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366/84/AV
IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the matter between:
A.A. MUTUAL INSURANCE
ASSOCIATION LIMITED Appellant
AND
CENTURY INSURANCE COMPANY
LIMITED Respondent
CORAM: CORBETT, JOUBERT, HOEXTER, JJA, GALGUT et NICHOLAS, AJJA
HEARD: 5 May 19 86 DELIVERED: 16 May 1986
JUDGMENT NICHOLAS, AJA
This appeal arises out of motion proceedings in the Witwatersrand Local Division of the Supreme Court.
On
2
On the application of CENTURY INSURANCE COMPANY LIMITED ("CENTURY"), a company incorporated in England, the Court a quo granted an order against A.A. MUTUAL INSURANCE ASSOCIATION LIMITED ("AA MUTUAL"}:
a) interdicting AA MUTUAL from redeeming the 200 000 eight percent cumulative redeemable participating preference shares in AA MUTUAL held by CENTURY; b) directing AA MUTUAL to withdraw its notice of redemption dated 30th October 1981; and c) for costs.
With the leave of the Court a quo, AA
MUTUAL now appeals to this Court.
The facts, so far as they relate to the
issue in the appeal, are not in dispute.
Ss......
3
Ss. (1) and (3) of s. 43 of the Companies Act, No 46 of 1926
(which was the Companies Act in force at all material times), provided:
"43. (1) Subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed: Provided that -
(3) Subject to the provisions of this section, the redemption of preference shares thereunder may be effected on such terms and in such manner as may be provided by the articles of the company."
In terms of regulation 6 (bis) of AA MUTUAL's Articles of Association -
"6.(bis) ...
4
"6.(bis) The Company may create Preference
Shares and any Preference Share may, with the sanction of a Special Resolution, be issued on the terms that it is, or at the option of the Company is liable to be redeemed. The Special Resolution creating such Redeemable Preference Shares shall determine the rights and privileges attaching thereto, as well as the terms of redemption."
In terms of the first of two special resolutions passed at an extraordinary general meeting of shareholders of AA MUTUAL on 26 June 1969, and duly registered by the Registrar of Companies, it was resolved:
"1. THAT the authorised capital of the
Company be and it is hereby increased from R30,000 divided into 300,000 Ordinary Shares of 10 cents each to Rl,030,000 divided into 300,000 Ordinary Shares of 10 cents each and
1,000,000
5
1,000,000 Cumulative Redeemable Participating Preference Shares of Rl,00 each by the creation of 1,000,000 Cumulative Redeemable Participating Preference Shares of Rl,00 each, to which Preference Shares the following rights, privileges and conditions shall attach, that is to say:-
There then follow clauses (a) to (g). In terms of clause (a) the rights included -
(a) the right, in priority to any payment of dividend on any other class of shares, to receive (i) a fixed cumulative preferential
dividend at the rate of 8% per annum; and
(ii) an additional cumulative preferential dividend calculated on the company's profits.
In terms of clause (g) -
"(g)
6
"(g). (i) the Company may at any time on six months' notice in writing to the holders thereof out of any profits or moneys of the Company which may lawfully be applied for that purpose redeem all or any of the said shares,
<ii) The shares to be redeemed shall be determined by a resolution of the Board of Directors of the Company. (iii) The Company shall give to the
Holders of the shares chosen for redemption notice in writing of the Company's intention to redeem the same and fixing a time (not less than six months ahead) and place for the redemption and surrender of the shares to be redeemed.
(iv) At the time and place so fixed each such holder shall be bound to surrender to the Company the certificate for his shares to be redeemed and the Company shall pay to him the amount payable in respect of such redemption."
On.......
7
On 22 October 1969 CENTURY and AA MUTUAL concluded a written agreement
in terms of which CENTURY sold to AA MUTUAL the entire insurance
business then
owned and operated by CENTURY in the Republic of South Africa, including the
assets being the goodwill, furniture,
fittings, office equipment and the like
which were the property of CENTURY at that time.
