THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case No: 562/09

In the matter between:

JOHN LOUIS CARTER FOURIE NO

First Appellant
JOHANNES FREDERICK KLOPPER NO

Second Appellant
JUANITO DAMONS NO

Third Appellant
KAREN KEEVY NO

Fourth Appellant

and

JOHN DENIS NEWTON

Respondent

Neutral citation: Fourie NO v Newton (562/09) [2010] ZASCA150

(29 November 2010).

Coram:
CLOETE, PONNAN, MHLANTLA and LEACH JJA and

EBRAHIM AJA

Heard:
1, 2 NOVEMBER 2010

Delivered:
29 NOVEMBER 2010

Summary:
Companies ─ s 424 of Companies Act 61 of 1973 ─ reckless
trading ─ personal liability of directors.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: Western Cape High Court (Cape Town) (Desai J sitting as
court of first instance):

The appeal is dismissed with costs, including the costs of two counsel.
_____________________________________________________________

JUDGMENT
______________________________________________________________

CLOETE JA (PONNAN, MHLANTLA and LEACH JJA and EBRAHIM AJA
concurring):

Introduction
[1] The CNA became an iconic brand in South Africa after it was
established in 1886. It came to have an enormous national 'footprint' and an
annual turnover exceeding a billion rand. In mid-2002 companies in the CNA
group were liquidated. One such company was Consolidated News Agencies
(Pty) Ltd ('Consolidated'), the liquidators of which are the present appellants.
The liquidators brought an action in the Western Cape High Court based on s
424 of the Companies Act 61 of 1973 in which they sought to hold the
respondent, Mr Newton, who was on the board of Consolidated, liable for
Consolidated's debts and liabilities without limitation The amount in issue is
about R256 million. Desai J dismissed the claim but subsequently granted
leave to appeal to this court.

[2] I wish to emphasise at the outset that the reason why the liquidators
have proceeded only against Newton is not because there is any suggestion
that his conduct was any different from the remainder of the directors of
Consolidated, but (apparently) because he was the only director that carried
director's and officer's liability insurance. There is nothing improper in such a
course: s 424 empowers a court to declare any person, who was knowingly a

party to the carrying on of the business of a company recklessly or with intent
to defraud creditors, personally responsible for the debts of the company. The
persons who have locus standi to bring s 424 proceedings (who include
liquidators) can therefore choose whom they wish to sue.

Chronology of Principal Events
[3] The record and the heads of argument exceed 10 000 pages. It would
therefore be convenient to give an overview of the important events before
analysing in detail the law and evidence relevant for the determination of the
appeal.

[4] In about 1997 the Gallo Group of companies sold the business of the
CNA to Consolidated, the company used for that purpose by Wooltru Ltd. The
structure adopted by Wooltru was to place an intermediate holding company,
Consolidated News Agencies Holdings (Pty) Ltd ('Holdings'), between itself
and Consolidated. Newton was appointed a director of Consolidated and
Holdings. He was also a director of Wooltru and the managing director of the
latter's wholly owned subsidiary, Wooltru Finance (Pty) Ltd, the internal
banker to the Wooltru group.

[5] Consolidated's business was loss-making at the time of acquisition. It
was financed by long-term interest free shareholder's loans from Wooltru
made via Holdings; by short-term 'bank' finance from Wooltru Finance (that
was obtained from other cash flush companies in the group) which was
repayable with interest; and a bank facility with First National Bank.

[6] After the sale, the management of Consolidated was instructed to
adopt a ten point plan to turn its fortunes around. Central to the plan was an
information technology (IT) system intended to enable management to get the
right stock to the right place at the right time ─ a management tool that, until
then, had been lacking. Another aspect of the ten point plan was that 55 new
shops, mainly in rural areas, were opened.

[7] In April 1999 Consolidated and M-Tel (Pty) Ltd concluded a retailer
agreement ('the RA') in terms of which Consolidated was appointed the
exclusive retailer of MTN cellular telephone products, and M-Tel warranted
that Consolidated would earn specified minimum commissions on the sale of
those products for three years from June 1999 until June 2002.

[8] During the latter part of 2000 it became apparent to management that
two strategic mistakes had been made in the ten point plan. First, the IT
system was far too sophisticated and expensive; and second, many of the
new shops that had been opened were not profitable.

[9] On 15 August 2000 Newton informed a supervisory board meeting of
Consolidated1 that the audit committee (a sub-committee of the supervisory
board) thought that Consolidated 'was not a going concern and that the
shareholder [Wooltru] kept it going'; that Consolidated's 'viability as a going
concern was a real issue and that Wooltru needed to address this issue as a
shareholder'; and 'that the audit committee would approve [Consolidated's
trading] results as long as Wooltru stands behind the business and Wooltru
views [Consolidated] as a going concern'.

[10] In August/September 2000 Wooltru decided to 'unbundle', ie to dispose
of its holdings in certain (but not all) of its subsidiaries. Wooltru retained
Casenove, a leading merchant banker based in London, to supervise the
process, which became known as 'Project Springtime'. Newton was one of the
two persons (the other being Mr Rabb) who, at meetings of Project
Springtime, represented Wooltru, which was assisted by a number of
professional advisors: apart from Casenove, there were firms of attorneys,
being Mallinicks and Edward Nathan Friedland, and accountants, being Ernst
& Young and Nkonkwe Sizwe.

1 Whilst Wooltru owned Holdings and Consolidated, the executive board of Consolidated met
monthly and the supervisory board, on which Newton sat, met quarterly.

[11] On 22 November 2000 the board of Wooltru decided to dispose of
Consolidated as it presented an obstacle to the unbundling process.
Casenove was given a mandate to find a buyer.

[12] On 1 March 2001 Consolidated's management circulated to the
directors of Consolidated the 100-day plan it had drawn up. The stated
purpose of the document was to act 'as a thought starter that should be
robustly debated and changed in order to achieve the desired levels of
commitment' and the plan was said to identify 'those actions that are required
to Stabilise and Energize CNA prior to the implementation of a more
fundamental re-positioning exercise'.

[13] On 14 March 2001 the Wooltru board resolved to sell Consolidated and
Holdings to a shelf company, Gordon Kay & Associates (Pty) Ltd ('GKA') in
which, as the name suggests, Messrs Gordon and Kay owned shares. A sale
of shares agreement was concluded between these parties the following day.
The relevant provisions of the agreement were the following:
(a)
the subject matter was Wooltru's shares in Holdings and the 'sale
claims' ie all amounts owing to Wooltru as at the effective date (1 March
2001);
(b)
the purchase price was R150 million, and an 'agterskot' being the
amount by which the cost of stock of Consolidated as at 1 March 2001
exceeded its trade creditors plus R138 250 million;
(c)
the purchase price was payable as to R15,4 million on closing date
(when the conditions precedent were fulfilled) which became 1 June 2002 (the
month before liquidation) and the balance 455 days after 1 March 2001;
(d)
GKA undertook to provide guarantees for payment of R30 million and
R54,6 million;
(e)
GKA undertook to establish a subsidiary of Holdings and to transfer to
the subsidiary all assets and liabilities of Consolidated except the top
performing 50 stores. (Ultimately, this provision was not implemented. What
happened was that the top performing 61 stores were housed in a company
other than Consolidated but also in the CNA group; the approximately 110

loss-making 'entertainment' stores were sold; and the plan was to franchise
the remaining stores);
(f)
Holdings undertook to bind itself as surety for the obligations of GKA
and to pledge 25 per cent of the shares in Consolidated to Wooltru; and
(g)
the subsidiary of Holdings would provide a suretyship to Wooltru.
After the sale of shares agreement, Newton remained a director of Wooltru
and Consolidated.

[14] Also in March 2001, GKA and the corporate banking division of Absa
concluded a mandate agreement in terms of which Absa Corporate was to act
as a merchant banker to GKA to advise it on the disposal of all or part of its
interest in the CNA group. The following month the retail banking division of
Absa granted the CNA group a general banking facility of R40 million.

