South Africa: High Courts - Gauteng

CASE NO: 05/6675

In the matter between:



INSAMCOR (PTY) LIMITED                                       Applicant



and



DORBYL LIGHT & GENERAL
ENGINEERING (PTY) LIMITED First Respondent

DORBYL LIMITED                                                Second Respondent

REGISTRAR OF COMPANIES                              Third Respondent

MINISTER OF TRADE AND INDUSTRY Fourth Respondent

MINISTER OF FINANCE                                          Fifth Respondent

BLIEDEN, J:

[1]      There is life after death. Whether this is so has been a topic of speculation for generations by philosophers and religious teachers. However, in the world of company law this is the effect of section 73(6) of the Companies Act, Act 51 of 1973 (the Act). The relevant section reads:

“73(6)    (a)The Court may, on application by any interested person or the Registrar, if it is satisfied that a company was at the time of its deregistration carrying on business or was in operation, or otherwise that it is just that the registration of a company be restored, make an order that the said registration be restored accordingly, and thereupon the company shall be deemed to have continued in existence as if it had not been deregistered.

(b) Any such order may contain such directions and make such provision as to the court seems just for placing the company and all other persons in the position, as nearly as may be, as if the company had not been deregistered.”

[2]      It is apparent from a reading of the section itself that, before such an order can properly be made, the court hearing the application for restoration must be satisfied about the following:

2.1     

That the company was, at the time of its deregistration, carrying on business or was in operation; or

2.2     

That it is just that the registration of the company be restored.

The present application

[3]      This is an application for the setting aside of an order restoring the first respondent (DLG) to the register of companies in terms of section 73(6)(a) of the Act (the restoration order). It is not in dispute that DLG was deregistered as a company on 19 March 1996. The restoration order contained the following declarations:

“5.       It is declared that upon the restoration of the registration of the Company:

5.1     

the assets of the Company are no longer bona vacantia;

5.2     

the assets of the Company will vest in the Company with retrospective effect to the date of deregistration and as if the Company had not been deregistered.

5.3     

The assets of the Company include all its right, title and interest in and to a sub-licence agreement concluded between Saunders Valve Company Limited; Stewarts & Lloyds of South Africa Limited, Insamcor Trading (Proprietary) Limited and the Company under licence to manufacture and sell various models of Saunders’ diaphragm valves.”

The unchallenged relevant facts

[4]     

4.1      On 30 June 1982 an agreement was entered into between Saunders Valve Co Ltd (Saunders) and Stewarts & Lloyds of South Africa Ltd (Stewarts & Lloyds). In terms of that agreement Saunders had granted certain licenses to Stewarts & Lloyds to manufacture and sell certain products in South Africa.

4.2     

On 11 September 1985 an agreement was entered into between the applicant (Insamcor), Stewarts & Lloyds (who was subsequently replaced by DLG in terms of a cession agreement entered into) and Saunders. In terms of this agreement DLG granted to Insamcor the right to use certain know-how to manufacture, assemble and sell certain products in South Africa. This agreement is referred to as “the 1985 agreement”.

[5]     

5.1      The 1985 agreement obliged DLG to, amongst others, provide certain technical know-how and assistance to Insamcor. In turn Insamcor undertook to pay royalties to DLG. The 1985 agreement also imposed a potential two year restraint of trade on Insamcor.

5.2     

DLG discontinued the conduct of its business during 1989, when its business was “divisionalised” into its parent company, the second respondent (Dorbyl). From that date on DLG was no longer in a position to comply with its obligations in terms of the 1985 agreement.

5.3      In terms of clause 28.2 of the 1985 agreement if “either party shall file a voluntary petition for insolvency, voluntarily surrender its business or any involuntary petition for insolvency or compulsory sequestration shall be filed against it and shall remain undischarged for a period in excess of 30 days, or it shall enter into a compromise with creditors generally, or it shall become insolvent or similarly lose control of its business involuntarily, or it shall be dissolved for any reason in accordance with the laws of the Republic of South Africa or England respectively, then the other party shall be entitled to terminate this Agreement, whether in whole or in part forthwith.”

