master, or liquidator or judicial manager or any creditor of or contributory to the company, if it thinks it proper to do so, declare that any of the past or present directors of the company or any other persons who were knowingly parties to the carrying on of the business in the manner or circumstances aforesaid shall be personally responsible, without limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

(2) Where the court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to the declaration and in particular may, subject to the prior rights of other creditors of any such director or other person, make his declared liability a charge on any debt or obligation due from the company to him or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him or in any company or person on his behalf or in any person claiming as assignee from or through the director, company or person, and may from time to time make such further order as may be necessary for the purpose of enforcing any charge imposed under this subsection. For the purposes of this subsection, the expression “assignee” includes any person to whom, or in whose favour, by the directions of the director other person subject to the declaration, the debt, obligation, mortgage or charge or interest therein was created, issued or transferred but does not include an assignee for valuable consideration given in good faith and without notice of any of the matters on the ground of which the declaration is made.

(3) Without prejudice to any other criminal liability incurred, where any business of a company is carried on with such intent or for such purpose as is mentioned in subsection (1), every director of the company or other person who was knowingly a party to the carrying on of the business in manner aforesaid shall be guilty of an offence and liable to a fine not exceeding level ten or to imprisonment for a period not exceeding two years or to both such fine and such imprisonment”.

The meaning within s 318 (1) is straightforward. That is that the Director concerned would have to have knowingly carried out the business of the company, fraudulently, negligently or recklessly. The cases which the plaintiff cited confirm this postulation. My understanding of these cases is that in terms of s 318, the creditor enjoys the advantage of not being required to prove that a causal connection between the fraud and the damages claimed exists, whereas the common law test requires that link to be established for the purposes of claiming liability.

See: Howard v Herrigel 1991 (2) SA 660.

In Govere v Ordeco (Pvt) Ltd & Anor 2013 (2) ZLR 257 (S) the applicant in that case was the former landlord of the first respondent Ordeco P/L. The applicant filed an application for a declaration in terms of s 318 of the Companies Act for the second respondent to be declared personally liable for the rents due to applicant and not paid by the first respondent. The second respondent made a lot of fuss about his non-involvement in the business of the company, and testified that he was only involved in the company’s affairs in an unofficial capacity. The Supreme Court made a nonsense of his attempt to avoid being liable and found that s 318 liability extends not only to ‘the past or present Directors’ but also to any other persons who were knowingly parties to the carrying on of its business, recklessly or with gross negligence or with intent to defraud.

In the leading case on fraudulent or reckless trading, Philotex (Pty) Ltd &  Ors v Snyman & Ors 1998 ; Braitex (Pty) Ltd & Ors v Snyman & Ors 1998 (2) SA 138 (SCA) at p 142 (H) it was pointed out by the Supreme Court of South Africa that recklessness should not be found lightly. At page 143D-E, the court pointed out that the provision (their section 424, to our s 318) was a punitive one, and directors could be held personally liable for liabilities of the company irrespective of whether a causal connection between their conduct and their liabilities existed or not. The Supreme Court found that ‘recklessly’ means ‘grossly careless’, the importance being that there is ‘the involvement of a risk, whether or not the doer realises it’

In the Al-Shams Global BVI Ltd v Sambadza 2016 (1) ZLR 595 at page 598B-C, tagu J referred to bhunu J’s opinion on gross negligence, in Chibwe t/a Ross Motors (Pvt) Ltd v Fawcett Security Operations (Pvt) Ltd HH 79/06 in which bhunu J cited the case of Rosenthal v Marks 1944 TPD 172, where the Transvaal Provincial District described gross negligence as being “tantamount to wilful non-performance of one’s contractual duties and obligations”

In the Howard v Herrigel case, the Supreme Court of South Africa found that even a ‘supine (inactive) attitude’ of a Director may amount to concurrence in the conduct.