[15] On 26 March 2001 an amended retailer agreement ('the ARA') was
concluded by various parties, including Consolidated, Holdings, Wooltru, M-
Tel and MTN. The effect of the agreement was that Consolidated waived the
amounts guaranteed to it by M-Tel under the RA; MTN agreed to provide
Wooltru with the guarantees required by Wooltru from GKA for R30 million
and R54,6 million payable on 30 June 2002 for part of the purchase price of
the shares of, and claims in, Holdings under the sale of shares agreement;
and Consolidated agreed to reimburse MTN.

[16] On 25 April 2001 the sale of shares agreement was amended and it
was agreed that as a condition precedent to the sale, Consolidated would
become a surety and co-principal debtor with GKA. Pursuant to the
agreement, Consolidated executed a deed of suretyship in favour of Wooltru
as surety and co-principal debtor with GKA for payment under the sale of
shares agreement.

[17] At the beginning of May 2001 GKA paid R15 million to Wooltru as part
payment of the purchase price. The payment was made using cash which
GKA had withdrawn from Consolidated in reduction of that part of the loan

claim (R120 million) which GKA had against Consolidated, which was
unsubordinated and which it had acquired from Wooltru.

[18] On 30 October 2001 Consolidated sold the assets and stock of the 112
'entertainment' stores to Biz Africa (Pty) Ltd for what was ultimately agreed at
R50,9 million with effect from 1 March 2001. The price was to be credited by
Biz Africa to Consolidated on loan account to become payable when
Consolidated in its discretion decided that Biz Africa was in a financial position
to pay.

[19] On 8 November 2001, but with effect from March 2001, Consolidated
sold its 61 top performing stores to a company incorporated into the CNA
group which later changed its name to Central News Agency (Pty) Ltd
('Central') for what was subsequently fixed at R133 million. The whole of the
purchase price was to be credited by Central to Consolidated on loan account
to become payable when Consolidated decided, in its discretion, that Central
was in a financial position to pay.

[20] On 13 November 2001 Absa Retail Bank approved a R10 million
facility to be used for letters of credit over and above the R40 million general
banking facility which had already been granted in March of that year.

[21] On 4 January 2002 Consolidated, with the permission of Absa Retail
Bank, transferred R15 million from its bank account to Wooltru in further
reduction of the purchase price due by GKA to Wooltru under the sale of
shares agreement.

[22] On 25 January 2002 Holdings pledged 45 per cent of its shares in
Central to Wooltru as security for GKA's obligations to Wooltru under the sale
of shares agreement and the sale of shares agreement was amended to
provide for payment of R15 million on 31 December 2001 and R74 million on
31 May 2002.

[23] On 16 April 2002 Consolidated and Central signed an addendum to the
sale of the 61 top performing stores to provide that Holdings could appropriate
the purchase price of R133 million by setting it off against the shareholder's
loan of R859,748 million.

[24] On 31 May 2002 GKA failed to pay Wooltru the balance of R74 million
due in terms of the (amended) sale of shares agreement. Newton had already
been alerted to this possibility by Gordon of GKA at the beginning of the
month, and had reported it to the board of Wooltru.

[25] On 20 June 2002 Absa retail bank increased the CNA group's general
banking facility temporarily (until September) from R40 million to R70 million.

[26] On 9 July 2002 Newton resigned as a director of Consolidated. Six
days later, on 15 July 2002, Absa retail bank unexpectedly called up the
overdraft facility. On 27 July 2002, Consolidated was provisionally wound up
as unable to pay its debts, which amounted to some R328 million. The order
was made final on 2 October the same year.

The Law
[27] Section 424(1) of the Companies Act provides:
'When it appears, whether it be 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 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.'

[28] The case against Newton is based on recklessness. The test for
recklessness has both objective and subjective elements. It is objective, to the
extent that the defendant's actions are measured against the standard of

conduct of a notional reasonable person.2 Accordingly, a defendant's honest
but mistaken belief as to the prospects of payment of a claim by the company
when due is not determinative of whether he was reckless; if a reasonable
person or business in the same circumstances would not have held that
belief, the defendant's bona fides is irrelevant.3 The test is subjective, to the
extent that it must be postulated that the notional person belongs to the same
group or class as the defendant, moving in the same sphere and having the
same knowledge or means of knowledge.4

[29] Acting 'recklessly' consists in 'an entire failure to give consideration to
the consequences of one's actions, in other words, an attitude of reckless
disregard of such consequences'.5 In the context of s 424, the court should
have regard, amongst other things, to the scope of operations of the
company, the role, functions and powers of the directors, the amount of the
debts, the extent of the company's financial difficulties and the prospects, if
any, of recovery.6 If when credit was incurred a reasonable man of business
would have foreseen that there was a strong chance, falling short of a virtual
certainty, that creditors would not be paid, recklessness is established.7

[30] A s 424 enquiry is typically one into commercial insolvency, as
opposed to factual insolvency. As it was put by Goldstone JA in Ex parte De
Villiers & another NNO: In re Carbon Developments (Pty) Ltd (in liquidation):8
'In short, the mere carrying on of business by directors does not constitute an implied
representation to those with whom they do business that the assets of their company
exceed its liabilities. The implied representation is no more than that the company will
be able to pay its debts when they fall due.'

2 Philotex (Pty) Ltd & others v Snyman & others; Braitex (Pty) Ltd & others v Snyman & others
1998 (2) SA 138 (SCA) at 143G.
3 Philotex at 147E.
4 Philotex at 143G-H and 148E-H.
5 S v Dhlamini 1988 (2) SA 302 (A) at 308D-E, applied in the corporate context in Philotex at
143F-G and Ebrahim & another v Airport Cold Storage (Pty) Ltd 2008 (6) SA 585 (SCA) para
14.
6 Fisheries Development Corporation of SA Ltd v Jorgensen & another; Fisheries
Development Corporations of SA Ltd v A W J Investments (Pty) Ltd & others 1980 (4) SA 156
(W) at 170B-C, approved in Philotex at 144B-D.
7 Philotex at 147C.
8 1993 (1) SA 493 (A) at 504E-F.

And the question whether a company is unable to pay its debts when they fall
due:
'[I]s always [a] question of fact to be decided as a matter of commercial reality in the
light of all the circumstances of the case, and not merely by looking at the accounts
and making a mechanical comparison of assets and liabilities. The situation must be
viewed as it would be by someone operating in a practical business environment.
This requires a consideration of the company's financial condition in its entirety,
including the nature and circumstances of its activities, its assets and liabilities and
the nature of them, cash on hand, monies procurable within a relatively short time,
relative, that is, to the nature and demand of the debts and to the circumstances of
the company including the nature of its business, by the sale of assets, or by way of
loan and mortgage or pledge of assets, or by raising capital.'9
As will appear from what is said hereunder, the passage just quoted is of
particular significance in the present case.

The Liquidators' Case
[31] The liquidators' case, in essence, was that from the period March 2001
until the date of its liquidation, Consolidated continued to trade and incur
debts which it could not repay and its board, in permitting it to do so, acted
recklessly.

[32] Prof Wainer was called by the liquidators to give expert evidence on
their behalf. Wainer is a chartered accountant, a practising accountant and
auditor registered with the Public Accountants and Auditors Board, a past
member of the Auditing Standards Board, the chairman of the monitoring
panel for the application of Generally Accepted Accounting Principles for the
Johannesburg Securities Exchange and a visiting professor at the faculty of
commerce of the University of the Witwatersrand. He also undertakes forensic
work which is a major part of his practice. He expressed the view, as an
accounting expert, that Consolidated should have been liquidated by no later
than March 2001. In argument before this court, the submission in the
alternative on behalf of the liquidators was that Consolidated should have

9 Blackman et al Commentary on the Companies Act, vol 3 14-130, relying on Australian
authority.

been liquidated not later than March 2002 and that the directors of
Consolidated had acted recklessly right up until the date of its provisional
liquidation. I do not propose being detained by a debate as to whether the
alternative contentions are open to the liquidators in the light of the pleadings.
I shall assume that they are.

