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South Africa: Supreme Court of Appeal |
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In the matter between:
JONATHAN DAVID PETERS NO First
Appellant
EDWIN MARCUS LETTY NO Second
Appellant
LEONARD CAREL VAN VUGHT NO Third
Appellant
in their capacity as the trustees of the Jonty
Peters
family trust
JONATHAN DAVID PETERS NO
Fourth Appellant
DERRICK STUART PLANTING NO Fifth
Appellant
MICHAEL STEPHEN EDY Sixth
Appellant
in their capacity as the trustees of the
Derrick
Planting Family Trust
and
THERESA
SCHOEMAN First Respondent
CATHERINA SUSARA
ABRAHAM Second Respondent
MüLLER LOUW Third
Respondent
MARIETHA MAGDA LUTTIG Fourth
Respondent
Coram: HEFER ADCJ, GROSSKOPF, MARAIS, SCHUTZ
JJA and MPATI AJA
Heard: 11 SEPTEMBER 2000
Delivered: 10 NOVEMBER 2000
Company law -
Contravention of s 38 of Act 61 of 1973 - Scheme for avoiding of - court to have
regard to true nature of agreement
and disregard parties' description
thereof
JUDGMENT
MPATI AJA/
MPATI AJA:
[1] The main question in this appeal is whether a written
deed of sale concluded in 1997 is hit by s 38 of the Companies Act 61 of
1973
(“the Act”) which prohibits the rendering by a company of any
financial assistance for the purpose of or in connection
with a purchase of its
shares. The appellants acted as trustees for two family trusts, which were the
sellers. Roux J, sitting
in the Transvaal Provincial Division, concluded that
the parties had failed to avoid the operation of the section, indeed that their
attempts to do so amounted to mere camouflage. Consequently he refused the
appellants’ claim for an order that the respondents
comply with their
obligations as buyers, particularly to pay the final instalment of the price.
Subsequently Roux J granted leave
to appeal to this court.
S 38(1)
provides:
“(1) No company shall give, whether directly or indirectly, and whether
by means of a loan, guarantee, the provision of security
or otherwise, any
financial assistance for the purpose of or in connection with a purchase or
subscription made or to be made by
any person of or for any shares of the
company, or where the company is a subsidiary company, of its holding
company.”
[2] The company (Carpe Diem Properties (Pty) Ltd) owned
immovable property in Mpumalanga. Had the immovable property of the company
been mortgaged to provide financial assistance to enable the respondents to pay
the price or any part of it for the shares in the
company, there would have been
a clear contravention of s 38. The conversion of the company into a close
corporation by the trusts,
followed by the giving of financial assistance by the
close corporation in order to enable the respondents to pay for the members'
interest so created, would not have offended against s 38. By contrast with the
Companies Act, s 40 of the Close Corporations Act
69 of 1984 (“the Close
Corporations Act”) allows a close corporation to give financial assistance
for the purpose of
the acquisition of a member’s interest. But here there
was another impediment. Section 27 of the Close Corporations Act requires
every
member of a company which is to be converted to a close corporation to be a
member of the corporation, while s 29(1) provides
that only natural persons may
be members of a corporation. The members of the company were the trusts which
each owned 50% of the
shares. They were not qualified to become members of the
close corporation. The parties were quite frank about their problems and
their
proposed solution, as the preamble to the deed of sale contained the
following:
“2.1 The Purchasers are prohibited by law from purchasing the shares in
the Company;
2.2 The Sellers may not convert the Company to a Close
Corporation and hold a members interest therein as they are not natural
persons;
2.3 To facilitate this transaction the Sellers have agreed to
transfer the shares to the Purchasers on the terms set out hereunder
and
thereafter to convert the Company to the Close Corporation;
2.4 After
conversion of the Company to the Close Corporation the mortgage bond will be
registered and the purchase price for the
members' interest paid to the
Sellers.”
