Andrew Pycroft v Michael Andrew Murray and Others

### Preamble
1
HH 151-2012
HC 6426/09
ANDREW PYCROFT
versus
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ANDREW PYCROFT
versus
MICHAEL ANDREW MURRAY
and
BRUCE MILLIKEN
and
JAMES IAIN HAMILTON KAY
and
DOUGLAS ALISTAIR KEITH
and
KALPESH GULABBHAI MEHTA
and
DAVID JAMES KAY

HIGH COURT OF ZIMBABWE
PATEL J

Civil Trial

HARARE, 10 to 12 January 2012 and 4 April 2012

P. Paul, for the plaintiff
R.M. Fitches, for the 1st, 3rd, 4th and 6th defendants
2nd defendant in person
5th defendant in person

PATEL J: The plaintiff in this matter claims the sum of US$1,465,555.91 together with varying rates of interest in respect of monies lent to an off-shore company for which the six defendants stood as sureties. The defendants resist this claim on several grounds giving rise to the following issues for determination:

(a) Has the plaintiff’s claim against the defendants become prescribed?

(b) If the plaintiff’s claim is not prescribed, what is the correct balance of capital and interest owed by Southern Energy Corporation Mauritius Ltd (SECM) and MK Global Ltd (MKG)?

(c) Has plaintiff taken over the business operated by Zambezi Saw Milling (ZSM)?

(d) Has the plaintiff in his dealings with the principal debtor acted in a manner prejudicial to the 1st, 3rd, 4th and 6th defendants
 and, if so, what effect does this have on the suretyships of these defendants?

(e) Was the plaintiff acting as agent for other investors and were the payments due to the plaintiff and those investors to be paid to the plaintiff?

(f) Were the loans called up and, if so, when did this occur?

(g) Was the interest which the plaintiff has claimed agreed upon and/or appropriate?

(h) Has the Contractual Penalties Act any application to the transaction and, if so, what adjustments should be made to the plaintiff’s claim?

The Evidence

Andrew John Pycroft, the plaintiff, testified as follows. In 2005 the defendants formed SECM as an off-shore company and several other local companies. They also formed MKG as a holding company to hold SECM and their other business ventures. They approached the plaintiff for short term loans with attractive interest rates, to be invested as deposits with two off-shore banks, Kingdom Botswana (KB) and Banco Privado Portuguez (BPP). The plaintiff and his clients agreed to lend money to SECM to be deposited with KB and BPP though the main account in the name of SECM. The latter maintained in its own records a sub-account in the name of the plaintiff. The defendants then borrowed monies from KB and BPP, on the basis of SECM’s deposit and the plaintiff’s sub-deposit, in order to fund their businesses. The plaintiff and his clients lent their funds initially to SECM and then to MKG. These loans were for three month periods with an interest rate of 3.5% per month accruing monthly. Capital and interest amounts were repayable on demand with 3 months notice. These terms were verbally agreed with the 5th defendant specifically and with the other defendants generally. Most of the loans were rolled over on the same terms. On 1 April 2008 the plaintiff and the 5th defendant, who was the Financial Director of
 SECM and MKG, agreed to change the interest rate to 1.75% per month because of difficult economic conditions. The plaintiff’s clients were to receive lower interest rates with the balance of the interest to be paid to the plaintiff as commission. The total invested by the plaintiff through the SECM account as from 1 September 2006 to 28 February 2010 was over one million United States Dollars. The closing balance was US$1,487,509 reflecting capital plus interest less withdrawals. The securities for the loans were various and comprised the two suretyship deeds with all six defendants in respect of SECM and MKG, bonding of goods, cession of shares in the subsidiary businesses, pledging of shares, motor vehicles and mining claims, and the cession of SECM’s deposit with BPP. In October 2007 MKG needed to be recapitalised because of the poor performance of the subsidiary businesses, and in 2008 the defendants sought equity partners in MKG. The proposed equity arrangements did not materialise. The plaintiff became involved in the running of the defendants’ businesses as from January 2008 in order to secure his investment interests. On 1 May 2008 he gave 3 months verbal notice to the 1st and 5th defendants for repayment of the total balance by 31 July 2008. He was persuaded to extend the deadline and was asked to attend the board meetings of MKG as an investor and holder of securities. The defendants have acknowledged their liability to the plaintiff at various times, including at board meetings of MKG. They have refused to repay the balance claimed, even though the plaintiff does not owe them any collateral debt or liability. The other investors have authorised the plaintiff as their investment agent to institute this action through written mandates.

