REPORTABLE

Case No 280/2002

In the matter between:

PETRUS WILLEM MICHAU

Appellant

and

THE MAIZE BOARD

Respondent

_____________________________________________________________________

CORAM

:
HARMS,  SCOTT et  HEHER  JJA
HEARD

:
15 AUGUST 2003
DELIVERED
:
12 SEPTEMBER 2003
Simulated contract – effect given to its true nature

J U D G M E N T

SCOTT  JA/…

SCOTT  JA:
[1] The appellant farms maize in the district of Harrismith, Free State.
On 27 July 1994 he entered into two written agreements with Rainbow
Chicken Farms (Pty) Ltd (‘Rainbow’) which carries on business as a
breeder and producer of broiler chickens. The one was styled ‘Agreement
of Lease Purchase and Sale’ and the other, ‘Management Agreement’.  In
terms of the former, broadly stated, the appellant was to hire a broiler site
for the 1994 to 1995 season from Rainbow which in turn undertook to
sell to the appellant at the beginning of each growing cycle its entire
stock of day-old chickens at the broiler site and to repurchase same at a
higher price from the appellant at the end of each growing cycle. In terms
of the Management Agreement, Rainbow was appointed by the appellant
as the latter’s manager to manage the broiler operation, to take proper
care of the chickens during their growing cycle and to procure the milling
and processing of the maize which was to be provided by the appellant
for the feeding of the chickens.  It was not in dispute that the object of
Rainbow and the appellant in entering into the agreements was to avoid
the payment of certain levies which would have been payable to the
respondent had the appellant simply sold maize to Rainbow.
[2] During July and August 1994, and in circumstances more fully set
out below, the appellant delivered in accordance with Rainbow’s
directions a crop of yellow maize of 2352,161 tons and was paid a total of

R917 342,79, being the equivalent of R390 per ton.  The respondent
subsequently instituted action against the appellant in the Free State
Provincial Division for payment of the levies, alleging that the
agreements referred to above were simulated and couched in terms aimed
disguising the true nature of the transaction between the appellant and
Rainbow which was the sale of maize.  The respondent’s claim was
upheld in the Court a quo and the appellant now appeals with the leave of
that Court.
[3] It is necessary at the outset to say something about the levies and
the circumstances in which they became payable.  At all times material to
the action there existed a Summer Grain Scheme (‘the Scheme’) which
was established in 1979 in terms of s 14(1)(a) of the Marketing Act 59 of
1968 (‘the Act’).  The Scheme was administered by the respondent which
is a control board contemplated in s 25 of the Act and established in terms
of s 6 of the Scheme.  Although the Act has since been repealed the
respondent continues to exist by virtue of the provisions of s 27(2) of the
Marketing of Agricultural Products Act 47 of 1996.  The appellant
planted, grew and harvested yellow maize on his farms in the Harrismith
district and was accordingly a ‘producer’ of summer grain (maize) as
defined in s 1 of both the Act and the Scheme.  As previously mentioned,
he produced and delivered a total of 2352,161 tons of yellow maize
during the months of July and August 1994.  For that season the

respondent, acting in terms of s 23 and 24 of the Scheme, imposed levies
totalling R156,31 per ton of yellow maize produced and the Minister of
Agriculture, acting in terms of s 46A of the Act, imposed a general levy
of R0,08 per ton of yellow maize produced.  The levies were payable to
the respondent on maize sold by the producer or ‘utilised by the producer
thereof for a purpose other than his own household consumption or
farming operations’.  If, however, the producer wished to sell his maize
he was required by the scheme, subject to certain exceptions, to sell it to
the respondent at a price determined by the latter which also determined
the consumer price, ie the price at which it, in turn, would sell the maize
to consumers.  For the purpose of these transactions cooperative societies
acted as agents for the respondent and purchased and sold maize for and
on behalf of the latter.  In 1994 the purchase price of yellow maize was
fixed at R330 per ton and the consumer price at R495 per ton.  The
difference accounted for the levies plus certain additional expenses.  If,
however, a producer sold maize to someone other than the respondent or
other than a person dealing in the course of trade with maize, the levies
would be payable by the producer to the respondent in the ordinary way.
Rainbow was not a person dealing in the course of trade with maize and it
follows that if the Court a quo is held to have correctly found that the
yellow maize produced by the appellant during the season in question
was sold by the latter to Rainbow, the levies imposed would be payable

