Wilds Home Owners Association and Others v Van Eeden and Others (53643/09) [2011] ZAGPPHC 101 (25 May 2011)

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[2011] ZAGPPHC 101
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Wilds Home Owners Association and Others v Van Eeden and Others (53643/09) [2011] ZAGPPHC 101 (25 May 2011)

NOT
REPORTABLE
IN
THE NORTH GAUTENG HIGH COURT,
PRETORIA (REPUBLIC OF
SOUTH AFRICA)
CASE NO
: 53643/09
DATE
:25/05/2011
In
the matter between:
THE
WILDS HOME OWNERS ASSOCIATION
................................
First
Applicant
RUDI
BOSHOFF
...............................................................................
Second
Applicant
ADRIANUS
LUKAS
FAURE
...............................................................
Third
Applicant
DEON
VAN
AARDE
..........................................................................
Fourth Applicant
HARRIS
KAPLAN
..................................................................................
Fifth
Applicant
P.J.J.
VAN VUUREN BELEGGINGS (PTY) LTD
............................
Sixth
Applicant
and
FRANCOIS
JOHANNES VAN EEDEN
.......................................
First Respondent
WERNER
HERBST
..................................................................
Second Respondent
HENCO
BOTES
...............................................................................
Third
Respondent
GERHARD
SWART
......................................................................
Fourth
Respondent
PIERRE
ROUX
.................................................................................
Fifth Respondent
EVERT
BRUWER
............................................................................
Sixth
Respondent
ANDRE
BARNARD
....................................................................
Seventh
Respondent
PIET
LOUW
....................................................................................
Eighth Respondent
HERMAN
STASSEN
......................................................................
Ninth Respondent
KOOS
PIETERSEN
........................................................................
Tenth
Respondent
MIDCITY
PROPERTY SERVICES (PTY) LTD
......................
Eleventh
Respondent
DIASTOLEUS
PROFESSIO INC
...............................................
Twelfth
Respondent
WOODHILL
COLLEGE (PTY) LTD
......................................
Thirteenth
Respondent
HENDRINA
AUDETTE KOEKEMOER
.............................
Fourteenth Respondent
WYBRAND
ANDREAS LODEWICUS DU TOIT
...................
Fifteenth
Respondent
________________________________________________________________
JUDGMENT
________________________________________________________________
MURPHY J
1. This matter concerns a long
enduring, acrimonious dispute between a significant number of members
of the Wilds Home Owners Association,
the “HOA”
(incorporated under section 21 of the Companies Act 61 of 1973 - “the
Act”), and those who control
the company.
2. The Wilds is a residential estate
in the east of Pretoria in the Township of Pretoriuspark Extensions
13, 14, 15, 17, 18, 19
and 20, Gauteng. The main object of the HOA,
according to clause 3 of the Memorandum of Association, is to
promote, advance and
profit the communal interests of members of the
association being persons who are registered owners of an erf and/or
sectional
title unit in the township. In promoting such communal
services the HOA is required to provide and maintain essential and
community
services, amenities and activities within the township
administered by the company.
3. The sixth applicant, PJ van Vuuren
Beleggings (Pty) Ltd, is the developer (“the developer”)
of the Wilds Estate
and is defined as such in Article 2 of the
Articles of Association of the HOA. The estate is being developed in
phases. Development
commenced almost 10 years ago with the first
residential transfers occurring in May 2003. As at June 2010, phase
1, which covers
approximately 36% of the estate, had been partially
developed. The development cost of the first phase was approximately
R750
million. The estimated development cost of the second phase
will amount to about R1,7 billion. Persons who buy property in the

estate automatically become members of the HOA and are accordingly
bound by the Articles of Association, as provided in the title

conditions of their transfer deeds. The developer is the registered
owner of 215 units/erven in phase 1 and the registered owner
of all
the land in phase 2 consisting of approximately 1700 units yet to be
proclaimed. Phase 2 will be developed in accordance
with the need
for new residential properties in the market.
4. The Articles of Association are
structured in a manner ensuring that the developer is able to
exercise complete control over
the HOA for the foreseeable future, at
least until the development is finished. In particular, Article 10.1
of the Articles gives
the developer the right to elect the majority
of the board of directors, and Article 23.1.4 bestows upon it a veto
right in respect
of any resolution taken at a general meeting. The
developer justifies these clauses on the basis of the extent of the
capital it
has invested and its entitlement to manage the fruits of
that investment.
5. The dispute ranges over a number of
issues, relating to questions of governance; financial oversight; the
amendment of the Articles
in order to diminish the entrenched
position of the developer; the imposition of certain special levies;
alleged financial irregularities;
the manipulation of members’
voting rights; the need for a forensic audit; the costs of
establishing the gardens of the estate
and the liability therefor;
the appointment of the management agent of the company; and the
removal of certain directors. As already
said, the dispute has been
on the go for a number of years and has now reached gargantuan
proportions. There have been three applications
to court and a
stalled arbitration process. The papers filed in the present
application contain no less than 10 sets of affidavits
in addition to
other affidavits from earlier proceedings, together accounting for a
record of almost 2500 pages. The heads of argument
run to just about
300 pages.
6. The first application was brought
by the first respondent in the present proceedings, FJ van Eeden (at
various times a director
of the HOA), in December 2008, who took up
the cudgels on behalf of some of the inhabitants aggrieved by the
developer setting
off the capital costs of landscaping against levies
owed by it to the HOA and the non-disclosure of that in the financial
statements.
The quarrel about this issue has been the source of all
the disagreements that followed. The relief sought in the first
application
was the setting aside of various decisions taken by the
directors and at general meetings during 2007, the removal of the
directors
appointed by the developer, and an investigation into the
HOA’s financial statements for 2007 and 2008. The application
was settled between the parties and an order was issued by
Bertelsmann J on 27 August 2009 staying the proceedings and referring

them to arbitration in terms of Article 41 of the Articles.
7. The second application was brought
by the HOA, the developer, and the four directors of the HOA elected
by the developer. It
sought, on an urgent basis, an interdict
restraining the respondents from convening and holding an
extraordinary general meeting
(“EGM”) of the HOA on 14
September 2009. The first to tenth respondents are all members of
the HOA, while the eleventh
is the management agent, the twelfth was
the previous auditor and the thirteenth the company at whose premises
the meeting was
scheduled to be held. The first to seventh
respondents (“the respondents”) opposed the urgent
application but also
launched a counter-application relying on
section 252 of the Act to claim far-reaching relief including a
forensic audit, amendments
to the Articles of Association, the
declaration of various decisions of the board and general meeting
invalid, the convening of
a special general meeting for the election
of a new board and certain consequential relief. After argument (and
negotiations between
the parties) on 11 September 2009, Sapire AJ
issued an order agreed to by the parties, in which both the urgent
and counter applications
were postponed and directing that an EGM be
held on 28 October 2009. The meeting of 28 October 2009 was duly
convened but achieved
little towards resolving the disputes. The
respondents filed an amended notice of motion on 9 May 2010
supplemented by a supplementary
founding affidavit seeking further
relief on an urgent basis. The amended counter-application was set
down as a special motion
before me on 22 March 2011. The applicants
no longer seek an urgent interdict, the need for such relief having
been overtaken
by events. The respondents filed a second amended
notice of motion on 15 February 2011 in which the relief sought has
been added
to.
8. The respondents are in actual fact
the “applicants” in the counter- application. However,
like the parties, I will
refer to them as the respondents; and to the
HOA (the first applicant), the developer (the sixth applicant) and
the developer appointed
directors, collectively as the applicants.
9. The only question remaining in
respect of the urgent application is the issue of costs, which the
order of Sapire AJ left over
for determination. Hence, it is only
the relief in the amended counter-application that must be fully
considered and determined.
I will give fuller details of the nature
of the relief sought later.
The Articles of Association
10. The decision-making structures and
processes established by the Articles of Association (“the
Articles”) of the
HOA have been the subject of much contention,
and are at the centre of the relief sought by the respondents. It is
necessary to
examine the most relevant provisions before discussing
the history and ambit of the present litigation.
11. The company was incorporated on 14
March 2003. The Articles reflect that the development of the Wilds
Estate is a development
in progress. Hence, Article 2 defines the
“development plan” to mean the provisional lay-out plan
relative to the
identified property which will eventually fall in the
security township to be known as “The Wilds”. It
furthermore
defines “the development period” to be “that
period from the establishment of the association until the developer

or its successors in title has sold the last erf on the land or has
notified the association that it has ceased development”.
The
“development” itself is defined as the residential
development on the land and the marketing thereof. The “development

scheme” is defined as the scheme for the development of the
land which may include any subdivision thereof by the developer
in
erven, group housing developments, cluster developments and any other
scheme of the land or subdivision thereof including development

schemes as defined in the Sectional Titles Act.
12. Article 3 governs membership of
the HOA. Membership is limited to the developer in its capacity as
such, and any person who
is, in terms of the Deeds Registries Act,
reflected in the records of the deeds office as the registered owner
of any erf, unit
or an undivided share in any erf or unit in the
scheme. An “erf” is defined as any erven on the land
upon which may
be erected any sectional title unit or group housing
unit or dwelling unit capable of registration in the Deeds Registry.
A “unit”
is defined as any group housing unit, sectional
title unit or a dwelling unit for a single family situated on a
residential erf
which may be registered in the office of the
Registrar of Deeds. Where a unit or erf is jointly owned, all the
owners of the unit
or erf are deemed to be one member of the
association in terms of Article 3.3. Article 4.6 provides that a
registered owner of
an erf or unit may not resign as a member of the
association.
13. Article 4.4, read with the
definition of “developer’s rights” in Article 2,
provides that for the duration
of the development period, the
developer shall have the right to complete the development scheme and
to promote and market it,
including the right to construct additional
units, buildings and other structures and to determine who shall have
any right to
or interest in any part of the scheme and to determine
the nature of such rights. Moreover, Article 5.1 restricts the right
of
members to alienate their property by generally requiring the
prior written consent of the board to do so and by making it a
condition
of alienation that the transferee will
ipso
facto
become a member of
the HOA.
14. Article 6.1 provides for the
establishment of a finance committee and/or an executive committee
consisting of at least one director
and such other persons as the
board may determine. Article 6.17 provides that the executive
committee and/or finance committee
shall act under delegated
authority of the directors of the company. The power to levy
contributions upon members for the purpose
of meeting the expenses of
the HOA, including capital expenditure, in pursuance of its main
object, and in pursuit of its business,
is conferred upon the finance
committee by Article 6.2. The remaining sub-articles of Article 6
deal with the mechanics of determining
and levying contributions.
Article 6.13 has particular relevance to the present dispute. It
provides that unless determined otherwise
by the board, no member
shall be entitled to any of the privileges of membership unless and
until he shall have paid every contribution
levied, interest thereon
and any other sum which may be due and payable to the HOA from
whatever cause arising.
15. Article 6.18 governs the
developer’s obligation to pay levies to the HOA. It provides
that for purposes of determining
the amount to be contributed by the
developer in respect of levies, the developer shall be deemed to be
the owner of a unit or
erf for each stand remaining registered in the
name of the developer. However, in terms of Article 6.19 the board
may enter into
an agreement with the developer for the provision of a
capital sum and for the transfer of land and/or equipment to the HOA
in
lieu of levies. Unlike the HOA, therefore, which is exempted from
the payment of levies by Article 6.20, the developer has liability

for the payment of levies equivalent to that of the other owners.
16. The power to make house rules in
regard to members’ rights of use and development of their
properties, including questions
of environmental preservation,
keeping of pets, the use of common areas, standards and guidelines
for architectural design of buildings,
structures etc, the prevention
of nuisance and the like, vests in the directors in terms of Article
8.1, but subject to any restriction
imposed or direction given at a
general meeting.
17. Articles 10-15 govern the
appointment, powers and procedures of the board of directors. These
articles are purposefully structured
in such a way as to entrench the
controlling interest of the developer. Article 10.1 provides for a
maximum of seven directors,
and expressly stipulates that until such
time as the last erf is sold and transferred, the developer shall
have the right to elect
the majority of directors. Article 10.3
secures this right by providing that the board shall during the
development period consist
of not less than two “nominees”
of the developer appointed by it. In terms of Article 10.4, any
other directors to
be appointed to office shall be elected by the
members in general meeting, the developer being entitled in voting on
the election
of such directors, to exercise its veto power. Article
23.1.4 confers upon the developer a veto right in voting at general
meetings
with regard to “any matter contained in this document
and/or the rules of the association or with regard to any other
matter
requiring a vote or decision to be taken in respect of any
amendment and/or addition to the rules or to the Memorandum and
Articles
of Association of the company.” That is a very wide
veto indeed, allowing, as it does, the developer to veto any decision

of the general meeting including the election of a particular
director or the amendment of any of the founding documents. The net

effect of these provisions is that where the board is to be
constituted of seven directors, the developer will always be able to

