Brief Summary

Company Law — Shareholding — Validity of breach notices — Applicants sought to restore shareholding in Verifika after cession to Enforced Investments — Dispute arose over the validity of breach notices sent by Enforced, claiming default under loan agreement — Applicants contended notices were defective for failing to specify a payment period and consequences of non-compliance — Court held that breach notices did not comply with lex commissoria of the loan agreement, rendering the cession and subsequent actions invalid, thus restoring shareholding to the applicants.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were applications on the return dates of two sets of urgent interim orders granted in the Gauteng Local Division, Johannesburg on 11 March 2020 and 10 July 2020. The central relief sought on the return date was final relief setting aside the enforcement of a contractual cession of shares (given as security), restoring the entire shareholding in the applicant company to the second applicant, and undoing corporate steps taken after the cession was implemented. The matter also included a counterapplication for mandatory and interdictory relief, and a conditional application for the winding-up of the first applicant.

In both matters the applicants were Verifika Incorporated (Pty) Ltd (Verifika) and Mr Bernard John Laferla. The respondents differed slightly across the two case numbers but, for present purposes, the dispute was primarily between the applicants and Enforced Investments (Pty) Ltd (Enforced), Ms Fatima Pereira Torres (Torres), and a director of Enforced, Mr John Robert Woodnutt (Woodnutt). The Independent Regulatory Board for Auditors, the Companies and Intellectual Property Commission, and (in one matter) the South African Revenue Service were cited but played no substantive role in the determination.

The general subject-matter of the dispute concerned whether Enforced was contractually entitled to call up security under a loan agreement and effect a forfeiture/transfer of shares following alleged payment defaults, and whether the various corporate actions taken after the share transfer (including changes to directors and a voluntary winding-up resolution) were lawful. The court treated the validity of Enforced’s breach notices under the loan agreement’s lex commissoria as decisive, because the parties accepted that if the breach notices were invalid then the cession and the subsequent steps taken pursuant to it would have to be set aside, and the counter-relief and winding-up relief would fail.

Material Facts

Verifika’s shareholding history was largely common cause. Ms Torres was initially the sole shareholder of Verifika. On 18 March 2016 she sold 50% of her shareholding to Mr Laferla, who became a director, while Ms Torres resigned as director but remained a signatory on Verifika’s bank account. On 6 June 2019 Ms Torres sold her remaining 50% to Mr Laferla for R2 million, against which he paid a R100 000 deposit.

On the same date, 6 June 2019, Mr Laferla, Verifika, and Enforced concluded a loan and repayment agreement in terms of which Enforced advanced R1.9 million to Verifika. As security, Mr Laferla ceded his shareholding in Verifika to Enforced and provided signed, undated share transfer forms, the relevant share certificates, and an undated resignation as a director. The agreement provided for repayment of the principal and monthly interest, with principal reductions scheduled over three years. The agreement did not fix an exact calendar date for the monthly interest instalments, nor a fixed interest amount, as the interest rate fluctuated (prime overdraft plus 1%).

By August 2019, Enforced asserted that Mr Laferla (and/or Verifika, as borrower) was in breach due to interest arrears. Enforced sent three written communications characterised as breach notices (dated 8 August 2019, 18 October 2019, and an email dated 24 January 2020) and contended that these triggered an event of default under clause 11.1.1 of the loan agreement, entitling Enforced under clause 11.2 to accelerate the debt and call up the security.

On 28 January 2020, Enforced caused the entire Verifika shareholding (previously ceded as security) to be transferred to Ms Torres as Enforced’s nominee, using the signed transfer forms held as security. On the same date, a shareholders’ meeting was held at which Ms Torres was appointed a director of Verifika. On 31 January 2020, Enforced issued a letter of demand claiming accelerated outstanding capital and interest in the amount of R2 059 666, which was received by Ms Torres.

On 24 February 2020, Mr Laferla paid the arrear interest. It was not disputed that interest had been in arrears at the time the breach notices were sent; however, it was also not disputed that there were no present arrears at the time of the return date proceedings and that subsequent amounts had been paid.

While the first urgent application was pending, further corporate steps occurred. On 9 March 2020, Mr Laferla was removed as a director at a shareholders’ meeting. On 10 March 2020, Mr Woodnutt was appointed as a director of Verifika. On 11 March 2020, Ms Torres signed a special resolution for the voluntary winding-up of Verifika on the basis of insolvency.

