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IN THE KWAZULU-NATAL HIGH COURT, DURBAN

REPUBLIC OF SOUTH AFRICA

CASE NO. 4431/2009

In the matter between:

GUNGADHAR BUGWANDIN APPLICANT

and

PURE PERFORMANCE PROPERTIES (PTY) LIMITED RESPONDENT

J U D G M E N T

Delivered on 10^th March 2010

WALLIS J

[1] The applicant and his three brothers, Sewcoomar Bugwandin, Rabindranath Bugwandin and Lallaram Bugwandin (referred to in the affidavits as SB, RB and LB respectively) are the shareholders in equal shares of the respondent, Pure Properties (Pty) Limited. There has been a breakdown in the relationship between the brothers. The applicant is no longer a director of the respondent and his shares in other businesses previously held by the four brothers in equal shares, have been sold and transferred to the other three. The respondent is a property owning company and all the brothers agree that it is desirable to dispose of the property. However, they have been unable to agree on the way in which to bring this about. In an endeavour to bring matters to a head the applicant has brought the present application for the winding up of the company in terms of s344(h) of the Companies Act, 61 of 1973, on the grounds that such a winding up would be just and equitable. The company opposes the application at the instance of the other three brothers. The background to the application is the following.

[2] The property owned by the respondent was purchased in July 1997 for a price of R428 557,00 including VAT. It appears that no attempt was made to develop the property, which Rabindranath Bugwandin says was purchased for strategic reasons, and it has for some time been occupied by one Praven Bugwandin at a relatively nominal rental, for the purposes of operating his own business. Praven Bugwandin is Lallaram Bugwandin’s son. Apparently, over the years Praven Bugwandin made endeavours to purchase the property but these were not pursued. From about 2004 or 2005 the present unfortunate differences that exist between the brothers came to a head and the process of separating their business interests began. This was successfully achieved with certain other businesses but not as yet with the respondent.

[3] In July 2007 an offer to purchase the property at a price of R425 000,00 was made to the respondent jointly by the Ruben Bugwandin Family Trust and LB Bugwandin (Pty) Limited. The representatives of these entities are Rabindranath Bugwandin and Praven Bugwandin respectively. This offer was debated at a meeting of shareholders held on 17 July 2007. At some stage during the meeting the applicant presented to the meeting a document offering to purchase the property for R525 000,00 but otherwise on the same terms and conditions as the offer under discussion. He claims that no decision was taken at the meeting. His brothers say that a decision was taken that the original purchasers be given an opportunity to review their offer and if they would raise the price to R525 000 they would be entitled to acquire the property at that price.

[4] It is unnecessary to resolve this dispute as the course of events thereafter is not disputed. On the 10^th August 2007 a memorandum of agreement of purchase and sale in respect of the property at a price of R525 000,00 was executed between Northern Spark Trading 446 (Pty) Limited and the respondent. Northern Spark was a company nominated by Rabindranath Bugwandin and Praven Bugwandin in place of the previous offerors. After the elapse of some time and at a point when transfer of the property was imminent litigation commenced. A rule nisi restraining the respondent from proceeding with the transfer of the property was issued on the 5^th May 2008 and confirmed on the 27^th February 2009 subject to the condition that the present proceedings be launched.

[5] In his founding affidavit the applicant makes the following allegations. He says that the relationship between himself and his brothers has broken down and he is now excluded from the management of the business. He claims that this breakdown is characterised by a considerable degree of animosity towards him. A key allegation is in paragraph 13 of the founding affidavit which reads:-

“I maintain that my brothers, in their capacity as members and Directors of the Respondent, are attempting to sell the property well below its market related value in order to prejudice my financial interests. Put simply - my brothers are stripping the Respondent of its principal asset to my financial detriment and their financial benefit.”

The applicant continues to say that it is impossible for him and his brothers to continue as members of the respondent and that endeavours to resolve their disputes have come to nought. On the basis of a valuation annexed to his affidavit in the earlier proceedings, and a further valuation annexed to his replying affidavit in these proceedings, he alleges that a sale of the property for R525 000,00 would be a sale at a considerable undervalue. Such a sale would he says be contrary to the fiduciary obligations of his brothers as the current directors of the respondent and he is uncertain to what extent that price would be diluted by the need to discharge the debts of the company.

[6] Against this background paragraphs 27 to 29 of the founding affidavit set out the applicant’s case. They read as follows:-

“27. I understand that it was intimated during argument, and again after Judgment was handed down on the 27^th February 2009, that the Respondent’s remaining members (who are also Directors) would simply convene a meeting under Section 228 of the Act and pass a Special Resolution to sell to Northern Spark, alternatively ratify the purported Sale to it (as they hold 75% of the Respondent’s membership. To date, I have not received any notice from the Directors or remaining members of the Respondent to convene any meeting under Section 228 of the Act.