elect four of them and is required to approve of the other three
until the end of the development period, being when the last erf
is
sold and transferred, which given the size of the development may be
at some distant future time.
18. Article 11 deals with the removal
and rotation of directors. Article 11.1 provides that each director
shall continue to hold
office as such from the date of his
appointment until the annual general meeting next following his said
appointment at which meeting
each director will be deemed to have
retired from office, and will be eligible for re-election to the
board at such meeting. Directors
are furthermore deemed to have
retired from office, and will be eligible for re-election to the
board at such meeting. Any vacancies
arising for various reasons
shall be filled (until the next AGM) by a person nominated by the
remaining board members; except where
the vacating director was a
nominee of the developer, in which event the vacancy can be filled
only by a person nominated by the
developer - (Articles 11.2 and
11.3).
19. Article 13 governing the
remuneration of directors has assumed some significance. Directors
are entitled to be repaid all reasonable
and
bona
fide
expenses incurred by
them respectively in or about the performance of their duties as
directors and any director being a professional
person shall be
entitled to be paid professional fees for professional services
rendered. Save for this entitlement, directors
shall not be entitled
to any other remuneration for the performance of their duties, unless
the HOA in general meeting otherwise
decides.
20. The proceedings of the meetings of
directors are regulated by Article 15. Meetings shall be held as
determined by the chairman
of the board, but must be at least
quarterly (unless unanimously agreed otherwise) and must be convened
upon not less than 48 hours
written notice. The quorum necessary for
the holding of any meetings of the directors shall be four directors
present personally;
provided that during the development period the
presence of at least three nominees of the developer shall be
necessary. The attendance
of the four developer nominated directors
will be sufficient to constitute a quorum.
21. Articles 16-23 govern general
meetings of the HOA. An annual general meeting (“AGM”)
must be held within six months
after the end of each financial year,
in addition to any other general meetings held during that year. The
AGM shall be held at
such time as the directors shall decide. All
general meetings other than AGM’s shall be called extraordinary
general meetings
(“EGM”’s). Article 16.4 has
particular relevance in this case. It provides inter alia for an EGM
to be convened
by the directors on a requisition by members
representing not less than 10% of the voting rights, or in default by
the requisitionists
themselves as provided by and subject to the
provisions of section 181 of the Act.
22. An AGM and a meeting called for
the passing of a special resolution, shall be called for by 21 clear
days notice in writing,
and an EGM, other than one called for the
passing of a special resolution, shall be called for by 14 clear days
notice in writing.
The notice shall specify
inter
alia
the general nature of
the business of the meeting and in the case of a special resolution,
the terms and effects of the resolution
and the reasons for it. The
membership may waive the notice period by condoning short notice at
the meeting - Article 17.1. The
quorum of a general meeting during
the development period shall be the members representing the votes of
the developer and five
members from all the other members personally
present and entitled to vote.
23. Article 22.1 provides that a
member may be represented at a general meeting by a proxy, who need
not be a member of the association.
The instrument of proxy must be
in writing and signed by the member concerned or his duly authorised
agent, but need not be in
any particular form.
24. At every general meeting every
member shall have one vote for each erf or unit registered in his
name; while co-owners will
jointly have one vote (Articles 23.1.1 and
23.1.2). Any member, including the developer, holding undeveloped
land in the township,
shall have one vote for each separate piece of
land registered in his name - Article 23.1.3. And, as already
mentioned, the developer
has the veto right bestowed upon it by
Article 23.1.4. Only members in good standing enjoy voting rights.
Article 6.13 referred
to above is reinforced by Article 23.2 which
reads:
“
Save as expressly
provided for in these articles and unless expressly permitted
otherwise by the chairman, no person other than
a member duly
registered, and who shall have paid every contribution, levy and
other sum, if any, which shall be due and payable
to the association
in respect of or arising out of his membership, and who is not under
suspension, shall be entitled to be present
or to vote on any
question, either personally or by proxy, at any general meeting.”
25. Ordinary resolutions shall be
carried on a simple majority of all the votes cast thereon.
Amendments to the Articles are required
in terms of Article 24 to be
by special resolution and are explicitly subject to the developer’s
rights of veto in terms
of Article 23.1.4. Special resolutions shall
be carried in accordance with the requirements of section 199 of the
Act.
26. Article 25.2 gives effect to
section 286 of the Act by imposing a duty on the directors to make
out the financial statements
and to lay them before the AGM. Article
26 gives effect to Chapter X of the Act in respect of auditors.
27. Article 41 deals with disputes
arising out of and in connection with the Articles. I shall examine
this provision more closely
later when dealing with the applicants’
special plea of arbitration.
The background to the first
application
28. A full set of the papers in the
first application has not been filed as part of the record in these
proceedings. However, the
applicant has annexed its answering
affidavit in the first application as Annexure RB43 to its reply in
the urgent application,
the latter serving simultaneously as its
answering affidavit to the counter-application. Annexure RB43
usefully sets out the history
and it is possible to extract from it
selected common cause or undisputed facts that give insight into the
ongoing drama as it
unfolded.
29. After incorporation of the HOA on
14 April 2003, the promoters appointed Mr. P. van Vuuren, the
managing director of the developer,
as the first director of the HOA.
Not long afterwards the developer appointed a second director, Mr.
Roos. At that stage the developer
was the only member of the HOA
because none of the stands had been sold or transferred to any
purchasers. The first transfer took
place in May 2003. In the
period between February and October 2004 the developer took initial
steps for the establishment of landscaped
verges for the first phase
of the development.
30. The crux of the complaint made by
van Eeden in the first application was that the directors withheld
from the auditors information
in relation to the cost and accounting
for landscaping that resulted in incorrect financial statements for
the years 2005-2007.
The accounts did not reflect as a debit the cost
incurred by the developer for landscaping in the sum of R2 049 795,
being gardening
costs in respect of the verges alongside Trumpeter’s
Loop (the main thoroughfare in the estate), which in actual fact
belong
to the Tshwane Metropolitan Municipality. The accounts also
did not include as a credit the levies payable by the developer in
the sum of R1 158 841. The landscaping expenses were not approved by
the members of the HOA prior to their being incurred though
the
directors later accepted the invoices but opted deliberately not to
disclose the costs in the financial statements. If the
expenses were
not for the account of the HOA, but were developmental costs for the
developer, (as the respondents contend), then
there would have been
no need to reflect them in the HOA accounts. However, because the
developer chose to set off those costs
against its levies payable to
the HOA, assuming it had the right to do that, it became necessary to
account for the transactions
accordingly.
31. The developer maintains that since
inception there was an agreement and/or understanding between it and
the HOA that the establishment
of the gardens along Trumpeter’s
Loop would be set-off against its levy obligations. Work was done on
the landscaping and
gardens during 2004, 2006 and 2007. The developer
paid the costs of the construction and laying of the landscaped
verges and gardens
directly to the sub-contractors.
32. At a directors’ meeting held
on 23 June 2005, one of the directors elected by the members, Mr.
Coenie van der Merwe, asked
one of the developer nominated directors,
Mr. A.L. Fourie (the third applicant) whether the developer was
paying levies. The set-off
arrangement was mentioned and Fourie
agreed to table a report. The developer alleges that a report was
indeed tabled at a directors’
meeting on 22 September 2005.
The minutes of that meeting record that it was decided not to show
the income and expenditure in
relation to landscaping in the
financial statements because this would leave the HOA with a
significant deficit.
33. Dissatisfaction regarding the
financing of the landscaping was evident at the AGM on 1 November
2005. The matter had been discussed
prior to that at a directors’
meeting on 24 October 2005. The third applicant, who was then
chairperson of the board, raised
the issue in his report to the AGM,
and informed the AGM of the set-off arrangement. The matter was
however not the subject of
any resolution.
34. The issue stayed alive during 2006
and 2007 with the gardening costs being discussed at various
meetings. The minutes of the
directors’ meeting of 25 January
2006 contain the following observation in paragraph 14:
“
CR has got
quotations for the gardens at Rhine Ridge and the two circles. The
developer made it very clear that they were not prepared
to incur any
costs as far as these gardens were concerned and that it was a cost
that would have to be carried by the HOA. This
is a contentious
issue and will have to be discussed asap.”
In a letter dated 26 April 2006
addressed to the directors the developer advised that it was not
prepared to carry the capital cost
and intended to set the costs off
against its levies payable to the HOA.
35. The matter did not appear to get
much attention at the AGM of 30 August 2006. It was merely noted in
the chairman’s report
that the landscaping of Trumpeter’s
Loop had been completed, that there had been a letter on the issue
from the developer
and that the HOA would maintain the garden. The
owners were informed that the gardens were being paid for by the
owners. It is
recorded that the general feeling of the members was
that the developer should take financial responsibility for the
landscaping.
36. The financial statements for the
years before 2007 did not include the landscaping costs or the
set-off of the developer’s
levies. The matter came up again at
the AGM of 19 June 2007. The minutes of the meeting record that the
chairman reported that
the financial statements for 2007 had been
withdrawn because there was a problem with the developer’s levy
contribution and
that revised statements would be ready in seven
days. Later that year, the finance committee recommended that the
developer be
permitted to offset its levy contributions against
payments it had made in respect of the gardens provided the
conditions of township
establishment did not require the developer to
install the gardens and the final figure was audited and approved by
an EGM. The
conditions of township establishment do not include any
explicit obligation to install the gardens, but the consequence of
that,
as we shall see, is a matter of some disagreement.
37. The minutes of the directors’
meeting of 18 July 2007 reflect that there was once again concern
about the non-payment
of levies by the developer. A recommendation
was made to do a forensic audit “on all levies by either
current auditors or
appointed auditors”. This recommendation
has not been acted upon. Various discussions continued through
October 2007 to
which I will refer later. Eventually, on 12 November
2007, the directors adopted and approved the corrected financial
statements
which reflected the set-off arrangement. An EGM was held
on 8 December 2007 at which it was noted that the audited financial
statements
had been approved by the directors. The financial
statements were put to the vote and approved by the EGM with 169
votes in favour
(being the total votes of the developer as member and
erf owner) and 81 against.
38. On 21 January 2008 van Eeden
circulated a document titled “Directors in Exile forum in the
Wilds estate”. The document
is basically a call to action.
Its opening paragraph sets the scene. It reads:
“
At the XGM held on
8 December 2007 nearly all the non-developer members present in
person or by proxy voted against the approval
of the financial
statements and budget. However, the developer used its majority vote
present at the meeting by virtue of stands
held to approve the
financial statements and budget. The approval of the financial
statements and budget is an attempt by the
developer and its four
directors to ratify the unauthorised spending of money by the
developer on the establishment of gardens
of R2 000 000 and other
items without the approval of the HOA in a general meeting.”
The document goes on to explain that
the intention is to form a “Directors in Exile” forum and
“to ensure that
we as non-developer members take control of the
management of the estate we have to ensure that we can mobilise our
majority vote”.
Annexed to the document is a proxy form.
Members were requested to “assign your proxy to the nominated
people”, being
the first, second and sixth respondents. The
document stated that the purpose of obtaining the proxies was to
obtain a majority
vote “to requisition general meetings and
vote at general meetings” so that “we can approve our
initiatives in
general meetings of The Wilds HOA and force the
directors of the HOA to execute them”.
39. The wrangle over the financial
statements, the developer’s levies and various proposals by van
Eeden (by then an elected
director) to amend the Articles continued
throughout 2008. At the meeting of the board on 31 October 2008 a
decision was taken
to withdraw the mandates of all the
sub-committees, including the finance committee. Item 12.1 of the
minutes records:
“
Not all mandates
have been inspected by the directors from the committees; therefore
all mandates are withdrawn to allow all sub-committees
to give
feedback as requested previously from the board of directors.
Thereafter mandates will be reviewed and instituted as approved
by
the board of directors.”
It is not recorded whether this
decision was unanimous. Both the first and second respondent were in
attendance at the meeting.
There is no minute recording any
objection to the decision by either of them. The upshot of this
decision was that because the
finance committee was no longer
operative, the setting and imposing of levies from then on fell to
the board dominated by the developer.
This state of affairs endured
for about two years.
40. On 13 November 2008 van Eeden
caused to be served on the board a requisition for a “special”
general meeting in
terms of Article 16.4 read with section 181 of the
Act. These provisions allow a portion of the membership to request
the board
to convene a meeting, and, failing it so doing, for the
members themselves to convene the meeting. This requisition (“the

first requisition”) tabled no less than 15 resolutions for
consideration by the meeting. These included:
The removal of the directors
appointed by the developer by means of a special resolution in terms
of section 220 of the Act on
the grounds that they knowingly
withheld financial information from the auditors in co-operation
with Midcity (the managing agent)
that resulted in incorrect
financial statements which they approved knowing they were
incorrect.
The appointment of Price Waterhouse
Cooper (“PWC”) as the auditors of HOA to re-audit the
financial statements of
the HOA since inception, and to conduct a
forensic audit as recommended by the finance committee.
The replacement of Midcity as the
managing agents by another company, namely Venter and van Wyk CC.
The limitation of the authority of
the board of directors to spend funds on behalf of the HOA to a
budget as approved by the general
meeting.
The recovery of the landscaping costs
from the developer.
Recovery of the costs of the re-audit
of the financial statements from the directors appointed by the
developer, the auditor and
Midcity.
Forcing the developer to deliver in
terms of its promises to establish a club house and sporting
facilities at the Wilds Estate.
The balance of the proposed
resolutions related to the review and termination of contracts which
the board had concluded for the
provision of various services to the
Estate.
41. The requisition was supported by
381 proxy forms and was addressed to the board. In response, the
board instructed the managing
agent to approach attorneys to obtain
legal advice concerning the validity of the proxies and whether the
requisition conformed
to the provisions of the Act. Midcity informed
the directors that its attorneys were of the opinion that the
requisition did not
comply with the provisions of the Act. This was
discussed at the directors’ meeting of 8 December 2008. It is
recorded
in the minutes that Fourie (the third applicant and then
chairman) had obtained two legal opinions and both concluded that the
requisition to convene an EGM did not conform to the requirements of
the Act. Surprisingly, Fourie refused to make the legal opinions

available to the member elected directors and declined to disclose
their content and the reasons for the conclusion reached. He
is
however recorded as stating that the proxies were valid for voting at
a general meeting but not for convening or requisitioning
a meeting.
It was further noted in the minutes that Midcity had undertaken a
validation process and for reasons not stated had
concluded that only
291 of the 381 proxies would be valid for use at a general or
extraordinary meeting. At that time there were
546 full title and 322
sectional title members.
42. Although frustrated by the refusal
of the board to convene the requested EGM, the requisitionists did
not take any steps at
that stage to convene the meeting themselves as
they were entitled to do in terms of section 181(3) of the Act. It
is not clear
why this did not happen. It may be that they chose first
to await the outcome of the first application which had been filed
three
days earlier on 5 December 2008. There was also an AGM
scheduled for and which took place on 10 December 2008.
43. At the AGM of 10 December 2008
seven directors were elected. The second, third, fourth and fifth
applicants were appointed by
the developer. The directors elected by
the members were the first, second and third respondents. The
meeting, by all accounts,
was a rowdy affair with much contestation
regarding the agenda. The second applicant, apparently claiming the
matter was
sub judice
,
refused to allow debate about the developer’s levies and a vote
on the approval of the disputed annual financial statements.
There
was also evident support for the proposals appointing PWC as auditors
and the replacement of the management agent.
The first application
44. The first application was launched
by van Eeden alone against the developer and the directors elected by
the developer. It
was aimed at setting aside the EGM held the
previous year, on 8 December 2007, as well as various decisions,
including the decision
of the board of directors to “recall”
the finance committee’s mandate. He sought in addition an
order directing
the finance committee “to fully investigate and
confirm the financials for 2007 and 2008”, and an order for the
removal
of the developer appointed directors.
45. The main issues in the first
application were whether the EGM should be set aside as a result of
there being short and improper
notice; whether the developer was
entitled to vote at the EGM (its levies allegedly not having been
paid); whether the developer
was entitled to set-off the costs for
the establishment of the gardens at Trumpeter’s Loop against
its levy contribution;
and whether the financial statements should
have included as a debit the costs of the establishment of the
gardens and the levies
as a credit set-off against such.
46. The first application was set down
for hearing before Bertelsmann J on 27 August 2009. The applicants
herein (the respondents
therein) raised a plea that the disputes in
the application were required to be referred to arbitration in terms
of Article 41.1
which provides:
“
Any dispute
arising out of or in connection with these articles including the
cancellation thereof, except where an interdict is
sought or urgent
relief may be obtained from a court of competent jurisdiction, must
be determined in terms of this clause.”
47. Bertelsmann J made an order
staying the application proceedings, directing the applicant to
declare a dispute within 10 days
of the order, as envisaged in
Article 41.1, and declaring that the process would further be
regulated in terms of the procedure
set out in Article 41. The
questions referred to the arbitrator were: whether or not the
decisions of the AGM of 8 December 2007
were valid; whether or not
the amended annual financial statements for the year ending 28
February 2007 were validly approved and
accepted by the board;
whether or not the developer was entitled to set off his levy
liabilities against the costs of establishing
gardens; whether the
developer was or is obligated to obtain the approval of the members
in general meeting as envisaged in clause
6.14 of the Articles before
embarking on the establishment of such gardens; and whether or not
the financial statements for the
financial year ending 2005, 2006 and
2007 should have included as a debit the costs of establishing the
gardens. The referral
has not been withdrawn, nor, as far as I am
able to ascertain from the evidence, has any arbitration hearing been
convened by the
parties or the nominated arbitrator. The unresolved
issues forming the subject of the arbitration however remain very
much alive
and have surfaced again in the subsequent court
applications. The parties on the one side have broadened to include
the other
respondents. Unattended to, the squabbles continue to
rankle, contributing to a measure of intractability and a hardening
of position
on all sides, with unfortunate repercussions for the
governance of the company.
The events leading to the urgent
application
48. While the first application was
pending, and before the decision was taken to refer those disputes to
arbitration, van Eeden
served a second requisition for a “special”
general meeting on 19 May 2009. Again he attached proxies
authorising
him to call the meeting on behalf of the homeowners. The
resolutions tabled include most of the significant resolutions tabled
in the first requisition. A “forensic audit scope”
intended for application in the event of the meeting resolving to

