CASE LAW UPDATE

Facts: The applicant is a manufacturer of emulsified meat products, including polony. One of its brands is the Thompson’s Tasty Meats brand. Thompson’s meat products are sold by Shoprite, a national supermarket chain. The respondent (Hadebe) claimed that he purchased a two-kilogram Thompson’s Family Value chicken polony from Shoprite. He claimed, further, that his nine children, wife, and brother ate of the polony and became ill and that one of his children died directly because of eating the polony, which was allegedly rotten and not fit for human consumption. The second respondent (EFF) took up Hadebe’s cause, and both began publishing allegations on popular social media platforms such as Facebook and X, calling, essentially, for a boycott of Thompson’s products and for justice for both the child who died and Hadebe and decrying the quality of the products manufactured by the applicant. The applicant regarded those repeated statements as being untrue and defamatory of it and brought urgent application proceedings against the respondents.

Application: A consent order was taken exactly in the terms set out in the notice of motion, which included the interim relief sought by the applicant. The applicant now seeks confirmation of the rule nisi with a punitive costs order against the EFF, while the EFF seeks the discharge of the rule and an order that its costs be paid by the applicant.

Discussion: There were no demonstrable, objective facts that could be referenced, other than the purchase of the polony. There was contradictory information about when the polony was consumed. There was no evidence that the deceased child had eaten the polony. There was no proof that the polony was contaminated. There was no proof that the polony had caused the death of a child. There was no proof that Hadebe’s child had died. The applicant did not accept that there was anything wrong with the product that Hadebe had purchased. Hadebe still had some of the polony left and handed it over to the applicant to permit a laboratory analysis of it to occur. That testing revealed that the pathogen load in the complaint sample was within the normal range and there were no distinct indicators that it was contaminated with bacteria or toxins that would have caused an illness. Despite the confusing narrative advanced by Hadebe, it is unfortunately true that a young girl with whom he had an association did, in fact, pass away. The deceased child was, however, not his child. And she did not die from eating contaminated polony manufactured by the applicant. Her official death certificate, which was before the court, records her cause of death to be due to "natural causes".

Findings: The applicant has a clear right to prevent falsehoods about the quality of its products from taking root in the community and from being published. It has already suffered an injury in the false allegations made by the EFF linking it to the death of the child and it has no other satisfactory remedy at its disposal to protect itself. The applicant has established the requirements for a final interdict. The EFF’s conduct was not reasonable in the circumstances. The granting of a final interdict will be justified where a respondent has palpably demonstrated that it has no defence to the allegations made about its conduct. No defence has been established by the EFF. The applicant is entitled to the confirmation of the rule granted, save in one respect. The relief granted at paragraph 3.1.2 of the order has not been established. There was no evidence to show that there was any physical threat made to the persons associated with the applicant or the property of the applicant.

Order: The rule nisi is confirmed against the second respondent, save for paragraph 3.1.2 thereof. The second respondent shall pay the applicant’s costs on the scale of attorney and client, such to include the costs of senior counsel.

MOSSOP J

Facts: KMSG Outsourced Services CC was the supplier of KN95 face masks. Lluvia (applicant) ordered a large quantity of these face masks for which it paid KMSG the amount of R5,079,619. The face masks were sold without any regulatory approval, which is required for KMSG to have sold the face masks. Lluvia instituted an application against KMSG to recover the said amount. The court granted summary judgment against KMSG in the amount of R5,079,619. When the Stassens (the only two members) did not honour the court order, Lluvia instituted liquidation proceedings against KMSG. The liquidation application was heard and granted. Unbeknown to Lluvia, KMSG had, in the meantime, applied for its own voluntary winding up by means of a resolution. It was indicated that KMSG had no assets other than stock valued at R10,000. It is self-evident that, with that being the only asset in the estate and Lluvia’s claims amounting to R5,079,619, there is no prospect of any dividend.

Application: Lluvia instituted the present application to hold the Stassens liable in terms of section 64 of the Close Corporations Act 69 of 1984. Section 64(1) of the Act contemplates three standalone grounds upon which a person can be held personally liable for a close corporation’s debts, i.e. if he/she acted recklessly, with gross negligence or with the intent to defraud. It is emphasised that the Stassens have conceded that their conduct was negligent, albeit that they deny that they were grossly negligent.

