Royalties belong to composers -
Judge rules in High Court

Judgement was handed down in the South Gauteng High Court Johannesburg on Friday 6th November 2009 when Judge Boruchowitz ruled in favour of music composers Colin Shapiro and Hotep Galeta in their application against SARRAL (the South African Recording Rights Association Limited).

Shapiro had asked the court to wind up the royalty society on the basis that SARRAL was misappropriating composers' royalty money and was insolvent.

Shapiro was joined by Galeta, a fellow SARRAL member as co-applicant in early 2006.

In his judgement the Learned Judge found that:

 - SARRAL is an agent collecting the royalties of its members and non members and occupies a position of trust in relation to members and non members;

 - SARRAL had breached its duty of trust and misappropriated members’ royalties;

 - There was a justifiable lack of confidence in the conduct of SARRAL’s management;

 - SARRAL kept the majority of members in ignorance of the company’s parlous financial circumstances;

 - SARRAL’s revenues were insufficient to meet its royalty liability to its members;

 - SARRAL was factually insolvent and was trading in insolvency;

 The Judge ordered that SARRAL be wound up.

Shapiro’s claim was that:

- SARRAL has been systematically mismanaged;

- Royalties earned though the licensing of members music have been misappropriated and used by SARRAL to fund itself;

 - SARRAL’s financial statements materially mis-state its financial position and are characterised by material irregularities;

 - SARRAL is factually insolvent;


Remarkably, in response to Shapiro’s allegations, SARRAL said in its answering affidavit (filed in August 2004) that after more than 30 years of accounting to its members as “agent”, it had been mistaken all along. It explained that it had now been advised that royalties earned from its members’ musical works and collected by it for distribution to members in fact formed part of SARRAL's own income and in this way SARRAL could technically never be insolvent unless and until its expenses exceeded ALL of the royalties collected in respect of its members’ musical works.

SARRAL testified that it was entitled to account in the capacity of  “owner” of its members’ musical works - notwithstanding the terms of the agreements entered into with individual members (which limit it to a commission of between 7 and 9%).  SARRAL told the court that it could deduct, from the royalty money,  all of its expenses, on top of and in addition to the commission.

This is in fact what it had been doing since 2004.

On this new version, SARRAL could use as much of the royalty monies as it decided was necessary to meet its expenses and the amount of royalty payments made to members were “in the discretion of the SARRAL Directors”.

In the result, as explained by Shapiro and Galeta to the court, members who, prior to 2004, received payments less a commission of only 7.5 % now had deductions of 50% (and more) taken from royalties collected for their musical works.

Shapiro and Galeta in their papers attached copies of SARRAL’s audited financial statements, which explained SARRAL’s method of doing business for at least the past 30 years. 

The audited financial statements placed before the court showed that SARRAL's revenue (i.e. from which it could legally deduct expenses) had always and from the inception of the company been derived from a commission taken on royalties (and interest earned on royalty payments awaiting distribution) and that it was liable, under its agreements with its members, to pay over the balance to its members.

Notwithstanding this dramatic “about face” and the new version of its rights advanced by SARRAL in court, this was (and to date still is) the way that SARRAL advises the public on its website as to how it meets its expenses

see:

how does SARRAL meets its expenses?
or

go to SARRAL's site

The final straw came in April of 2004 when the board was presented with a Management Committee Report by then financial Manager Kuselwa Mthethwa. This report admitted what Shapiro had suspected: that the company was using members’ royalties to run itself and quantified the amount of composers' money already misappropriated.  The report forecast that by 2005 the amount would be over R11 million.  Professor Peter Klatzow, vice chairperson of SARRAL at that time, commented to Shapiro in an e-mail: "The real question is how long can we keep going. Its a disgrace that dedicated royalty money should have been used for management"

* Footnote:

Mothobi Mutloatse, formerly CEO of Skotaville Press, is no stranger to controversy, having been the subject of a court battle between Transnet and Sechaba Photoscan (reported in the Mail and Guardian February 2003). Though he left SARRAL by August 2005, the board led by Graeme Gilfillan and later manager Tebogo Singo have persisted in the essential tenets of the defence raised by Mutloatse in 2004 until October 2009.

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