[3] The manner in which the parties gave effect to the
purpose just stated was the following: The purchase price of R1 000 000 was
payable by means of an initial deposit of R100 000, a further deposit of R450
000 within 10 days of signature (clause 6.2), and by
the utilisation of a bank
loan of R450 000 to repay the sellers’ loans totalling R250 000, and to
pay the sellers R200 000
in settlement of the buyers’ remaining
indebtedness on the price. Clause 3.1 provided that after the first R450 000
had been
paid “the sellers will transfer the shares [in the
company] and cede the claims to the purchasers in consideration for the
purchase price” (emphasis supplied). In terms
of clause 3.3 the share
certificates and written cessions of the claims would be held in trust by the
attorneys Deneys Reitz on behalf
of the sellers. Clause 3.4 provided for the
pledging of the shares and claims with the sellers as security for the
buyers’
compliance with their obligations. The pledge was to be effected
simultaneously with the transfer. In terms of clause 4 the sellers
would take
the necessary steps to convert the company into a corporation once the deposit
of R450 000 (clause 6.2) had been paid
and the transfer of the shares and
cession of the claims had been effected. The buyers were to co-operate in the
effecting of the
conversion. Once all of this had been done, clause 5 would
come into operation. It reads:
“The sellers sell to the purchasers who purchase the members'
interest and the claims in equal shares . . .” (emphasis
supplied).
[4] Some time after the transaction the buyers refused to
proceed with it, contending that s 38 had been contravened so that the
sale was
void ab initio.
[5] As I have stated, Roux J considered the
form in which the parties' agreement was cast as amounting to camouflage. I do
not agree
if by that the learned judge meant that the parties had deliberately
camouflaged their real agreement. It was not alleged in the
affidavits that the
transaction reflected in the written agreement was a simulated one in that
sense. There are two classes of "simulated"
transaction known to our law. The
first is one in which the parties have set out to conceal the real agreement by
dressing it up
in the guise of another. The second is one in which the parties
have mistakenly characterised their real agreement as something
which, when
juristically analysed, it is not. In the first, the simulation is deliberate;
in the second, it is unwitting. In both
instances a court will have regard to
the true nature of the agreement and disregard the description given to it by
the parties.
As I have said, there is no suggestion in the affidavits that the
transaction was simulated in the first sense. What was argued,
was that to the
extent that the written agreement purported to characterise the transaction as a
sale of members' interest, and to
exclude a purchase of shares in the company,
it was not an accurate reflection of the real agreement between the parties. In
other
words, it was argued that it was a simulation in the second sense.
Whether the agreement was camouflage in that sense has to be
considered. The
judge a quo characterised the agreement as "a deliberate attempt to avoid
the prohibition contained in s 38 ...". No doubt it was, but that
does not mean
that there was a contravention, because as Miller JA said, in dealing with the
predecessor of s 38 in Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) at
806F:
"No doubt the matter was so arranged with the very object of ensuring that s
86 bis (2) was not contravened, but it is trite law that that would not
be improper, provided only that the agreement was genuine and not
disguised in
order to conceal the true agreement."
[6] The essential contention of
the buyers is that a purchase of the shares was inherent in the transaction.
The court a quo accepted this argument and said:
"Whatever one chooses to call it the Respondents 'purchased' the shares in
Carpe Diem from the Applicants. The Respondents had to
acquire ownership or
control of the rights attaching to the shares to convert Carpe Diem to a Close
Corporation. This was a vital
step in the scheme of things, as the Applicants
could not be members of a Close Corporation."
That conclusion appears to
me to be correct for the following reasons.
[7] In this Court Mr
Cilliers, for the respondents, conceded during argument that the trusts would
have been entitled to
transfer the shares in the company to a third party for
the sole purpose of converting the company to a close corporation and thereafter
transferring the members’ interest so created to the respondents, in
return for which the trusts would be paid the sum of R1
000 000 to be raised by
mortgaging the immovable property owned by the close corporation. Mr Cilliers
conceded further that in
such circumstances the respondents would have had no
case. However, the parties did not do that. They avoided the interposition
of
a third party by agreeing to transfer the shares directly to the appellants to
give them locus standi to effect the conversion themselves and so become
members of the close corporation. It is quite clear that what the purchasers
wished
to acquire ultimately was the members’ interest in a close
corporation into which the company had been converted. That is
why Clause 5
of the deed of sale provides for the sale of the members’ interest by the
sellers (trusts). Paradoxically, in
my view, that is where the difficulty in
the way of concluding that the shares were not sold, arises. The trusts are
incapable in
law of creating or acquiring members’ interest in a close
corporation and therefore can have no members’ interest to
sell. The
agreement requires the purchasers to create themselves the very thing
which the sellers purported to sell in terms of Clause 5.