Respondent’s recklessness: It is not disputed that the face masks sold by KMSG did not carry the necessary regulatory approval. The Stassens concede that KMSG was at least required to determine whether the importer of the face masks had the necessary authority to import, sell and supply the face masks. KMSG did not have a permit to on-sell the masks. Due to KMSG’s non-compliance with the statutory provisions, the NRCS subsequently ordered the face masks’ destruction, rendering them worthless. The respondents, having conceded that they were negligent, do not agree that they were grossly negligent. They style their conduct to have been an “oversight on their part”. It was submitted that KMSG held themselves out as specialist suppliers of face masks and personal protection equipment in general. The Stassens’ liability is aggravated given that they were transacting with, and in fact profited from, much needed and lifesaving medical equipment. Aside from the statutory provisions, it was submitted that, from a moral and ethical perspective, anybody who deals with medical products has an elevated duty to ensure that those medical products are safe and compliant. To sell such equipment as an aid to prevent Covid-19 in the middle of the epidemic adds insult to injury.

Findings: The respondents’ non-compliance with the statutory provision amounts to criminal conduct, which carries with it a fine and even imprisonment. KMSG was part of a group that specialised in protective equipment and this was at the core of its business for quite some time. They should have satisfied themselves that they were entitled to import, or sell, or supply the K95 face masks. The conduct of the Stassens did not equate to that of mere negligence. They should have acquainted themselves with the statutory provisions pertaining to their business before they embarked thereon. Taking into account every aspect of the Stassens’ conduct cumulatively, including the strategic delays, they certainly conducted the business of KMSG recklessly, not only in the sense that they did not comply with the law with regard to the K95 face masks, but also in that they strategically delayed the hearing of every facet of the matter from the company level to the present level, so as to avoid liability and to minimize the assets available for distribution upon liquidation.

Order: The respondents, in their personal capacities are jointly and severally liable for the debts of KMSG owing to the applicant. The respondents are to pay the applicant the amount of R5,079,619.

VAN NIEUWENHUIZEN AJ

Facts: In 2013, the fully laden bulk carrier, the MV Smart, time chartered by Minmetals, ran aground in the vicinity of the Richard Bay harbour entrance when departing from the port, causing it to break up and sink. This incident gave rise to various legal proceedings, including arbitration proceedings in London. Underpinning the arbitration and the action, are allegations that Transnet failed to provide a safe port. In the action between the owners and Transnet, the owners asserted privilege in respect of various discovered documents relating to the arbitration. Transnet seeks to compel the disclosure of these documents. The owners have resisted producing the documents, claiming that they are privileged from disclosure, as they were subject to an implied contractual undertaking of confidentiality between it and Minmetals, and that some are irrelevant. Minmetals refuses to agree to the disclosure of the documents.

Appeal: The owners, relying on the provisions of section 5(1) of the Admiralty Jurisdiction Regulation Act 105 of 1983, moved for the joinder of Minmetals to the application to compel so Minmetals could assert its position, if so advised, but regardless, be bound by an order of a South African court as to whether the documents should be disclosed. The High Court, relying on the provisions of section 5(1), joined Minmetals as a party to the application to compel. The High Court’s order expressly confined Minmetals’ joinder to the application to compel discovery brought by Transnet.

Joinder: Section 5(1) provides extended powers, in the interests of justice and convenience, that would otherwise not be available to a High Court when not exercising its admiralty jurisdiction, to join peregrine not otherwise amenable to the jurisdiction of the court. The reasoning of the High Court was not flawed. The avoidance of courts in different countries having to adjudicate on the same or substantially the same issues arising out of the same incident or set of facts, is the very mischief that the owners seek to avoid. The purpose and context of section 5(1) is plainly underpinned by considerations of convenience so that if the same issue arises between a number of persons, that issue should be decided in one action rather than in multiple proceedings. The importance of the section is to avoid a multiplicity of actions, with the real danger of conflicting judgments in different countries.

Appealability: The joinder of Minmetals has not finally disposed of the relief sought. The application to compel may require identifying which system of law will determine whether the documents are to be produced. The joinder order simply facilitates a full and proper ventilation of all the issues material to the determination of the application to compel, but it has not disposed of any part of any of the relief sought. On a strict application of the Zweni test, the order of the High Court is not appealable. It remains open to Minmetals to oppose the application to compel, or to abide the relief. There are no considerations which make an appeal imperative. Minmetals has not pointed to any considerations to persuade that it is in the interests of justice that the joinder decision should be appealable.