Michael Andrew Murray is the 1st defendant. He testified on behalf of himself as well as the 3rd, 4th and 6th defendants. He confirmed the relationship between SECM and MKG and their subsidiary companies, as well as the loan arrangements between the plaintiff and the defendants. The six defendants had equal shareholdings in SECM and MKG. The plaintiff had no shares or directorships in SECM, MKG or their subsidiaries. In 2007 the plaintiff was approached to participate in the negotiation of new equity partners for MKG. The plaintiff wanted to be actively involved, failing which he threatened to foreclose on his loans. The negotiations with both prospective equity partners fell through because of the plaintiff’s involvement and the economic meltdown in November 2008. In 2008 and 2009 the plaintiff dictated the reorganisation of MKG and the running of its subsidiaries. His constant threats of foreclosure and interference in all the subsidiary companies affected their business decisions. The 1st defendant could not recall whether the plaintiff’s loans were repayable on 3 months notice. Although the plaintiff threatened to foreclose, he never gave any formal notice of demand to SECM, MKG or any of the defendants. Under cross-examination, the 1st defendant accepted that the plaintiff was not guilty of any wrongdoing and that he did not act in bad faith. Nevertheless, he was over-bearing and contributed to the failure of all the companies. As regards ZSM, all of its shares were ceded to the plaintiff as security. In November 2009 there was directors resolution authorising the plaintiff to sign an agreement for the sale of the business and assets of ZSM to a third party. The 1st defendant could not dispute that the plaintiff injected funds into the companies, but he could not comment on the rates of interest agreed between the parties. At the board meetings of MKG, between January 2008 and December 2009, the indebtedness of MKG to the plaintiff was discussed and acknowledged. However, the accounts that were produced by the 5th defendant were never independently audited.

Bruce Milliken, the 2nd defendant, was responsible for the running of the water-maker business operated by Watermaker Africa (WA). His evidence was that he formally resigned from the group of companies comprising SECM and MKG Global in July 2007 because the defendants’ marketing strategy was doomed to failure.


He stood by his summary of evidence wherein he acknowledged the indebtedness of the defendants to the plaintiff and the fact that the 5th defendant prepared monthly statements reflecting that debt. There was no reason to doubt the accuracy of those statements, as the 5th defendant is a professional accountant.

Kalpesh Gulabbhai Mehta, the 5th defendant, is the Financial Director of MKG. He also stood by his summary of evidence and confirmed that MKG and the defendants are liable to the plaintiff. He prepared monthly statements on behalf of MKG for the plaintiff, applying the interest rates set by the plaintiff with the 1st defendant. He further testified that the capital lent by the plaintiff was initially advanced to SECM and then subsequently to MKG. The monthly and updated statements that he had prepared were discussed at weekly board meetings. All the defendants had access to the statements but elected not to receive them. The notice period for repayment was initially 1 month. This was altered to 3 months notice in September 2006 by agreement between himself, the plaintiff and the 1st defendant. In May 2008, at a board meeting of MKG, the plaintiff gave notice of demand to MKG for the repayment of all loans by the end of July 2008. Present at that meeting were the plaintiff, the 5th and 6th defendants, and one Peter Wilkinson. The defendants executed two deeds of suretyship in August 2006 (for SECM) and in August 2007 (for MKG). Under cross-examination, the 5th defendant stated that MKG’s failure to engage equity investors was not attributable to the plaintiff or his influence. Moreover, the plaintiff did not interfere with the subsidiaries, but attempted to put in place measures to safeguard the MKG group. With respect to ZSM, its shares were ceded to the plaintiff as collateral for his investment. The ZSM business and assets were valuated by the 3rd and 4th defendants and were then sold to a third party for US$150,000 in order to recover losses. The plaintiff was to acquire 10% of the shares in the purchasing company for US$30,000. The latter company has only paid US$35,000 to date and the sale has therefore not yet been finalised. The US$30,000 payable by the plaintiff for his acquisition of shares should be debited to the plaintiff’s loan account (as at the end of July 2009) so as to reduce MKG’s liability for both capital and interest. The figures contained in the updated statement that he prepared as at 28 February 2010 [Exhibit 2] were not audited, primarily because of the prevailing exchange control regime and the attendant fear of prosecution. In any event, the other defendants never asked for any audit of these figures. He personally compiled Exhibit 2 and stood by its authenticity and correctness (apart from the US$30,000 in respect of the ZSM shares). He has updated the relevant figures up to 31 December 2011. The balance outstanding as at that date is US$2,085,032. The gross asset value of MKG in 2010/2011 was about US$200,000 and at the present time it is approximately US$100,000.

