Can liquidation be used to eliminate competitors? This question gained significant importance in the case of Dangerous Goods vs Jag Freight and Another, where the Court’s criticism highlighted the potential impact of such applications.
The case of Omni Software Solutions (Pty) Ltd and Another v Koekemoer and Others (19656/2023) [2024] ZAWCHC 168 was different in that it involved a clear and severe abuse of a Director’s duty of care, which led to the formation of an unlawful competitor.
Common cause facts
Over 25 years, Omni UK developed software for products and systems which could be used in the hospitality industry to assist the management of its clients, thereby saving costs (the products). The development of these products came at a tremendous cost to Omni UK.
In February 2020, Omni UK introduced these products to South Africa, and Omni SA was licensed to market them to prospective clients. Ms Koekemoer was the face of Omni South Africa.
Given the impending expansion of the Omni business into South Africa, Mr Ladha offered Koekemoer the opportunity to handle the South African operations. In return for her involvement, she was offered a 20% shareholding in the South African business and a salary equivalent to her local position. Omni UK subsidised the establishment of Omni SA and all associated costs. Ms Koekemoer, the sole director of Omni SA, was the company representative and was responsible for sales, training and support of the systems in South Africa, as well as managing and liaising with the South African clients.
Having extensive knowledge of Omni UK, Ms Koekemoer was responsible for hiring the trainers and installers the Omni UK team had trained. She was trained in the UK on the Omni systems. Her responsibilities included two staff and two branches in Johannesburg and Cape Town. She recommended a package of R118,000.00 per month for herself, a significant financial implication for the company.
Image By: Omni software Solutions
From approximately 2018 to 2020, Omni SA’s business was doing well, so much so that Bidvest, one of Omni SA’s largest clients, wanted to introduce the product to certain banks and introduced it to the Peermont Group Hotels. This, in turn, led to Peermont wishing to use the maintenance module for all of its casino offerings. Bidvest also wanted to start using the system for health care. Discussions were had about adapting the system for that purpose. It was then decided to re-develop the system, leading to the development of Omni Commercial, Facilities and Maintenance and the rebranding of Omni Clean to become Omni Hotels, given that it had new and additional features.
As the sole director of Omni SA, Ms Koekemoer had fiduciary duties in terms of, amongst others, sections 76(3)(c) and 76(2)(a) of the Companies Act, 71 of 2008 (the Act) as well as the common law to act in the company’s best interest and certainly not in conflict with them.
As part of the position in Omni SA, Ms Koekemoer was also responsible for appointing employees.
Inter-relationships
ASV is a company whose sole director is the fifth respondent, Mr Jeremias Bekker (Mr Bekker). Mr Bekker started ASV whilst employed by Omni SA, and after he departed from Omni SA in February 2023. ASV now directly competes with Omni SA. According to Omni, Mr Bekker and Ms Koekemoer have been friends for many years, which is particularly important since Mr Bekker is the director of ASV, a direct competitor of Omni SA.
Regarding the third and fourth respondents, they are Ms Mariette Koorsen (Ms Koorsen) and Mr Gert Koorsen (Mr Koorsen), who are married to each other and both of whom were employed at Omni SA by Ms Koekemoer. Ms Koorsen is Ms Koekemoer’s sister, and Mr Koorsen is Ms Koekemoer’s brother-in-law. According to Omni, although the evidence implicates Mr and Ms Koorsen in having acted with Ms Koekemoer and Mr Bekker to pursue a common purpose, no interdictory relief is sought against Mr and Mrs Koorsen.
Mr Koorsen provided no information regarding Mr Koorsen’s knowledge, expertise, and experience. The information provided regarding Mr Koorsen comes from Ms Koekemoer and Mr Bekker. It is somewhat contradictory in that: According to Ms Koekemoer, Mr Koorsen has no knowledge of computer engineering or software coding or any other skills to steal information from Omni, but this notwithstanding, he was able to tailor-make programs for Epicode to suit client’s needs and that it can be written in 2 – 3 days.