5.4      DLG was deregistered on 19 March 1996.

[6]      During September 2001 Dorbyl sold the business previously conducted by DLG to a company called New Adventure Investments 262 (Pty) Ltd (which later changed its name to Dynamic Fluid Control (Pty) Ltd (DFC). The 1985 agreement was listed as an asset that was sold.

[7]      During January 2004 a further agreement was entered into between Dorbyl and DFC.

[8]
         8.1      This further agreement records that:

8.1.1   

DLG was a wholly owned subsidiary of Dorbyl;

8.1.2   

the business operations of DLG were divisionalised into Dorbyl during or about 1989 as part of a group restructure by Dorbyl;

8.1.3   

DLG was deregistered pursuant to that restructure;
8.1.4   

due to an oversight, the rights and obligations which pertained to the agreement were not transferred by DLG to Dorbyl;

8.1.5   

as part of the sale, DFC acquired all rights in terms of the agreement.

[9]      Insamcor was unaware of these events at the time they occurred and for a considerable period thereafter. Insamcor was also unaware of the ex parte application for restoration, which was launched on 30 January 2004. The applicant did not provide its consent to the cession and delegation of the 1985 agreement.

[10]     The ex parte order restoring the first respondent to the register was granted on 2 March 2004. This order was granted as a consequence of an application brought by Dorbyl. The 10 page affidavit in support of the application contained the following relevant allegations:

         10.1     Dorbyl was at all material times the sole shareholder of DLG.

10.2     The 1982 agreement referred to in 4.1 above was mentioned as was an agreement said to have been concluded in 1988 between Saunders and DLG in terms of which the license agreement which at that time vested in Stewarts and Lloyds was ceded and assigned to DLG.

10.3     DLG discontinued its operations in 1989 and Dorbyl thereafter carried on the business formerly carried on by DLG.

10.4     As a result of an oversight the rights and obligations which were held by DLG pursuant to the license agreement were not transferred to Dorbyl but remained vested with DLG.

10.5     Dorbyl wrongly believed the asset had been transferred to it and carried on its business as if it were the owner of all the rights and obligations under the license agreement.

10.6     In 1995 steps were taken to deregister DLG, this ultimately occurred in March 1996.

10.7     Dorbyl only became aware of the true position regarding the license agreement shortly before bringing the restoration application.

10.8     Dorbyl will become a 100% shareholder of DLG with retrospective effect.

[11]     On 31 August 2004 DLG instituted proceedings under case number 2004/19272 against Insamcor for, amongst others:

11.1     Payment of royalties in respect of the period October 2001 to June 2004. (It was deregistered for 29 months of this 33-month period);

         11.2     A restraint of trade interdict.

[12]     DLG was only able to institute these proceedings after its restoration. Insamcor only became aware of the fact of the application for restoration, as well as the preceding deregistration and divisionalisation of DLG, pursuant to the delivery of documents in terms of a request made in terms of Rule 35(12).

Insamcor’s case for setting aside the restoration order

[13]     It is Insamcor’s case that the restoration order was erroneously made and granted in its absence, as contemplated in Rule 42(1) of the Rules of this Court. It therefore falls to be set aside.

[14]     In argument before this Court Mr Puckrin, Insamcor’s counsel, submitted that there were three grounds on which the applicant relied for the relief claimed by it. These were:



(a)     

There was an irregularity in the proceedings in that Insamcor, although an essential party to the application for restoration, was not joined in that application.

(b)     

Dorbyl, the applicant in the restoration application, failed to disclose, and misrepresented, several material facts to the court. Had the relevant facts been properly and correctly disclosed, the presiding judge, would not have granted the restoration order.

(c)     

On the disclosed facts, the order made was not competent as no basis was laid in the founding papers for the relief contained in paragraph 5.3 of the order. (This paragraph is quoted in paragraph [3] above.)

[15]     At this stage it is convenient to deal separately with each of the grounds relied upon by the applicant.