[8] One is
therefore driven to the conclusion that, on a proper construction of the deed of
sale in its totality, what was
in reality being sold were the shares in the
company and the sellers’ claims. But the sale of the shares was only one
facet
of a multi-faceted transaction the ultimate object of which was to enable
the respondents to become the owners of members’
interest in a close
corporation which would acquire the company’s assets and the question
still remains: does the transaction
offend against the provisions of s 38(1) of
the Act? In terms of the deed of sale, after payment by the respondents of the
deposit
of R550 000, the shares will be transferred and the claims ceded to
them. Thereafter the company will be converted to a close corporation
with the
respondents as its members in equal shares. It is true that financial
assistance is to be given to enable the balance of
R450 000 to be paid and that
the conversion will facilitate the giving of that assistance. But it is to be
given only after the
conversion, ie after the company has ceased to exist and
its assets have become those of the close corporation. While the company
is in
existence, its financial position will remain untouched by the arrangement. It
will make no loan and its assets will not be
encumbered. The position of its
creditors will not be prejudiced in any way. Compare Lewis v Oneanate Pty
Ltd and Another 1992(4) SA 811 (A) at 818 D. It is true that one of the
assets which it now owns and which will in due course become that of the
close
corporation will be encumbered to enable the purchasers to pay the balance of
the purchase price of the shares but that will
happen only after the company has
ceased to exist, and it will be the close corporation which is providing
financial assistance and
not the company. That is not prohibited by the Act or
the Close Corporations Act.
[9] In Lewis v Oneanate, supra, it
was said that the object of s 38(1) of the Act is to protect the creditors of a
company “who have a right to look to its
paid-up capital as the fund out
of which their debts are to be discharged”. The purpose is to avoid the
employment and depletion
of that fund or exposing it to possible risk in
consequence of transactions concluded for the purpose of or in connection with
the
purchase of its shares (at 818 B-C). In my view, the present deed of sale
is simply not within the mischief at which s 38(1) is
aimed.
[10] Mr
Cilliers had a second string to his bow. He submitted that the appellants had
cancelled the agreement. They had exercised
an election to cancel on three
occasions, so it was argued: first by letter dated 18 April 1997, secondly by
telephone during May
1997 and thirdly by letter dated 6 May 1997. In the first
letter, written by the appellants’ attorneys to the respondents’
attorney, the appellants threatened to cancel the sale if the signed agreement
was not received by them by close of business on 21
April 1997. From the
contents of the letter of 6 May 1997 it appears that the respondents’
attorney had replied to the first
letter and advised, inter alia, that
the agreement was with “the fourth party” for signature by him or
her. In the last paragraph of the letter of
6 May 1997 the following is
said:
“. . . our client instructs us that if the fourth party has not signed
the agreement and we are not paid the second deposit
by close of business on 8
May 1997, we will be instructed to cancel the land sale
agreement.”
[11] As to the alleged cancellation by telephone, the
fourth respondent merely states in the answering affidavit that the applicants,
through their legal representative, confirmed the “cancellation”
(contained in the first letter) to the respondents’
attorney during May
1997.
[12] Whether or not an innocent party has made an election to cancel
is a question of fact to be decided on the evidence. See the
passage in
Segal v Mazzur 1920 CPD 634 at 644-5, quoted in Christie in The
Law of Contract in South Africa 3ed at 598.
[13] After receiving the
respondents’ response to the first letter, the appellants’ attorneys
wrote the second letter
clearly indicating that no election to cancel as
threatened in the first letter had been exercised. The second letter certainly
does not purport to cancel. It merely states that the appellants will give
instructions to cancel if the “fourth party”
has not signed the
agreement by close of business on 8 May 1997 and the second deposit not paid.
No such instructions seem to have
been given. I am in any event of the view
that none of the letters referred to can be said to constitute a clear and
unequivocal
notice of cancellation. See Putco Ltd v TV and Radio Guarantee
Co (Pty) Ltd and Other Related Cases 1985 (4) SA 809 (A) at 830 E; Kragga
Kamma Estates CC and Another v Flanagan 1995 (2) SA 367 (A) at 375
C-D.
[14] The appeal must therefore succeed. The following order is
made:
(1) The appeal is upheld with costs.
(2) The order of the trial court is
set aside and the following is substituted:
(a) The respondents are ordered to pay to the applicants, within 20 days of
date of this order, the sum of R450 000 pursuant to clause
6.2 of the Memorandum
of Sale dated 9 May 1997;
(b) The respondents are ordered to comply with
their further obligations under the Memorandum of Sale dated 9 May 1997;
(c) The respondents are ordered to pay the costs of the application, jointly and severally, the one paying the other to be absolved.
_________________
L
MPATI
ACTING JUDGE OF APPEAL
AGREE:
HEFER
ADCJ
GROSSKOPF JA
MARAIS JA
SCHUTZ JA
SAFLII:
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