Whether Plaintiff was Agent for Other Investors

In the evidence adduced at the trial, there was no doubt whatsoever that the plaintiff was acting as agent for his clients in the loans made to SECM and MKG. It was also not in dispute that the defendants bound themselves to pay the plaintiff in respect of all the investments, including those made on behalf of his clients. This emerges clearly from the deeds of suretyship and Exhibit 2.

Whether Loans Called Up and When

The evidence shows that the parties agreed on a 3 months notice period because of the capitalisation purpose for which the funds in question were lent and invested. Even in the absence of any such agreement, a period of 3 months notice would undoubtedly have been reasonable in the circumstances of the case. At the end of the trial, it became abundantly clear that the plaintiff did give the defendants 3 months notice to repay the balance outstanding on the loans. This was done verbally at a board meeting of MKG on 1 May 2008. The plaintiff’s evidence in this regard was corroborated by the 5th defendant and not meaningfully contested by the 1st defendant.

Prescription of Plaintiff’s Claim

In terms of section 16(1) of the Prescription Act [Chapter 8:11], the extinctive prescription of a debt commences to run as soon as the debt is due. In the instant case, given the roll-over arrangement between the parties, the debt would only have been due on notice, i.e. on the notice period agreed or on reasonable notice. The plaintiff gave 3 months notice for repayment on 1 may 2008, which notice expired on 31 July 2008. Thereafter, he issued and served the summons upon the defendants on 6 January 2010. This operated to judicially interrupt the running of prescription within the 3 year prescriptive period. It follows that the plaintiff’s claim herein has not prescribed. Indeed, Adv. Fitches quite correctly concedes this point in his closing submissions.

In view of that concession, it is not necessary to delve into the other aspects pertaining to the interruption of prescription by acknowledgement of liability and prescription being delayed by the principal debtor having been outside the country. I would however note that after the plaintiff’s notice of demand the defendants specifically requested and were granted a moratorium on the threatened foreclosure. That being so, I fully agree with Mr. Paul that it is unconscionable for the defendants to have raised the plea of prescription on the ground that summons should have been issued earlier.

Whether ZSM Business Taken Over by Plaintiff

On 24 November 2009, at a meeting of the board of Allesandro Investments (Pvt) Ltd (AI), the company trading as ZSM, it was resolved that the plaintiff be appointed and authorised to conclude the agreement in respect of the sale of the business and assets of AI to one Neville Kloppers representing his company. The evidence that emerged at the trial was that the business and assets of AI were then sold for the sum of US$150,000 and that the plaintiff took 10% of the shares in the purchasing company for US$30,000. This sum was deducted from the purchase price payable to AI and was therefore effectively paid on the plaintiff’s behalf. What also became evident at the trial was that this US$30,000 was not factored into the computation of the plaintiff’s loan account with SECM and MKG. It was accordingly accepted by the plaintiff and the 5th defendant that this amount should be deducted from the plaintiff’s claim so as to reduce MKG’s liability for both capital and interest (as at the end of July 2009).

In any event, the above transactions relating to the disposal of AI’s business and assets demonstrate that the plaintiff merely acquired a minority shareholding in the purchasing company. They do not show that the plaintiff took over the business operated by AI or ZSM, and there is nothing in the evidence adduced or closing submissions to support that contention.

Whether Interest Rates Agreed and Appropriate

In his closing address, Adv. Fitches makes the curious submission that the transactions between the parties amounted to asset management within the ambit of the Asset Management Act [Chapter 24:26]. Consequently, because the transactions were not registered under the Act, the Court should decline to recognise them. And if they are recognised, the only interest rate that ought to be applied is the official rate prevailing at the time, i.e. the rate charged by commercial banks or the prescribed rate or the rate paid by banks on money in a foreign currency denominated account.

Apart from the fact that these issues were not canvassed in the pleadings or in the evidence at the trial, I must confess that I find the submissions relating to interest rates utterly incomprehensible. It is also entirely unclear whether it is the plaintiff or the MKG group that is contended to be the supposed “asset manager”. In any event, it may be as well to address and clarify this aspect so as to place the matter beyond doubt. By virtue of section 3(2) of the Act:

“a person carries on the business of asset management if he or she, on behalf of one or more clients, invests the property of such client or clients in any one or more of the following ways –

(a) in the money market; or
(b) in a recognised stock exchange; or
(c) by purchasing immovable property, motor vehicles or other valuable property for resale within any period of twelve months; with a view to securing a profit for such client or clients, whether the investment is made pursuant to a trust deed or any other written or verbal agreement, and whether or not the property of any client is pooled with that of any other client.”