There were disputes about service and receipt of the breach notices. The court accepted Woodnutt’s version that the 8 August 2019 letter was delivered by hand at Verifika’s chosen domicilium address (left with the receptionist), despite Mr Laferla’s denial of receipt and despite his being overseas at the time. In respect of the 18 October 2019 letter, the court held that delivery at the chosen domicilium in the manner required by the agreement was not established on the papers. In relation to the 24 January 2020 email, it was common cause that Mr Laferla actually received it (he responded later the same day), bringing it within the “actually received” clause of the notice provisions, even though the contract’s email field was left blank.

Legal Issues

The central legal question was whether Enforced validly invoked the loan agreement’s lex commissoria (clause 11), specifically whether Verifika’s failure to pay interest “strictly on due date” coupled with a “failure to remedy such default within three business days of written demand” occurred on the strength of the breach notices relied upon by Enforced. This required determination of whether the breach notices (i) complied in content with what clause 11.1.1 required to trigger an event of default and (ii) were delivered in accordance with the notice and domicilium provisions (clause 22).

A substantial interpretive dispute arose about whether a breach notice under clause 11.1.1 had to state the three-business-day period expressly, or whether it was sufficient that three business days elapsed after demand without remedy. That dispute was principally one of contractual interpretation (a question of law), informed by authority on similarly worded clauses.

Beyond the time-period question, the court had to decide whether the breach notices were sufficiently clear and unequivocal in setting out the breach and the consequences of non-remedy, because strict compliance with a lex commissoria is required. This involved the application of legal principles to the specific contents of the notices (a mixed question of law and fact).

If the breach notices were invalid, the court had to determine the consequences for the validity of Enforced’s enforcement of the share cession and for the validity of subsequent corporate acts (director appointments, removal, winding-up resolution, and related steps). The parties accepted that this outcome would also determine the counterapplication and the conditional winding-up application.

A further legal issue was whether Enforced could, after enforcing the security mechanism, rely on an alleged repudiation by Mr Laferla as an alternative foundation for relief, given principles of election between inconsistent remedies.

Finally, in relation to the conditional winding-up application, the court had to decide whether the application was fatally defective for non-compliance with section 346(3) of the Companies Act 61 of 1973, which requires a certificate of security.

Court’s Reasoning

The court approached the matter on the basis that the applicants sought final relief on motion and that the Plascon-Evans rule applied to factual disputes. The judgment emphasised that clause 11 created a lex commissoria, and that such clauses must be strictly complied with, including compliance with contractual requirements for delivery of notices at a chosen domicilium.

Interpretation of clause 11.1.1 and whether the notice had to state “three business days”

On the specific interpretive dispute about whether the written demand had to specify the contractual remedial period, the court considered authority from the division and full court decisions dealing with similarly worded clauses. Those authorities supported the view that where a clause provides that default becomes actionable if the breach is not remedied within a stated period “after written demand”, the clause does not necessarily require the notice to repeat the period; it is sufficient that the debtor remains in breach after the period has elapsed. The judgment treated this line of authority as binding and preferred it over the applicants’ submission that the three-day period had to be explicitly set out in the breach notice.

The court therefore concluded that the breach notices were not invalid merely because they did not provide, or correctly provide, the “three business days” period on their face.

Requirements of strict compliance, clarity, and consequences

The court then focused on what clause 11, properly construed, still required for a valid demand capable of triggering an event of default. It reiterated that strict compliance is required when invoking a lex commissoria, and that the content of a breach notice must be clear and unequivocal. Drawing on authority about demands placing a debtor in mora and the function of default notices, the court reasoned that the recipient must be informed not only of what is required to remedy the breach, but also of the consequences if the breach is not remedied.

Although clause 11.1.1 did not expressly require the notice to set out consequences, the court’s interpretive conclusion was that, in context, a failure to state the consequences of non-remedy would render the notice defective. In the court’s analysis, where the creditor intends to exercise a significant contractual remedy (here, acceleration and calling up of security culminating in forfeiture/transfer of shareholding), the notice must communicate that intention in unequivocal terms, so that the debtor is not left to infer the next step.

Delivery and domicilium

On delivery, the court accepted that the contractual domicilium clause altered the evidential burden: Enforced did not need to prove actual receipt if it proved service in the manner required by the agreement. The court referred to authority explaining that delivery at a domicilium contemplates hand delivery by an appropriate method that would ordinarily bring the notice to the addressee’s attention, including leaving it with a responsible employee, pushing it under a door, or placing it in a mailbox.

The court also considered clause 22.4, which provided that a written notice or communication actually received by a party (including by facsimile) would be adequate notice, even if it did not comply with other formalities.

Application to the three breach notices

In relation to the 8 August 2019 letter, the court found that service at the domicilium address was established on the evidence (including the attendance register and Woodnutt’s direct evidence of delivery to the receptionist). The fact that Mr Laferla was overseas and denied personal receipt did not displace the conclusion that service occurred in accordance with the domicilium clause. However, despite proper delivery, the court held that the letter did not comply with the lex commissoria because it failed to set out the consequences if the breach was not remedied and did not unequivocally and unconditionally communicate Enforced’s intended next step upon non-payment. The letter therefore did not validly trigger an event of default.