direct PWC to conduct a forensic audit was attached to the
requisition. The proposed resolutions 12 and 13 in the second
requisition
added a different slant. The rationale for these
resolutions was that the developer’s directors were using their
majority
on the board “to disrupt and paralyse the functioning
of the board”. They therefore sought reinstatement of the
executive
and finance committees to run the estate along with
sub-committees dealing with
inter
alia
aesthetics and
gardens, security and communication. Resolution 13 proposed that the
executive committee be authorised to proceed
with the process for
changing the Articles.
49. On 1 June 2009, the second
applicant, in his capacity as chairperson of the board, addressed the
following email to van Eeden:
“
With regards to
your request for a Special General Meeting the HOA has acquired a
legal view and again have (sic) come to the same
conclusion that you
still do not conform to company law in your request for a special
general meeting. The HOA will therefore
not convene the meeting as
requested by you. If you should decide to continue with your request
an urgent interdict to stop you
will be sought in the High Court of
Pretoria for your costs,”
50. A few weeks later, on 24 June
2009, van Eeden served a third requisition (Annexure RB21) in which
it is noted that as a director
and member he was “duly
supported by no less than 99 other members of The Wilds HOA in total
representing not less than one-twentieth
of all the members having a
right to vote at a general meeting”. The requisition put
forward eleven resolutions, some of
which repeated the resolutions of
the previous requisitions. Resolution 1 proposed nine amendments to
the Articles “in order
to ensure proper transparency,
accountability and good corporate governance”. They are aimed
entirely at removing or diluting
the entrenched rights of the
developer. The most significant include: the deletion of the right
of the developer under Article
10.1 to elect the majority of
directors until the last erf is sold and transferred; the repeal of
the requirement in Article 15.3
that at least three nominees of the
developer shall be necessary at all meetings of directors in order to
form a quorum; the repeal
of the developer’s veto right in
Article 23.1.4; and the repeal of Article 24 requiring in effect that
the developer approve
all amendments to the Articles. The
requisition repeats the resolutions in the earlier requisitions for
the removal of the directors,
the appointment of PWC, the performance
of a forensic audit, the recovery of the costs of the gardens, the
replacement of the management
agent and the budgetary limitation.
51. The requisition was made, as it
stated, on the basis of proxies furnished by members to van Eeden.
Annexure RB22 to the founding
affidavit in the urgent proceedings is
an example of such a proxy. It is headed: “Proxy Form”;
and the relevant member
in terms of it appoints van Eeden (or the
sixth or second respondent in his stead) “as my/our proxy to
requisition general
meetings and vote for me/us on my/own behalf at
any general meeting” of the HOA.
52. On 5 August 2009, van Eeden and
some of the other respondents distributed a notice advising of the
convening of an EGM on 14
September 2009 at Woodhill College in
Pretoria. The documentation attached to the notice included the
requisition, the proposed
resolutions, the proposed forensic audit
scope and a budget.
53. On 19 August 2009 van Eeden
circulated an email to all the homeowners in the estate in which he
explained that he was convening
the meeting because the directors had
failed to arrange the meeting despite the three requisitions. He
stated that the proxies
had been solicited “to block the
developer’s elected directors and the developer to abuse (sic)
their majority on the
board of directors”, and that they would
vote “yes” on every resolution.
54. In the period between 19 and 30
August 2009 the parties became involved in negotiations with a view
to settling their differences.
The attorney for the applicants
addressed a letter dated 24 August 2009 to the attorney for the
respondents setting out for the
first time some clarification of the
applicants’ position regarding the validity of the
requisitions. The principal objection
was that a proxy allows a
member to appoint another person in his stead to vote in his place at
a meeting, but not to requisition
a meeting of members. The letter
also pointed out that neither the notice nor the requisition
specified that the proposed resolution
to amend the Articles was
required to be a special resolution. The applicants then demanded a
written undertaking from the respondents
not to continue with the
EGM, failing which an urgent application would be launched.
55. In the midst of this, the first
application was settled on the terms outlined above and Bertelsmann J
issued the relevant order
on 28 August 2009. Two days later on 30
August 2009 van Eeden circulated an email advising members that the
EGM had not been cancelled
and would proceed on 14 September 2009.
56. At a directors’ meeting on
31 August 2009, van Eeden raised various objections to the legality
of the meeting, but also
handed to the chairman a letter dated 29
August 2009 in which he undertook not to convene the EGM of 14
September 2009 if the board
supplied him with a valid reason. It is
not clear if any reason was furnished. But the applicants have held
firm to the position
stated in the letter of 24 August 2009. In the
founding affidavit they added that the proposed resolutions did not
contain a description
of the general effect of the resolutions, nor
was the requisition supported by a sum reasonably sufficient to meet
the expenses
of the HOA in giving effect to the resolutions. It is
debatable whether these lapses, if that, rendered the requisition
unlawful.
The complaint that the notice did not record that any
amendments to the Articles would need to be carried by special
resolutions
is legitimate. The applicants also took the view that the
removal of the directors was
lis
pendens
or
sub
judice
by reason of the
order in the first application referring the matter to arbitration.
Such objections at first glance, would pertain
to the validity or
invalidity of any resolutions that might or might not have been
adopted by the meeting. On balance though,
the objections to the
validity of the requisitions at best were formalistic and technical.
The urgent application
57. When the parties were unable to
settle their differences, the applicants launched the urgent
application on 31 August 2009 for
an order interdicting and
restraining the respondents from convening and holding the EGM on 14
September 2009.
58. The respondents filed their answer
in the urgent application, as well as the counter-application relying
mainly upon section
252 of the Act, on 4 September 2009.
59. As I described earlier, the urgent
application was enrolled before Sapire AJ on 11 September 2009. He
postponed the application
and the counter- application
sine
die
and reserved the
question of costs in respect of both. He ordered that an EGM should
be held on 28 October 2009 and set out a
procedure for the convening
of the meeting.
60. The urgent application has been
overtaken by events, and, as previously explained, the only
application now requiring determination
is the counter- application.
61. In the answering affidavit in the
urgent application, the respondents submitted that the history of the
matter shows that the
developer “will not hesitate to oppress
and subdue any member that disagrees” with it, and that the
urgent attempts
to interdict the EGM on technical grounds was an
indication that something was amiss and that the developer had
something to conceal.
They argued that the requisition was in
compliance with section 181 of the Act in that there is no difference
(at least in substance)
between giving a proxy to a person to
requisition a meeting and signing a specific requisition form. They
submitted, in addition,
that the general effect of the resolutions
was obvious from their terms, as was the requirement that a special
resolution would
be necessary in terms of section 191 of the Act in
respect of some of them.
62. The relief sought in the
counter-application has evolved and changed in response to events
that occurred after the order in
the urgent proceedings was made. In
view of that, it is necessary to consider the facts and allegations
in relation to these events
before dealing with the relief sought in
the counter-application.
The events leading up to the EGM of
28 October 2009
63. At some point before the meeting
directed to be convened by Sapire AJ, Mr. J.J. de Koker, of the HOA’s
erstwhile auditors,
Diastoleus Professo Inc., was charged by the
Independent Regulatory Board for Auditors (“IRBA”) with
misconduct. The
gravamen of the charge was his having allowed the
developer to set-off his liability for levies against the costs of
establishing
gardens on municipal property without disclosing that in
the financial statements. In January 2010 he pleaded guilty to the
charges.
The relevant charges (Annexure HK26 to the applicants’
answering affidavit to the respondents’ supplementary affidavit

in the counter application) read:
“
4.2 There is a
material
omission in the financial statements with an unqualified audit
opinion dated 11 May 2007 insofar as landscaping services due to
the
Association (HOA) from PJJ van Vuuren Beleggings (Pty) Ltd and levies
due by PJJ van Vuuren Beleggings (Pty) Ltd to the Association
were
not reflected in the audited financial statements
4.3 The practitioner
failed to obtain any audit evidence alternatively failed to obtain
sufficient and/or appropriate audit evidence
in relation to the
landscaping services and outstanding levies.”
64. The respondents assert that their
lack of confidence in both the auditors and the financial management
of the HOA by the board
has been vindicated by the finding of the
IRBA. They are accordingly anxious about the fact that the
management of the company
is for all intents and purposes in the
exclusive hands of the developer with no finance committee in place
to properly oversee
the financial affairs of the company; and fear
most of all that levies imposed by the developer will be used
illegitimately to
subsidise further capital expenditure which is
rightly for the account of the developer.
65. In accordance with the express
terms of the order made by Sapire AJ, the respondents on 14 September
2009 notified the board
of directors of all the issues to be included
in the agenda of the EGM scheduled for 28 October 2009. The
documentation encompassed
all the proposed resolutions and amendments
that had been tabled in the three requisitions, including
additionally a resolution
to reinstate the committees that had been
suspended and a fuller motivation setting out the object of the
resolutions.
66. The HOA in accordance with the
court order gave notice of the EGM. The respondents have made
something of the fact that the
audit scope of the proposed forensic
audit was not attached to the documentation. They maintain that the
omission forms part of
“the concerted effort undertaken”
by the developer to ensure that the forensic investigation is
stymied. The applicants
admit that the audit scope was not attached,
but that this was a mere oversight which was corrected by ensuring
that each member
was given a copy at the meeting, which allegation I
am inclined, and in any event, obliged, to accept.
67. At a board meeting on 23 September
2009, the board approved expenses in the amount of R1 392 098,72
being in respect of legal
fees. Two amounts were payable to the
attorneys in respect of the urgent application, being R300 722,07 and
R872 876,65. Two
additional invoices in the amounts of R106 000 and
R112 500 were also accepted, being amounts claimed as professional
fees by two
of the developer’s directors in respect of their
time and services in defending the application. After the expenses
were
tabled and approved, the board passed a resolution raising a
special levy in the amount of R1500 to be paid by each member of the