[33] In his expert report, which he amplified in his evidence, Wainer pointed
out that in each month from March 2001 until its liquidation Consolidated
recorded losses (except for December 2001 and January 2002); in general,
budgeted profit (loss) had not been achieved; there were material negative
deviations from the budgets (even after the budgets were revised to be less
optimistic in July 2001); and the results were as bad, or worse, than in prior
years. This appears from the following table prepared by Wainer:

Profit (Loss)
Prior year
Budget
March 2001
(5 788)
(6 038)
(4 917)
April 2001
(12 856)
(10 700)
(6 448)
May 2001
(9 430)
(10 564)
(5 215)
June 2001
(14 084)
(8 250)
(4 149)
July 2001
(1 356)
(11 520)
(7 746)
August 2001
(9 404)
(7 976)
(7 972)
September 2001
(10 977)
(7 829)
(6 851)
October 2001
(10 746)
(7 141)
(1 797)
November 2001
(1 196)
(1 925)
(1 309)
December 2001
17 843
38 766
26 165
January 2002
5 565
7 432
10 567
February 2002
(810)
Unavailable
Unavailable
March 2002
(2 631)
(5 789)
(7118)
April 2002
Unavailable
Unavailable
Unavailable
May 2002
(5 407)
(9 491)
(5 882)
June 2002
Unavailable
Unavailable
Unavailable
Apr – July 2002
(35 552)
(37 758)
Unavailable

[34] Wainer pointed to the fact that Consolidated made payments totalling
R31,4 million (being two payments of R15 million, one in May 2001 and one in
January 2002, a payment of R1 million in June 2001 and a further payment of
R400 000 in September 2001) in reduction of the purchase price due by GKA
to Wooltru. But both Mr Bird of Casenove and Newton expected GKA to do
this and although the payments reduced the cash available to Consolidated,
they were not of themselves of particular significance. The suggestions that
GKA was intent on an asset stripping exercise and that Newton was looking
after Wooltru's interests in breach of the fiduciary duty he owed to
Consolidated, are both without foundation. GKA wanted to keep Consolidated
going, not strip out its assets and leave it for dead, and Newton's attitude
towards the fiduciary duties he owed Consolidated as a director appears from
his conduct at the meeting of the board on 28 March 2002 which I shall deal
with when I conclude the discussion of his evidence.

[35] Wainer singled out the conclusion of the ARA for particular criticism.
He said that it 'had no real value to Consolidated and was clearly contrary to
its interests and needs'. The provisions of the ARA highlighted by Wainer and
the liquidators' counsel were the following:
(a)
Consolidated waived the R40 million which it expected to earn from the
RA for the second period ended June 2001.
(b)
The income warranty for the third period, 1 July 2001 to 30 June 2002,
was to remain in force, but the period was to be extended by some three
months so that it would run from 1 April 2001 to 30 June 2002.
(c)
MTN in its turn would provide the guarantees required by Wooltru from
GKA. The guarantees were for R30 million and R54,6 million respectively, and
were payable on 30 June 2002.
(d)
The agreement made it plain that it was the intention of the parties that
MTN would in fact be reimbursed by Consolidated and a company styled
Newco.
(e)
The mechanism by which this was to occur was via a trust account
opened by attorneys Webber Wentzel Bowens.

(f)
Consolidated was obliged to pay all of its future income earned
pursuant to the ARA into the trust account. It was allowed to withhold only
R15 million per month up to a maximum withholding of R20 million.
(g)
This meant that the shortfall under the third income warranty, which
was expected to be R40 million, would be discharged by M-Tel paying that
amount into the trust account instead of to Consolidated.
(h)
If, by June 2002, the monies in the trust account were insufficient to
repay MTN, M-Tel would make up the difference; but with one crucial
qualification. If what it had to pay exceeded the amount due to Consolidated
under the third income warranty, then Consolidated would have to repay it.
(i)
Consolidated's ability to find future investors, if it ever had any such
ability, was choked off by a provision that from any investment made the
amount withheld by Consolidated from the trust account would have to be
paid into the trust account.
(j)
Consolidated and Newco bound themselves as sureties and co-
principal debtors with GKA for all of the latter's obligations to MTN to refund to
it any amount paid under the guarantees.
(The wording of the preceding sub-paragraphs is taken from the heads of
argument.)

[36] Wainer said that the ARA would have had a profound impact upon the
cash flow of Consolidated in the period from March 2001 in that the
guaranteed income amount accrued up to February 2001 and further
shortfalls on guaranteed income would not be received. The anticipated
further cash receipts in respect of the year ended June 2001 (anticipated by
the directors at about R14 million) and expected in about September 2001,
would not arise at all. Moreover, in respect of the period to 30 June 2002, a
lower amount would be received from M-Tel in respect of the minimum
income warranty as the period for the measure of the actual income was
extended from 12 to 15 months ─ without changing the original amount of the
warranted minimum income. In addition, from 1 April 2001 cash flow would be
negatively affected in respect of actual sales of the M-Tel products as the
proceeds had to be deposited into a trust account and that could not be used
(except to the limited extent provided for in the agreement, ie up to R20

million) for the business of Consolidated. The amounts accumulated in the
trust account would not be released to Consolidated but, the commercial
reality was, these amounts would be taken by MTN to cover the guarantees to
Wooltru by MTN of R84,6 million.

[37] Wainer calculated the negative cash flow effect of the ARA on
Consolidated at R135 million. He concluded on the ARA that as at the date of
its conclusion and significantly as a result of it, it was clear that the future
liquidation of Consolidated was virtually certain; and that this would or should
have been clear to any chartered accountant or 'experienced businessman'.

[38] An assumption underlying Wainer's evidence is that but for the ARA,
the RA would have resulted in the CNA receiving payment under the income
warranties from MTN. The validity of the assumption is, to put the position at
its lowest, questionable. The RA required the CNA to have at least 250 stores.
Management contemplated closing stores which would put the CNA in breach
of this obligation. That apart, according to Newton, Mr Jenkins (an executive
director of Johncom which held shares in the ultimate holding company of M-
Tel) told him and Rabb of Wooltru that M-Tel was dissatisfied with the CNA's
performance under the RA, was not intending to pay any money in terms of
the profit warranty provisions which it contained and was intending to litigate.
Jenkins confirmed that he had met with Newton and Rabb to tell them that M-
Tel was unhappy about the relationship with Consolidated. I see no reason to
reject Newton's evidence on this point.

[39] According to Jenkins, he also told Gordon that he should not rely on
receipt of a cheque for R14 million for the first guaranteed period under the
RA. At the same time, Jenkins realised the importance of the relationship
between the CNA and companies in the Johnnic group. So did Gordon, who
told Jenkins (according to Jenkins): that the CNA had lost its way; that the fact
that the deficit in the revenue margins was so large, was an indication of non-
performance in the business; that management needed a new lease on life
and that the business needed new vision; that he understood why MTN would
be unhappy; that his position was not dependent on extracting money for the

past; that he needed customers and that he wanted the relationship with MTN
and Johncom 'because that was the most important and critical success
factor'. This was music to Jenkins' ears. He explained his own commercial
approach to the breakdown of the relationship between MTN and the CNA
and his reasons for concluding the ARA as follows:
'[I]t was the right commercial thing. There's always more value in business in the
future than there is in the past. And very often things don't go according to plan, and
they go wrong, but the biggest question in business is: How do you fix them? And
that, you know, for both Johncom and MTN, we needed retail outlets, we needed
channel to market, and what CNA needed, was they needed product, and they
needed customers. They needed feet through their stores, and that the synergistic
benefits of a co-operative relationship between this massive retailer with 300 stores,
and the might of MTN with its telecommunications product, which was a big magnet
for customers, and, ja, the ability to expose for sale the rest of the Johncom product,
this was a very, very ─ to my mind, a very, very good synergistic business model.'
When the view of Wainer, that the ARA had no real value to Consolidated,
was put to Jenkins, he replied: 'I think in my mind the agreement had
inestimable value'; and when asked for his opinion as a businessman, he
went so far as to say that, from CNA's perspective, the conclusion of the ARA
was 'probably . . . a sine qua non for the success of CNA'.

