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“If it sounds too good to be true, it probably is” (wise old adage)Pyramid schemes are in the news again.

They are easy to fall for, with not only desperate pensioners and low-wage earners but also Captains of Industry and many otherwise-savvy investors regularly tricked into “investing” in them. The reason of course is that the con artists behind these schemes are adept at hiding their true nature, coming up like clockwork with ever more creative cover stories to lure the unwary. Very popular are “Ponzi” schemes, where the masterminds behind them promise to do everything for you – all you need do is “invest”, then sit back and reap the profits.

Don’t be a victim! Workplaces are great hunting grounds for these swindlers, so if you are an employer it is worth warning your staff upfront about how to spot and avoid these schemes.

See Sanlam’s Infographic above for some classic warning signs -

Tell everyone - Being an “early bird” doesn’t help

Many pyramid schemes rely on their victims putting aside their suspicions in the perennial hope that, even if the scheme is illegal and doomed to eventual collapse, they will be one of the few (12%) “Early Birds” flying away into the sunset with all the loot whilst the latecomers (88%) are left with all the losses.

The reality is that even the “early birds” are at serious risk of losing not only their “profits” but also

their original investments.

The reason is that a liquidator (“trustee” in the case of a person or a trust) can recover any monies paid out by a liquidated scheme during the 6 month period prior to liquidation, unless the recipient can prove that the disposition was made “in the ordinary course of business”

and without intention to prefer one creditor above another. Note that the investor isn’t safe even after 6 months, although the onus of proof then shifts to the liquidator.

A recent Supreme Court of Appeal (SCA) case illustrates -

PYRAMID SCHEMES: EASY TO FALL FOR, AND EVEN EARLY BIRDS LOSE THE WORM

Source: Sanlam Employee Benefits. Reproduced with authority from http://thinkvisually.co/portfolio/ponzi-schemes-sanlam/.

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How an innocent investor lost R224,000

• A Trust attracted investors to a pyramid scheme by fraudulently promising that the scheme was “viable, lawful, not in contravention of any statutory or regulatory provisions, not a pyramid scheme and that the deposits would be utilised by the Trust to purchase from certain estate agents their rights to commissions which had been earned but not yet paid”

• When the scheme collapsed the Trust was sequestrated and the original trustees convicted of criminal offences

• The trustees in the insolvency sued an investor for return of “undue preferences” totalling R224,000 being –

o A first investment of R100,000 repaid after 3 months with interest of R12,000 (effectively a 42% rate of interest), and

o A second investment of R100,000 repaid after 2 months with interest of R12,000

(effectively a 74% rate of interest)

• As the investor had been paid out less than 6 months before sequestration, the onus was on him to prove his defence that the payments were made “in the ordinary course of business”

• Unsurprisingly however the SCA held that the payments were clearly – on a factual, objective basis - not made in the ordinary course of business. No matter that the investor acted innocently (it was accepted that he had no knowledge of the true nature and illegality of the scheme), he must repay to the sequestrated Trust both the R24k interest and his original R200k capital, together with interest and legal costs. Of course he still has a concurrent claim against the sequestrated trust, but statistically that’s likely to be worth little or nothing.

The bottom line – take advice!

Take advice before you invest in anything offering suspiciously high returns. If you decide to go ahead anyway, make sure that you

can afford the risk of losing it all - because you probably will.

And if after you invest you start picking up inklings of anything irregular or illegal, get legal assistance immediately. Some of the Court’s comments suggest that the investor’s claim would have been a lot stronger had he become aware of the true nature of the scheme and then demanded repayment of his capital, not on the basis that the investments were due for repayment but on the basis that they were illegal and void – an important distinction that might have saved him R200,000.

NOTE FOR ATTORNEYS: The judgment in Griffiths v Janse van Rensburg NO (20269/2014) [2015] ZASCA 158, available on Saflii http://www.saflii.org/za/cases/ZASCA/2015/158.html, has a wide-ranging analysis of previous case law on the subject as well as on the possible applicability of the enrichment remedy condictio ob turpem vel iniustam causam (see also the dissenting judgment in this regard).

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If you employ anyone (domestic workers excluded) you must be registered with the Compensation Fund in terms of COIDA (the Compensation for Occupational Injuries and Diseases Act). COIDA provides for compensation for employees injured, disabled or killed by a workplace accident or work-related disease.

Your employees can claim only from

the Fund, not from you. They are covered by the Fund even if you haven’t registered, but in that case you will have to pay a penalty to the Fund, probably equivalent to the full amount of your employee’s claim. You must submit a Return of Earnings form every year for assessment of contributions payable by you to the Fund. The Department of Labour has announced an

extension of the 2015/2016 submission deadline to 31 May 2016. Penalties are imposed for non-compliance so don’t be late!

NOTE FOR ATTORNEYS: For details and forms see “All about Workmen’s Compensation” on the Department of Labour website http://www.labour.gov.za/DOL/find-more-info/all-about-workmens-compensation.

EMPLOYERS: COIDA DEADLINE EXTENDED TO 31 MAY

Can you and your business afford to run the risk of losing all your important computer files and data when your computer crashes, or is stolen/lost/damaged/destroyed?If you are still doing all your backups manually, say to another computer or external hard drive, consider this –

1. Your backup computer or external hard drive has to be taken off site for maximum security.

2. If you schedule say weekly backups, you could lose up to a whole week’s work. Missing even one scheduled backup could cost

you even more dearly.

3. If you save over a file by mistake, it could be gone forever unless you have saved and kept older versions separately.

4. You are wasting time and effort by backing up manually, plus you have to remember to do the backups and to take them offsite.