HOA to meet these expenses. A circular was sent on the same day to
all the members informing them of the levy and advising that
they
were “free to arrange with Midcity to pay the amount over 12
months interest free at R125 per month”.
68. The respondents have leveled a
number of criticisms at these decisions. Firstly, the approval of
the expenditure and payments
to the directors was not placed on the
agenda prior to the meeting. No copies of the invoices were attached
to the agenda, though
the minutes state that the accounts were
circulated at the meeting.
69. The respondents contend moreover
that the payment of fees to the directors would be unlawful because
Article 13.2 states that
“directors are not entitled to any
remuneration for the performance of their duties in terms hereof,
unless the association
in general meeting otherwise decides”.
The applicants rely on Article 28 which entitles the directors to be
indemnified
out the funds of the HOA against any liabilities
bona
fide
incurred or in respect
of costs, losses and expenses. I doubt this Article covers the fees
that the directors claimed. Such probably
explains why at a
directors’ meeting on 22 January 2010 the board, perhaps more
sensitive to the possibility of its conduct
being perceived as
unfair, unjust or inequitable, adopted a resolution in the following
terms:
“
During the court
case time was spent by Mr. Boshoff and Mr. Fourie on behalf of the
HOA with lawyers and counsel (sic). They have
issued invoices for
the time spent in this regard. It was noted by the Board that the
invoices were approved at a previous meeting
with the instruction:
“Do not pay yet”. They do not request payment of the
said invoices. The Board discussed the
payment. It is resolved
that:
The Mr ’s (sic)
Boshoff and Fourie are requested to supply proof of their auditors
of what their time is worth in order
to support the invoice as
provided;
After receipt of the
above the matter shall be reconsidered.”
It is not clear whether any further
steps have been taken in respect of these payments. The respondents
seek an order interdicting
such payments unless approved at a general
meeting. Considering the prescriptions of Article 13.2, they are
entitled to that relief.
The directors seek the payment of fees, not
the recovery of expenses or indemnification of any liabilities
incurred on behalf of
the HOA. They may recover fees only with the
blessing of the general meeting, which they do not have.
70. The respondents submit that the
raising of the special levy was nothing more than a transparent
attempt on the part of the applicants
“to have the dice loaded
in their favour” at the EGM. They question the motives and
timing of the levy, contending
that the applicants had in mind the
consequence that members who failed to pay timeously would be
regarded as not being in good
standing and would therefore be
disqualified from voting at the EGM in terms of Article 23.2. The
applicants deny the charge of
attempted manipulation. These questions
have assumed importance and I shall examine them more fully later
when assessing the fairness
of the applicants’ overall conduct
of the affairs of the company.
71. At the board meeting of 27 October
2009, the day before the EGM, the second applicant resigned as
chairman. Van Eeden, who
at that stage was vice-chairman assumed
that he was entitled to assume the mantle of chairman. The board
however elected the fifth
applicant, Mr. H. Kaplan as chairman. Van
Eeden has relied on Article 12.3 which provides that the
vice-chairman shall assume
the powers and duties of the chairman in
the absence of the chairman or his inability or refusal to act. The
resignation of the
chairman meant that there was no chairman rather
than an absent chairman. The applicable provision when a chairman
vacates office
is Article 12.1 which provides that in the event of a
vacancy the board “shall immediately appoint one of their
members as
a replacement”. That is exactly what happened at the
meeting, and nothing sinister or untoward can be ascribed to the
board’s
refusal to accept the authority of van Eeden to assume
the chair. His contention that he automatically became acting
chairperson
is not correct.
72. The auditors, Diastoleus Professo
Inc., tendered their resignation to the board which was accepted at
the board meeting of 27
October 2009. They no doubt wished to avoid
being the subject of the resolution calling for their removal which
was tabled at
the EGM scheduled for the next day. By then they would
have appreciated that their employee, Mr. de Koker, was guilty of the
misconduct
to which he pleaded guilty in January 2010.
The Extraordinary General Meeting
of 28 October 2009
73. There were ten resolutions tabled
and voted on at the EGM. For the most part they repeated those
proposed in the third requisition
and were concerned with:
the proposed amendments to the
Articles of Association;
the removal of the auditors;
the appointment of auditors to
perform a forensic investigation;
the cost of the landscaping;
the obligation of the developer in
respect of the clubhouse and sporting facilities;
the appointment of new management
agent and termination;
the ongoing financial management of
the company;
the reinstatement of all
sub-committees;
the budget of the financial committee
for the current financial year; and
the removal of the existing
directors.
74. With the exception of the removal
of the directors, each resolution was carried by a vote of 374 to
215. The 215 votes against
represented the votes held by the
developer, meaning that every member other than the developer voted
in favour of each resolution.
75. The contestation about the
contents, merits and implementation of the resolutions forms the
basis of the counter-application
as amended. I will deal with the
issues more fully when considering the merits of the counter-
application. It may nonetheless
be worthwhile at this juncture to
touch briefly on the position taken by the applicants in relation to
each agenda point.
76. Regarding the amendment to the
Articles, the applicants state correctly that the resolution was not
carried with the required
majority. Amendments to the Articles must
be passed by 75 percent of the meeting, and that did not happen. As
for the removal
of the auditors, they had already resigned and been
replaced by PWC. The resolution that the costs of establishing the
garden
would be the obligation of the developer, the applicants
maintain, was the subject of the referral to arbitration and the
financial
statements had already been corrected to reflect the
set-off arrangement; which statements had been approved by the EGM of
8 December
2007, and which meeting also accepted that the conditions
of township establishment did not contain a condition requiring the
developer
to install the gardens. The agenda item regarding the
clubhouse and sporting facilities was ruled out of order as a
contractual
matter between each individual member and the developer
and thus it was beyond the authority of the HOA to unilaterally amend
the
terms of such contracts. The appointment of the management
agent, it argued, is in terms of Article 14.1.2 a matter for the
board
of directors and not the general meeting. Likewise, the
resolution to the effect that the board shall manage the financial
affairs
in accordance with a budget presented and approved at the
general meeting, the applicants maintain, is an illegitimate attempt
to usurp the authority of the board contrary to the provisions of the
Articles and the Act. As for the sub-committees, the applicants
have
given an undertaking that all the committees will be reinstated,
though subsequent events show that may now prove difficult
while the
developer retains entrenched control. As for the budget approval,
that too they insisted is a matter for the board.
And, finally,
regarding the removal of the directors, the four developer nominated
directors resigned as directors before the
meeting and the EGM opted
to retain the first, second and third respondents.
The AGM of 2 December 2009
77. In the period immediately after
the EGM, the developer did not nominate directors to replace those
who had resigned. Both sides
appeared to accept that the fifth
applicant, Mr. Kaplan, who had been elected chairman at the meeting
of 27 October 2009, remained
a director. On 5 November 2009 van
Eeden wrote to the management agent enquiring whether the developer
had appointed replacement
directors and urging the board to be
convened to implement the resolutions of the EGM. There were various
interactions between
the two sides in the period between the EGM and
the AGM on 2 December 2009, but they were to no avail in resolving
any of the disagreements.
In this period there was no functional
board of directors. The respondents aver that the non-cooperation by
the directors of
the developer was intended to frustrate the
implementation of the resolutions. The tone of the averments in the
affidavits dealing
with this period gives insight into the escalating
acrimony and tension between the two sides.
78. The parties are at odds about
whether the 2009 AGM was called on short notice. The decision to
convene the AGM was taken on
27 October 2009 by the board. The
applicants’ version is that the notices were sent on the 4th
and 5
th
of November 2009 and that this was adequate in that 21 clear days
notice as required by the Articles was in fact given. The
respondents
have put up a case in reply that this could not be so.
The issue has acquired significance in relation to whether the
meeting
was properly convened or whether it was adjourned at the
close, with the consequence that the existing directors remained in
office.
79. There is a further difference of
opinion about whether the minutes correctly record what transpired at
the meeting. The minutes,
Annexure HK16, are concise, being only one
page in length. The first substantive item is item 3, titled:
“Consideration
of Chairman’s Report”. There under
is recorded the following minute:
“
The chairman
started to speak on the matter. The meeting became unruly and the
chairman then adjourned the meeting for ten minutes.
Meeting stood adjourned
from 19.10 - 19.20
The Chairman proceeded
with the meeting and again was interrupted. The chairman warned that
if the unruly behaviour continued the
chairman will let the meeting
stand adjourned to a date to be determined. The meeting was hostile,
muted and unplugged the microphone
(sic) and threatened to take the
chairman out. At this the chairman adjourned the meeting
indefinitely because of unruliness.”
The minute is dated 3 December 2009
and is signed by the fifth applicant in his capacity as chairman.
80. After the AGM the respondents took
the position that as a matter of law all directors ceased to be
directors at the commencement
of the AGM and no further directors
were elected at the meeting. The next day, 3 December 2009, the
developer appointed the fourth
and fifth applicant, as well as Ms. H.
Koekemoer and Mr. W. du Toit as directors. These four persons met on
the same day and elected
the fifth applicant as chairman and Ms.
Koekemoer as vice-chairman.
81. The respondents, in a letter dated
2 February 2010 addressed to the management agent and the company
secretary, attach a transcript
of the proceedings of the AGM and
contest the applicants’ account of the events. It is apparent
from the transcript that
the members did not accept the fifth
applicant as either chairman of the meeting or as chairman of the
board of directors. Though
not entirely obvious from the transcript,
it seems that van Eeden assumed the chair of the meeting with the
approval of the resident
members in attendance. The meeting then
took the view that the AGM had been called on short notice. Van
Eeden informed the meeting
that the AGM could not take place because
the requisite percentage to condone late notice, as required by
section 186 of the Act,
was not in attendance. He next announced that
the meeting could not be adjourned and a new AGM had to be called.
With that the
meeting ended without attending to any business.
82. Article 11.1 provides that each
director shall continue to hold office as from the date of his
appointment until the AGM next
following his appointment at which he
will be deemed to have retired. Article 11.5 provides that the
appointment of directors of
the HOA shall terminate automatically at
each AGM unless re-elected. The respondents submit that because the
AGM was called off
rather than adjourned, van Eeden and the other
member elected directors were the only persons who remained directors
beyond 2 December
2009 (the developer appointed directors having
resigned), and accordingly that any directors meetings after that
which did not
include them were irregular.
83. The respondents further contend
that even if the AGM was adjourned, there was a duty to re-convene it
within 21 days as required
by section 192 of the Act. This did not
happen.
The events subsequent to the AGM of
2 December 2009
84. On 22 January 2010 a meeting of
the board of directors was convened. In attendance were the four
directors appointed by the
developer, as well as the second and third
applicants, who had not been re-appointed, but who were recorded in
the minutes as attending
as “nominees” of the developer.
No member elected directors were in attendance, nor did any receive
notice of the
meeting. Nothing in the minutes indicates that the
directors were of an intention to seek the election or appointment of
member
elected directors or to give effect to any of the resolutions
of the EGM.
85. On 24 March 2010, the respondents’
attorney addressed a letter to the attorney of the applicants. The
relevant parts
of the letter read:
“
1. The above
matter refers, and in particular our client places on record its
objection to the developer’s usurpation of
the board of
directors of the Wilds Home Owners Association (“the HOA”).
2. We wish to confirm
that we have consulted with our clients in this matter, and it has
come to our attention that your clients,
and in particular the
developer, have contrived to remove all the independent directors
from the current board, which now comprises
only the developer’s
nominees, some of whom did not (sic) even stay on the estate. As a
result, the proper functioning of
the board is completely undermined.
……
.
4. Our clients, as the
elected representatives of the Wilds HOA, have been informed by this
contrived board that they are no longer
entitled to attend board
meetings of the board of the HOA. As such they have been summarily
excluded from the deliberations of
the board, without any valid
reason.
5. Our instructions are
to place on record that the contrived board is not validly
constituted, and as such the developer’s
conduct has left the
HOA dysfunctional and without the competence or ability to take valid
decisions. Accordingly, we are in the
process of preparing a High
Court application which will permanently rectify this impropriety on
the part of your clients, and
introduce the appropriate management
mechanisms that will allow the HOA to operate in a manner which
benefits all its members.
……”
86. Neither the applicants, nor their
attorneys replied to this letter, beyond the latter informing their
counterparts that they
would take instructions.
87. On 7 May 2010 the respondents
filed an amended notice of motion in the counter-application. I will
deal with the relief sought
in the various versions of the notice of
motion in greater detail in due course. At this stage, it is
necessary only to draw attention
to the extended ambit of the dispute
between the parties introduced by the amendment. The first notice of
motion, filed on 4 September
2009 during the urgent proceedings,
sought an order appointing PWC to perform a forensic audit; amendment
of the Articles in accordance
with the resolutions in annexure RB21;
an investigation into the clubhouse and sporting facilities issue; a
declaratory order that
the requisition of the EGM was in compliance
with section 181 of the Act, and a further declaration that the
procedures for purposes
of special resolutions required in terms of
section 191 and 220 of the Act had been complied with. The amended
notice of motion
did not persist with the declarators (the necessity
therefor having fallen away). The orders for the forensic audit and
the amendments
were still sought, as was the investigation into the
clubhouse and sporting facilities issue. In addition, orders were
sought
i) joining Koekemoer and duToit; ii) declaring the EGM of 28
October 2009 to be valid; iii) declaring the first, second and third

respondents to be directors of the HOA; iv) declaring the first
respondent to be the acting chairperson of the HOA until the board

elects a chairperson; and v) directing the board to implement the
resolutions adopted by the EGM within 30 days. In the alternative,

an order was sought directing that an interim board of directors be
appointed for the HOA, pending finalisation of the main prayers,
such
board to consist of two directors appointed by the developer and two
elected by the members, and an independent lawyer to
be appointed as
chairman. As a further alternative, an order was sought placing the
HOA under judicial management. Finally, with
the suspended decision
of the board to pay two directors more than R200 000 in fees in mind,
an order was sought interdicting and
prohibiting the second to fifth
applicants from receiving any payments of any nature whatsoever from
the HOA in respect of the
previous litigation between the parties.
88. The amended notice of motion of 7
May 2010 was supported by a supplementary affidavit outlining the
history of the dispute,
augmenting the papers by outlining the
factual situation between September 2009 and May 2010 and justifying
the amendment of the
relief sought. The applicants filed an answering
affidavit to the supplementary affidavit on 15 June 2010 in which
they dealt with
the allegations made in the supplementary affidavit
and set out their opposition to the relief sought.
89. About six weeks later, on 27 July
2010, the applicants filed a supplementary affidavit, the purpose of
which was to properly
plead and raise as a preliminary point the
alleged failure by the respondents to follow the correct procedure
for the resolution
of disputes in terms of Article 41 of the
Articles. The Article, as sketched briefly earlier, requires disputes
arising out of
or in connection with the Articles to be determined by
an expert as specified in Article 41.3. Depending on the nature of
the dispute,
the expert may be either an advocate, accountant,
quantity surveyor, architect, engineer or appraiser. The clause is
essentially
an arbitration clause in that Article 41.8 provides that
the decision of the expert will be final and binding.
90. The respondents filed their reply
to the answering affidavit and answer to the applicants’
supplementary affidavit on
16 August 2010.
91. On 15 February 2011 the
respondents filed a second amended notice of motion in which they
persist with their prayers related
to the forensic audit and
investigation, the amendments to the Articles, the implementation of
the resolutions of the EGM, the
interdicting of payments to the
directors and the alternatives of an interim board or judicial
management. They no longer seek
an order declaring the first, second
and third respondents to be directors, or the first respondent to be
acting chairperson. It
is accordingly not necessary to determine the
precise consequence for the directorships of the 2009 AGM being
either abandoned
or adjourned. However, the respondents seek orders
declaring the AGM of 2 December 2009 and the decisions taken at it to
be null
and void – though it seems no decisions were actually
taken. In addition they request an order directing the HOA to
convene
a “special” general meeting within 60 days of any
court order to address the consequences of any relief that may be

granted including but not limited to the election of a new board of
directors.
92. On the same day, the respondents
filed a further supplementary affidavit dealing briefly with events
that took place after 16
August 2010. The applicants filed an answer
to that affidavit on 1 March 2011.
93. In the period after August 2010
the applicant circulated a call among members inviting them to file
nominations for persons
to serve on the sub-committees of the HOA.
Only one nomination was received. Furthermore, the board called,
convened and held
an AGM for the year ending 28 February 2010 on 1
December 2010. The developer appointed the fifth applicant (Kaplan),
the fourth
applicant (van Aarde) and the fourteenth and fifteenth
respondents (Koekemoer and du Toit) as directors. Only 32 owner
members
signed the attendance register at the AGM. These elected Mr.
B. Garlic, Mr. P. van Niekerk and Mr. Gert Le Roux as member elected

directors. The respondents suggest that the poor attendance was a
result of the ongoing conflict and a loss of confidence by the

members in the ongoing management of the company.
The notice of motion and the relief
sought in the counter-application
94. As just explained, the notice of
motion in the counter-application has undergone metamorphosis twice.
A fourth version was handed
up during argument, which because of the
relief I propose to grant I do not need to discuss. In the main the
relief sought is based
on section 252 of the Act which permits the
court to grant just and equitable relief if it appears to it that an
act or omission
of a company is unfairly prejudicial, unjust or
inequitable or that the company’s affairs are being conducted
in a manner
unfairly prejudicial, unjust or inequitable to a member
or to some part of the members of the company. Besides the relief in
terms
of section 252 of the Act, the respondents seek the other
declaratory orders and mandatory and prohibitory interdicts described