28. In any event I submit that the remaining members of the Respondent cannot adopt any Special Resolution under Section 228 of the Act for the simple reason that I (holding a 25% membership in the Respondent) will not vote in favour of any resolution to sell to Northern Spark, alternatively to ratify the purported sale to it, and RB (equally holding a 25% membership in the Respondent) is, I am advised, disqualified from voting in favour thereof as he has an interest in the purported sale, being a member and Director of Northern Spark. To this end I respectfully draw this Honourable Court’s attention to the fact that there was no mention in RB’s answering affidavits (annexure “B” hereto) that he had ever complied with Sections 234 and 235 of the Act in declaring his interest in the purported sale to Northern Spark.

29. In the premises I submit that it is clear that my brothers and I (the members of the Respondent) have reached a deadlock in the affairs of the Respondent. We cannot agree on how to sell the property or on how the membership of the Respondent can be disposed of. During our settlement negotiations we had debated purchasing the membership interest of the other but I will not agree to the valuation SB, LB and RB place on my membership (were they to purchase it) and equally they will not agree on the valuation I place on their membership (were I to purchase it).”

[7] In summary therefore the applicant’s case for a winding up of the respondent is based on the proposition that there is a deadlock in the company in regard to the disposal of its principal asset in circumstances where all the shareholders are agreed that it is desirable that it should dispose of that asset. He submits that the only way out of this alleged impasse is by way of a winding up of the company. That will result in the sale of the immovable property by a liquidator and the distribution of the net proceeds accruing from the sale, after discharging the company’s liabilities and the costs of liquidation, in equal shares to the shareholders.

[8] The response by the respondent is that the contention that there is a deadlock in its affairs in regard to the disposal of the property is fundamentally flawed. It is based, as the above passages from the founding affidavit demonstrate, on the proposition that, because of his interest in Northern Spark, Rabindranath Bugwandin may not vote at a meeting of shareholders in favour of a resolution in terms of s 228 of the Companies Act to sell the property to Northern Spark. The respondent submits that this is incorrect and flows from the misconception that constraints that operate upon Rabindranath Bugwandin insofar as his directorship of the company is concerned also apply when, in his capacity as a shareholder, he exercises a vote at a general meeting of shareholders on a resolution under s 228 of the Companies Act. On the basis that the underlying contention is incorrect, it is said that there is no deadlock as all four shareholders are able to vote at a shareholders’ meeting on a resolution under s 228 and if three brothers vote in favour of a sale and only the applicant against the resolution will be carried with the requisite majority.

[9] Whilst it was submitted in the heads of argument on behalf of the applicant that Rabindranath Bugwandin “is by virtue of his fiduciary position as director of the respondent precluded from voting for any section 228 Resolution in which he would benefit personally, either directly or indirectly, any sale of the property involving him cannot be validly concluded …” this was not pursued with any degree of conviction in the course of oral argument. Mr. Stewart accepted that the constraints imposed by sections 234 and 235 of the Companies Act on directors voting in meetings of directors on contracts in which they have interests, do not apply to a shareholder voting at a shareholders’ meeting on a resolution in terms of section 228. That is unquestionably correct. When matters are considered at a meeting of shareholders and fall to be put to the vote shareholders are generally entitled to vote in such manner as will advance their own interests even if in so doing, they adversely affect the rights of other shareholders.¹ It is only where it can be shown that the result is inequitable or oppressive to other shareholders that they can legitimately complain.² One can readily think of transactions involving public companies involving the disposal of the business of the company to another entity in which the principal shareholder of the first company has a substantial or controlling interest, where that shareholder’s votes have determined the outcome of the transaction.

[10] Once it is accepted that Rabindranath Bugwandin is entitled to vote at a shareholders’ meeting in favour of a resolution in terms of section 228 of the Companies Act it follows that it is possible for such a resolution to be passed and for the company validly to dispose of its principal asset. (There is a suggestion in an answering affidavit that such a meeting has already been held and such a resolution has been passed, but as the applicant disavows any knowledge of such a meeting and its validity may be in issue I refrain from any further comment on that possibility). On that basis the respondent is correct in saying that there is no deadlock as alleged by the applicant. That is not to say that if Mr Bugwandin does vote in favour of such a resolution that his interests cannot be taken into account if the validity of such a resolution is challenged in due course. Whether it would be relevant to such a challenge depends upon the basis for any such challenge. All that needs to be said at present is that the contention that there is a deadlock in the affairs of the company insofar as the disposal of the property is concerned is unsound.