The failure to join the applicant

[16]     In Henochsberg on the Companies Act, 5^th edition Volume 1 page 142, the learned authors make the point that in view of the effect of an order restoring registration, particularly in relation to other persons who may retrospectively obtain enforceable rights against, or become retrospectively bound by enforceable obligations to the company, it may, depending on the circumstances, be necessary for a rule nisi to be sought with directions for its publication. This view is supported by two High Court decisions, one in this division and one in the Transvaal Provincial Division.

[17]     In Ex parte Sengol Investments (Pty) Ltd 1982 (3) SA 218 (T) Van Dijkhorst J noted that, as the mineral rights which were in question in that case had become bona vacantia upon the deregistration of the company who held them, they were consequently held by the State. These rights revert to the company upon registration. Accordingly the position of the State is affected by the application for restoration, and it is an interested party to whom notice should have been given of the application to reregister.

[18]     At page 477D of the Sengol Investments case (supra) his lordship said:

“Likewise debtors and creditors of the company at time of deregistration may upon restoration find their obligations or rights resuscitated.”

His lordship made the point that it was not only the State who was an interested party, but there could also be other parties and they were to be alerted. At 477E-F the learned judge states:

“Although the applicant alleges that the company had no other assets than the mineral rights, and that it had no liabilities, the possibility does exist of the discovery of forgotten assets. That this is not illusory is evidenced by the cases where this fact necessitated an application like the present. It is, therefore, in my view, imperative that a rule nisi be issued calling upon all interested persons to show cause why the company’s registration should not be restored. This would cover the case of parties not known to the applicant to have an interest.”

[19]     The Sengol decision was followed by Goldstone J in Ex parte Jacobson: In re Alec Jacobson Holdings (Pty) Ltd 1984 (2) SA 372 (W).

[20]     A contrary view is expressed in the decision of Ex parte Varvarian: In re Constantia Pure Food Co (Pty) Ltd 1965 (4) SA 306 (W). In that case it was held at page 309D-H that there seems to be no reason why any party, be it as creditor, debtor or party in litigation pending, should have a right to intervene in an application for the restoration of a company to be reregistered, particularly where the restoration of the company would afford that company an opportunity which it would otherwise lose of proceeding with litigation against the intervening party. In Ex parte Varvarian De Vos J, at the passage mentioned above said:

“Now it seems to me that the provisions of this section could never have been envisaged by the lawgiver as affording a new additional remedy, either substantive or procedural, to persons standing in some legal relationship to the company, either as member, creditor or otherwise, where such remedy is not otherwise in law provided for, excepting only one circumscribed remedy, namely to ask in terms of section 199(7) for the restoration to the register of the company struck off by the registrar. If this right is exercised the worst that can happen to any party, or the best, according to the facts, would be the revival of a pre-existing relationship which may have been terminated by the action of the registrar in securing the removal from the register. The restoration then brings the company back into existence as if the registrar had never acted, and leaves all parties concerned thereafter to enforce such rights as they may have against the restored company.

There seems to be no reason why any party, albeit as creditor, debtor or party in litigation pending, should have a right to intervene in an application of this kind, particularly in the present circumstances, where the restoration of a company to the register would afford that company an opportunity which it would otherwise lose of proceeding with litigation against the intervening party.”

[21]     It should be mentioned that in neither the Sengol or In re Jacobson decision (supra) was the decision in Ex parte Varvarian referred to or mentioned. As is made plain in the passage from the Sengol case to which I have referred the statement of law by De Vos J in Varvarian appears to be of too wide an application for it to be accepted as a general rule. It may have been correct in the circumstances of that case, but to state a rule in the wide terms and language used in the Ex parte Varvarian case seems to me to be unjustified. Each case must be decided on its own facts.

[22]     In addition as the decisions in Sengol and In re Jacobson, having been the subject-matter of judgments subsequent to that of Varvarian, they overrule the latter case inasmuch as this is relevant. I am bound by these decisions and in my view they are clearly correct.

[23]     The Court of Appeal in England in Smith v White Knight Laundry Ltd [2001] EWCA Civ 660; (2001) 3 All ER 862 and in particular at 876 (paragraph [56]) also confirmed that justice required that in certain instances, a restoration direction be set aside to give companies affected thereby the opportunity of being heard.