above.
95. Prayers 2-9 of the second amended
notice of motion read:
“
2. That Price
Waterhouse Coopers be appointed to perform a forensic audit on the
financials of the first applicant from inception
thereof, in
accordance with the forensic audit scope attached to annexure “RB21”
to the founding affidavit, and to
report back to the applicants, the
respondents, and the above Honourable Court pertaining to its
findings, within a period of six
months from this order;
3. That the auditors
Price Waterhouse Coopers be requested to investigate in particular
items 6, 7 and 10 of the resolutions referred
to in the requisition
annexed as annexure “RB21” to the founding affidavit;
4. That Price Waterhouse
Coopers be requested to investigate all facts and circumstances
surrounding the promises of the developer
relating to the proposed
clubhouse and sporting facilities as part of the development of The
Wilds Estate, and to report back to
the applicants, respondents and
this Honourable Court thereon within a period of 6 months of this
order;
5. That the articles of
association shall be amended in accordance with paragraphs 1.1 to 1.9
of the resolutions stipulated in annexure
“RB21” annexed
to the founding affidavit of the applicants;
6. An order directing
that the first applicant convene a special general meeting within
sixty days of this court order to address
inter
alia
the
consequences of any relief that may be granted by the honourable
court including but not limited to the election of a new board
of
directors;
7. An order declaring
that the Annual General Meeting of 2 December 2009 is null and void;
8. An order declaring
that all the decisions taken at the above-mentioned annual general
meeting are null and void;
9. An order directing the
board of directors of the First Applicant to implement the
resolutions adopted by the aforesaid Special
General Meeting as
contained in annexure “A” annexed hereto within 30 days
after a new board of directors referred
to in paragraph 6 has been
appointed.”
96. Prayer 10, dealing with an interim
board of directors, reads:
“
10. Alternatively
to prayers 2 to 9 above, an order directing that an interim board of
directors be appointed for the First Applicant,
pending finalisation
of prayers 2-9 above to be enrolled for hearing on the normal opposed
roll, pending trial and execution of
any orders granted in respect
thereof. The interim board of directors is to be constituted as
follows:
10.1 Two directors are to
be appointed by the Sixth Applicant;
10.2 Two directors are to
be appointed by the members in general meeting;
10.3 Mr. Etienne Naude
alternatively
an
independent advocate, to be appointed by the chairperson of the
Pretoria Society of Advocates, who shall be appointed as chairman
of
the first applicant and who shall have a casting vote;
10.4 Such directors
referred to in paragraphs 11.1 to 11.3 above shall have all the
rights and obligations of directors in terms
of South African law,
and their appointment shall only terminate by order of court, or as
set out in paragraph 11.5 below;
10.5 The appointment of
the aforesaid directors and independent chairman may only be
terminated by a court order, or by agreement
between all five
directors, who will be entitled to appoint another director in the
event of one director resigning, by unanimous
consent or a court
order.”
97. Prayer 11 deals with the further
alternative of appointing a judicial manager and placing the HOA
under judicial management.
Because I do not propose to make any such
order there is no need to set it out.
98. Prayer 12 is the prayer seeking an
order interdicting and prohibiting the second, third, fourth and
fifth applicants from receiving
any payment of any nature whatsoever
from the HOA in respect of all the previous litigation between the
parties. Prayer 13 seeks
an order that the second to sixth applicants
(that is all the applicants save the HOA) be ordered to pay the costs
of both the
urgent application and the counter-application jointly
and severally.
Section 252 of the Act
99. The relief sought in the
counter-application asserts the remedy against oppressive or unfairly
prejudicial conduct provided
in section 252 of the Act. The
provisions of the section of relevance in this case read:
“
(1) Any member of
a company who complains that any particular act or omission of a
company is unfairly prejudicial, unjust or inequitable,
or that the
affairs of the company are being conducted in a manner unfairly
prejudicial, unjust or inequitable to him or to some
part of the
members of the company, may, subject to the provisions of subsection
(2), make an application to the court for an order
under this
section.
(2) ….
(3) If in any such
application it appears to the court that the particular act or
omission is unfairly prejudicial, unjust or inequitable,
or that the
company’s affairs are being conducted as aforesaid and if the
court considers it just and equitable, the court
may, with a view to
bringing to an end the matters complained of, make such order as it
thinks fit, whether for regulating the
future conduct of the
company’s affairs or for the purchase of the shares of any
member of the company by other members thereof
or by the company and,
in the case of a purchase by the company, for the reduction
accordingly of the company’s capital,
or otherwise.
(4) When an order under
this section makes any alteration or addition to the memorandum or
articles of a company -
(a) the alteration or
addition shall, subject to the provisions of paragraph (b), have
effect as if it had been duly made by special
resolution of the
company; and
(b) the company shall,
notwithstanding anything contained in this Act, have no power, some
as otherwise provided in the order,
to make alteration or addition to
its memorandum or articles which is inconsistent with the order,
except with the leave of the
court.
(5)(a) A copy of any
order made under this section which alters or adds to or grants leave
to alter or add to the memorandum or
articles of the company shall,
within one month after the making thereof, be lodged by the company
in the form prescribed with
the registrar for registration.”
100. The section clearly targets two
classes of corporate behavior: firstly, acts or omissions by a
company that are unfairly prejudicial,
unjust or inequitable; and
secondly the conduct of the affairs of the company in a manner which
is unfairly prejudicial, unjust
or inequitable to a member or to some
part of the members of the company. While the respondents have
pointed to various acts and
omissions as being unfairly prejudicial,
unjust and inequitable, a reading of their complaints as a whole
reveals that they apprehend
that the affairs of the company are being
conducted by the developer and its nominated directors in a manner
which is unfairly
prejudicial, unjust and inequitable to a sizeable
part of the membership.
101. If the court is persuaded that
there has been what may broadly be referred to as “unfair
conduct”, and if it considers
it just and equitable to do so,
it may make such order as it thinks fit. The discretion in relation
to the possible relief to
remedy the unfair conduct is accordingly a
wide one, which must be exercised with a view to bringing to an end
the matters complained
of. The section is to be interpreted and
applied to advance the remedy rather than limit it -
Donaldson
Investments (Pty) Ltd v Anglo-Transvaal Collieries
1980 (4) SA 204
(T) 209.
102. The phrase “the affairs of
the company are being conducted” is wide enough to cover
conduct by anyone who is taking
part in the conduct of the affairs of
the company, whether
de
facto
or
de
jure,
and would in my view
include the conduct of the developer in the general meeting and its
nominated directors on the board insofar
as that conduct relates to
the corporate affairs of the HOA
-
Re
HR Harmer Ltd
[1958] 3 All
ER 689
(CA) 698; and
Heckmair
v Beton & Sandstein Industrieë (Pty) Ltd
1980
(2) SA 353
(SWA) 354. A distinction must be kept between acts or
conduct of the company on the one hand, and acts or conduct on the
part
of a shareholder in his private or some other capacity on the
other -
Re Unisoft Group Ltd
(No 3)
[1994] 1 BCLC 609
,
622-623. However, notwithstanding how a shareholder or director may
be motivated privately to vote, resolutions of the general
meeting
and of the board of directors are decisions of the company and the
consequences of them are consequences brought about
by the conduct of
the company - Blackman
et
al
:
Commentary
on the Companies Act
9-12.
Section 252 will generally relate to the way that some corporate
power is being exercised. In
Re
Legal Costs Negotiators Ltd
[1999]
2 BCLC 171
(ChD) 199, it was said:
“
If the company
through its directors or in general meeting exercised it powers to
conduct the affairs of the company in an unfairly
prejudicial manner
which failed to give effect to the legitimate expectations of it
contributories and the state of affairs could
not be cured by the
petitioners through the exercise of powers available to them, then a
petition … would lie.”
103. It has been held that section 252
applies only in regard to what is taking place or has already taken
place, and that therefore
relief is not available where an order is
sought forbidding threatened conduct, for example perhaps, the
threatened exercise of
a veto -
Investors
Mutual Funds Ltd v Empisal (South Africa) Ltd
1979
(3) SA 170
(W) 177. Blackman (
op
cit
9-14) submits on the
contrary that there would seem to be no reason why the threat to do
something cannot itself constitute conduct
entitling the member or
members to an order, especially when the threat would be unfairly
prejudicial, unjust or inequitable if
put into effect.
104. The test is essentially one of
fairness. In its earlier guise the section targeted “oppressive
conduct” which meant
conduct which was burdensome, harsh and
wrongful. The requirement is now less onerous. What is required is
fair play or fair
dealing. In
Elder
v Elder & Watson
[1952]
SC 49
, 55 it was said that the conduct complained of had “to
involve a visible departure from the standards of fair dealing and
a
violation of the conditions of fair play on which every shareholder
who entrusts his money to a company is entitled to rely”.
A
member usually will be entitled to relief where a dominant group of
shareholders use their greater voting power unfairly disabling
others
from enjoying fair participation in the affairs of the company -
Aspek Pipe Co (Pty) Ltd v
Mauerberger
1968 (1) (SA)
517 (C) 527. The point was made similarly by Slade J in
Re
Bovey Hotel Ventures Ltd
(cited
in
Re RA Noble (Clothing)
Ltd
[1983] BCLC 273)
as
follows:
“
Without prejudice
to the generality of the wording of the section, which may cover many
situations, a member of a company will be
able to bring himself
within the section if he can show that the value of his shareholding
has been seriously diminished or at
least seriously jeopardized by
reason of a course of conduct on the part of those who have had
de
facto
control
of the company, which has been unfair to the member concerned.”
Generally, fairness is a matter of
balancing all the interests involved in the light of the history and
structures of the company
and the conduct complained of viewed as a
whole -
Reid v Bagot Wells
Pastoral Co (Pty) Ltd
[1993] SASC 4323
;
(1993)
12 ACSR 197
, 212 SC (SA). In
Re
Saul D Harrison and Sons plc
[1995] 1 BCLC 14
(CA) Hoffman LJ explained that the concept of
fairness was chosen in order to free the court from technical
considerations of legal
rights and to confer on the court a wide
power to do what appeared just and equitable. This does not mean
that the court can do
whatever the individual judge happens to think
is fair. Fairness must be applied judicially and rationally.
105. Within the context of company law
an important consideration in granting relief against unfair or
inequitable conduct always
will be that a company is an association
of persons for an economic purpose, usually entered into with legal
advice and some degree
of formality, the terms of which association
are contained in the articles of association and sometimes in
collateral agreements
between shareholders. This feature, said Lord
Hoffman in
O’Neill v
Phillips
[1999] UKHL 24
;
[1999] 2 All ER
961
966-967(HL), “leads to the conclusion that a member of a
company will not ordinarily be entitled to complain of unfairness

unless there has been some breach of the terms on which he agreed
that the affairs of the company should be conducted”.
This
means that the enquiry will invariably begin with a consideration of
the articles of association and whether the conduct is
in keeping
with them, holding in mind the principle that by becoming a
shareholder in a company a person undertakes by his contract
to be
bound by decisions taken in accordance with the provisions and
prescriptions of the articles. However, the powers of the
directors
under the articles are invariably fiduciary powers to be exercised
for the benefit of the company as a whole and should
not be exercised
for some illegitimate ulterior or inequitable purpose. Moreover,
there will be instances in which equitable considerations
will make
it unfair for those conducting the affairs of the company to rely
upon their strict legal powers -
O’Neill
v Phillips
(
supra
967). Unfairness may
consist not only of a breach of articles but also in using the
articles unfairly or in a manner contrary to
good faith.
106. The proper approach is that
enunciated by Lord Wilberforce in
Westbourne
Galleries Ltd, Re
[1973] AC
360
, 379 where he declared in relation the just and equitable
winding-up remedy:
“
The foundation of
it all lies in the words ‘just and equitable’ and, if
there is any respect in which some of the cases
may be open to
criticism, it is that the courts may have been too timorous in giving
them full force. The words are a recognition
of the fact that a
limited company is more than a mere legal entity, with a personality
in law of its own: that there is room in
company law for recognition
of the fact that behind it or amongst it, there are individuals, with
rights, expectations and obligations
inter se which are not
necessarily submerged in the company structure. The structure is
defined by the Companies Act and by the
articles of association by
which shareholders agree to be bound …… The ‘just
and equitable’ provision
does not … entitle one party to
disregard the obligation he assumes by entering a company, nor the
court to dispense him
from it. It does, as equity always does,
enable the court to subject the exercise of legal rights to equitable
considerations,
considerations, that is, of a personal character
arising between one individual and another, which may make it unjust,
or inequitable,
to insist on legal rights, or to exercise them in a
particular way.”
107. The UK Court of Appeal summarised
the principles underlying the remedy as follows in
Grace
v Biagioli Titanium Electrode Products Ltd, Re
[2000] BCC 85
at para 61:
“
(1) The concept of
unfairness, although objective in its focus is not to be considered
in a vacuum. An assessment that conduct is
unfair has to be made
against the legal background of the corporate structure under
consideration. This will usually take the form
of the articles of
association and any collateral agreements between shareholders which
identify their rights and obligations as
members of the company.
Both are subject to established equitable principles which may
moderate the exercise of strict legal rights
when insistence on the
enforcement of such rights would be unconscionable;
(2) It follows that it
will not ordinarily be unfair for the affairs of a company to be
conducted in accordance with the provisions
of its articles or any
other relevant and legally enforceable agreement, unless it would be
inequitable for those agreements to
be enforced in the particular
circumstances under consideration. Unfairness may, to use Lord
Hoffmann’s words, ‘consist
in a breach of the rules, or
in using rules in a manner which equity would regard as contrary to
good faith’: see p.1099A;
the conduct need not therefore be
unlawful, but it must be inequitable;
(3) Although it is
impossible to provide an exhaustive definition of the circumstances
in which the application of equitable principles
would render it
unjust for a party to insist on his strict legal rights, those
principles are to be applied according to settled
and established
equitable rules and not by reference to some indefinite notion of
fairness;
(4) ………….
(5) A useful test is
always to ask whether the exercise of the power or rights in question
would involve a breach of an agreement
or understanding between the
parties which it would be unfair to allow a member to ignore. Such
agreements do not have to be contractually
binding in order to found
the equity;
(6) It is not enough
merely to show that the relationship between the parties has
irretrievably broken down. There is no right of
unilateral withdrawal
for a shareholder when trust and confidence between shareholders no
longer exist. It is, however, different
if that breakdown in
relations then causes the majority to exclude the petitioner from the
management of the company or otherwise
to cause him prejudice in his
capacity as a shareholder.”
108. Mr.
Ellis
SC, who appeared on behalf of the applicants, placed much in store on
the principle of non-interference in internal management,
which he
stressed the court should observe when interpreting section 252. The
court, he submitted, notwithstanding the far-reaching
terms of the
remedy, should avoid an unwarranted assumption of the responsibility
for the management of the company. The members
have contractually
undertaken to abide by the articles and structures of the company.
Members do not have a remedy in terms of
section 252 merely because
they have been outvoted or because they are continuously outvoted, no
matter how galling or financially
disadvantageous -
In
re M Dalley & Co
[1968] HCA 82
;
(1968)
1 ACLR 489
(SC:Vic). It is not enough that an entrenched shareholder
may cause members discomfort, especially when it acts in terms of its

powers and entitlement in terms of the articles. Nor, he submitted
further, does section 252 entitle the court to re-write the
articles,
but only to subject them to be exercised in an equitable manner. I
accept fully that the court should proceed cautiously,
but the last
proposition is not correct. The express provisions of section 252(4)
and 252(5)(a) envision the court issuing an
order making an
alteration to the articles. And the subsection unambiguously provides
that any such order shall have the same effect
as if the amendment to
the articles had been passed by a special resolution. Moreover, in
terms of section 252(4)(b), any amendment
effected to the articles by
means of a court order in terms of the subsection may only be altered
by a further court order. In
short, the power of the court to make
an order “as it thinks fit” includes the power to
intervene in the internal arrangements
of a company and to amend the
articles when it considers it just and equitable to do so; typically,
I would surmise when the articles
are structured in a way denying a
significant part of the membership fair participation in the affairs
of the company. The fact
that the courts have to date not resorted
to the power to amend the articles does not detract from the
authority to do so in terms
of the section. In
Bader and Another v Weston and Another
1967
(1) SA 134
(C), 147F; Corbett J (as he then was) had no doubt that an
amendment to the articles with a view to bringing an end to the
matters
complained of was competent in terms of the provision.
The essence of the respondents’
complaint of unfairly prejudicial, unjust or inequitable conduct in
the management of the
affairs of the company
109. The point of departure, the
respondents submit, for the purpose of assessing whether the affairs
of the company have been conducted
in an unfair manner, is
recognition of the
sui
generis
nature of the
relationship between the members and the company in the context of a
developmental scheme for the establishment of
a security residential
estate. The members are not typical shareholders who have invested
money in a company in exchange for shares
and annual dividends to be
drawn down from trading profits earned in a commercial enterprise.
The company is an association incorporated
not for gain in terms of
section 21 of the Act, having as its main object the promotion of
communal or group interests. The relationship
of the members with
each other is akin to that of members of a voluntary association
established in pursuit of a social or cultural
objective. The
majority of the members in the HOA are individual home owners in the
residential estate; while the developer is
a member by virtue of its
position as promoter and its continuing ownership of the remaining
215 undeveloped erven in Phase 1 of
the estate. The entrenched
position of the developer is atypical, though, in my estimation, not
illegitimate, at least for the
initial phase of the development.
110. The establishment of the security
residential estate came about as a consequence of the developer
purchasing the land, devising
the development plan and the
development scheme, and marketing the product resulting in the sale
of the erven to the members. The
advertising material promised to
create amenities and facilities in the estate, including
inter
alia
a landscaped central
boulevard (Trumpeters Loop) leading to a secure recreation area
featuring a swimming pool, tennis courts,
squash courts, bowling
greens, trim park, walking trails and a clubhouse. In one
promotional document (pg. 358 of the record),
the amenities are
stated to be “included in the price”. It is not denied
that in spite of the development having been
in progress for about
eight years none of the amenities are in place and none of the
promised facilities have been brought to fruition.
The “landscaped
central boulevard”, Trumpeter’s Loop, was not financed by
the developer, but, as explained above,
was in effect paid for by the
HOA setting off the levies payable by the developer. Whether the
funding of the landscaping was authorised
by the members is the
pivotal controversy which resulted in the present litigation. The
respondents, and the members aligned with
them, object to subsidising
the capital costs of the development out of levies.
111. This quarrel set in motion a
series of events which the respondents characterize separately and
collectively as unfair, unjust
and inequitable management of the
affairs of the company justifying the intervention of the court. The
alleged unfair conduct
includes: the transfer of the liability for
the capital cost for the landscaping from the developer to the HOA;
the improper accounting
for the cost of the landscaping; the refusal
of the board of directors to abide the wish of the members for the
conduct of a forensic
audit; the suspension of the finance committee;
the exertions of the board to thwart the convening of the EGM
requisitioned by
a sizeable group of members; the imposition of a
special levy by the board with a view to disenfranchising members at
the EGM;
the obstructionist approach followed by the developer
nominated directors at the EGM; the improper convening and conduct of
the
2009 AGM; the attempt to pay the developer nominated directors a
fee for attending to the litigation, payable from the special levy;