There is no suggestion *in casu* that any of the funds in question were invested on a recognised stock exchange or in the purchase of immovable or movable property. This only leaves the money market, which term is defined in section 2(1) of the Act to mean:

“the market consisting of the Reserve Bank and registered banking institutions in which offers to buy, sell or exchange cheques, bills of exchange, certificates of deposit, Zimbabwe Government or other stocks and bonds and other monetary instruments are made and accepted”.

On the facts, what the plaintiff did was to advance his money together with that of his clients as loans to SECM and MKG to be invested in two off-shore banks. The deposits so made were then used to borrow funds to capitalise the MKG group of businesses. None of this indicates that either the plaintiff or SECM or MKG was engaged in the “business” of asset management. By the same token, it cannot be said that any of the parties invested any monies in the “money market” as defined in the Act. For these very obvious reasons, I find myself quite unable to accept the rather nebulous arguments proffered by Adv. *Fitches*.

According to the plaintiff, the interest rate that was initially agreed between the parties was 3.5% per month. This rate was then reduced by agreement to 1.75% per month in April 2008 because of the prevailing economic difficulties. The applicable rates were confirmed by the 5th defendant, while the other defendants did not gainsay or challenge the agreement of the parties in that regard. Moreover, there is no suggestion in the pleadings or in the evidence at the trial that the rates so agreed are illegal or usurious. Again, there is nothing to support the contention that these rates are not appropriate to the convertible currency in question. In the premises, it must be concluded that the interest claimed by the plaintiff was not only agreed upon but also appropriate to the transactions between the parties.

Correct Balance of Capital and Interest Owed

The defendants herein bound themselves as sureties and co-principal debtors. Therefore, their obligations are not separate and independent but joined and accessory to those of the principal debtor. Consequently, a valid principal obligation is necessary in order to found the defendants’ liability to the plaintiff. Moreover, it is for the plaintiff to establish the quantum of the debt that he claims to be owed to him. In other words, the principal debt must not be unliquidated or uncertain in amount. The defendants cannot be called upon to pay as sureties until the amount of the principal debt has been ascertained, either by a final balancing of accounts or by other proof, and they cannot be held liable beyond that amount. See, in all these respects, *Caney’s Law of Suretyship* (5th ed.) at pp. 25-26, 28, 37, 55 & 100.

The undisputed evidence is that the 5th defendant prepared monthly and updated statements of account in respect of the plaintiff’s loan account with SECM and MKG. The 5th defendant is a qualified accountant. He was also a very honest and impressive witness. I see no reason to doubt his assertion as to the authenticity and correctness of the statements that he prepared. These statements were always accessible to all the defendants, even though they declined to receive their own copies. Moreover, the figures they contained, reflecting the current outstanding balances due to the plaintiff, were discussed at the board meetings of the MKG group. None of the defendants questioned the accuracy of the mathematical calculations of capital and interest contained in the statements, whether at their board meetings or in the evidence adduced at the trial.

The only questionable amount arising from the transactions between the parties relates to the US$30,000 that the plaintiff benefited from pursuant to the sale of the business and assets of Al and ZSM. It was acknowledged at the trial that this figure should have been taken into account in computing the monthly balances due to the plaintiff. As indicated at the end of the trial, the 5th defendant has since revised and adjusted the updated statement to capture this reduction in the overall liability of the defendants. Mr. Paul has attached the revised statement to his closing address and there is no demurrer thereto in Adv. Fitches’ response.

On the above facts, the argument that the statements were not audited cannot be raised as a defence to the plaintiff’s claim. All the defendants were equal shareholders and directors of SECM and MKG. The 5th defendant is the Financial Director of the MKG group and prepared the statements in that capacity. Therefore, it was for the defendants to have had the statements audited if they were so inclined. Accordingly, I am amply satisfied that the amount of the principal debt, being the correct balance of the capital and interest owed by SECM and MKG to the plaintiff, has been properly ascertained. It follows that the correlative obligations and liability of the defendants qua sureties have also been duly established.

Whether Plaintiff’s Conduct Prejudicial to Defendants

According to *Caney, op. cit.*, at pp. 205 ff., the creditor’s dealings with the principal debtor and the other sureties must not have the effect of prejudicing the sureties. If they do, the sureties are released. As is explained by the learned authors, the duty not to prejudice is an inchoate one bounded by equitable considerations. Its scope is therefore a matter of debate and it is crucial to identify its limits. What is required for the release of the surety is a positive act amounting to fault by the creditor. One of the typical cases of prejudice where the surety is released is that in which the creditor agrees with the principal debtor upon a material alteration or variation of the latter’s obligation which is prejudicial to the surety, for instance, through an agreement not to enforce the principal debtor’s obligation.