[24]     I agree with Mr Puckrin that this issue must be decided on the established principle of law that the audi alteram partem rule must apply. A party whose rights are affected by an order of court and who has obligations imposed upon it by that order, has the right to be heard before such order is made.

[25]     As submitted by counsel, the applicant’s rights in this case were potentially affected in a material way by the order being granted. As is plain, the effect of a restoration order is that the dissolution of DLG became void at the time when the company was supposed to have been dissolved. Obligations, which had not existed prior to the restoration order, were deemed recreated by the restoration order and imposed upon Insamcor. These obligations are of a serious nature and the imposition thereof could, potentially, mean that Insamcor would be prevented from trading for a period of two years in terms of the restraint provision of the 1985 agreement, and that it would be held liable for the payment of royalty fees to DLG for a period during which the latter was not even in existence.

[26]     The principle that a party whose rights may be affected has a right to be present and to be heard, has been confirmed in a long line of cases. See Nelson Mandela Metropolitan Municipality and Others v Geyvenwouw CC and Others 2004 (2) SA 81 (SE) at 89B; Rosebank Mall (Pty) Ltd and Another v Cradock Heights (Pty) Ltd 2004 (2) SA 353 (W) and the cases cited therein.

In Pretoria Portland Cement Co Ltd and Another v Competition Commission and Others 2003 (2) SA 385 (SCA) at 403 Schutz JA stated as follows:

“Schlesinger v Schlesinger 1979 (4) SA 342 (W) was concerned with an attempt to oppose an order which had been granted ex parte. Le Roux J stated, correctly (at 347 in fine – 348A):

‘On principle, however, it seems to me that any party who shows a direct and substantial interest in the proceedings, and whose affidavit indicates that his opposition might contribute something to a just decision of the case, should not be deprived of an opportunity of being heard.’

One is concerned here with one of the fundamental principles of our law – audi alteram partem. A party’s right to a hearing cannot be lost merely because a Judge hearing an urgent application omitted to provide for a return day or to draw expressly to his attention the respondent’s right to resist relief obtained against him without his knowledge.”

[27]     Mr Puckrin also referred to sections 9(1) and 33(1) of the Constitution (Act 108 of 1996) which guarantees the right to equal protection and benefit of the law and just administrative action. He submitted, correctly in my view, that this aim cannot be achieved where a party whose rights are materially affected by a decision is not afforded a chance of being heard prior to such decision being granted. It has now been definitively established that a constitutional right is to be weighed equally with competing considerations. A two-stage approach is not to be followed. Instead, the protected constitutional right must properly be taken into account from the outset. Laugh It Off Promotions CC v South African Breweries International (Finance) B.v. t/a
International [2005] ZACC 7; 2005 (8) BCLR 743 (CC).

The failure to make full and proper disclosure

[28]     The normal rules in respect of ex parte applications apply to restoration applications. Ex parte Pillay & Sons Ltd 1951 (1) SA 229 (T) at 231. Nothing in section 73(6) detracts from the right to be heard, which is entrenched in the common law and in the Constitution. Although in the present case Dorbyl, as applicant, joined the Registrar of Companies and certain organs of state, it was brought ex parte Insamcor. Those respondents who were joined were not in a position to confirm, deny or supplement the allegations made by the second respondent. The party that could have done so, Insamcor, was not joined.

[29]     The position in respect of ex parte applications was cogently summarised by Nugent J in Ghomeshi-Bozorg v Yousefi 1998 (1) SA 692 (W) at 696D-E as follows:

“It must be borne in mind too that an order granted ex parte is by its nature provisional, irrespective of the form which it takes. Once it is contested and the matter is reconsidered by a court, the plaintiff is in no better position in other respects than he was when the order was first sought. (Banco de Mocambique v Inter-Science Research and Development Services (Pty) Ltd 1982 (3) SA 330 (T) at 332B-D) and there is no reason why he should be in a better position in this respect merely because the defendant was unaware that he was called upon to submit to the court’s jurisdiction for the purpose of an impending action.”