[40] It is for these commercial reasons that the ARA was concluded. They
were ignored by Wainer and the liquidators.  So was the co-operation
agreement concluded at the same time between Johncom, GKA and the CNA
that recognised that the success of the CNA and Johncom was intertwined,
that constituted companies in the Johncom group preferred suppliers to the
CNA group and that recorded that the purpose of the agreement was to
facilitate co-operative dealings between the Johncom Group and the CNA
group to enhance their respective businesses. Wainer said in cross-
examination that he considered the ARA as containing 'vague-ish references
to possible benefits', and that he found 'nothing of any moment' in the
agreement. This attitude may be contrasted with the view expressed in an
Absa document dated 8 April 2001 recommending the granting of the R40

million facility to the CNA which, after the provisions of the ARA were
summarised, continues:
'The company [Consolidated] does not have a strong holding company, however the
strategic partnership which has been formed with Johnnic, will provide comfort to
suppliers, bankers and possible future investors.'
Despite being aware of this viewpoint, Wainer said that he had made nothing
of it.

[41] It seems to me that the evidence about the conclusion of the ARA
shows businessmen with conflicting interests finding a mutually beneficial
commercial solution to their differences, rather than a reckless carrying on of
the business of Consolidated. The terms of the ARA and the co-operation
agreement also evince a genuine belief on the part of those who concluded
these agreements that the CNA would not be liquidated. If that were not so,
the conclusion of the agreements would have been a pointless exercise in
cynicism. More importantly, MTN would hardly have undertaken a liability to
pay R85 million to Wooltru on 30 June 2002 and nor would Consolidated have
undertaken to repay that amount, had the prospect of an intervening
liquidation of Consolidated remotely crossed their corporate minds. I am
accordingly not prepared to find that the conclusion of the ARA on its own
constitutes, or is even evidence in a wider context of, reckless trading by the
board of Consolidated.

[42] Another important ─ and in fact critical ─ theme in Wainer's evidence
was that during the period 1 March 2001 to the date on which Consolidated
was provisionally liquidated (I quote from his expert report):
'There was no clarity and commitment regarding the source, extent and term of future
funding for Consolidated.'
The phrase 'clarity and commitment' cropped up many times in Wainer's
evidence. It was argued on behalf of the liquidators as a matter of law that
absent clarity and commitment as to future funding, it was reckless to carry on
the business of a company ─ in casu, Consolidated ─ which was predicted to
make losses in the future; and Wainer discounted much of the evidence relied
upon by the defence as justifying the continued trading of Consolidated, on

the basis that such evidence did not measure up to this standard. It was in
these two cardinal respects, in law and in fact, that the case of the liquidators
was misconceived. I shall deal first with the law and then the evidence
disregarded by Wainer.

[43] As far as the law is concerned, the phrase 'clarity and commitment' is
not an accounting term. It was culled from the judgment of this court in
Philotex.10  In that matter, the question was whether directors of a company
called Wolnit had carried on the business of that company recklessly. Wolnit
was part of a group of companies. Howie JA, writing for a unanimous court,
said:11
'Wolnit's inability to trade and pay its debts without group support would, in my view,
have prompted reasonable businessmen standing in the shoes of respondents and
their co-directors to obtain clarity on certain basic questions before deciding against
liquidation and in favour of incurring the credit necessary for the continued operation
of the business. Those questions would have been: (a) What financial support will the
group provide? (b) For how long will that support be available? Without clarity and
the group's commitment on those crucial enquiries it was neither responsible nor
reasonable for the Wolnit board to have taken the risk, knowingly or not, that trade
creditors might not be paid.'
It is quite apparent from the passage quoted that Howie JA was dealing with
the situation where a company could not trade and pay its debts without group
support. It is equally apparent from the Accounting and Auditing Guide
'Trading Whilst Factually Insolvent'12 referred to by Wainer that the inquiry
(clarity and commitment) arises in the context of a company which is
dependent on group support. Para .19 of the guide says:
'Other factors which might be considered relevant in the context of an entity's trading
while factually insolvent and which are highlighted in the Philotex judgment are:
•
in determining whether a company can continue to trade and pay its debts
with group support, clarity should be obtained on the following basic questions before
credit is incurred:
─
What financial support will the group provide?

10 Above, n 2.
11 At 175F-H.
12 Issued in July 1999 by the South African Institute of Chartered Accountants.

─
For how long will that support be available?'

[44] If an essential (and I do not mean sole) source of funding of a company
is intra-group support, and that support has been or may be withdrawn, that
would be a factor, or it may be decisive,13 in considering whether the actions
of the board in continuing to trade were reckless as contemplated in s 424.
But where there are sufficient other potential or existing sources of funding it
does not follow that where group support is or may be withdrawn, the
members of the board would immediately have to shut up shop on pain of
contravening s 424. The essential question is whether the board would be
acting recklessly in seeking to exploit the other sources of funding. The
answer to that question would in the first place depend on the amount of
funding required, for how long it would be required, and the likelihood of it
being obtained ─ whether timeously or at all; and in the second place, on how
realistic the possibility is that the company's fortunes will be turned around.
The second consideration will materially depend on whether there is a
credible business plan or strategy that is being or could be implemented to
rescue the company. A business that may appear on analysis of past
performance to be a hopeless case, may legitimately be perceived as a
golden opportunity for a turnaround strategy.

[45] In evaluating the conduct of directors, courts should not be astute to
stigmatise decisions made by businessmen as reckless simply because
perceived entrepreneurial options did not in the event pan out. What is
required is not the application of the exact science of hindsight, but a value
judgment bearing in mind what was known, or ought reasonably to have been
known, by individual directors at the time the decisions were made. In making
this value judgment, courts can usefully be guided by the opinions of
businessmen who move in the world of commerce and who are called upon to
make these decisions in the performance of their functions as directors of
companies, and by experts who advise businessmen in the making of such
decisions or who evaluate them at the time they are made. And that is the

13 The question was left open in Philotex at 185F.

second and factual shortcoming in the liquidators' case. Because of the
narrow view taken of the law, they relied only on the evidence of Wainer.
Wainer is an accountant ─ a very highly qualified and experienced
accountant, whose views have been of assistance to many courts in the past,
as the law reports demonstrate ─ but he is nevertheless an accountant, not a
businessman; and, as he was constrained to concede in cross-examination,
he is not an expert on what would be obvious to a businessman. No witness
was called on behalf of the liquidators to fill this lacuna, to say in his or her
opinion as a person of business what the board of Consolidated was or was
not able to do and what a reasonable director might have expected to happen
given the circumstances known or which should have been ascertained or
anticipated. Of course, the ultimate conclusion as to whether a director acted
recklessly or not is a decision for the court.