Regarding the 18 October 2019 letter, the court reached the opposite conclusion on content but not on service. It held that the letter, on its terms, did forewarn of consequences and thus complied substantively with what clause 11 required. Nonetheless, on the papers the court found that Enforced did not establish delivery at the domicilium as contemplated by clause 22. The evidence about an envelope and an alleged signatory did not, in the court’s view, prove the required contractual delivery. Consequently, the second breach notice was defective due to improper delivery.

As to the 24 January 2020 email, the court accepted that Mr Laferla actually received it and that clause 22.4 therefore addressed the method-of-service objection, notwithstanding that the agreement left the email address field blank. However, the court held that the email suffered from the same substantive defect as the first notice: it did not unequivocally and unconditionally advise of the consequences if the alleged breach was not rectified. For that reason it was not a valid breach notice capable of triggering an event of default.

Having found that none of the three breach notices validly triggered an event of default under clause 11.1.1, the court concluded that clause 11.2 was not activated, Enforced was not entitled to call up the security, and the cession/transfer of Mr Laferla’s shareholding effected on 28 January 2020 was invalid. It followed (as the parties accepted) that all subsequent steps predicated on the cession fell to be set aside, and the interim relief previously granted had to be confirmed.

Election and repudiation

The respondents attempted to rely in reply on an alleged repudiation by Mr Laferla. The court held that Enforced’s conduct—specifically, calling up security and effecting the cession—amounted to an unequivocal election to pursue a particular contractual remedy consistent with enforcement, not cancellation. In the court’s view, Enforced could not “blow hot and cold” by relying on inconsistent remedies, and it could not use repudiation as a fallback in circumstances where it had already acted on a chosen remedy and had not notified any intention to cancel. The attempt to shift to repudiation therefore failed.

Conditional winding-up application and statutory defect

The conditional winding-up application in case number 14799/2020 was expressly dependent on the applicants succeeding. In any event, the court held it was fatally defective because the applicants in that winding-up proceeding had not filed a certificate of security as required by section 346(3) of the Companies Act 61 of 1973. The court dismissed the winding-up application on that basis alone, without reaching its merits.

Costs

The court applied the ordinary principle that costs follow the result and found no reason to depart from it. The parties accepted that the employment of two counsel was justified. The court declined to make a special costs order in relation to two postponed dates (4 May 2020 and 18 May 2020), despite criticism that the applicants did not comply with relevant practice directives for enrolment; the court considered that it should have been apparent the matter would not proceed on those dates and that it was unclear whether fees for those dates would be allowed on taxation.

Outcome and Relief

The court set aside the respondents’ taking possession of and dealing with Mr Laferla’s shareholding in Verifika, and ordered that his entire shareholding be restored. It also set aside the voluntary winding-up resolution and associated corporate steps taken after the invalid cession, including setting aside Ms Torres’s appointment as a director, directing the Companies and Intellectual Property Commission to reinstate Verifika’s enterprise status to “in business”, and interdicting the respondents from interfering with or altering Verifika’s status.

Both counterapplications were dismissed, and the respondents were ordered to pay costs jointly and severally, including the costs of two counsel where employed. The conditional winding-up application was dismissed, including because of non-compliance with section 346(3) of the Companies Act 61 of 1973.

Cases Cited

Plascon Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A).

SA Wimpy (Pty) Ltd v Tsouras 1977 (4) SA 244 (W).

Tangney and others v Zive’s Trustee 1961 (1) 449 (W).

Chesterfield Investments (Pty) Ltd v Venter 1972 (3) SA 777 (T).

Lench and Another v Cohen and Another 2006 (1) SA 99 (W).

Cohen and Another v Lench and Another 2007 (6) SA 132 (SCA).

Hodgkinson v K2011104122 (Pty) Ltd (10019/2013) ZAWCHC22; [2019] 2 All SA 754 (WCC) (5 March 2019).

De Wet NO v Uys NO 1998 (4) SA 694 (T).

North Vaal Mineral Co Ltd v Lovasz 1961 (3) SA 604 (T).

Rautenbach v Venner 1928 TPD 26.

Klingbiel v Olawagen (23891/2015) [2016] ZAGPJHC 145 (16 March 2016).

Maltz v Mererthal 1920 TPD 338.

Sebola and Another v Standard Bank of South Africa Ltd and Another 2012 (5) SA 142 (CC).

Ponisammy and Another v Versailles Estates (Pty) Ltd [1973] 1 All SA 540 (A).

