IN THE COURT OF APPEAL OF LESOTHO
HELD AT MASERU
C OF A (CIV) No.10/2010
CIV/APN/111/2009
In the matter between:-
CONCRETE ROOTS (PTY) LTD ….................APPELLANT
AND
LEBAKENG TIGELI …...............................RESPONDENT
CORAM: SCOTT, JA
HOWIE, JA
FARLAM, JA
HEARD: 12 OCTOBER 2010
DELIVERED: 22 OCTOBER 2010
SUMMARY
Unfair competition – two of the three directors of company A setting up company B in direct competition with A and in breach of their fiduciary duties to A – inference of misappropriation of A’s funds by B – interdict and procedural relief sought pending action by remaining director of A against B – such a derivative action not barred by the rule in Foss v Harbottle.
JUDGMENT
[1] Messrs L. Tigeli, R. Lehobo and M. Pitso are the directors and registered shareholders of Pile Enterprise (Pty) Limited. For
convenience I shall refer to the three individual litigants by their respective surnames and to the company as Pile. Pile was incorporated
in August 2006. Lehobo and Pitso were shareholders from its inception. Tigeli became a shareholder in 2007.
[2] By September 2008 Tigeli on the one hand and his fellow shareholders on the other were in material dispute. At that stage Pile conducted business from Room 12, Mpilo Lodge, Maluti Road, Maseru as a supplier of office stationery and equipment and operated a current account and a call account at the Maseru branch of Nedbank (Lesotho) Limited.
[3] By early November 2008 a company with the name Concrete Roots (Pty) Limited had been registered and was conducting business. Its directors and shareholders were Lehobo and Pitso. Concrete Roots, as I shall refer to it, was also a supplier of office stationery and equipment. It also conducted business from Room 12, Mpilo Lodge. And it also had current and call accounts at the Maseru branch of Nedbank.
[4] On 20 March 2009 Tigeli, citing Pile, Lehobo, Pitso, Concrete Roots and Nedbank as respondents, applied for a Rule nisi interdicting the operation of the bank accounts of both companies pending finalisation of an application on the return day for various forms of declaratory and procedural relief. The interdict was to have immediate interim effect. The object of the relief to be sought on the return day was for the purposes of prosecuting an action, (presumably against Concrete Roots). Nomngcongo J granted the order.
[5] An opposing affidavit, deposed to by Lehobo, was filed on behalf of Concrete Roots, seeking to anticipate the return day and outlining its defence to the application. This was done by way of a few very terse statements. They were these: Tigeli had no locus standi; Concrete Roots had a contract with the Lesotho Government and Tigeli was suing Concrete Roots for damages for unfair competition, for both of which reasons the company needed access to its bank accounts; and Tigeli’s application was based on speculation that Lehobo and Pitso had transferred funds from Pile to Concrete Roots, which was untrue.
[6] The matter came before Chaka-Makhooane J on the anticipated return day, 26 March 2009. On 23 November 2009 she made an order referring the case for oral evidence as to the transfer of funds out of Pile’s bank accounts and as to the operation of Concrete Roots’s bank accounts. As regards the latter issue Nedbank was ordered to release to the parties the bank statements of Concrete Roots from the date of the opening of “the account” to the date of the interim order. Costs were to stand over. In due course, the bank statements of Concrete Roots were produced, and form part of the record.
[7] On 19 March 2010 Chaka-Makhooane J granted the order against which the present appeal has been brought. It said no more than that the application was granted with costs but it was common cause before us that all concerned accept that it was intended to be an order in terms of paragraph 2 of the notice of motion. The only appellant is Concrete Roots to which I shall hereafter refer as “the appellant”.
[8] It is appropriate at this point to set out the terms of paragraph 2:
“2.1An order declaring second and third respondents’ dual directorship in fourth respondent (CONCRETE ROOTS (PTY) LTD)unlawful and in conflict with their respective fiduciary duties in first respondent (PILE ENTERPRISE (PTY) LTD)and to cease such; or alternatively to resign therefrom.