by the appellant to the respondent in the sum of R367 854,46 and the
appeal must fail.  If, on the other hand, it is held that the Court a quo
ought to have found that the maize produced by the appellant was utilised
by him for his own farming operations, the levies would not be payable
and the appeal must succeed.
[4] The agreements referred to in para 1 above were so structured that
the appellant, who farmed in the Free State, played no role in the raising
of the chickens which was done at Rainbow’s broiler site in Kwazulu-
Natal.  Every aspect of the operation was handled by Rainbow.  Indeed,
the appellant conceded in evidence that all he had to do was produce the
maize.  But this, coupled with an obvious intention to avoid the levies,
would not be sufficient in the absence of anything else to justify the
respondent’s claim that the agreements were simulated and that the true
nature of the contractual relationship between the appellant and Rainbow
was one of sale.  It has long since been established in cases such as
Zandberg v Van Zyl 1910 AD 302, Dadoo Ltd and Others  v Krugersdorp
Municipal Council 1920 AD 530, Commissioner of Customs and Excise v
Randles Brothers & Hudson Ltd 1941 AD 369 and more recently
affirmed in Erf 3183/1 Ladysmith (Pty) Ltd and Another v Commissioner
of Inland Revenue 1996 (3) SA 942 (A) that parties are free to arrange
their affairs so as to remain outside the provisions of a particular statute.
Merely because those provisions would not have been avoided had the

parties structured their transaction in a different and perhaps more
convenient way does not render the transaction objectionable.  What they
may not do is conceal the true nature of their transaction or in the words
of Innes JA in Zandberg’s case, supra, at 309, ‘call it by a name, or give
it a shape, intended not to express but to disguise its true nature.’  In such
event a court will strip off its ostensible form and give effect to what the
transaction really is.  But, while the principle is easy enough to state in
the abstract, its application in practice may sometimes give rise to
considerable difficulty.  Each case will depend upon its own facts.  A
Court will seek to ascertain the true intention of the parties from all the
relevant circumstances, including the manner in which the contract is
implemented.  The onus is upon the party who alleges that the transaction
is simulated.
[5] It becomes necessary, therefore, to examine in greater detail the
agreements referred to in para 1 above and the manner in which they
were implemented.  By agreement between the parties a number of
documents were tendered in evidence ‘as if they [had] been produced in
Court pursuant to a notice given by the plaintiff in terms of Rule 35 (10).’
These included a set of accounts in similar form in respect of each of
seven 49-day broiler cycles which had been drawn up by Rainbow.  Each
set purported to give the number of one day-old chickens purchased by
the appellant from Rainbow, their purchase price, the maize used to feed

them, the price at which they were repurchased by Rainbow at the end of
the 49-day period and the appellant’s profit.  The maize stated to have
been used in the course of the cycles totalled the figure of 2352,161 tons
previously mentioned.  The first of the 49-day cycles was said to have
commenced on 10 September 1994 and the seventh to have commenced
on 16 January 1995.  The Agreement of Lease Purchase and Sale made
no provision for Rainbow to pay for the maize to be used in the feed for
the chickens.  But it did require the appellant to pay the purchase price of
the day-old chickens within fourteen days of the end of each cycle.
Rainbow was similarly required to pay the purchase price of the chickens
at the end of each cycle within the same 14-day period.  In the event, this
did not occur.  The maize produced by the appellant during July and
August 1994 was delivered to the Sentraal-Oos (Koöperatief) Bpk (SOK)
of which he was a member.  In terms of an arrangement between
Rainbow and SOK the latter periodically sent to Rainbow a schedule
setting forth the quantity of maize delivered to SOK by each of the
farmers with whom Rainbow had entered into similar agreements.  The
schedule also indicated whether the cheque in payment of the maize was
to be sent to the farmer or to SOK.  If the farmer was not indebted to
SOK the cheque was sent directly to him.  If, on the other hand, the
farmer was indebted to SOK, whether by reason of a production loan or
otherwise, the cheque was sent to SOK which first deducted what it was

owed before handing over the balance to the farmer.  It appears that the
appellant was indebted in an amount of some R2,2 million to SOK which
enjoyed a lien over his maize.  Three cheques were sent to SOK in
payment of the appellant’s crop of 2352,161 tons of maize.  They were
dated respectively 28 July 1994, 15 August 1994 and 2 September 1994.
Their total value was R846 777,96 which worked out at precisely R360
per ton.  The cheques were drawn on an account in the name of the
appellant at the Durban branch of a national bank.  It appears, however,
both from the documents emanating from Rainbow and the evidence of
the appellant himself that this account was opened and financed by
Rainbow.  The maize was delivered on the instructions of Rainbow to
various concerns for milling.  Subsequently and by cheque dated 24
October 1994, the appellant was paid a further sum of R70 564,83.  The
cheque was drawn on the same account as before but was payable to the
appellant and not to SOK.  This amount represents precisely R30 per ton
in relation to the appellant’s crop of 2352,161 tons.  The appellant
received no further payment as income or profit from having concluded
the agreements with Rainbow.
[6] What is immediately apparent from the aforegoing is that the sum
paid to the appellant, whether directly or indirectly amounted to precisely
R390 per ton for his maize.  This was R60 per ton more than he would
have received had he sold the maize to the respondent.  It was R105 per