Clauses 16, 17 and 21 of the memorandum of agreement were in the following terms:
"Clause 16.The consideration payable by A.A.M. (sc. AA MUTUAL) to CENTURY for the acquisition of CENTURY'S business in South Africa, as set out in the Agreement, shall comprise: (a) The agreed estimated realisable
value or the written down depreciated
book
8
book value in the books of CENTURY on the effective date (whichever is the greater) of the furniture, fittings, office equipment and motorcars sold by CENTURY to A.A.M. in terms of this Agreement, plus
(b) The ,sum of R200 000,00 in cash payable by A.A.M. to CENTURY on the effective date. Simultaneously with such payment being made, CENTURY shall apply and subscribe for 200 000 cumulative redeemable participating preference shares of Rl each in the capital of A.A.M. as created by special resolution of the A.A.M. passed on the Twenty sixth day of June One thousand nine hundred and sixty nine. A.A.M. undertakes to allot such shares at par for cash against CENTURY'S application therefor.
Clause 17. Notwithstanding the terms and conditions relating to the aforesaid preference shares, A.A.M. hereby undertakes (a) That it will not, while CENTURY or any approved transferee holds such
shares
9
shares, exercise the rights in terms of Clause(s) ... (g) of the conditions attaching to such preference
shares entitling A.A.M. to
redeem such shares
(b) That it will, within receipt of six
months' notice in writing from CEN
TURY , redeem such shares on
the conditions set out in Clause (g) of the conditions attaching thereto.
Clause 21 Insofar as may be necessary for the protection of CENTURY'S rights under this Agreement, A.A.M. undertakes to procure that a resolution is passed by its shareholders at A.A.M.'s Annual General Meeting ratifying the special privileges granted to CENTURY under Clause 17 hereof and simultaneously with the ratification of this Agreement by the Board of A.A.M., A.A.M. undertakes to procure confirmation from the Automobile Association of South Africa that it will vote in favour of such ratification at such Annual General Meeting."
CENTURY ...
10
CENTURY duly applied for and was allotted the 200 000 shares referred to in clause 16. (It does not appear whether the steps referred to in clause 21 were taken, but neither party sought to raise any point in this regard. )
In its replying ; affidavit CENTURY pointed out (and I did not understand this to be challenged) -
".... that in accepting the 200 000 Redeemable Preference Shares in respect of the purchase consideration of R200 000, it was appreciated by both parties that the value of the said shares, by reason of the participating preferent Dividend would be far in
excess of their par value
It was known to both that the value of the Applicant' s short-term insurance business sold to Respondent far exceeded R200 000."
It.....
11
It was, no doubt, such considerations which led to the
inclusion of clause 17 in the memorandum of agreement.
In a letter to CENTURY
dated 30 October 1981 (which is the notice of redemption referred to in
paragraph (b) of the order appealed
against), AA MUTUAL stated:
"A Board decision was taken to redeem the 200 000 8% Cumulative Redeemable Participating Preference Shares held by you and in terms of Clause (e) (sic) of the 'Conditions of Issue' you are hereby given six months' notice with effect from the 1st November 1981 of the intention to redeem these shares.
These shares will be redeemed at par. Our settlement cheque, which will include pro-rated dividends earned, will be handed to you on 1st May 1982 in exchange for the Share Certificate."
In......
12
In a letter by CENTURY'S attorneys dated 30
March 1982 a demand was made that AA MUTUAL withdraw the
notice contained in the letter dated 30 October 1981, and
it was advised that failing such withdrawal by 7 April 1982,
proceedings would be instituted. The demand was not
complied with and the application was accordingly launched
on 22 April 1982.
The only question which the Court a quo was asked
to decide, was whether AA MUTUAL was precluded by clause 17
of the agreement dated on 22 October 1969 from redeeming the
redeemable preference shares held by CENTURY. That was
also the only issue in the appeal.
It was contended on behalf of AA MUTUAL that clause
17.......
13
17 of the memorandum of agreement was not binding on AA
MUTUAL. The argument as I understood it was this.
What has to be considered is the combined effect of para-
graphs (a) and (b), namely, that so long as CENTURY holds
the 200 000 shares, they are not liable to be redeemed
save at CENTURY'S option. Such a result is incompatible
with s. 43(1) of the Act, and with regulation 6(bis) of the
Articles of Association - both of which require that the
preference shares which a company is empowered to issue are
preference shares which are, or at the option of the com-
p_any are to be liable to be redeemed.