[46] Evidence was led by the defence which supports a conclusion that
Newton did not act recklessly in the circumstances which prevailed from time
to time after March 2001. Without going into detail at this stage, the evidence
can be summarised as follows:
(a)
Mr Bird of Casenove believed that there was a huge opportunity in
Consolidated in terms of the management plan in place at the time GKA
purchased the shares.
(b)
Mr Jenkins said that the CNA was perceived by its competitor in the
Johnnic Group, Exclusive Books, as a 'slumbering giant'.
(c)
Mr Norman of Absa Corporate testified that there was great interest in
the market place both to acquire equity in the company Central, which housed
the 61 best performing stores, and also in the franchising of other stores.
(d)
Mr Meisenholl served on a committee of Absa Retail Bank that on 1
April 2001, after considering detailed reports in respect of the business of the
CNA, granted the CNA a loan facility of R40 million and in June 2002
increased the facility to R70 million (until 1 September 2002).
(e)
None of the experts retained by Wooltru to assist it in its unbundling
suggested liquidation as a serious option, and Newton considered that there
were several funding opportunities available to CNA once it lost the financial

backing of Wooltru in February 2001, some of which (although diluted) were
still there until his resignation from the board on 9 July 2002.
I propose now dealing in turn with the evidence of the witnesses called on
behalf of the defence.

Bird
[47] Bird was in charge of the local arm of Casenove, the merchant banker
which, as I have said, was retained to oversee Project Springtime, the
unbundling of Wooltru. For that purpose he and Newton met with the other
professional advisors retained by Wooltru on a weekly basis from October
2000 to October 2001. As part of the unbundling process the directors of
Wooltru would be required in terms of the rules of the Johannesburg
Securities Exchange to put out a circular, approved by shareholders, that
there would be sufficient resources left behind to finance the working capital
requirements of what remained undistributed. That required considerable
work in analysing the cash requirements and cash flow profiles of
Consolidated and making recommendations as to its future.

[48] Bird expressed the view in an internal report dated October 2000,
which was never placed before the board of Consolidated, in which he said (I
have inserted the names of the companies in the place of the noms de
plume):
'Wooltru has undertaken to its own shareholders, that no further cash will be invested
in Consolidated. Consolidated is regarded as a going concern only if Wooltru
continues to provide financial support.14 In the event that the support for
Consolidated is formally withdrawn, Consolidated would technically be trading under
insolvent circumstances (being both insolvent and unable to pay its debts) and this
would have severe implications on the directors of Consolidated, who could be
prosecuted under s 424 of the Companies Act. The implications are that the directors
are not only guilty of an offence, but also become personally liable for the debts of
Consolidated. Wooltru therefore needs to consider its commitment to Consolidated
very carefully.'

14 This view accords with what Newton told the supervisory board meeting of Consolidated
held some two months previously, on 15 April 2000 ─ see para 9 above.

Bird explained this passage as follows. Wooltru was owed R290 million, which
'technically' (Bird's expression) was on call. If Wooltru withdrew its support,
which from a legal perspective it was entitled to do, Consolidated would have
gone insolvent. The reason why s 424 was mentioned was to focus attention
on the issues and draw the attention of his seniors in London to the statutory
provisions in South Africa which differ from those in the United Kingdom. Bird
said that Wooltru never seriously considered liquidating Consolidated nor did
Casenove ever propose this as a serious option, and nor did he himself
consider it ─ it was mentioned for the sake of completeness.

[49] It was Bird's opinion that there was tremendous potential in
Consolidated.  R350 million had been invested by Wooltru in a new IT system
to improve the problems with stock, and a lot of inefficiency at Consolidated
had been associated with stock. He had a number of meetings with the
management of Consolidated; they were excited about the advent of the new
stock control system. Bird always thought that the high level of stock
represented an opportunity to release substantial amounts of cash into the
business. There was also the possibility of franchising stores. He pointed out
that Consolidated had a turnover of a billion rand a year, which he explained
was 'a huge positive' inasmuch as small changes (for example, the
improvement of buying power by a small percentage) would have a
substantial impact on profits.

[50] Bird said that in attempting to find a buyer for Consolidated, he would
'very definitely' look at a private equity investor that, typically, would look for
assets in the business to fund the acquisition; and according to Bird,
Consolidated's business lent itself to that possibility. But he emphasised that
there had to be a credible turnaround strategy for two reasons: first, so that a
buyer could have regard to what had been done already and come up with
further ideas; and second, as a negotiating tactic so that a prospective
purchaser would not regard the seller as being 'stuck in a corner' and the
seller could legitimately contend that it was keeping the business because it
was viable ─ which, Bird said, Consolidated's business was. He was asked in
cross-examination:

'Well, had you had a solvency statement on the 1st of March 2001, what would it
have looked like? Would the CNA be insolvent, or would it be solvent?'
and he replied:
'I have no idea, because I haven't seen ─ you know, the new management who
came in, had a plan. They believed that they could, amongst other things, franchise;
they could split the business, restructure the business; they could raise equity in a
new entity which was going to hold the top 50 stores. All of those have cash flow
implications and funding implications. . . .'
He was also asked in cross-examination:
'And isn't it important to look historically at where a company is in order to forecast a
future or do you do it in a vacuum?'
and he replied:
'I wouldn't say you do it in a vacuum, but the past is not necessarily a good predictor
of the future, particularly where you are in a turnaround situation. You are changing
the way in which the business was run.'
These exchanges encapsulate the difference in approach between, on the
one hand, the liquidators and Wainer, and on the other, the businessmen
called on behalf of the defendant.

[51] Bird presented a paper to the Wooltru board at a meeting on 14
February 2001, which represented his views and advice at the time. He said,
amongst other things, that if Wooltru were to continue to hold the CNA, it
would have to put a further R100 million to R150 million at risk in order to
realise an amount of R135 to R150 million. But that related to the Wooltru
business plan and whereas Wooltru had adopted what Bird termed a 'one size
fits all' approach to the stores, Bird said that GKA appreciated that there were
differences between the three categories of stores that provided the potential
for a different strategy, particularly franchising.

[52] On 9 April 2001 Bird drafted a document which dealt with security for
the purchase price to be paid by GKA to Wooltru, where the possibility that
Consolidated might be put into liquidation by, or be unable to make payment
on, 30 August 2002, was mentioned. Bird again said, however, that he did not
expect Consolidated to go into liquidation and that, although it was a
theoretical possibility, he did not consider it to be a probability.

[53] Bird dealt with Wainer's view that it should have been obvious to a
reasonable businessman that the CNA should have been liquidated in March
2001 and he was asked whether this was obvious to him from Casenove's
perspective. His reply was:
'Absolutely not. We thought there was value in the business, hence our valuation. If
we felt that the business should have been liquidated, well actually we would have
been concluding that there was little, if any, value in the business. We had valued on
the basis of a going concern and we felt that there was value in the business. What
was clear is that the business needed to be run in a different way. So certainly it was
never seriously contemplated and it was not something which I expected to happen
imminently.'
In cross-examination he said:
'If you are operating a business which is consuming cash, you have options. You can
do other things. You can change the way in which the business is run. You can sell
down stock, reduce your stock levels. There are a number of things which
management of businesses can do to change the path on which they're on. They can
secure additional financing, they can sell assets. They can do all sorts of things to
help the cash flow.'
Indeed, Bird said in re-examination that given what he himself knew about
Consolidated's business, 'it might well have been a curious thing' for Newton
to have suggested liquidation of Consolidated in February 2001.

Jenkins
[54] Jenkins, who, as I have said, facilitated the conclusion of the ARA, said
that CNA's competitor in Johncom, Exclusive Books:
'[A]lways perceived that the CNA had a huge amount of, let's call it retail and buying
muscle, and that, if they were able to get their logistics right and their ordering right,
and get their, let's call it their model right, they would be a fearsome competitor in the
books environment . . .'.

[55] When asked the question 'did you think that CNA should be liquidated
at that time March/April 2001', Jenkins answered with a categoric 'no'.