2.2 An order directing respondents to disclose or cause to be disclosed to applicant herein all transactions in respect of all bank accounts of both first and fourth
respondents.
2.3 An order directing first, second, third and fourth respondents to disclose or cause to be disclosed to applicant herein all their business activities including their personal assets.
2.4 An order declaring the business activities of fourth respondent(CONCRETE ROOTS (PTY) LTD) as constituting unlawful competition and to desist from such.
2.5 An order directing fifth respondent to freeze all accounts belonging to first (PILE ENTERPRISE (PTY) LTD) and fourth respondents (CONCRETE ROOTS (PTY) LTD) pending finalisation of applicant’s claim against first, second, third and fourth respondents herein in action proceedings instituted simultaneously with this application.
2.6That the costs of this application be awarded against those respondents who oppose this application, jointly and severally, the others to be absolved.”
We were informed from the Bar that the envisaged action has indeed been instituted.
[9] The first submission advanced by counsel for the appellant was that Tigeli lacked locus standi. He argued that because the wrong allegedly done was one to Pile the rule in Foss v Harbottle (1843) 2 Hare 461 (67 ER 189) at 492 applied, namely, that only Pile could sue. This submission lost sight of the well-known exception to that rule which is that a derivative action by a minority director or shareholder lies where the wrong involves conduct which is fraudulent and the alleged wrongdoers are the majority directors or shareholders of the company: Burland and Others v Earle and Others [1902] AC 83 (PC). Obviously the latter would not vote for action against themselves. Faced with the authority of Burland’s case, counsel conceded that his point could not succeed.
[10] He also had no criticism - unsurprisingly - of the order in so far as paragraph 2.1 was concerned. Apart from the fact that Lehobo and Pitso have opposed neither the application nor the appeal, their being directors and shareholders of Pile’s competitor when they knew all there was to know of Pile’s business and financial structure could not have constituted a clearer breach of the fiduciary duties they owed to Pile as its directors. And, of course, the appellant was not an existing company - it was they who had it registered and who instigated the competition.
[11] The problem for the appellant is that once those are the facts the conclusion has to be that Lehobo and Pitso practised an intentional deception on Pile. The inevitable inference is that the appellant’s competition with Pile was unfair and so constituted an actionable wrong. It is not without significance that in the short period of its existence the appellant had achieved a government contract which, but for the appellant, would no doubt have been granted to Pile.
[12] These circumstances justified interdictory relief pending the action, as well as the orders for disclosure, even without regard to the question whether money was being siphoned off from Pile to the appellant. However, such bank statements as there are on record, although they do not paint the full picture (for instance Pile’s current account and call account details, as presented, do not relate to the same dates) nevertheless justify the conclusion that Pile’s funds were modest and dwindled even further whereas substantial sums passed in and out of the appellant’s accounts. It is not disputed on the papers that by the time of the interim order on 20 March 2009 there was a total in Pile’s accounts, taken together, of not much more than M6000. The combined total in the appellant’s accounts was in excess of M120 000.
[13] Tigeli’s allegations were also not disputed that when he met with Lehobo and Pitso early in March 2009 it was evident to him, judging by the outward manifestations of their respective lifestyles and the vehicles they were driving, that their fortunes had enjoyed an infusion of prosperity.
[14] Counsel for the appellant contended that it was not the most probable inference from all the facts presently proved that Pile’s money was dishonestly being transferred to the appellant. I think it is. This necessitates a restraint not only upon Lehobo and Pitso who are the people responsible for Pile’s current misfortunes but also upon the appellant, to which their knowledge and actions are in law attributable.
[15] That being so, all the relief granted by the Court below was warranted and counsel for the appellant fairly conceded as much.
[16] The appeal is dismissed with costs.
______________________
C T HOWIE
JUSTICE OF APPEAL
I agree: ______________________
D G SCOTT
I agree: ______________________
I G FARLAM
Counsel for the Appellant : Mr. T. Matooane
Counsel for the Respondent: Adv. T.R. Mpaka