Now it may be assumed for present purposes that paragraph (b) of
clause 17 is unenforceable. In terms of s. 43(3) of the
Act......
14
Act, the redemption of preference shares may be effected on
such terms and in such manner as may be provided by the
articles of the Company.Regulation 6(bis) of the Articles
of Association confers the power to issue preference shares
on the terms that they are, or at the option of the com-
pany are liable to be redeemed. The special resolution
creating the redeemable preference shares (which resolution,
in terms of regulation 6(bis), shall determine the rights
and privileges attaching to the shares, as well as the terms
of redemption) provides in clause (g) that the company may
redeem all or any of the said shares. Prima facie, there-
fore A A MUTUAL has no power to enter into a contract such
as paragraph (b), which seems to be in conflict with its Articles
There.......
15
There is however no warrant for "combining"
paragraphs (a) and (b). They are separate and distinct
from one another and are clearly severable. Paragraph
b) purports to confer on CENTURY a right to redeem, where-
as paragraph (a) places a clog on the exercise of AA MUTUAL's
power to redeem. CENTURY has not sought to exercise the
power contained in paragraph (b), and the matter does not
arise in these proceedings.
The short question is whether paragraph (a} is
unenforceable. There is nothing in that paragraph which
is incompatible with s. 43, with regulation 6(bis) or with
the special resolution. The effect of that paragraph is
merely that AA MUTUAL renounces pro tanto the right to
redeem......
16
redeem which it has. Such a renunciation is unobjection-
able.
Subject to certain exceptions, every person can
renounce a right conferred by law solely for his own benefit
One of the exceptions is that no one can renounce a right
contrary to law (e.g., where the result of the renunciation
would be to effect something, either expressly forbidden by
statute or absolutely illegal by common law, or where the
result of a renunciation by an individual would be to
abrogate the term of a statute which in its nature is
mandatory and not merely directory.) See Ritch and Bhyat
v Union Government (Minister of Justice), 1912 AD 719 at
734-735.
The......
17
The right to redeem under the special resolution
is one solely for the benefit of the company. It was not
created in the public interest. Until the enactment of
section 43 . (which was introduced into our companies legisla-
tion by s. 21 of Act No 23 of 1939 (as amended by s. 23 of
Act No 46 of 1952)), it was considered that the public in-
terest required that shares should not be redeemable - the
general rule was that a company could not issue redeemable
preference shares, because redemption would amount to an
illegal purchase by the company of its own shares. See
Trevor v Whitworth (1887) 12 App. Case 409; Pennington's
Company Law, 4th ed., p. 192. The interests of creditors
cannot be affected by a waiver by the company of its right
to.....
18
to redeem - on the contrary their interests are
best
served if there is no redemption. The company may re-
deem none or all or any of the redeemable preference
shares, as it pleases and as determined by the board of
directors. No member, nor any one else, has grounds for
complaint if the company decides not to redeem any shares.
Nor can the rights of any person other than the company be
affected if the company enters into an agreement by which
it renounces pro tanto its right to redeem any particular
shares. There is nothing in s. 43, or in regulation
6(bis) of the Articles, or in the first special resolution,
or in the common law, which obliges the company to redeem
or which prohibits an agreement not to exercise the right of
redemption......
19
redemption, unless, possibly, the effect of the agreement
is to deprive the shares concerned of their character of
redeemable preference shares, e.g., by providing that they
are under no circumstances to be redeemed.
Paragraph (a) of clause 17 is not such an agree-
ment. In ordinary circumstances, the undertaking not to
redeem operates only while CENTURY (or an approved trans-
feree from CENTURY) holds the shares. Their character as
redeemable preference shares is unaffected.
No other ground was advanced to justify a conclusion
that paragraph (a) is unenforceable. The result is that
the appeal must fail. In granting leave to appeal the
Court a quo directed that the costs of the application for
leave .
20
leave, including the costs of opposition, be reserved for
determination by the Court of Appeal. In my view those
costs should be costs in the appeal, and it is so ordered.
The appeal is dismissed with costs, including
the costs of two counsel.
C. NICHOLAS, H.C NICHOLUS, AJA
CORBETT, JA JOUBERT, JA HOEXTER, JA GALGUT,
AJA
Concur
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