Norman
[56] The evidence established that Absa is one of the largest commercial
banks in South Africa. Absa was involved with Consolidated on two fronts:
Absa Corporate looked for an equity partner for the CNA and the retail
banking division lent money to the CNA. Mr Norman was employed in Absa
Corporate, which was given a mandate by GKA contained in a letter written by
the latter on 26 March 2001 in the following terms:
'2.
MANDATE
2.1
We are delighted to confirm the appointment of Absa Corp. to act as
merchant bank to Gordon K & Associated (Pty) Ltd ("the mandator") in relation to
advising on the potential disposal of all or part of the CNA Group (Pty) Ltd ("CNA
Group"), and the structuring and strategy of the Group going forward.
2.2
In terms of the mandate Absa Corp. undertake to:
2.2.1 assess all available information and produce a report outlining the various
alternatives open to the shareholders of CNA Group;
2.2.2 provide any financial and strategic advice regarding the future disposal and/or
strategy for the CNA Group; and
2.2.3 assess and advise the mandator on offers received by potential acquirers of
all or part of the CNA Group's operations/business units.
2.3
The mandator, in terms of this letter, grants to Absa Corp. (Investment
Banking Department) a call option offering it the opportunity to acquire up to 20% of
the existing issued ordinary shareholders equity of the CNA Group at a price of R80
million for 20%.'
Wainer said that he ignored the interest shown by Absa in itself acquiring
equity in the CNA for R80 million as it lacked both clarity and commitment.

[57] After the mandate had been granted, Norman met the executive
management of the CNA and attended both board and management
meetings. Information was obtained from those meetings and from
management reports.

[58] On 23 April 2001 at a meeting held at the CNA, Gordon presented to
management a new proposed structure for the CNA. This structure involved
separating the CNA stores into three categories: the top 50 stores, termed the
'destination' stores; the bottom 150 stores, termed 'entertainment' stores

which were to be sold to a Johnnic consortium; and the remaining stores
which were to be franchised or closed. Norman said that, as a merchant
banker, he considered this to be a viable plan. Indeed, to implement it, Absa
Corporate prepared a detailed weekly timetable which commenced on 13
August 2001 and which was due to be completed by 31 October 2001.
Although implementation was delayed, the sale of the top stores to Central
was concluded on 8 November 2001 and according to Norman, by April 2002
some stores had already been franchised and there was ongoing interaction
with Absa franchise which, he said, 'I think  . . . is the biggest franchise
division of all the banks. It is their business to really roll out these plans I think
ten stores had been done'. According to Norman, the CNA had retained Mr
Eric Parker, whom he described as 'the guru of franchising', to assist it in this
regard. He took issue with the suggestion in cross-examination that the
franchising was a 'hope', insisting that it was a 'plan'.

[59] From April 2002 a document prepared by Absa Corporate (which was
continuously updated) was shown to prospective purchasers of equity in
Central. The document showed that it was anticipated that profit after sale of
the whole CNA group would not become possible even in 2005. Despite that,
Norman testified, substantial interest was shown by various different parties
including Sanlam, Old Mutual, Shoprite, Ackermans and merchant banks. The
problem, however, was that the operational separation of the top 61 stores
sold to Central had not been effected, due to the fault of a very senior
individual in the CNA group (whom it is not necessary to name) who gave
repeated assurances that everything was in hand, but failed to perform his
mandate. There is no suggestion that Newton was aware of this problem.

[60] In re-examination, Norman's evidence was to the following effect:
'It was put to you that the fact that Consolidated was losing money was none of your
concern? --- None of my concern in relation to what we wanted to achieve. We have
to . . . put together a plan that undoes that situation. That is the whole point of us
being involved, to come in, put in a plan, implement, turn it around, and everybody is
happy about it. That is the game. It is of concern in relation to the ongoing business,

but it wasn't of concern to us in relation to our strategic plan. We knew it was making
losses.
And would the prospective purchasers or the people interested in the business,
would they have been aware of that, or not aware of that? --- Absolutely they'd be
aware of it. That's part of the attraction. They're getting an asset. It's going to be
substantially below what the value is. If it's a loss making business, you can get it
cheaper and you can turn it around.
In a similar context it was put to you that the risk of turn around was extremely high
and to which you answered, it was high. Now be more specific? --- It's a relative
concept. I mean we did a deal where people bought 45 hospitals which were totally in
liquidation. And that's now the Netcare Group. So who is to say whether that was a
high risk when they did it, or extremely high risk, but they turned 45 hospitals, which
owed Absa R100 million, into the Netcare Group.
Your client is highly successful? --- To say the least, yes.'

Meisenholl
[61] Meisenholl, a chartered accountant with over 26 years experience in
banking and the managing executive of the credit risk management
organization of Absa Retail Bank, gave evidence on the banking facilities
granted by Absa to the CNA.

[62] At the end of March 2001 the CNA group applied to Absa for a R40
million general banking facility. In accordance with ordinary practice, the
application was first considered by a business banker and a business analyst
in the Sandton business centre who would have interacted with senior
personnel of the CNA. It was then checked by risk management and the
general manager of the business centre. From there it went to the credit
department where it was reviewed by a credit analyst. Ultimately, because the
facility requested exceeded R30 million, it came before the lending committee
of which Meisenholl was a member.

[63] On 30 April 2001 the lending committee declined the application
pending receipt of further information. Once the information had been
provided, and after Meisenholl, Mr Emsley (the managing executive of the
business bank) and Mr Human (the general manager of credit risk at Absa)

had consulted with senior management of the CNA (Gordon and Holden), the
facility was granted by the lending committee on 10 April 2001. Present were
Mr van der Merwe, the executive director responsible for credit; Mr Emsley;
Meisenholl; Mr du Preez, a general manager in the business bank; and Mr
Human, who dissented. I do not propose setting out the detail of the
investigations made by Absa. It suffices to say that the application by the CNA
was considered thoroughly and the recommendations at every level of the
process were carefully motivated.

[64] The facility of R40 million was temporarily exceeded from time to time
by the CNA, the excesses subsequently being approved by Absa, and on 13
November 2001 it was extended to include a R10 million letter of credit facility
─ again after a detailed investigation by Absa at the various levels I have
mentioned. In March 2002 the CNA applied for an additional R20 million. That
was refused by the lending committee on 30 April 2002, but a temporary
bridging facility of R10 million was allowed and subsequently extended to 15
May 2002.

[65] On 16 May 2002, the lending committee noted that the R10 million had
been repaid and that Absa's exposure was within R30 million. On 31 May
2002 Dr Booysen (the executive director responsible for the credit risk
management organisation within Absa) and Meisenholl met with Newton, who
gave them the assurance that Wooltru would not demand that the outstanding
purchase price due by GKA be taken out of the CNA. It appears that the Absa
representatives understood that Wooltru might again become a shareholder of
the CNA, although no definite answer was given as Newton undertook to
revert. At the end of May or early June 2002, a round robin resolution of the
lending committee approved a temporary increase in the general banking
facility granted by Absa to the CNA by R21,6 million to R60 million, subject to
a reduction to R38 million on 20 June; and before 20 June, the facilities were
increased to R70 million until September 2002.

[66] Newton was aware of the fact that Absa had granted the facilities to
which I referred in the previous paragraphs. The attitude of Absa would hardly

have prompted him to consider the liquidation of Consolidated. On the
contrary, as late as 30 May 2002 he met with Meisenholl, who said:
'So that was the discussion with Mr Newton it was not in terms of the R70 million
term facility it was really what is the best way to keep CNA group operating and
trading as a going concern. . . .'