the threat of the developer to use his veto to prevent any alteration
of the Articles; the failure of the developer to stick to
his
collateral agreements to the members of the HOA; the risk of the HOA
being used as a vehicle to bankroll the capital expenditure
of the
developer in Phase 2 of the development out of members levies; and
the general conduct of the affairs of the HOA by the
developer
nominated directors during 2010-2011. I turn now to deal with each
of these issues and the submissions made in relation
to them.
112. In reviewing the conduct, the
respondents submit that besides keeping in consideration that the
company is an association not
for gain and without a profit motive,
the conduct of the nominated directors should be examined in the
context of the estate being
a scheme for communal living, where
considerations of majority rule, financial transparency,
accountability and the receptivity
of office bearers is paramount to
harmonious living as expressed in the company’s main business
and object. The respondents
profess that it was unlikely that the
individual homeowners, when signing on, appreciated the full extent
of the developer’s
entrenched position, which was intended at
conception to be temporary, but has endured because of the economic
downturn and the
inability of the developer to divest itself of its
remaining 215 erven.
The liability and accounting for
the cost of the landscaped boulevard
113. Although I have traversed some of
the evidence and issues related to this dispute, a fuller review is
needed to ascertain whether
there has been unfairness in the conduct
of the affairs of the company.
114. The fact that the advertising
material declared the cost of the landscaped boulevard to be included
in the price of purchasing
an erf in the development, supports the
conclusion that it is manifestly a capital development cost for the
account of the developer.
The applicants say however that subsequent
to the distribution of the promotional material an oral agreement
between the HOA and
the developer was entered into in the early
stages of the development which allowed for the costs of the
landscaping to be borne
by the HOA and set off against the
developer’s levies. The applicants have tendered little
evidence as to the particular
terms of the alleged agreement, nor do
they disclose the exact date of its conclusion. The only directors
of the HOA at the time
were Mr. P.J. van Vuuren, the principal, if
not sole, shareholder of the developer, and Mr. Roos, a director
appointed by the developer.
In other words, on the applicants’
version the alleged oral agreement was concluded between the
developer and the then board
of directors of the HOA consisting of
the developer and one of his nominated directors. The fact that Mr.
P.J. van Vuuren represented
the developer and the HOA simultaneously,
according to the respondents, constitutes a conflict of interests,
which required the
approval of the general meeting. It is
furthermore uncertain how many members of the HOA there were at the
time. The first general
meeting of the HOA took place in November
2004.
115. The applicants point out that
nothing in the conditions of establishment imposed any obligation to
do the landscaping on the
developer. The lack of any such reference
in the conditions, to my mind, is at best inconclusive. The key
question is whether
the HOA assumed the liability. The applicants
however insist that the members of the HOA were always aware of the
agreement and
acquiesced in the decision to have the HOA assume the
liability.
116. The respondents deny the
existence of the agreement and allege that in any event it would have
been in breach of the Articles,
and possibly the Act.
117. The cost of the landscaping is
set out in an invoice dated 12 October 2007 (some two to three years
after most of the work
was completed) under the letterhead of the
developer (Annexure HK5). The invoice is stated to be in respect of
“landscaping
of gardens on municipal land on behalf of the
Association on the following dates”. The dates range from
February 2004 to
April 2007. The total amount claimed is R2049795,44
and seems to be in respect of various payments made during the period
to two
service providers, namely “Bokamosa” and “The
Nursery”. No invoices were submitted to the HOA before October

2007, even though the services were rendered mainly in 2004 and 2006,
and were paid by the developer at the time.
118. The respondents dismiss the
applicants’ claim that the members acquiesced in the
arrangement as an opportunistic distortion
which glosses over the
enduring discord and dissent as evidenced in the minutes of various
meetings between 2004 and 2007; and
hence contend that the factual
basis of the applicants’ justification is blatantly false. The
very misrepresentation of the
true situation, they say, is itself
unfairly prejudicial behavior in the conduct of the company’s
affairs. In view of that
it is important to review the relevant
discussions and decisions recorded at each meeting.
119. The subject seems to have arisen
for the first time at the directors’ meeting of 23 June 2005,
to which I have previously
referred. On that occasion, it may be
recalled, one of the member directors, Mr. van der Merwe, enquired
whether the developer
was paying its levies. Mr. Faure, a developer
nominated director, and the third applicant, is recorded in the
minutes as replying
that the levies were payable but that the
developer was not paying them, because “he deducts the money
from the expenses
that he is paying at this stage, for example the
landscaping”. Faure undertook to forward a report “that
explains
this in detail”. It is not noted in the minutes, and
hence was probably not pointed out, that this arrangement was in
terms
of an earlier agreement concluded between the developer and the
HOA prior to the election of member directors. The first time the

members elected directors was at the EGM of 9 November 2004. The
agreement, if it was indeed entered into, would thus have been

concluded on the applicants’ version before that date. The
landscaping expenses which the developer would have incurred before

this time, according to the invoice Annexure HK5, would have been in
the order of R600 000.
120. Faure submitted a report at the
directors’ meeting of 22 September 2005. The relevant minute
reads:
“
After the
directors discussed this matter it was clear that:
(1) There was (sic)
levies that was supposed to be paid by the developer and,
(2) There was an expense
incurred by the developer that was supposed to be paid by the HOA.
Therefore it was decided
not to show this income and expense on the financial statements
because this would leave the HOA with an
even bigger deficit.
AF (third applicant)
informed the meeting that an explanation of the expenses as well as
the levies that was supposed to be paid
would be enclosed in the
directors’ report and that the chairman will explain this to
the owners at the Annual General Meeting.
See appendix A for the
developer levies v cost breakdown that was discussed.
CvdM (van der Merwe)
suggests that all future maintenance be done by procedure and that
the process must be transparent. The work
will go out on a tender
and the directors will choose the appropriate quotation.”
Appendix A is not annexed to the
minutes. The document the applicants allege is Appendix A (Annexure
HK7), which is disputed by
the respondents, includes no costs
breakdown but only a statement of levies. Van der Merwe has filed an
affidavit in these proceedings
in which he avers that no Appendix A
including a cost breakdown was presented at the meeting. It is not
essential to resolve the
dispute conclusively. Suffice it for present
purposes to say that absent a document according with the description
of Appendix
A in the minutes, the applicants’ version that a
breakdown of the costs of the landscaping was discussed at the
meeting is
questionable and less creditworthy.
121. The applicants state in the
answering affidavit that Faure reported to the members at the AGM of
1 November 2005 that the developer
had set off its levies payable
against the expenses incurred for the establishment of the gardens in
Trumpeter’s Loop and
that no objection was raised in response.
This in their view amounted to acquiescence and affirmation that “the
meeting resolved
and confirmed that the HOA will fund the project for
the establishment of the gardens in Trumpeter’s Loop”.
The respondents
charge that these averments are demonstrably false
and aimed at misleading the court. The only reference to the issue
in the minutes
of the AGM appears under item 3: “Consideration
of the Chairman’s Report”, where it is noted:
“
Garden - entrance
of Rhino Ridge: There are plans for the entrance and the directors
are requested to get comparative quotes. A
tender process will be
put into operation. The HOA will fund this project as they have
funded the other gardens. The residents
were not satisfied with this
as it was felt that the developer should take responsibility for the
infrastructure and HOA is to
maintain it - this will be communicated
to the developer.”
122. There is nothing at all in the
minutes of the AGM indicating that the meeting resolved that the HOA
will fund the establishment
of the gardens on Trumpeter’s Loop.
Indeed, to the contrary, the members objected to such and resolved
informally that in
their view such was a cost for the developer. The
members manifestly rejected what the chairman sought to present to
them as a
fait accompli
.
There is also no minute to the effect that the developer and the HOA
had earlier in 2004 concluded an agreement to the effect
that the HOA
would be liable. There is moreover no evidence that the developer
afterward communicated with the members regarding
the objection
raised at the AGM. It is consequently clear that at least from this
point onwards the developer had no right or authority
from the
general meeting to continue to incur landscaping costs for the
account of the HOA. Notwithstanding that, the developer
continued to
incur costs in the amount of R1,5 million subsequent to the meeting
in respect of the landscaping of Trumpeter’s
Loop. One may
assume therefore either that the developer was not updated about the
objection raised by the members, or, if informed,
chose to ignore it.
123. The matter came up again at the
directors’ meeting of 25 January 2006 at which quotations for
the proposed landscaping
were discussed. The deponent to the
answering affidavit again misstates what is reflected in the minute
by omitting to mention
that the issue remained contentious and
unresolved. The minute specifically recorded that the developer’s
refusal to carry
the cost was a “contentious issue” that
required more discussion. No reference was made to the existence of a
contract
or arrangement that excused the developer from liability.
124. The applicants then claim that on
8 February 2006 the directors resolved that the developer would
finance the gardens out of
the levy contributions payable by the
developer. Such a course of conduct would have been superfluous had
there been a prior agreement.
Yet again the deponents’ averment
is at variance with the minutes of the meeting, which note:
“
The Developer will
finance the gardens out of the levy contributions from the developer.
WG (a member director) was not happy with
this decision as he said
the memorandum and Articles of Association says that levies can only
be utilised mainly for maintenance.
WG feels that this should be
taken to the AGM for the owner’s approval. WG stated that he
was not prepared to sign anything
to approve this as he feels that it
is in contravention of the Memorandum and Articles of Association.
This will be investigated.
WG and CR also felt it should be a joint
responsibility between the developer and the HOA to develop these
gardens, as it is neutral
territory it belongs to Tshwane. AF to
take up with the developer and give feedback to the HOA.”
In view of that, it is false and
misleading to state that the directors resolved at this meeting to
finance the gardens out of levies.
The issue remained contentious
and the resolution was to investigate the issue further.
125. The board thereafter invited the
intervention of the attorney of the applicants, Mr. Johan Meyer, who
addressed the board at
its meeting of 29 March 2006 in order to give
his interpretation of the Articles regarding the use of levies for
capital outlay.
The minutes deal with the discussion as follows:
“
Johan Meyer a
lawyer was invited to give his interpretation of the Memorandum and
Articles of Association regarding the use of the
levies for capital
outlay. He highlighted that this was a standard clause in security
complex contracts. The big dispute is who
is responsible for
carrying the cost of the garden. The HOA feels if the Developer does
not want to contribute to the garden why
must they be responsible for
the full amount as this is neutral territory that belongs to Tshwane
Town Council. The argument was
used that the estate was sold through
brochures displaying beautiful gardens and double security and this
is what residents expect.
WG feels that although the HOA paid for
the first gate’s gardens the residents were not well informed
and therefore it went
ahead but should they approach the residents
now they will not be happy about having to lay out the second garden.
WG requested
that the developer put in writing on their letterhead
that they are not prepared to pay for or contribute any monies toward
the
second entrance’s garden. Johan Meyer stated as the first
entrance’s garden was paid by the HOA it can be seen as a