Mr Bekker, on the other hand, states that Mr Koorsen worked for ASV as the head of development. Regarding Epicode, this company was registered on 1 November 2023 but had been in existence as a shelf company since 2 August 2023.
Disputed facts
According to Omni, there is a concern that Ms Koekemoer and the other respondents are misusing Epicode. According to Omni, Epicode is peddling ASV’s software and unlawfully competing with Omni.
Omni contends that it investigated Ms Koekemoer, which led to the discovery that Ms Koekemoer and the respondents had:
- Stolen Omni’s company proprietary information; and
- They used that proprietary information to establish ASV, a shelf company, to peddle what ASV represented as a product and system they developed. Omni content that these were their products and not ASVs.
On that basis, ASV wrongfully and unlawfully diverted Omni’s customers towards itself, significantly impacting Omni’s business operations.
Omni added to the Court that further investigations showed that ASV had been established by erstwhile employees of Omni SA (Mr Bekker, Ms Koorsen and Mr Koorsen) in 2021 whilst Omni SA employed them. The systems and products ASV offers its clients are identical or substantially similar to those of Omni SA.
Omni also pointed out that Ms Koekemoer, Ms Koorsen, Mr Koorsen, and Mr Bekker, all of whom were employed by Omni SA, wrongfully, unlawfully and intentionally (while acting in concert and with a common purpose) utilised the proprietary information and know-how which they acquired while employed at Omni SA to divert Omni SA’s customers to ASV so that they could use the former as a springboard to launch the latter as a direct competitor in the market. Simply put, what Ms Koekemoer and the respondents did constituted unlawful competition, which had to be stopped through the urgent application heard by the Court.
Omni contends that Ms Koekemoer’s conduct constituted a breach of confidence as contemplated in section 213 of the Act in that while she was a director of Omni and thus governed by the Act, she contravened the provisions of the Act by disclosing confidential information to Mr Bekker at ASV and permitted ASV to access this information. This also constitutes a criminal offence as contemplated in section 216 of the Act.
Issues to be determined
The Court pointed out that the issue in dispute is whether Omni SA and Omni UK have satisfied the requirements for an interim interdict against Ms Koekemoer and Epicode arising from unlawful competition perpetrated by way of:
- Using confidential and proprietary information belonging to Omni;
- Approaching and soliciting Omni’s clients in South Africa and the United Kingdom; and
- Passing off the products, systems and/or services offered by Koekemoer and Epicode as being those of Omni and/or as being related to and/or affiliated with Omni.
Legal framework
It is settled law that unlawful competition gives rise to two causes of action, namely a delictual claim for damages and/or a claim for interdictory relief, and the applicant is obviously at large to pursue those remedies against the respondents if so minded. In this regard, the locus classicus on the remedies available in cases of unlawful competition is Dun and Bradstreet (Pty) Ltd v SA Merchants Combined Credit Bureau, where the Court stated the following:
Reverting to the position in our law and without attempting to define generally the limits of lawful competition, it seems to me that where, as in this case, a trader has by the exercise of his skill and labour compiled information which he distributes to his clients upon a confidential basis (i.e. upon the basis that the information should not be disclosed to others), a rival trader who is not a client but in some manner obtains this information and, well knowing its nature and the basis upon which it was distributed, uses it in his competing business and thereby injuring the first mentioned trader in his business, commits a wrongful act vis-à-vis the latter and will be liable to him in damages. In an appropriate case, the plaintiff trader would also be entitled to claim an interdict against the continuation of such wrongful conduct.
When information is distributed on a confidential basis, it is not meant to be used or imitated by rival traders. Any attempt to do so is a deliberate misappropriation of the products of another’s skill and labour. This conduct is dishonest and constitutes fraud upon the compiler of the information, with serious legal consequences.