[30]     In the present case, the court should have been fully informed of all the facts relating to the company’s position at the date of deregistration and of the explanation for its occurrence. As was emphasised in National Director of Public Prosecutions v Basson 2002 (1) SA 419 (SCA) at para [21] utmost good faith must be observed. Failure to reveal material facts and information in an application where such facts might have influenced the court in arriving at a decision to grant relief, would in itself be sufficient to warrant a dismissal and setting aside of the order complained of. Schlesinger v Schlesinger (supra) at 345F-H.

[31]     The enquiry falls into two parts, namely whether material facts were undisclosed and, secondly, whether a court should exercise its discretion in a particular case to set aside the order granted, in the present case, the restoration order.

[32]     Counsel submitted that what constitutes a material non-disclosure in order to enable me to exercise a discretion whether to set aside the order or not requires me to have regard to the following:


(a)     

The extent to which the rule has been breached;
(b)      The reasons for non-disclosure;
(c)      The extent to which the court may have been influenced by proper disclosure in the application;
(d)      The consequences from the point of doing justice between the parties of denying relief in the application for the order;
(e)      The interests of innocent third parties.

See: Jewel Net CC t/a Platinum International/Shimansky Collection v Arthur Kaplan (Pty) Ltd t/a Arthur Kaplan Jewellers 2002 BIP 194 (W) at para [67] pages 195-196.

[33]     In considering the various factors to which reference is made in the above paragraph one must take into account what was said in Schlesinger v Schlesinger (supra) at 350B-C, namely:

“It appears to me that unless there are very cogent practical reasons why an order should not be rescinded, the Court will always frown on an order obtained ex parte on incomplete information and will set it aside even if relief could be obtained on a subsequent application by the same applicant.”

[34]     An analysis of the factual position as at the time of the restoration application as it appears from the unchallenged facts in the applicant’s affidavit demonstrates the following:

34.1     From the date of the cession (which appears to have been around September 1988) the rights and obligations in terms of the 1985 agreement vested in DLG. It subsequently manufactured and sold various models of Saunders diaphragm valves.

34.2     During 1989 the business of DLG was transferred to Dorbyl and that business was conducted as a division of Dorbyl, as opposed to a business conducted by a separate legal persona. In this process of rationalisation the assets and liabilities of DLG were transferred to Dorbyl.

34.3     From that date accordingly, DLG did not perform its obligations towards Insamcor in terms of the 1985 agreement. It could not have done so, as it was an empty shell, stripped of all its assets and functioning capacity.

34.4     Dorbyl claims in the restoration application that the agreement was not transferred to it, a fact that it apparently overlooked at the time.

34.5     Dorbyl claims in the restoration application that it “is trading with rights which it believed were transferred to it and was performing obligations it believed it was obliged to perform pursuant to the licence agreement, whilst such rights and obligations do not vest in it”.

34.6     Dorbyl then goes on to state that the aforesaid position only recently came to its notice and that it needs to regularise the position “so as to enable it to carry on its current use of the licence lawfully”. It stated further that:

“It is imperative for the applicant to regularise its legal position and ensure that the obligations in terms of the licence agreement in the interests of all parties remain enforceable at its, the applicant’s (Dorbyl’s), behest.”

34.7     Dorbyl disposed of the former business of DLG to DFC during September 2001.
34.8     Accordingly, when it alleged in the restoration application of 2004 that it had been conducting that business and performing the obligations thereunder, it could not have been truthful. That which enabled performance under the 1985 agreement had been transferred to DFC by that time.

34.9     The fact of the sale to DFC was not disclosed to the court in the restoration application.

34.10    The sale of shares and loan account agreement between Dorbyl and DFC records that, as from the sale date, DFC had “beneficially enjoyed all the rights … relating to the licence agreements from the sale date”.

34.11    Dorbyl disclosed only the existence of the 1982 licence agreement to the court hearing the restoration application. This was the agreement in terms of which Saunders granted a licence to Stewarts and Lloyds to manufacture and sell in South Africa certain valves as identified in that agreement. Subsequently, as stated above, Stewarts and Lloyds ceded and assigned its rights and obligations arising from the 1982 agreement to DLG.