[11] Recognising the difficulties with the contention advanced in the application papers, Mr. Stewart, who appeared for the applicant, advanced his primary argument on the basis of the principle that the winding up of a company, the shareholders of whom are closely related but are no longer able to co-operate with one another, may be just and equitable on the basis of an analogy with partnership. This is a situation that, according to Trollip J (as he then was):-

“… is strictly confined to those small … companies in which, because of some arrangement, express, tacit or implied, there exists between the members in regard to the company’s affairs a particular personal relationship of confidence and trust similar to that existing between partners…Usually that relationship is such that it requires the members to act reasonably and honestly towards one another and with friendly co-operation in running the company’s affairs. If by conduct that is either wrongful or as not as contemplated by the arrangement, one or more of the members destroys that relationship, the other member or members are entitled to claim that it is just and equitable that the company should be wound up in the same way as, if they were partners, they could claim dissolution of the partnership…”³

Mr Stewart contended that in view of the fact that the present company is one in which the shares are held by four brothers who, on the papers, clearly linked their business interests together, the respondent company falls in the category referred to by Trollip J and the breakdown of relationships over the sale of the immovable property provides a justification for the winding up of the company on the basis that this is just and equitable.

[12] The first problem with this submission is that it is unsupported by anything in the founding affidavit and as a result it has not been dealt with in the answer on behalf of the company. Had it been pertinently suggested that the company was established on this basis and that because of the breakdown in the relationship it is no longer possible to continue, one can readily conceive of many matters that might have been canvassed in far greater detail in the opposing affidavits. For example it could have been said that while other businesses involving mutual interaction and co-operation were established and conducted on such a footing, this particular company, which is purely a vehicle for the ownership of property, was not so conducted. Alternatively the circumstances of the breakdown might then have become relevant to a proper consideration of the application. It is unnecessary to go further. The application was not brought on that basis and it cannot now be pursued on that basis when the foundation for the original contention of deadlock has fallen away.

[13] There is in my view a further insuperable obstacle to the applicant’s claim when it is advanced on this basis. Once the initial contention is shown to be fallacious the Court is faced with the situation where it is possible that a resolution under s 228 has been put or will be put to a general meeting of shareholders and may be pursued by way of the conclusion of a sale of the property. If there has been such a resolution there is no information before me in regard to the circumstances in which it was taken. If taken without notice to the applicant its validity will no doubt be challenged. Such a sale will relate to an agreement of purchase and sale of the property at a price of which the Court is unaware and against a background of which the Court knows nothing. If no such resolution has yet been taken then one can only be taken at a future stage in circumstances that are wholly uncertain. This is important for the reasons set out in the next paragraph.

[14] Both valuers agree on the comparable sale that should form the basis of their valuations of the respondent’s property. However it appears from the report by Mr. Roper annexed to the replying affidavit, when taken in conjunction with the information obtained from a Windeed search, that Mr. Pardey, in his report to the respondent, has used an erroneous area for the property and consequently an erroneous value per square metre. If that is so that is a fact which will have to be taken into account by the shareholders if and when they meet to discuss the sale of the property. It may have to be taken into account by a Court in due course if any subsequent sale is challenged on the basis that the price is inequitable. The state of the property market at the time of any sale will have to be considered to determine whether the sale is at a fair price. None of this is dealt with fully in the papers and insofar as it relates to events that have not yet occurred it is speculative.

[15] I mention all these matters because it seems to me that the allegation that the sale will be inequitable is in the light of these circumstances speculative at this stage. The valuers have adopted markedly different approaches. These are matters that the parties will need to consider in deciding their future conduct. It may result in the three brothers reviewing any decision, whether firm or tentative, that they have made at this stage to support a sale to Northern Spark at a price of R525 000. They may think it sensible to explore the market further to test the strength of the different valuations before proceeding to a sale of the property. That may either show that a sale at this price is defensible or that it is indeed, as the applicant fears, a sale at an undervalue. Whether this will be done and what the outcome will be I cannot foretell. It does, however, indicate that to make any decision at this stage on the question of a sale would be premature.

[16] It follows that in my view the present application, when considered on the basis urged by Mr Stewart in argument is premature. The court is not in a position to assess whether any sale to Northern Spark would work an inequity on the applicant of such a nature that he would have a legitimate cause to complain of such a sale. It was argued that in those circumstances it would be appropriate to refer the application for the hearing of oral evidence but I do not think that this is the correct course to adopt. It is better that clarity be reached on whether a sale is to take place, who the buyer will be and the terms of such sale as well as the basis upon which it is claimed that the sale is inequitable and directed, as suggested in the founding affidavit, at stripping the value out of the company to the prejudice of the applicant. Those issues should be properly identified before they can be made the subject of a reference to oral evidence. I am accordingly not prepared to exercise my discretion in favour of a reference to oral evidence.

[17] For those reasons the application cannot succeed and it is dismissed with costs.

______________________

DATE OF HEARING 5 MARCH 2010

DATE OF JUDGMENT 10^th MARCH 2010.

APPLICANT’S COUNSEL MR M.E. STEWART

APPLICANT’S ATTORNEYS MAHARAJ ATTORNEYS

RESPONDENT’S COUNSEL MR G.M. HARRISON

RESPONDENT’S ATTORNEYS HENWOOD BRITTER AND CANEY

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