One of the main issues for determination in this matter is whether the information which Ms Koekemoer, Mr Koorsen, Ms Koorsen, and Mr Bekker were all privy to whilst employed with Omni SA, constituted confidential information and whether they all, in particular Ms Koekemoer, used it even after her resignation to promote the business of Epicode to the detriment of Omni’s business. If so, that would constitute unlawful competition.
According to Omni, its confidential information comprises client lists, pricing information and Omni’s databases (“confidential information”). In Cambridge Plan AG and Another v Moore and Others, the Court held as follows:
There is authority that a party to a fiduciary relationship may not make a list of customers during the currency of their relationship for the purpose of using it to the detriment of the other party after the relationship has been terminated. In Pelunsky & Co. v Teron 1913 WLD 34, the defendant, when he knew he was going to leave the plaintiff’s employee, took a copy of a list of customers for use in a business he was setting up for himself. In awarding damages against him, the Court extracted the principle from the English decisions that:
Speaking generally, a servant is not entitled to use information gained in his master’s employment in any way inconsistent with good faith. This applies to information he has honestly acquired during the service on his master’s behalf—a fortiori; it applies to information acquired from his master during his employment without his master’s knowledge.
The Court pointed out that confidential information is meant for a trader’s exclusive use and circulates within the confines of such trader’s business. It is not readily available to the public or, as it is generally expressed, it is not public knowledge. The position was stated as follows in Van Castricum v Theunissen and Another, where the Court held that:
The information must have the necessary quality of confidence about it; namely it must not be something which is public property and public knowledge.
Image By: dinokeng.co.za
The Court pointed out that whether the confidentiality requirements have been met is an issue to be decided according to the facts of the case. However, certain factors indicate the confidential nature of the information.
There is also no evidence at all pertaining to the:
- The amount of money that Epicode spent to develop its product;
- Who assisted Epicode in developing its product;
- Ownership of its software ;
- The functionality of its software and the product; and
- How Epicode managed to develop this product when until at least November 2023, it was a dormant company.
The Court pointed out that, from the facts as set out above:
- Ms Koekemoer and Mr Koorsen were all involved in filching Omni’s client lists and, somewhat shamelessly, utilising Omni’s Licencing Agreement. They then denied that it was the same document and that it was, in any event, not confidential.
- It is clear that the counsel for Ms Koekemoer and Epicode’s argument that Epicode is not a competitor of Omni is, to put it mildly, devoid of any merit and can be summarily dismissed.
The Court determined that Epicode clearly competes with Omni in terms of the products Omni has developed. Further, the Court agreed with Omni’s submission that, given the fact that Ms Koekemoer has always been the face of Omni SA, it can be accepted that the two clients Epicode solicited from Omni were lured by Epicode’s product being passed off as that of Omni or that such product is affiliated with Omni.
It is clear that while employed by Omni SA, Ms Koekemoer engaged in unlawful competition with Omni in favour of ASV and that Omni was entitled to stop such activities, inter alia, with an interdict had they come to its attention sooner than October 2023.
The Court pointed out that what Ms Koekemoer did was abuse her position as the sole director of Omni SA to build two rival businesses, ASV and Epicode, and as soon as she was caught and suspended, she tendered her resignation, and even then, during the handover, she continued to steal Omni’s confidential information, with the intention of taking Omni’s clients with her. Ms Koekemoer was employed precisely to bring in clients for Omni SA, which is not denied, but she did exactly the opposite.
The Court finally granted an order to liquidate ASV.
The bottom line
This case is a perfect indicator of the Directors’ duty of care to act within the provisions of the Act. Mismanagement/misconduct is often the root cause of financial distress and must be managed carefully.
Fortunately, Omni was not adversely impacted to the point that they became financially distressed. However, other companies will be less fortunate. If we want to improve the financial viability of companies in South Africa and avoid a mass exodus towards business rescue and liquidation, Directors cannot abuse their duty of care.
We live in interesting times