president (
sic
:
“precedent”) that was set and the developer is not
deviating from his original purpose, he will again be prepared
to
install the second garden if he can set it off against his levies
payable. The developer is (not) using this amount of money
for
private gain but rather to enhance the development. WG said that at
present the company is insolvent due to not receiving
all the levies
that it should have and now this is going to be repeated. WG
suggested raising this at the AGM for discussion as
he feels that the
Developer and the HOA must come to some compromise. WG again
requested that this issue be referred back to the
developer for
further consideration. AF said he would discuss this with the
developer and get an answer from him in writing.”
126. Mr. Meyer, as I have said, was
and is the applicants’ attorney of record. Prior to his
presentation to the board he
had consulted with the developer. Once
again, therefore, it is noteworthy that he makes no reference to a
prior agreement between
the developer and the HOA in terms of which
the costs would be borne by the HOA to be set-off against the
developer’s levies.
He mentions only the “precedent”
created by the manner in which the earlier costs had been dealt with.
127. In response to this interchange
the developer addressed its letter of 26 April 2006 to the board
regarding the issue, which
reads as follows:
“
Hiermee verwys ons
na die versoek van The Wilds Home Owners Association insake die tuine
op die Stadsraad grond.
Graag bevestig ons dat
ons is nie bereid om enige bydrae van Kapitale aard teenoor genoemde
tuine te maak nie.
Ons gaan die Kapitale
fondse voorskiet vir die installering van die tuine in lieu van ons
heffingsverpligtinge.
Ons beskou die saak as
afgehandel.”
128. The minutes of the directors’
meeting of the same day note that “suggestions” were made
to refer the matter
to the AGM. It is not stated who made the
suggestion but most probably it was one of the member elected
directors.
129. The matter received attention at
the AGM of 30 August 2006. In the minutes under the item:
“Consideration of Chairman’s
Report” it is noted
that the landscaping of Trumpeter’s Loop had been completed,
was put out to tender and the best
quote was accepted. It is further
noted that a letter had been received from the developer and that
“the HOA are to
maintain
the gardens”. The letter was not included in the documentation
for the meeting and its precise content is not reflected
in the
minutes. Nor was the issue regarding the capital cost of the gardens
alluded to in the chairman’s report, but was
only clarified in
response to questions arising in relation to the report. The recorded
minute is somewhat vague and ambiguous,
reading:
“
The owners were
informed that the gardens were being paid for by the owners. The
general feeling was that the developer should take
some financial
responsibility for these gardens”.
What is clear from the minutes is that
no resolution was put to or adopted by the AGM ratifying the capital
expenditure or authorising
the board to incur expenditure in respect
of the gardens up to an amount as determined by the meeting.
130. The respondents attach
significance to the failure of the board and the developer to have
made proper disclosure of the capital
costs and the set-off in the
financial statements for the year ending 28 February 2006 and in the
estimated income and expenditure
for the year 1 March 2006 - 28
February 2007, which were tabled at the meeting. I will deal with
the topic of non-disclosure more
fully later. The point for present
purposes is that the 2006 AGM gave the matter the limited
consideration it did without having
the benefit of the figures
relating to the capital cost and the amount set off against the
developer’s levies.
131. The applicants are of the opinion
that the matter was finally laid to rest at the 2006 AGM. The
respondents point to the expressed
sentiment of the AGM that the
developer had to take some responsibility as a clear indication that
the meeting rejected the
fait
accompli
with which they
had been presented.
132. The quarrel between the parties
gained in momentum and acrimony from this point onwards, especially
with the realisation among
some of the members that neither the costs
nor the set-off had been reflected in the financial statements.
133. Not much else came to pass on
this score until the next AGM on 19 June 2007. This meeting approved
the minutes of the 2006
AGM but made no reference to the issue of the
developer taking responsibility for the cost of the garden. In the
paragraph 50.23
of the answering affidavit the deponent avers that
Faure (the third applicant) explained to the AGM that the financial
statements
had to be withdrawn because there had been non-disclosure,
and indicated to the meeting the expenses which the developer was
setting
off against its levies, as well as the amount of the levies
payable by the developer were. The applicants do not back this
assertion
with any reference to the full and comprehensive minutes of
the meeting. The only relevant minute is item 7 headed:
“Consideration
of the Audited Annual Financial Statements 1
March 2006 - 28 February 2007” which reads:
“
AF reported that
the Financial Statements had been withdrawn. There was a problem
with the Developer’s levy contribution,
although it is
transparent it has to be reflected in the set of books. This has
been referred to the finance committee. The committee
will meet with
Midcity, the HOA and the new directors to come to a suitable
solution. The revised financial statements will be
ready in 7 days.”
134. The respondents deny that there
was any disclosure of either the costs of the gardens or the amount
of the set-off to the 2007
AGM. Their denial gains credence and
authenticity from the minutes of the subsequent directors’
meeting of 18 July 2007,
where it is noted that a complete list of
the expenses incurred had not been finalised.
135. The minutes of the directors’
meeting of 18 July 2007 expose a measure of dissatisfaction and
suspicion about the accounting
treatment of the costs of the gardens.
It is common cause that prior to this date, for a period of almost
four years, there had
been no disclosure of the expenses and set-off
in the financial statements. The relevant minute reads:
“
All expenses not
reflected in the books must be listed and submitted for approval.
A forensic audit must be
done on all levies by either current auditors or appointed auditors.
A written document must
be done to send to residents to clarify how the correction will be
done.
Midcity has compiled a
list of the levies payable by the Developer and handed it to the
auditor.
……
All expenses on behalf of
the HOA made by the Developer will be listed.
These lists are to be
checked by the board and then they can be included in the books.”
136. Despite the board suggesting that
a forensic audit be done (and this decision being supported in
subsequent resolutions of
the AGM), to date no forensic audit has
been conducted. The applicants’ view is that no resolution was
taken by the meeting,
and the matter was referred to the finance
committee for further consideration.
137. At the directors’ meeting
of 8 November 2007 a report compiled by Mr. W. Pretorius, being a
report of the finance committee
regarding levy increases, was
submitted. The report analysed the general financial position of the
HOA. In paragraph 4 under the
heading “Further Recommendations”
it made the following proposal:
“
(i) The advance
from the Developer to install gardens offset his levy contributions
(sic) be accepted provided that:
a. The Developer
provides the Conditions of Township establishment to the HOA and the
said conditions do not require the Developer
to install gardens.
b. The final figure is
audited and approved by the previous board of directors.
c. The financial
statements are approved on (sic) the Extraordinary General Meeting
(XGM).”
The minutes of the directors’
meeting of 8 November 2007 note that the report will serve to form
part of the agenda of the
upcoming EGM decided by the meeting to be
held on 8 December 2007. The agenda for the meeting was stated to
be: 1) Approval of
the Financial Statements; and 2) Approval of the
proposed budget.
138. The final version of the 2007
financial statements (Annexure HK12) includes a balance sheet
reflecting an amount of R1 642
965 as “Trade and other
payables” under Current Liabilities. Note 3.1 to the balance
sheet discloses the developer
as a trade creditor owed an amount of
R2 049 795 in respect of landscaping. Levies and contracting fees for
5 years (2003-2007)
are set off against this amount leaving a balance
of R890 954 owed by the HOA to the developer. The amounts owing as
levies and
contracting fees are disclosed for each year.
139. At the EGM on 8 December 2007 the
amended financial statements were approved by 169 votes in favour and
81 against. The votes
in favour were those of the developer. At the
meeting van Eeden objected, declaring that the developer was not
entitled to vote
on account of it not having paid its levies. The
applicants maintain they were entitled to vote by reason of the
set-off arrangement.
Accordingly, as the applicants see it, because
of the approval of the financial statements by the EGM there is no
longer any issue
with regard to the landscaping costs, the
developer’s levies and their non-disclosure. It sees no
difficulty in the fact
that for all intents and purposes it was the
judge in its own cause. On the other hand, only 81 other members
attended the meeting.
The exact number of members at this stage of
the development is not immediately evident from the papers and it is
thus difficult
to say categorically whether the members were the
victims of their own apathy.
140. As discussed earlier, not long
after the correction of the financial statements, the Independent
Regulatory Board for Auditors
found Mr. T.J. de Koker, the auditor,
guilty of making a material omission by not reflecting the
landscaping expenses and developer’s
levies in the financial
statements and failing to obtain any audit evidence in relation to
those items.
141. What might legitimately be
described as a breakdown between those controlling the HOA and a
significant number of its members
followed on these events, as can be
seen in the litigation which ensued.
142. The respondents have urged me to
declare finally whether or not the developer has exclusive liability
for the costs of the
landscaping. I hesitate to do so for two
reasons. Firstly, the amended notice of motion seeks no such relief;
and secondly there
is no need to do so for the purpose of deciding
whether the affairs of the company are being or have been conducted
in a manner
unfairly prejudicial, unjust or inequitable to some of
the members.
143. A determination of whether the
manner in which the landscaping costs and the set off were dealt with
constituted “oppressive”
or unfairly prejudicial conduct,
involves balancing all the interests concerned in the light of the
history and the structure of
the company, with reference to the
articles of association and, within limits, the other relevant,
collateral agreements and arrangements.
In the present case, of
particular importance, as I have intimated, is the fact that we here
have to do with a majority of the
membership being residents in a
security estate who have been denied effective voting rights and full
democratic participation
in the management of the company by reason
of the entrenched position of the developer. Added to that, the
development is ongoing
and the promises made (collateral to the
Articles) regarding the proposed facilities of the estate have not
been kept, with the
developer showing a clear intention to seek to
finance those commitments from levies payable by the members.
144. Although the advertising material
leaves the impression that the developer will pick up the tab for
“the landscaped central
boulevard” and the other
facilities, there is nothing in principle which prevents the
developer and the members from agreeing
to transfer that liability to
the HOA. The applicants’ version that such an agreement was
indeed concluded between the developer
and the two developer
nominated directors at the early stages of the development is
improbable. Firstly, there is no record, memorial
or minute
recording the conclusion of that agreement. Secondly, the alleged
existence of such an agreement was raised for the
first time late in
the day after litigation had commenced. And, thirdly, and most
importantly, there were several occasions in
the contentious
correspondence between the parties where had such an agreement been
concluded its existence would have been alluded
to and reliance
placed upon it; yet this never happened.
145. Even had the agreement existed
its genesis and execution probably would have been tainted by
illegality, unfairness and a conflict
of interests of sufficient
order that its conclusion would in and of itself have constituted
unfairly prejudicial conduct towards
the membership in the management
of the company’s affairs.
146. In the first instance, any such
agreement, or at least the one contended for by the applicants, might
have fallen foul of the
provisions of section 236 of the Act. The
contract supposedly concluded by the developer, P.J.J. van Vuuren
Beleggings (Pty) Ltd,
with the HOA represented exclusively by P.J.J.
van Vuuren and Mr. Roos, was a contract “of significance in
relation to a
company’s business” and thus one within the
purview of section 234(2) of the Act. Section 234(1) provides:
“
A director of a
company who is in any way, whether directly or indirectly, materially
interested in a contract or proposed contract
referred to in
subsection (2), which has been or is to be entered into by the
company or who so becomes interested in any such
contract after it
has been entered into, shall declare his interest and full
particulars thereof as provided in this Act.”
That interest has to be disclosed to
the members in general meeting. There is no evidence that van Vuuren
ever disclosed his interest
to the general meeting. It is uncertain
though how many members there were at the time the agreement was
supposedly concluded,
and what would have been needed for a general
meeting to be held. Nor, as required by section 239 of the Act, was
any resolution
in relation to the contract recorded in any minutes of
the board or the general meeting. The purpose of requiring the
disclosure
is to enable the general meeting to permit the board to
enter into the contract and to permit the interested director to be
counted
in the quorum and to vote on the contract. If the interested
director does not disclose his interest and the directors enter into

the contract, the contract is voidable at the instance of the company
as against the interested director and against a third party
(the
developer) if the third party had knowledge of the director’s
breach of duty (Blackman
op
cit
8-327). Moreover, in
terms of section 236 the resolution to enter the contract is equally
invalid. However, whatever the niceties
of statutory compliance, the
fact remains that at the AGM of 1 November 2005 the members gave a
clear indication that the developer
was not entitled to assume that
the HOA would accept liability for the landscaping costs after that
date.
147. The conclusion of a voidable
contract, by means of an invalid resolution, excusing one of the
directors (indirectly) from a
substantial liability to the company,
involving as it does a significant conflict of interests not
appropriately disclosed to the
general meeting would generally be
unfair, in that it would potentially enrich that director unjustly at
the expense of the members
to whom disclosure was not made. However,
the evidence on the papers is insufficient for me to reach any
definitive conclusion
about whether sufficient disclosure was made as
required by the statute prior to the 2005 AGM. At best it can be
said that the
developer ought fairly to have dealt with the conflict
of interests in a more transparent fashion, and should not have
continued
to incur additional expenses after the AGM.
148. Besides the inadequate disclosure
of the conflict of interests, the alleged oral agreement would have
fallen foul of the provisions
of the Articles of Association. The
agreement and all subsequent resolutions by the board which sought to
transfer the capital
cost of the landscaping from the developer to
the HOA were not in conformity with Article 6.14 which reads:
“
The directors or
the finance committee shall not be entitled to undertake on behalf of
the association any permanent works of a
capital nature exceeding an
amount to be determined by the general meeting on an annual basis
without the sanction of a resolution
of the association in general
meeting.”
There is no evidence before me of any
specific resolution by the general meeting before or after the 2005
AGM authorising the directors
to undertake any permanent works of a
capital nature (which the landscaping of Trumpeter’s Loop was)
or a general authority
to undertake such works up to a pre-determined
budget. At the very best for the applicants, the approval of the
amended 2007 financial
statements at the EGM of 8 December 2007 could
technically constitute implied retrospective ratification. Such would
not, at least
to my mind, exclude the taint of unfairness entirely.
The 2007 EGM was attended by a small percentage of the residents of
the estate
and the votes in favour were those exclusively vested in
the developer. Furthermore, the authorisation of permanent works of
a
capital nature by way of a general meeting resolution was not an
agenda item in the notice convening the meeting. Had it been,
more
residents might have shown interest in attending the meeting. In
addition, the entrenched position of the developer allowed
it to
validate its own conflict of interests, perhaps contrary to the
spirit of the Act. And, finally, it was never placed on
the agenda
that the developer required a resolution favouring the set-off
arrangement before it would be entitled to vote. Were
I to reject
the respondents’ accusation of unfairness simply on the basis
of the approval of the financial statements by
the 2007 AGM, I would
in effect hold that the exclusive votes of the developer in favour of
the financial statements: i) ratified
the possibly invalid agreement;
ii) authorised the expenditure; iii) approved the set-off; iv)
permitted the developer to vote
despite non-payment of its levies;
and v) was procedural despite the only agenda item being: “approval
of the financial statements”.
Fairness required rather that
each of these items should have been specified on the agenda to be
voted on by separate resolutions,
and that all members received
proper notice of them. That did not happen.
149. The applicants justify their
conduct with reference to Article 6.19 which provides:
“
The board may
enter into an agreement with the developer for the provision of a
capital sum and/or the transfer of land and/or equipment
to the
association in lieu or levies.”
I have not been referred to any
specific resolution in the minutes of the meetings of the board in
terms whereof the developer agreed
to provide a capital sum in lieu
of levies. But even accepting there was such an agreement, that alone
would not have entitled
the board to undertake the permanent works of
a capital nature, with the capital sum provided, without the approval
of the general
meeting in terms of Article 6.14. The fact remains, it
is undisputed, there was never a resolution adopted by the HOA in
general
meeting in respect of the establishment of the gardens along
Trumpeter’s Loop.
150. Moreover, as the minutes of the
various meetings of the board and the general meeting across the five
year period reveal, the
respondents and their associates never
acquiesced in the arrangement. It is important to keep in mind that
most of the landscaping
costs were incurred after November 2005, by
which time the dispute was very much alive. The developer and its
directors went ahead
in the face of opposition and without proper
authority. The board should have placed the issue overtly on the
agenda of the AGM
for a resolution in terms of Article 6.14 and to
have allowed an open, informed debate and a vote. Instead, it chose
largely to
obfuscate and followed an improper course in the financial
disclosure of the costs and levies. Its rationale for not disclosing

the amounts in the financial statements, as stated by Faure at the
directors’ meeting of 22 September 2005, namely “not
to
show this income and expense on the financial statements because this
would leave the HOA with an even bigger deficit”
was improper
and not in accordance with generally accepted accounting practice.
The non-disclosure was interpreted by the members
to be an
illegitimate attempt to conceal the fact that the HOA was bearing a
development cost which was for the account of the
developer.
151. In the final analysis, therefore,
the handling of the development landscaping costs by the board, in
conjunction with the developer,
is inescapably an instance in which
the affairs of the company were conducted in a manner unfairly
prejudicial to part of the members
of the company. All other
disagreements between the parties owe their provenance to this
primary dispute, resulting conspicuously,
as it did, in several
members of the company losing confidence in the directors of the
company.
The attempts to requisition and
convene an Extraordinary General Meeting
152. With that loss of confidence, the
activist members aimed their efforts at three targets. They sought
first to convene a general
meeting in order to alter the structure of
the company by amending the Articles of Association to remove the
entrenched rights
of the developer. They secondly (in view of the
uncovering of the irregular accounting) demanded a forensic audit.
And thirdly,
they hoped to enforce the un-kept promises of the
developer to provide the facilities described in the advertising
material.
153. The manner in which the
applicants responded to the attempts by the members to convene an EGM
was less than edifying and was
experienced by them as another
instance of unfair conduct.
154. Article 16.4 provides:
“
The directors may,
whenever they think fit, convene an extraordinary general meeting and
an extraordinary general meeting shall
also be convened on a
requisition made in terms of section 181 of the Act (i.e. members
representing not less than 10% of the voting
rights may requisition a
meeting), or in default may be convened by the requisitionists as
provided by and subject to the provisions
of that section.”
155. Article 17.1 requires 14 or 21
clear days notice of an EGM (depending on the nature of the business
of the meeting) specifying
the time and place of the meeting, the
general nature of the business and in the case of a special
resolution, the terms and effect
of the resolution and the reasons
for it.
156. The relevant parts of section 181
of the Act read:
“
(1) The directors
of a company shall, notwithstanding anything in its articles, on the
requisition of -
(a) …….
c) in the case of a
company not having a share capital, one hundred members of the
company or of members representing not less than
one-twentieth of the
total voting rights of all the members having at the said date (date
of the lodging of the requisition) a
right to vote at general
meetings of the company, within 14 days of the lodging of the
requisition issue a notice to members convening
a general meeting of
the company for a date not less than twenty-one and not more than
thirty-five days from the date of the notice.”
In terms of section 181(3) if the
directors do not issue the notice, the requisitionists may themselves
convene the meeting on 21
days notice. They are entitled in terms of
section 181(5) to recover any reasonable expenses incurred.
157. It will be recalled that the
first requisition lodged on 13 November 2008 gave notice of fifteen
resolutions aimed at removing
the directors, limiting their
authority, recovering the costs of establishing the gardens,
appointing PWC as auditors and for them
to do a forensic audit and
replacing the managing agent. The requisition was supported by proxy
forms signed by 381 members, being
considerably beyond the 5 percent
required by section 181 and the 10% required by the Articles. Faure,
the then chairperson, refused
to disclose to the member elected
directors the reasoning of the legal advice he had obtained that the
requisition did not comply
with the Act. The members did not at that
stage exercise their right to convene the meeting themselves, mainly,
it would seem,
because they proceeded to launch the first
application. The second requisition was lodged with the board on 19
May 2009 while
the first application was pending. As explained
earlier, extra resolutions were added. For a second time, the board
on unspecified
grounds discounted the requisition as irregular and
threatened the members with an urgent interdict if they continued to
convene
the meeting. The third requisition was lodged on 24 June
2009 supported by 99 members. Yet again, without explaining why, the

second applicant rejected the requisition and threatened legal
action. At this point the members went ahead to convene the meeting