Order: The appeal is struck from the roll. The appellant is directed to pay the costs of the respondents, such costs to include the costs of two counsel where employed.

Koen AJA (PONNAN JA, DAMBUZA JA, MOCUMIE JA and NICHOLLS JA concurring)

Facts: Thistle is a registered inter vivos discretionary trust and a South African tax resident. Thistle is a beneficiary of 10 vesting trusts described as the Zenprop Group. Zenprop is a property developer and property owner. In the course of its business, it frequently buys and sells properties. In the 2014, 2015 and 2016 tax years, Zenprop disposed of assets and realised capital gains, the proceeds of which it distributed to Thistle. Thistle, in turn, distributed the proceeds of those capital gains to the natural persons who were its beneficiaries. The proceeds of the capital gains were all passed through the multi-tiered trust structure to the ultimate beneficiaries within the same tax years in which they were realised. Acting on legal advice received, Zenprop and Thistle did not account for the capital gains in their tax returns for the 2014, 2015 and 2016 tax years. They were advised that the relevant amounts were capital gains which, in terms of the common law conduit principle, and the relevant provisions of the Income Tax Act 58 of 1962 (ITA), were taxable as capital gains in the hands of the ultimate beneficiaries. The beneficiaries accounted for the capital gains in their tax returns and paid the capital gains tax for which they would have been liable in respect of these capital gains.

Appeal: SARS conducted a tax audit of Thistle. It took the position that on a proper application of the ITA, liability for the capital gains realised by Zenprop had passed from Zenprop to Thistle as the direct beneficiary of Zenprop, but did not pass further from Thistle to its beneficiaries. It accordingly held Thistle liable for capital gains tax in respect of the amount of the capital gains distributed to it by Zenprop. An additional assessment followed, which Thistle successfully appealed to the Tax Court. The Supreme Court of Appeal upheld SARS’ argument that the capital gains realised by the disposal of properties by Zenprop were taxable in the hands of Thistle and not in the hands of the ultimate beneficiaries (the court also dealt with the imposition of understatement penalties).

Discussion: Thistle argues that the conduit principle is a rule of common law that applies to the taxation of trusts. Therefore, it must not only inform the interpretation of the relevant provisions of the ITA but also apply to the taxation of the relevant capital gains, unless the ITA has clearly excluded or qualified such application. Thistle contends that there is nothing in the ITA that excludes or qualifies the application of the conduit principle to the capital gains in this case. Apart from the conduit principle, Thistle relies on the deeming provision in section 25B of the ITA. It argues that in terms of section 25B the capital gain of Zenprop is deemed to be the capital gain of Thistle when it was distributed to Thistle and then deemed to be the capital gain of the beneficiaries when it was distributed further from Thistle to the beneficiaries. SARS submits that section 25B does not apply to capital gains, only to other income that is relevant for income tax purposes. It emphasises that section 25B was introduced into the ITA at a time when capital gains tax did not exist in South Africa and accordingly could not, originally, have been intended to apply to capital gains.

Findings: Paragraph 80(2) of the Eighth Schedule of the Act deals with capital gain in respect of the disposal of an asset by a trust. The wording of paragraph 80(2) shows that the provision applies the conduit principle only to the first beneficiary trust in a multi-tiered trust structure. It is not reasonably possible to interpret paragraph 80(2) to allow the conduit principle to run through a multi-tiered trust structure to attribute liability for capital gains tax in respect of the disposal of an asset to a beneficiary beyond the first beneficiary of the trust that realised the capital gain by disposing of that asset. The legislative history of paragraph 80(2) and the 2008 memorandum both confirm that paragraph 80(2) was amended into its present form for the purpose of preventing the conduit principle operating through multiple discretionary trusts in a tiered trust structure. Paragraph 80(2) thus admits of only one interpretation – that, in relation to capital gains tax, the conduit principle does not apply throughout a multi-tier trust structure and capital gains are taxable once distributed to a second-tier trust.

Order: The appeal is dismissed.

CHASKALSON AJ (MAJIEDT J, MATHOPO J, MHLANTLA J, THERON J and TSHIQI J concurring)

BILCHITZ AJ (with MADLANGA J) dissenting from para [94]