A Ponzi scheme victim’s seemingly ill-informed legal approach and “very, very late” filing of a replying affidavit has absolved Durban-based law firm Garlicke & Bousfield from having to contend with a R2.5 million claim.
An application in which Lizelle Jacobs, the previous chief financial officer of Cotton King Manufacturing, asked to be substituted as the plaintiff in the action brought against the firm 12 years earlier was dismissed with costs on 13 September.
Judge Rob Mossop, sitting in the High Court in Durban, not only refused Jacobs’s application but also ruled that the case has become prescribed.
In November 2010, well-regarded attorney Colin Cowan, an executive consultant at Garlicke & Bousfield, shot himself in his garden, leaving behind a suicide note in which he admitted to having committed “fraud”.
Subsequent investigations found he had been running a Ponzi scheme. Cowan allegedly offered a “bridging finance” service to the firm’s clients. This involved providing short-term finance at high interest rates to clients who were acquiring immovable property and needed to put up a deposit or funds in a short period but were unable to access such funds on a short-term basis. At the time, it was speculated that investors were collectively owed about R100m.
Just over 10 years later, the High Court found Garlicke & Bousfield liable for the Ponzi scheme. The firm was ordered to pay R7m to a former client and investor, Merlin Stols.
‘Inordinately’ long delay
According to the particulars of claim, as set out in the judgment handed down in the Jacobs case earlier this month, it was alleged that Cotton King had agreed to invest R2.5m as bridging finance in October 2010. The money was to be repaid to Cotton King with interest at the rate of 30% a year by 31 January 2011. It was alleged that although the money had been paid, it had not been repaid by the due date.
A summons was issued in February 2011, with Cotton King cited as the plaintiff and Garlicke & Bousfield as the defendant.
Jacobs first launched the substitution application on 27 March 2013.
In her founding affidavit, she explained that Cotton King had sold its business and placed itself in voluntary liquidation. She said the action against the defendant was duly sold, transferred, and ceded to her because the liquidators “did not wish to become embroiled in long and protracted litigation”.
Garlicke & Bousfield delivered an answering affidavit in May 2013, followed by a supplementary answering affidavit in October 2014. It took Jacobs 78 months to deliver a replying affidavit (in May 2021), followed by a supplementary affidavit delivered just over two years later in July 2023.
Although Judge Mossop granted condonation for Jacobs’s late supplementary affidavit, he ruled that the (“very, very”) late filing of the replying affidavit could not be condoned. In short, he found Jacobs’s “general explanation” of the delays to be insufficient.
Considering the “inordinately long period of time” that the substitution application had taken before it was sufficiently complete to be argued, Judge Mossop said:
“The law expects litigants to act with all due and necessary haste when litigating. Where there is a prolonged lack of speed and an ignoring of prescribed time limits, the defaulting party must provide compelling reasons why their failure to act with the required swiftness should be overlooked.”
Cotton King’s (lack of) claim
Another key issue examined in the judgment was whether the claim was Cotton King’s to cede in the first place.
In the deed of cession, it is mentioned that the monies invested were not Cotton King’s but belonged to Jacobs. The payment was made via Cotton King’s account, but Judge Mossop said Cotton King’s particulars of claim were entirely predicated on its being the investor.
“The applicant has not at any stage attempted to press her own claim as the investor. She makes it plain that her entire case against the defendant is dependent on the rights that she acquired from the deed of cession and not from any original right that she personally possesses,” the judge said, flagging her failure to do so as “curious”.
Break down in security
Something else that can be described as curious is the case of the disappearing R400 000 allegedly put up in security by Jacobs.
On 19 October 2011, the registrar of the court directed Cotton King to put up security of R400 000 for the defendant’s costs by close of business on 2 November 2011. Cotton King never put up that security.
In the supplementary affidavit filed in 2023, it is disclosed that Jacobs paid about R420 000 into a trust account, of which R400 000 was to be used in respect of the security previously ordered. However, Judge Mossop said there had been no order in place requiring her to put up that security.
“What is in place is an order by the registrar directing Cotton King to deliver security in that amount,” he said.
In her “general explanation”, Jacobs said she had been informed that “the security for costs issue had to be addressed, as that formed the crux of the dispute in the substitution application”.
In mid-2018, she learned that the money had been stolen by an employee of her (now former) attorneys.
An action against her former attorneys is currently in process.
Commenting on Jacobs’s suggestion that the security payment formed the crux of the dispute, Mossop said it wasn’t the only impediment to the substitution application being granted.
“She appears not to have addressed the further issues raised in the supplementary answering affidavit, namely that the investment was between the applicant in her personal capacity and Mr Cowan and not between Cotton King and the defendant, that Cotton King never had a claim against the defendant, and that any claim that the applicant may have had against the defendant had prescribed by no later than 2 February 2014.”
Judge Mossop added that none of these allegations had been addressed by the applicant.
Claim has prescribed
He further stated that there was clear evidence that the applicant’s claim has prescribed.
In a letter written by Cowan and addressed to Jacobs, dated 14 October 2010, it was recorded that the investment was to be repaid by no later than 31 January 2011.
“Absent any admission made by the defendant regarding its liability for the investment, and none have been mentioned in this matter, the applicant’s claim against the defendant became prescribed at midnight on 30 January 2014,” Judge Mossop said.
In his summation, the judge said Jacobs’s attempt to litigate against the defendant has come to an end. He said her claim in her personal capacity has prescribed, and Jacobs had not taken cession of anything from Cotton King that could improve her position.
Judge Mossop said that allowing Jacobs to be substituted in the place of Cotton King “would serve no purpose and would not advance her position” but would prejudice the firm, “who would have to endure the inconvenience and expense of this essentially hopeless action limping on”.
However, he said Jacobs was not without remedy.
“Her true cause of action is against her erstwhile attorneys in respect of which she has already issued summons,” Judge Mossop said.