[67] Meisenholl justified the extension of banking facilities to the CNA for
essentially three reasons:
(a)
first, the operation made business sense: the CNA had changed its
business model from a news agent to a retail outlet with a diversified product
and there was a demand for the product the CNA was selling;
(b)
second, the group was debt free (ie no debts were owing outside the
group), the CNA was a strong brand with over 300 branches and a new IT
system to control stock had been introduced, with the result that 'from a whole
business case perspective, we considered that it is viable'; and
(c)
third, and most critically, Absa, having met with top management, had
confidence that management would be able to make a success of the group.
Therefore, concluded Meisenholl, the lending committee 'considered it a fair
decision, R40 million trading facility versus turnover of one billion rand at that
stage' ─ even although, as pointed out in cross-examination, the risk of the
CNA's inability to repay the loan to Absa was described as 'high' to the
lending committee. Meisenholl also said in connection with the second point
to which I have just referred that although Absa would have had regard to
financial statements of the CNA, 'financial statements . . . reflect a picture of
what happens in the past, they do not give a view of what is going to happen
in the future'. This view stands in stark contrast to the position adopted by
Wainer, as does the following statement, made by Meisenholl in cross-
examination:
'If I knew what I knew twelve months later, in terms of what happened with
management, how the cash flows panned out, etc we would have said no [to the
CNA's application for credit facilities] but I haven't got the luxury when I take a credit
decision to work on hindsight.'

Newton
[68] It is now necessary to examine the evidence of Newton himself.
Newton never seriously considered liquidating Consolidated, and nobody
proposed this option:
(a)
The merchant banker (Casenove), the firms of attorneys (Mallinicks
and Edward Nathan Friedland) and the firms of auditors (Ernst & Young and
Nkonkwe Sizwe) who were retained by Wooltru to advise on its unbundling,
and participated in the weekly meetings with Newton representing Wooltru
when the affairs of Consolidated were considered in detail, did not suggest
that Consolidated should be liquidated. Newton was entitled to rely on this
multi-disciplinary array of talent for advice that Consolidated should be
liquidated, if that was the view held by any of them.
(b)
Deloittes, who audited the financial statements of both Consolidated
and Holdings at February 2001, expressed an unqualified audit opinion, which
meant, as Wainer readily conceded, that their view was that Consolidated was
a going concern for the foreseeable future, ie for at least the next 12 months.
In addition, on 4 September 2001, Deloittes advised the management of
Consolidated, after reviewing management reports, that both before and after
the restructuring in the CNA group, the assets of the companies in the group,
fairly valued, exceeded the liabilities and that the companies were therefore
technically (ie factually) solvent. Wainer disagreed with all of the conclusions
reached by Deloittes. But the point is not who is correct. The point is that
Newton was entitled to rely on the views of a reputable firm of auditors in
performing his duties as a director of Consolidated.
(c)
The corporate and retail banking divisions of Absa, which each
conducted in depth investigations into the affairs of the companies in the CNA
group, did not suggest liquidation. I have already dealt with the evidence of
Norman and Meisenholl. Again, the question is not whether Wainer was
correct in stating that 'many of them [ie bankers] do not have high level skills'
or justified in saying that 'It appears from the files [Absa retail bank] didn't
have the full story. From my experience with these banks, they certainly
wouldn't have the appropriate expertise at the advances level to analyse it
anyway, and they got critical pieces of information which were materially
incorrect.' The point is that the ongoing actions of both divisions of Absa, in

continuing to provide and extend overdraft facilities after careful consideration
and in attempting to find an equity partner, of all of which Newton was well
aware, would have made liquidation of Consolidated the remotest possibility
present to his mind.
(d)
The management of Consolidated, in their monthly reports after the
sale of shares agreement in March 2001 to which Newton had access at least
after January 2002, and in their monthly reports before the sale of shares
agreement to which Newton did have access, far from mentioning liquidation
as a possibility, were consistently positive. Newton was entitled to accept and
rely upon the judgment, information and advice of management, unless there
were proper reasons for querying such.15 It was submitted in argument on
behalf of the liquidators that those in management were simply seeking to
protect their jobs. But that cannot explain why management proposed a
management buyout on two occasions. The first was between October and
December 2000 when it was known that Wooltru was looking for a buyer for
Consolidated; and the second was as late as mid-June 2002. There can be no
stronger expression of confidence by management in a business than a
proposed management buyout. Wainer could not explain why it was that
management did not see that liquidation was inevitable in and after March
2001, and he did not address the continuously positive outlook by
management which continued at least until shortly before Consolidated was
liquidated.

[69] Newton dealt succinctly with the funding opportunities available to
Consolidated, and the liquidators' touchstone of clarity and commitment, as
follows:
'As at 1 March [2001] there was no shareholder . . . interest bearing debt, and CNA
had a huge raft of possible sources of funding available to it. It had creditor funding, it
had the ability to sell down stock, it had the ability to raise bank debt. It had the ability
to sell off equity and inject funds. There was absolutely no need to have clarity about
which of those sources it was going to utilise and certainly it was not necessary to
have commitment from any of those sources at that time. The company's assets

15 The Fisheries Development Corporation case, above, n 4, at 166C, approved in Philotex,
above, n 2, at 144I.

exceeded its liabilities and it could trade and it could rely in the normal course of
events to acquire funding from one or other of those sources. So I don't think this
term "clarity and commitment" is of any application to any business situation other
than where it is relying solely on a shareholder to provide the funding.'
As a matter of law, I disagree with the last sentence: clarity and commitment
are required not only where a company relies solely on a shareholder to
provide funding, but also where shareholder funding is essential for the
company to survive even though other funding is available.

[70] Newton quantified the sources of funding as at 1 March 2001 as
follows:
(a)
Stock: As at 28 February 2001 stock was in the books at R318 million.
Said Newton, one could assume that the CNA was overstocked by R180
million. As a matter of fact, the CNA ran down stock by even more than R180
million ─ at cost. Had stock been sold at the normal margin of 40 per cent, it
would have realised R300 million in cash.
(b)
Creditors: Creditors had been paid down from R220 million at the end
of January 2001 to R100 million at the end of February. There was
accordingly R120 million available in the form of creditor finance.
(c)
Cash: There was cash in the bank of R10 million.
(d)
Overdraft: Bank overdraft facilities of R70 million were ultimately
granted.
(e)
MTN: The RA was capable of renegotiation for R85 million. That is
what happened when the ARA was concluded.
(f)
Investors: If 50 per cent of the shares in Central were sold, the
outstanding purchase price due to Wooltru could have been paid.
(g)
Franchising: There were 160 stores in the franchising division. 100
stores could have been franchised at a price of R500 000 per store realising a
minimum of R50 million. (As will appear from para 71(b) below, the 100 day
plan anticipated that 150 stores would be franchised.)
Newton was not cross-examined on the figures he put to the various funding
opportunities. He repeatedly tendered in cross-examination to provide those
figures, which he had calculated during an adjournment after he had been led
in chief, but that opportunity was denied him. The figures were accordingly

given in re-examination and the objection by the liquidators' counsel to this
evidence was correctly overruled.

[71] As at March 2002, the financing opportunities had diminished and
some had been utilized to their full extent. In addition, I agree with the
liquidators' counsel that because of Consolidated's obligations to MTN under
the ARA and GKA's obligations guaranteed by Consolidated to pay the
balance of the purchase price to Wooltru, it is unlikely that any cash inflow
from an equity partner (assuming that one could be found because of these
very obligations) would have gone to Consolidated ─ although the debt due to
Wooltru by GKA would have been discharged. But there was still the prospect
of overdraft finance, and the plan to franchise stores was being implemented.
(a)
Overdraft: In June 2002 the overdraft was increased from R40 million
to R70 million until 1 September of that year. It was submitted on behalf of the
liquidators that it was reckless for the board to have applied for this facility. I
cannot agree. Although as a matter of law an overdraft is repayable on
demand, it was not reckless for Newton to assume that once Absa retail bank,
after due consideration, had granted an overdraft for a fixed term, it would not,
shortly after it had been increased (again after due consideration), and before
that term had expired, unexpectedly call it up. The expected cash flow of the
business presented to Absa in June 2002 by the management of the CNA
showed that cash in the bank/overdraft would fluctuate (overdraft figures in
brackets) from about (R40 million) in March to bottom out at (R70 million) in
August 2002, gradually recovering to between (R50 million) and nil to
November, becoming positive in December and exceeding R100 million in
January and R150 million in February 2003. Traditionally, the Christmas and
back to school period (December and January) was the only period in the
year that the CNA made a profit and that was well known to the board of the
CNA and to Absa. At the board meeting on 28 March 2002, which Newton
attended, Holden, the senior member of management present, said (and I
quote the minutes):
'Tim Holden reported on the financial results, and indicated that the business was
tracking ahead of the initial plan as presented to ABSA with expenses being well
contained and the business achieving better margins. The loss for the trading year is