34.12    Dorbyl did not disclose to the court the existence of the 1985 agreement between Saunders, Stewarts and Lloyds and Insamcor. Indeed Dorbyl in its answering affidavit in the present application claims that the court hearing the restoration application “was informed that the respondent [Insamcor] was also a party to the agreement referred to in paragraph 5.3 of the Notice of Motion and a draft order was handed up to replace the Notice of Motion”. If this was done it was done viva voce and was not supported by the affidavits before the court at that time.

34.13    The agreement referred to in paragraph 5.3 of the Notice of Motion is not the 1982 agreement. Insamcor was not a party to the 1982 agreement and the information given to the court was on Dorbyl’s own admission, wrong.

34.14    Had the 1985 agreement been placed before the court hearing the restoration application, it would have been in a position to assess the obligations that would be re-imposed on Insamcor by the restoration of DLG to the register. The court a quo would have been in a position to take notice of the fact that payment of royalties and the imposition of a restraint of trade would be in issue. It would have been in a position to assess whether it would be just to cause the re-imposition of such obligations in circumstances where DLG had not traded for fifteen years and had been deregistered for eight of those fifteen years.

34.15    The court in the restoration application would have been aware that the company was at the time of its deregistration neither “carrying on business” or “in operation” as required in section 73(6) of the Act.

34.16    It seems clear therefore, that certain important relevant facts were not disclosed to the court a quo.

[35]     It seems plain that Dorbyl misled the court by alleging that at the time of the restoration application it was performing obligations it was obliged to perform pursuant to the licence agreement. No mention is made of the sale of this business to DFC. In effect Dorbyl, is seeking to regularise the position so as to enable it to “carry on its current use of the licence lawfully” when at the time of the application there was no current use by it and the licence had been sold two years previously.

The order was incorrectly granted

[36]     Paragraph 5.3 of the court order in the restoration application is not supported by any evidence in the founding papers before the court. No mention is made in the founding affidavit of the 1985 tripartite agreement between Saunders, Stewarts & Lloyds and Insamcor. Yet the order refers to that agreement. It follows that the court did not have the opportunity of considering the tripartite agreement or the effect of its order on Insamcor.
[37]     It seems to me therefore clear, that the order was erroneously made. Had all the facts been placed before the learned judge, the order would no doubt have been different.

Was it “just” to restore the company?

[38]     As was submitted by counsel for the respondents the effect of the restoration order is not a declaration as to the validity or enforceability of the licence agreement. However, in my view this is not relevant. The effect of paragraph 5.3 of the order is that the court declared a situation to exist which in fact did not exist. There was no justification for this order, nor in my view, for the reasons already stated, for DLG to be restored at the time the application was made.

The royalty application

[39]     Counsel informed me that Meyer AJ in a separate application found that Insamcor is liable to make payments of royalties to DLG and furthermore granted certain ancillary relief based on the 1985 agreement. Counsel were agreed that although Insamcor’s locus standi was an issue in that case the issue of the restoration order and whether it should be set aside or not was not fully considered by the learned judge. It was therefore agreed by counsel that the present application should be heard.


Conclusion

[40]     In my view it is plain that the order restoring DLG to the register should not have been granted. There will therefore be an order in the following terms:

1.       The order of court of 2 March 2004 under case number 2004/1868 restoring the first applicant to the register in terms of section 73(6) of Act 51 of 1973 is set aside.

2.       The second respondent is ordered to pay the applicant’s costs, such costs are to include the costs of two counsel.

                                                      ________________________

                                                               P BLIEDEN
                                                      JUDGE OF THE HIGH COURT


COUNSEL FOR APPLICANT             ADV C E PUCKRIN SC
                                                      ADV R M ROBINSON

INSTRUCTED BY                               D M KISCH INC

COUNSEL FOR RESPONDENTS  ADV P J VAN BLERK SC

INSTRUCTED BY                               MARTINI-PATLANSKY

DATE OF HEARING

DATE OF JUDGMENT : 18^th April 2006