The answer of course is to switch to an automatic, online backup solution. Getting great reviews at the moment is CrashPlan, downloadable from Code 42 at https://store.

code42.com/store/. You can back up to other computers (onsite or off, so you could for example set your office and home computers to back up to each other) and/or external drives.Choose between the Free version, which gives you a daily automatic backup to multiple computers/drives plus easy access to both old and new versions of each file, or one of the Paid plans which also give you additional features like minute-by-minute backups plus unlimited secure storage in the Cloud.

SURVIVING YOUR NEXT COMPUTER CRASH

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Starting A Business? The “Flying Solo” Option“A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer” (Nolan Bushnell, founder of Atari)

Step 3 in starting your own business is, you will recall from our last article, picking the correct trading vehicle upfront.

Let’s start off our analysis of the various choices open to you with the sole proprietorship (or “sole trader”) option – could it be the best fit for your particular needs and those of your new business?

What exactly is a sole proprietorship?

In a nutshell, you are the business. You are the only proprietor, owner and operator; you run the business at your own personal risk and for your own personal profit. Although sole proprietorship is a legitimate trading vehicle it is not a separate legal entity, nor is any trading name you may use in the business – so for example “Joe Bloggs trading as Joe’s Perfect Plumbers” has no existence separate to Joe, everything is done in Joe’s own name, Joe must pay all taxes personally and all business income is included in his own personal income tax return.

Like all your options, this one has both advantages and disadvantages. Let’s explore some of them -

4 advantages…1. It’s simple – of all your options this is the easiest to set up, operate and close down. There’s no need for company or trust registration, your administrative burden is low, and you make all management decisions independently.

2. It’s quick – you can start trading immediately.

3. Profits are yours and yours alone.

4. You are taxed at personal rates, which can sometimes (but not always – see below) be to your advantage.

… and 4 disadvantages1. Risk – you are 100% personally liable for all the debts and obligations of the business. All sales and contracts are in your name. Remember that your potential liabilities extend far beyond your regular trade creditors – think for example of product/service liability, labour law compensation claims, and your landlord. Creditors of your business can (and will if you run into financial difficulty) attach all your assets, both “business” and “personal”. Sleepless nights await you if any important assets (like your house) are in your name.

2. Access to funding can be problematic for a sole trader,

and not only is starting off with insufficient capital a common cause of business failure, but down the line it can stop you from expanding the business to its true potential. For example, you can’t as an individual sell shares in your business to raise new venture capital. As a rule of thumb therefore, sole proprietorship is a poor choice if you plan to grow your business significantly.

3. Tax and estate planning – as mentioned above, being taxed at your personal income tax rate may be a plus in some cases, but in others you will benefit far more from a tax-efficient structure incorporating one or more corporate entities or trusts as well.

4. It’s lonely! Confirmed lone wolves will always be happiest on their own but for most of us having a partner or two not only both brings new skills to the business, it also eases the stresses and strains of management and decision-making.

Remember to take full professional advice on the legal and tax implications of using each type of entity before choosing.

This is the second article in our series “Choosing the right legal entity for your business”. Next time we’ll look in more depth at the partnership option.

NOTE FOR ATTORNEYS: SMEToolkit South Africa http://southafrica.smetoolkit.org/sa/en has a host of resources you can refer your SME clients to, but older articles should be treated with caution, particularly those written before the new Companies Act came into effect.For more on the tax aspects see SARS’ “Small Business” pages at http://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Pages/default.aspx.

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Are you an agency trading through a company or close corporation (CC)? If so, this is for you - a recent High Court (Full Bench) case in which a close corporation lost its commission because its Fidelity Fund Certificate (FFC) was only in the sole member’s name and no separate FFC had been issued to the CC.

Coming short – a CC without its own FFC

1. A close corporation estate agency successfully carried out its mandate to find a tenant for a landlord.

2. Only the sole member of the CC held an FFC, which stated that it was issued to her in her ‘capacity’ as ‘Principal (Sole Proprietor at Firm)’ of the CC, with the CC’s trading name also specified.

3. The agency sued for its commission when the landlord refused to pay it.

4. Holding that the FFC had clearly been issued to the member herself and not to her CC, and that this disentitled the CC to its

commission, the Court dismissed its claim.

Protecting your commission

Don’t put your commission claims at risk. Obtain separate FFCs for your trading entity/ies as well as for all directors/members/principals and agents. The entity’s FFC is issued free of charge but you must display it “in a prominent position” on its premises.

Another risk – the “trading as” scenario

In another recent High Court case, a CC with a valid FFC had fulfilled its mandate to find a buyer for a property, but it did so not in the CC’s name but in its trading name. The seller refused to pay the agency’s commission, arguing that it had never given a mandate to the CC, which was neither mentioned nor named in either the agency’s documentation or on its website. The Court, finding on the facts that the CC and its trading name were effectively one and the same, awarded the agency its R78k

commission. But don’t risk having to go the litigation route - avoid uncertainty by disclosing both your legal entity’s name and its trading name/s on all documents, letterheads, website etc. Take full advice in any doubt.

NOTE FOR ATTORNEYS: The judgment in Erasmus N.O. and Another v Verna van Den Blink Properties CC (A270/2014) [2015] ZAFSHC 198 is on Saflii http://www.saflii.org/za/cases/ZAFSHC/2015/198.html.

The “trading as” case is Ustica 1153 CC t/a Cape Region Home Sales v Jordaan and Another (A158/2014) [2015] ZAWCHC 87, also on Saflii http://www.saflii.org/za/cases/ZAWCHC/2015/87.html.

ESTATE AGENTS: HOW TO SECURE YOUR COMMISSIONwww.patherandpather.co.za

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Action is the foundational key to all success.

- Pablo Picasso -