Under cross-examination, the 2nd defendant admitted that the plaintiff has informally agreed to release him from his liability, subject to his assisting the plaintiff to recover his investment. In particular, the 5th defendant has been asked to withdraw from the market as a competitor and to give his advice on the sale of certain machinery. I do not think that this accommodation operates in any way to discharge the defendants for several reasons. In particular, the plaintiff has persisted in seeking judgment against the 2nd defendant and the latter has not pleaded any release in his defence. Even assuming that the 2nd defendant is released, this would not really prejudice the other defendants as they would upon paying the debt become entitled to recover the 2nd defendant’s pro rata share from him. Equally significantly, the accommodation between the plaintiff and the 2nd defendant is one with a co-surety rather than with the principal debtor. In any event, the nature of the assistance sought from the 2nd defendant as a condition for his release is hardly prejudicial to the other defendants. On the contrary, this assistance would actually benefit the principal debtor directly and thereby serve to reduce the extent of all the defendants’ liability to the plaintiff.

As is acknowledged by Adv. Fitches, the defendants bear the onus of proving prejudice, viz. that the plaintiff’s conduct caused them such prejudice as to discharge their obligations under their sureties. The defendants aver that the plaintiff’s actions prejudiced their suretyship obligations in several ways. Firstly, his interfering conduct prevented the fruition of viable equity investments in the MKG group. Secondly, his actions prevented the group itself from remaining financially viable.

On the evidence placed before the Court, I am unable to find any substance in these assertions. More specifically, I cannot see anything in the plaintiff’s conduct or actions that can be viewed as a positive act amounting to such fault on his part as to justify the discharge of the defendants’ obligations as sureties. Indeed, the 1st defendant explicitly accepted that the plaintiff was not guilty of any wrongdoing and that he did not act in bad faith. More specifically, the 5th defendant confirmed that MKG’s inability to engage equity investors and the failure of its subsidiary companies were not attributable to the plaintiff or his influence. He went further to affirm that the plaintiff’s interventions were designed to safeguard the MKG group of companies and thereby secure his investment. In his opinion as an accountant, the viability or failure of MKG and its subsidiaries does not impinge upon or detract from the defendants’ liability as sureties to repay the plaintiff and his clients. I am inclined to endorse that opinion on the facts before me.

It follows from all of the foregoing that the defendants have not established any basis for invalidating their sureties or diminishing their respective liabilities to the plaintiff. Their obligations under the deeds of suretyship remain intact and fully enforceable.

Application of Contractual Penalties Act

It is not in dispute that the interest rates that were applied to the plaintiff’s loans were agreed by the parties. The initial rate was 3.5% per month and this rate was reduced in April 2008 to 1.75% per month. There was no additional interest to be charged in the event of default and, therefore, no penalty interest was involved. In the absence of any penalty element, as was properly conceded by
 Adv. *Fitches*, the equitable relief available under the Contractual Penalties Act [*Chapter 8:04*] has no bearing on the determination of this matter.

*In Duplum* Interest

Although this was not an issue before the Court, it seems necessary to deal with it briefly for the sake of completeness. The 5th defendant testified that the total capital amount lent by the plaintiff was approximately US$850,000. He further confirmed that as at the date of the summons being served on the defendants, in January 2010, the interest due on the loans had not accrued to the *in duplum* level so as to exceed the unpaid capital. As for the interest that accrued after the summons, it is well established that the *in duplum* rule does not apply *pendente lite*. See *Standard Bank of SA v Oneanate Investments (Pty) Ltd* 1998 (1) SA 811 (SCA) at 832.

Disposition

In the result, the plaintiff is entitled to judgment as against all six defendants as prayed in the summons, subject to the adjustment necessitated by the US$30,000 share transaction following the sale of the business and assets in ZSM.

Accordingly, it is ordered that the defendants jointly and severally, the one paying the others to be absolved, pay to the plaintiff the capital sum of US$1,431,719.82 with interest at the rate of 1.75% per month on the sum of US$918, 257.21 and at the rate of 1.5% per month on the sum of US$513,462.61 both calculated from the 1st of February 2010 to the date of payment in full, plus costs of suit.


Wintertons, plaintiff’s legal practitioners
Atherstone & Cook, 1st, 3rd, 4th and 6th defendants’ legal practitioners
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