In Orzinsky NO v Lloyd 1992 (3) SA 396 (C) the court stated at page 414G-H that:-

“If a company continues to carry on business and to incur debts when, in the opinion of a reasonable businessman, standing in the shoes of the directors, there would be no reasonable prospect of the creditors receiving payment when due, it will in general be a proper inference that the business is being carried on recklessly”

Further, the cases uniformly speak to the duty of care owed to creditors by the Directors of a company. The cases make it clear that the causal connection between the directors’ conduct and the damage suffered is not one which has to be introspected upon per se in terms of s 318. That is because the directors themselves have a duty of care and skill which is owed to creditors. The reasonable man test, must be applied by a court in determining a director’s liability.

Returning now to the present matter, the following comments made by the liquidator (refer pages 110 to 111 of Exhibit ‘1’) caught my attention as they offer useful findings of fact as follows:

Southern Flower’s records and books of account were not properly kept.

The land which Southern Flowers claimed to own was actually owned by a company called E.M Weir. E.M Weir was leasing the land to Southern Flowers.

The accounting records were not made available to the liquidator initially, but then when they were eventually made available, they were not signed by the directors and were under a different entity.

The loan allegedly advanced to Southern Flowers by CBZ, and which appeared to have gone missing was still being investigated.

After Southern Flowers ceased operations, property worth US$12,500-00 was stolen and a Police report was made. The liquidator states in his report that he did not expect to ever recover this property.

The liquidator’s factual findings place the issue of the defendant’s duty of care toward the plaintiff as one which requires resolving. Thus it will only be after I have heard the testimony of the defendants that I would be in a position to appropriately and objectively determine whether the defendants have shown that they discharged their duty of care to the plaintiff. In the Philotex case, this point is mentioned when the court said that the test for recklessness:-

“…is objective insofar as the defendant’s actions are measured against the standards of conduct of the notional reasonable person”

It will be noted that in analysing the abovementioned cases, I have darted here and there in amongst cases which deal with the categorisation of gross negligence or fraudulent and reckless conduct without settling on a particular category. It would only be after I have heard the testimony of the businessmen; and only after a finding that that particular individual failed to discharge his duty of care to the plaintiff, that I would then be in a position to decide whether that individual has behaved recklessly or fraudulently or grossly negligently. On the question of onus, the common delictual reasonable foreseeability test will be applied, in order to establish (i) whether the gross negligence, recklessness or fraud was reasonably foreseeable and then; (ii) if it was foreseeable, then whether the reasonable businessman would have guarded against such harm occurring. Thus in the present matter, it is for the plaintiff to allege the harm suffered, and for the defendants to defend their actions.

Mr Ocheng submitted in his Heads of Argument, (and I find it to be so from the record of evidence) that all of the defendants did not cross-examine Mr Vant on his evidence pertaining to the alleged misrepresentations which were made to him about Southern Flower’s purported ownership in the land and shares, and also the evidence about the Karuva sales proceeds. As such, that evidence remains unchallenged.

In Supreme Service Station (1969) (Pvt) Ltd v Groombridge (Pvt) Ltd 1971 (1) RLR 1 (AD) at page 5m, the court stated that:

“Courts should not allow rules of procedure to be used to cause an injustice. If the defence is something peculiarly within the knowledge of a defendant, and the plaintiff has made out some case to answer, the plaintiff should not lightly be deprived of his remedy without first herring what the defendant has to say”

I find that the plaintiff has made out a prima facie case to answer. And it is to that end that I find it necessary to hear what the defendants have to say.

Accordingly, I rule as follows:-

“The application for absolution from the instance is dismissed with costs”

Kevin J. Arnott, plaintiff’s legal practitioners

IEG Musimbe and Partners, 1st, 2nd & 5th defendants’ legal practitioners

Nenjy Nyamapfeni Law Practice, 3rd defendant’s legal practitioners

Scanlen and Holderness, 4th defendant’s legal practitioners