ton less than Rainbow would have had to pay had it purchased the maize
from the respondent.  But more significantly, the payment of R70 564,83
made directly to the appellant, and which resulted in the appellant in
effect receiving precisely R390 per ton for his maize, was made before 1
November 1994 which, according to Rainbow’s accounts, would have
been the day on which the first of the seven 49-day cycles was completed.
Had the true intention been to give effect to the contracts according to
their tenor the amount to which the appellant would ultimately have
become entitled would not have been known at that stage.  The reason is
that the income or profit accruing to the appellant from each cycle was
dependent on several factors which would only have become known
once the cycle had been completed.  It is true that the payments to SOK
and the appellant were reflected as ‘drawings’ in the accounts, but that
these should have constituted the precise amount to which the appellant
would ultimately become entitled under the agreements could hardly have
been coincidental.
[7] The Agreement of Lease Purchase and Sale did not specify the
exact price at which the day-old chickens would be purchased by the
appellant or at which the broiler chickens at the end of each cycle would
be purchased by Rainbow.  Instead, it recorded that in both instances the
price was to be agreed between Rainbow and the appellant but in the case
of the day-old chickens it was to be ‘no less than 95c (plus VAT at 14%)

and … no more than 100c (plus VAT at 14%)’ and in the case of the
broiler chickens ‘no less than R4,95 (plus VAT at 14%) and … no more
than R5,30 (plus VAT at 14%)’.  An examination of the accounts in
respect of each broiler cycle reveals that in each case the purchase price
of the day-old chickens is given as 93c.  This, of course, is lower than the
minimum specified in the contract.  But of far greater significance is the
fact that in respect of each cycle the price of the broiler chickens is given
in rands to the seventh decimal place or, in other words, cents to the fifth
decimal place.  The price, moreover, varies from cycle to cycle, albeit in
some cases only by a few decimal points of a cent.  The inference that
these figures were arrived at by working backwards so as to arrive at a
predetermined result is overwhelming, particularly when it is borne in
mind that amount to which the appellant was ultimately entitled was paid
in October 1994 and before the completion of the first cycle.  If this were
not enough, the accounts relating to three of the cycles contain minor
arithmetic errors which if corrected would result in the amount paid to the
appellant (being the equivalent of R390 per ton of maize supplied) having
to be altered.
[8] What emerges, thus far, is first that the provisions of the
Agreement of Lease Purchase and Sale with regard to payment were
wholly disregarded.  The payments by Rainbow to the appellants were
related to the delivery of maize, not to the purchase price of chickens.

Second, the payments by Rainbow were made via a bank account opened
by Rainbow in the name of the appellant.  Why the payments should have
been laundered in this way was never explained.  Counsel for the
respondent submitted that the object was to create the impression that the
appellant was paying for the release of his own maize.  No other
inference was suggested in argument.  Third, the accounts prepared by
Rainbow for each cycle were clearly drawn up so as to arrive at a
predetermined total amount, ie R917 342,79.  That amount was paid to
the appellant before the figure would have been known had it been based
on the sale of chickens.  In the result, the inference is inescapable  that the
accounts for each cycle were prepared to create the impression that the
appellant derived his income from the sale of chickens whereas in truth
he derived his income from the sale of his maize to Rainbow.
[9] On behalf of the appellant it was pointed out that the accounts
made provision for the payment of VAT which would not have been
payable had Rainbow purchased maize from the appellant to feed its
chickens as the transaction would have been zero-rated for VAT
purposes.  However, this is hardly decisive as the payment of VAT would
not be inconsistent with an intention to disguise the true nature of the
agreement.
[10] The appellant, not surprisingly, denied in evidence that the contract
was simulated and that a price for his maize had been determined in

advance.  He conceded, however, that he had no idea of the price of day-
old chickens or poultry and that, although in terms of his agreement with
Rainbow the price at which the chickens were sold would be decisive as
to whether there was a profit or not, the price of chickens was of no
importance to him at the time.  He said he simply placed his faith in
Rainbow to give him an added value on his maize.  What is clear is that
the appellant’s evidence was wholly inconsistent with that of a person
who had genuinely entered into an agreement to farm chickens.  His sole
concern was what return he would receive on his maize.  As previously
indicated, Rainbow’s accounts were drawn up so as to arrive at an
obviously predetermined return of R390 per ton.  This strongly suggests
that R390 was an agreed amount.  But if not, the inference is
overwhelming that in such event the appellant would simply have left it
to Rainbow to determine the figure which he subsequently accepted, the
only limitation being that it would be more than the R330 per ton
determined by the respondent.
[11] In the result I am satisfied that the respondent discharged the
burden of establishing that the true nature of the transaction between the
appellant and Rainbow was the purchase by the latter of the former’s
maize.

[12] The appeal is dismissed with costs, such costs to include the costs
of two counsel.

D G SCOTT

JUDGE OF APPEAL

CONCUR:
HARMS JA
HEHER  JA