GPC Developments CC and Others v Uys (A71/2017) [2017] ZAWCHC 80; [2017] 4 All SA 14 (WCC) (15 August 2017).

Bekker v Schmidt Bou-Ontwikkelings CC 2007 (1) SA 600 (C).

Standard Bank of South Africa Ltd v Hand 2012 (3) SA 319 (Gauteng South High Court).

Hano Trading CC v JR 209 Investments (Pty) Ltd 2013 (1) SA 161 (SCA).

Godbold v Tomson 1970 (1) SA 61 (D).

Nel v Cloete 1972 (2) SA 150 (A).

Baines Motors v Piek 1955 (1) SA 534 (A).

Dexgroup (Pty) Ltd v Trustco Group International (Pty) Ltd [2014] 1 All SA 375 (SCA).

Betterbridge (Pty) Ltd v Masilo and Others NNO 2015 (2) SA 396 (GNP).

Muller v Mulbarton Gardens (Pty) Ltd 1972 (1) SA 328 (W).

Loryan (Pty) Ltd v Solarsh Tea and Coffee (Pty) Ltd 1884 (3) SA 834 (W).

Bekazaku Properties (Pty) Ltd v Pam Golding Properties (Pty) Ltd 1996 (2) SA 537 (C).

Total South Africa (Pty) Ltd v Bekker NO 1992 (1) SA 617 (A).

Montesse Township and Investment Corporation (Pty) Ltd and Another v Gouws NO and Another 1965 (4) SA 373 (A).

EB Steam (Pty) Ltd v Eskom Holdings SOC Ltd 2015 (2) SA 526 (SCA).

Legislation Cited

Companies Act 61 of 1973, section 346(3).

Disaster Management Act 57 of 2002 (referred to in the context of lockdown regulations affecting procedural steps and enrolment).

Rules of Court Cited

No Uniform Rules of Court were expressly cited in the judgment. The judgment referred to applicable practice directives, including paragraph 9.8.2, in addressing criticism of enrolment and set-down steps.

Held

The court held that the validity of Enforced’s enforcement of the share cession depended on whether an event of default arose under clause 11.1.1 of the loan agreement, which in turn depended on whether Enforced issued valid breach notices in strict compliance with the contractual lex commissoria and notice provisions.

It held that although a breach notice under clause 11.1.1 did not have to specify the remedial period expressly, the notices had to be clear, unequivocal, and had to communicate the consequences of non-remedy in order to be compliant. On the facts, the first notice was properly delivered but defective in content; the second notice was substantively compliant but not proved to have been delivered in accordance with the domicilium clause; and the third notice was actually received by email but defective in content. Accordingly, no valid event of default was established and Enforced was not entitled to call up the security or effect the cession.

The court further held that Enforced could not rely on alleged repudiation as a fallback after electing to enforce the agreement through calling up security, and that the conditional winding-up application was fatally defective for failure to file a certificate of security as required by section 346(3) of the Companies Act 61 of 1973.

LEGAL PRINCIPLES

A contractual lex commissoria (in the broad sense of a stipulation conferring a right to invoke contractual remedies on breach) must be strictly complied with. Whether the right to invoke the remedy arose is determined by asking whether the contractual condition precedent, properly interpreted, was fulfilled on the facts.

Where an agreement contains a contractual notice procedure tied to the exercise of a remedy, that procedure must be followed; a non-compliant notice may render the attempted invocation of the remedy ineffective. In addition, contractual requirements for delivery of notices at a chosen domicilium citandi et executandi must be complied with if reliance is placed on deemed receipt; actual receipt is not required where the contract permits deemed receipt upon proper domicilium service.

Even where a contract does not require the breach notice to state the remedial period explicitly, a breach notice that triggers significant contractual consequences must be sufficiently clear and unequivocal. The notice must inform the recipient what must be done to avoid the consequences of default and must communicate the intended consequences if the breach is not remedied, so that the recipient is not left in doubt about the creditor’s intended course.

A party faced with conduct entitling it to choose between inconsistent remedies is bound by the doctrine of election: having elected a remedy and acted on it, that party cannot ordinarily rely on a contradictory remedy as an alternative basis for relief in the same factual setting.

In winding-up proceedings, non-compliance with the peremptory requirement of section 346(3) of the Companies Act 61 of 1973 (filing a certificate of security) renders the application fatally defective, justifying dismissal without reaching the merits.

Verifika Incorporated (Pty) Ltd and Another v Enforced Investments (Pty) Ltd and Others; Verifika Incorporated (Pty) Ltd and Another v Torres and Others (6183/2020; 14799/2020) [2021] ZAGPJHC 108 (18 January 2021)