approximately R52 million. Plans for next year have already taken out R40 million of
costs which implies that CNA should break even. CNA requires approximately R30
million cash injection to enable the double-digit growth and smooth operation of the
business going forward. The down side is the upward fluctuation of interest rates.'
The increase in the overdraft granted by Absa was precisely the cash injection
which management sought.
(b)
Franchising: The 100 day plan envisaged that 150 stores would be
franchised. It read:
'The current owners [GKA] have taken the decision to begin the process of
franchising with the objective of having the first fully operational franchise stores up
and running by October 1, 2001. It is anticipated that a total of 150 stores will be
franchised during the 24 month period beginning in October 2001 and ending in
October 2003. This being said, the target is to convert ten stores per month starting
in February 2002.'
There was a delay in implementing the franchising plan but the report given to
the CNA board at its meeting held on 28 March 2002, far from giving cause
for concern, was positive. The minute in this regard reads:
'Franchising update: The first five franchise stores are up and running. The system is
now in, once all the minor problems are resolved the balance of the franchise stores
can be sold in earnest. Anton Hingeston has completed another presentation that
has again sparked interest. Banks are processing and finalising the loans, as no
payments have been received yet.'
As a matter of fact, the list of creditors of Consolidated reflects that R1,82
million was paid as a deposit for franchising rights on 30 April 2002, and that
two other deposits were paid on 1 March. Counsel for the liquidators
submitted that the franchising plan ended up as a debacle. But the argument
again loses sight of the fact that the conduct of Newton does not fall to be
evaluated with the benefit of hindsight.

[72] No particular event occurring after March 2002, apart from the
application for the increased overdraft which I have dealt with, was relied
upon in argument on behalf of the liquidators as constituting reckless conduct.
The unchallenged evidence of Newton was that the CNA was paying trade
creditors in June 2002. The liquidation of Consolidated in July was
precipitated by Absa unexpectedly reducing the overdraft facility, which it had

granted until September, apparently because it realised that Wooltru was not
interested in again becoming a shareholder in the CNA.

[73] On Newton's evidence alone, which I see no reason to reject, he was
not guilty of reckless trading. On the contrary, he was well aware of the
fiduciary responsibility he owed to Consolidated and, as is quite apparent from
the clash between himself and Gordon at the CNA board meeting of 28 March
2002, he was prepared to exercise it. At that meeting Gordon suggested that
over and above the overdraft facilities already obtained from Absa, a further
R70 million overdraft should be obtained by Central. That money was
intended by Gordon to be taken out of the CNA group and used to reduce the
purchase price GKA owed to Wooltru. The minutes record that a 'heated
discussion' then ensued. Newton agreed with Holden who expressed the view
of management that the business of the CNA could not sustain the additional
loan burden of R70 million. The minute records:
'Responding to a question from Brian Leroni [a director], John Newton said that whilst
he could not express the view of Wooltru, his view as a Director of CNA was that he
recognises the upcoming "cash squeeze" and that should debt be incurred in CNA to
repay Wooltru, the Directors should be mindful of their fiduciary responsibilities
should this put CNA in a potential insolvent position.'

Conclusion
[74] I am quite unable to find that the board of Consolidated, or Newton in
particular, in any way conducted the business of Consolidated in or after
March 2001 with an attitude of reckless disregard for the consequences. Nor
in my judgment would a reasonable man of business in the position of Newton
have foreseen, when credit was incurred, that there was a strong chance that
creditors would not be paid. Several witnesses, including Newton, gave
entirely acceptable evidence that they saw no reason to consider liquidating
Consolidated. Save in regard to the possibility of an outside investor, which
Wainer considered improbable after the conclusion of the ARA, no-one gave
evidence that the funding opportunities available to Consolidated, to which
Bird and Newton in particular testified, had no reasonable prospect of being
realised and no-one testified that these funding opportunities were inadequate

to turn the CNA around. Wainer's evidence, constituting an accountant's view
based on the management accounts alone, was not sufficient to counter the
evidence given by and on behalf of Newton; and the liquidators' case in any
event rested on a misinterpretation of this court's decision in Philotex.

[75] The appeal is dismissed with costs, including the costs of two counsel.

_______________
T D CLOETE
JUDGE OF APPEAL

APPEARANCES:
APPELLANTS:

H Z Slomowitz SC (with him E A Limberis SC)
Instructed by Werksmans, Cape Town;
Lovius Block Attorneys, Bloemfontein.

RESPONDENTS:

S F Burger SC (with him I P Green)
Instructed by Webber Wentzel Bowens, Cape
Town;
Matsepes Attorneys, Bloemfontein.
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From: The Registrar, Supreme Court of Appeal
Date: 29 November 2010

Status: Immediate
J L C FOURIE NO & OTHERS v J D NEWTON
Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

1.
In 2002 companies in the CNA group were liquidated. One such company was
Consolidated News Agencies (Pty) Ltd, the liquidators of which brought civil proceedings in
the Cape High Court against Mr Newton (who was the only member of Consolidated's board
that carried director's and officer's liability insurance).

2.
The liquidators alleged that Consolidated should have been liquidated shortly after
Wooltru Ltd sold its shares in the CNA group to a shelf company in March 2001, and that the
directors of Consolidated had acted recklessly in continuing to trade until Consolidated was
ultimately liquidated in July 2002. The liquidators accordingly sought an order declaring
Newton liable without limitation for all of the debts of Consolidated, which amounted to
approximately R262 million.

3.
The Cape High Court dismissed the claim. The decision was confirmed on appeal by
the SCA.

4.
The liquidators called an accounting expert who pointed out that in each month (with
two exceptions) from March 2001 until its liquidation, Consolidated recorded losses; that in
general, budgeted profit or loss had not been achieved; that there were material negative

deviations from the budgets; and that the results were as bad as, or worse than, in prior years.
The expert also expressed the view that absent clarity and commitment in respect of future
funding, it was reckless for Consolidated to continue trading once Wooltru had sold the
shares in the CNA and therefore withdrawn its financial support.  Newton and other expert
witnesses, however, testified that a number of funding opportunities were available to
Consolidated that were being exploited. Furthermore merchant banks, firms of attorneys and
accountants who were intimately acquainted with the financial affairs of the CNA never
suggested that Consolidated should be liquidated; a major bank had advanced overdraft
facilities to the CNA group exceeding R70 million; and management had sought to acquire
equity in the group by way of a management buyout.

5.
The SCA reasoned that the essential question was whether the board had acted
recklessly ie that their conduct evinced an entire failure to give consideration to the
consequences of their actions to exploit other sources of funding. The answer to that
question, said the court, would in the first place depend on the amount of funding required,
for how long it would be required, and the likelihood of it being obtained ─ whether
timeously or at all; and in the second place, on how realistic the possibility was that the
company's fortunes would be turned around ie whether there was a credible business plan or
strategy that had been or could be implemented to rescue the company. The court continued
that in evaluating the conduct of directors, courts should not be astute to stigmatize decisions
made by businessmen as reckless simply because perceived entrepreneurial options did not in
the event pan out: a business that may appear on analysis of past performance to be a
hopeless case, may legitimately be perceived as a golden opportunity for a turnaround
strategy. What is required is not application of the exact science of hindsight, said the court,
but a value judgment bearing in mind what was known, or ought to have been known, by
individual directors at the time decisions were made.

6.
The SCA concluded that on the evidence, it could not be said that any member of the
board of Consolidated had traded recklessly. The appeal was accordingly dismissed.

--ends--