and their actions ultimately led to the applicants launching the
urgent application.
158. For the first time on 24 August
2009, almost one year after the members lodged the first requisition,
the attorney for the
applicants outlined the applicants’
reasons for challenging the legality of the requisitions. The reasons
as set out in the
letter are in some respects spurious and in the
main are incorrect or invalid. They were as follows:
A proxy allows a member to appoint
another person in his stead to vote in his place at a meeting, but
does not allow a member
to requisition a meeting of members;
the requisition was only signed by
van Eeden and not by the requisite number of 100 persons and/or
members as provided for in
the Companies Act;
the notice of 5 August 2009 conveyed
the impression that the HOA had called the meeting and not the
requisionists;
neither the notice nor the
requisition specified that the proposed resolution to amend the
Articles was required to be a special
resolution;
the requisitionists were usurping
and/or encroaching upon the powers of the board of directors; and
the requisition and documentation
were misleading about the cost of a forensic audit (stated to be
R200 000).
159. More than 30% of the membership
had signed proxies in relation to the first requisition with the
intention of requisitioning
a meeting. Section 181 is silent on the
form which a requisition should take and the signing by members of a
proxy for that purpose
can be construed as compliance, or at least
substantial compliance. On the other hand, it is true that it is
obligatory to specify
that a special resolution was required to amend
the Articles. The other points raised, though, are either wrong or
inconsequential.
But still, whatever the validity or the invalidity
of the points taken by the applicants against the requisition, their
conduct
was not confidence inspiring and detracted from the
possibility of resolving the disputes. Undue insistence on technical
legalities,
without any obvious benefit from compliance, can in
certain circumstances be unfair. There was quite evidently a high
level of
dissatisfaction and uncertainty among the members of the
company as indicated by the number of the proxies furnished to the
directors.
There is no getting away from the fact that the
respondents, despite at times being inept in their approach, have
always been motivated
by the collective interests of the residents
and the goals of good corporate governance and transparency. The
applicants were unreceptive
and too litigious in their response.
Significant accounting irregularities had been uncovered. The more
prudent course would have
been to try to allay the fears of the
membership by less antagonistic means. The threat of an interdict on
the technical grounds
relied upon was misplaced, ill-advised and
probably needlessly hardened the stance of the members. The issues
raised in the requisition
were entirely legitimate and deserving of
discussion. As a first resort, the board and the developer should
have hastened to convene
a general meeting and used the power of
persuasion, and if need be as a last resort the developer’s
veto to prevent any valid
interests of the developer from being
unduly undermined, had it come to that. The precipitate, even
impetuous, resort to threats
of litigation revealed a disdainful
disregard for the apprehension of the membership. This conduct too,
therefore, was unfairly
prejudicial to the members, compelling them
prematurely to costly litigation, and unfairly disabling them from
enjoying fair participation
in the affairs of the company.
The non-implementation of the
resolutions of the EGM by the board of directors
160. Sapire AJ gave no reasons for his
order convening the 2009 EGM, which was made with the consent of the
parties. None of the
assumed technical defects in the requisitions
happened to pose an insuperable hurdle, because the meeting was
convened without
their having been rectified in any noticeable way.
161. The resolutions tabled at the EGM
mirrored those contained in the requisitions. Their aims were
threefold: to amend the articles
to remove the entrenched position of
the developer; the replacement of the directors, the auditor and
management agent; and to
give the general meeting greater control
over the financial management and affairs of the company.
162. The first resolution tabled was
for the amendment of Articles 10.1; 10;4; 15.3; 23.2; 23.1.4 and 24,
all of which in one way
or another entrenched the rights of the
developer placing it in effective control of both the board and the
general meeting. Article
24 is the provision governing the amendment
of the Articles. It provides:
“
The company may
from time to time by special resolution amend and/or substitute its
existing articles of association, subject to
the Developer’s
rights in terms of paragraph 23.1.4.”
Accordingly, amendments to the
Articles in all instances require a special resolution and the
concurrence of the developer. In general
terms there must be a quorum
of 25 percent of the total membership attending the meeting and the
resolution has to be passed by
not less than three-fourths of the
number of members entitled to vote who are present in person or by
proxy. The resolution to
have been carried therefore needed 441 votes
out of the total of 589 votes possible at the meeting. All of the
residents attending
the meeting voted in favour of the amendments,
amounting to 374 votes in total. The developer used his 215 votes to
vote against
the resolution. The 75% threshold was not reached and
consequently the developer had no need to resort to the veto in
Article 23.1.4.
163. Resolutions 2 and 3 related to
the auditor. I shall discuss them when dealing with the need for a
forensic audit. Resolution
4 mandated the finance committee to
recover the costs to establish the gardens, while Resolution 5
instructed the finance committee
to compel delivery in relation to
the provision of the clubhouse and facilities in respect of which the
developer appears to have
reneged. Resolution 6 replaced the
management agent. Resolution 7 related to the financial management of
the HOA. A further resolution
dealt with the removal of the
directors; it lost some of its force by virtue of the developer
nominated directors having resigned
shortly before the meeting.
164. What is clear about Resolution 4
is that this was the first occasion upon which the general meeting
was formally and directly
called to express itself on the capital
landscaping expenditure. While it is correct that Article 14.1
confers wide financial
powers on the board, the managerial
prerogative therein is subject to the restriction in Article 14.1.1,
namely “save as
may be expressly provided herein”. As
discussed before when examining the subject of the landscaping costs,
Article 6.14
requires “the sanction of a resolution of the
association in general meeting” for permanent works of a
capital nature.
The aim and effect of Resolution 4 was to deny the
directors that sanction. Absent that sanction they were obliged to
collect
the levies payable by the developer. It is not denied by the
applicants that no steps have been taken to implement the resolution.

The board’s position is that it has for all intents and
purposes collected the levies in that it entered into an agreement

with the developer for the provision of a capital sum, which it was
entitled to do in terms of Article 6.19, and such agreement
was by
way of the set-off reflected in the amended 2007 financial
statements.
165. Resolution 4 was passed by an
appropriate majority. The failure of the directors to implement the
resolution is inappropriate.
It may yet be shown that the developer
has a sound defence to any claim to be instituted; and it may turn
out that the general
meeting is persuaded at a later stage that it is
not prudent to persist in the efforts to recover the levies. It may
also be that
the board may have to pass another special levy to
finance the action for recovery. But it is unfairly prejudicial of
the board
to simply ignore the resolution of the meeting to bring
suit against the developer on the ground that the majority of the
board
(the developer appointed directors), do not agree with the
resolution. The board was not entitled to incur the expenditure
without
the authority of the general meeting, and the resolution was
an unequivocal refusal to ratify the unauthorised expenditure. The

general meeting embraced the view of the respondents, presumably
based on legal advice, that any agreement between the HOA and
the
developer is voidable, and the capital expenditure incurred by the
board was not permitted in terms of the Articles.
166. It was mooted in argument on
behalf of the respondents that Resolution 4 had the effect of
disenfranchising the developer by
virtue of the provisions of Article
6.13 which provides that no member shall (unless otherwise determined
by the board) be entitled
to any of the privileges of membership
until levies have been paid. Similarly, Article 23.2 provides that
unless specifically
permitted otherwise by the chairman no member may
vote at the general meeting unless the member’s levies have
been paid.
The point has been seized upon by the respondents,
because if correct it would mean that the resolutions amending the
Articles
would have been properly passed by the mandatory percentage.
Article 6.13 must be read as limited by Article 23.2. The
privileges
referred to in the former do not include the right to vote
at a general meeting, by virtue of the latter provision specifically

and expressly dealing with it. Accordingly, assuming that the
developer was not properly paid up (which it might deny
inter
alia
on the grounds of
estoppel), it merely needed the specific permission of the chairman
to vote, which events at the meeting show
it apparently got, even if
only tacitly. For that reason I do not accept the belated submission
that the developer was not entitled
to vote at the EGM.
167. Resolution 6 proposed that the
contract with the managing agent, Midcity, be terminated and that
another company be appointed
in its stead. The view of the chairman
of the meeting was that this was a matter for the exclusive
managerial prerogative of the
board. Article 14.1.2 provides that the
directors shall “at all times have the right to engage on
behalf of the association
the services of ….. a managing agent
….. on such terms as they shall decide, and this right to
engage shall also
include the right to dismiss the same”.
Resolution 6 does not seek to amend the Articles, by transferring the
power to appoint
and dismiss the managing agent to the general
meeting. It merely aimed at allowing the general meeting to exercise
the power normally
reserved to the board. No attempt has been made
by the board to honour and give effect to Resolution 6 that was
passed by a vote
of 374 to 215.
168. Shortly before the EGM three of
the four developer nominated directors strategically resigned.
Consequently, at the time the
resolution was passed, it was not
possible to convene a board meeting with a quorum. In those
circumstances, the respondents submit,
the general meeting had an
inherent residual power to exercise the power to appoint the managing
agent. They make the same submission
with regard to the appointment
of the auditors and the decision to perform a forensic audit, to
which I will return later.
169. In
Ben-Tovim
v Ben-Tovim and other
2001
(3) SA 1074
(C) it was held that if for some reason the directors
cannot or will not exercise the powers vested in them, the general
meeting
may do so. HJ Erasmus AJ (as he then was) explained the
principle as follows:
“
Are the
shareholders in general meeting entitled to step in and resolve a
deadlock that has developed between directors by taking
resolutions
on behalf of the company? The pendulum of the division of powers
between the general meeting and the board of directors
has through
the years swung from the general meeting as the supreme organ to
prominence of the articles of association. There are
indications, at
least in other jurisdictions, that the pendulum is beginning to swing
back again ….. Whatever swings of
the pendulum and differences
of emphasis there might have been, it has been generally accepted
that if for some reason the directors
cannot or will not exercise
powers vested in them, the general meeting may do so. One of the
reasons a board of directors cannot
exercise powers reserved for it
is the development of a state of deadlock among the directors…….
In
Barron
v Potter
[1914]
1 Ch 895
, a case in which no board meetings could be held owing to
differences between the directors, the Court found (at 903) that, ‘on

a principle founded on plain common sense’, where directors
having certain powers are unable or unwilling to exercise them,

‘there must be some power in the company to do itself that
which under other circumstances would be otherwise done’.
In
Alexander
Ward and Co Ltd v Samyang Navigation Co Ltd
[1975]
2 All ER 424
(HL), in which a company had no directors, the Court
referred to the ‘general meeting which, in the absence of an
effective
board, has a residual authority to use the company’s
powers’.”
I am likewise satisfied that in the
face of an accounting irregularity in the collection and use of the
levies (matters falling
within the responsibilities of the managing
agent), and in circumstances where no board of directors existed, it
was within the
inherent, residual authority of the general meeting to
decide to dismiss the managing agent by means of an ordinary
resolution
and to appoint another. The enduring refusal by the board
to implement that resolution, or its unilateral reversal of it, is
another
instance of unfairness in the conduct of the affairs of the
company.
170. Resolution 7 relating to the
financial management of the HOA had three components. The first was
the imposing of an overall
restriction on the spending authority of
the board by limiting it to an approved budget as presented and
approved at a general
meeting. The second compelled strict financial
control by prohibiting expenditure beyond each line item of the
budget. And the
third required all financial expenses to be approved
by at least two homeowner elected directors and the relevant
sub-committee
chairman. This resolution was also passed by 374 votes
to 215.
171. The applicants are of the opinion
that the resolution was incompetent because such matters fall within
the managerial prerogative
of the board. That may be an
overstatement. I do not see an insurmountable barrier to such
constraints being placed upon the board
by the articles of
association of a company, and counsel has not referred me to any
principle or legal proscription that might
present any such
impediment. All the same, in this case, to achieve that objective, an
amendment to the Articles is requisite,
and to that end a special
resolution of the general meeting is needed because none of the
powers sought to be reserved to the general
meeting by Resolution 7
are so reserved in the Articles as currently formulated. Article 14,
governing the functions and powers
of the board of directors, vests
the prerogative of financial management in the board. Article 14.1.1
is wide in its scope, conferring
on the board the power to “manage
and control the business and affairs of the association”. It
stipulates that the
directors “shall have full powers in the
management and direction of such business and affairs and
save
as may be expressly provided herein
,
may exercise all such powers of the association, and do all such acts
on behalf of the association as may be exercised and done
by the
association ….” The Articles moreover are structured to
permit the budget to be drawn up by the finance committee
in terms of
Article 6.2, which committee, if and once constituted, acts under the
delegated authority of the board in terms of
Article 6.17. There is
accordingly nothing in the Articles that expressly authorises the
general meeting by ordinary resolution
to impose the restrictions
envisaged in Resolution 7. Likewise, the imposition of a requirement
that two homeowner elected directors
approve all expenditure in
effect amounts to an amendment to Article 15.8 which provides that
any resolution of the board shall
be carried on a simple majority of
all votes cast.
172. In consequence, therefore, I
agree with the applicants that Resolution 7 was not competent and
does not have to be implemented
by the board. Not because the subject
matter is exclusively and permanently reserved to the managerial
prerogative of the board,
but because the resolution in effect sought
to amend the Articles and did not comply with Article 24 read with
section 199 of the
Act.
173. I do not consider it necessary to
canvass the resolutions relating to the removal of the directors and
the reinstatement of
the finance committee. Suffice it to say the
voting in relation to them was predictably the same as in the other
resolutions.
More important for the purposes of a section 252
determination are the ramifications of the board imposing a special
levy just
before the EGM and the ongoing resistance of the developer
and its nominated directors to the conduct of a forensic audit.
The discouraging and
disenfranchising effects of the special levy
174. Prior to the EGM, and subsequent
to the order of Sapire AJ, the board met on 23 September 2009 and
approved legal expenses
of almost R1,4 million in respect of the
first application and accepted invoices in an amount of more than
R200 000 from two directors
in respect of their time spent on the
application, which as I outlined earlier should have been put first
to the general meeting.
The notice convening the meeting included the
agenda item “Special Levies”. The board then passed a
resolution raising
a special levy in the amount of R1500 to be paid
by each member of the HOA to meet the expenses it had approved.
175. The respondents contend that the
raising of the additional levy of R1500 was calculated to discourage
member participation
in the EGM, and in fact disenfranchised a
significant number of members (63), because Article 23.2 grants the
right to vote at
general meetings only to members who are paid up.
They also say that the special levy was unwarranted at the time it
was raised
because there were sufficient funds on hand to meet the
immediate expenses of the HOA, including the legal expenses.
176. Doubt has been expressed also
about the legality of the special levy. Article 6.8 provides that
“the finance committee
may from time to time levy special
contributions upon the members”. The finance committee had not
been in existence since
the decision of the board taken on 31 October
2008 to revoke the mandates of all the sub-committees. The
respondents hence submit
that the decision to impose a special levy
was
ultra vires
the powers and competency of the board of directors. The applicants
respond by referring to Article 6.16 and 6.17 which read:
“
6.16 The
establishment of a Finance Committee shall be in the discretion of
the directors of the Association and in the absence
of a Finance
Committee being established the powers and responsibilities set out
above as be vested on (sic) the Finance Committee
shall
mutatis
mutandis
apply and vest in the Executive Committee.
6.17 The Executive
Committee and/or Finance Committee shall act under the delegated
authority of the directors of the company.”
The submission of the applicants, with
which I agree, is that in the absence of a constituted and operative
committee the board
is entitled to exercise these powers. Such, it
would seem to me, is the necessary implication of Article 6.17 when
construed in
the context of the Articles read as a whole. Therefore
nothing more need be said about this point.
177. There is also a disagreement
about a possible delay in sending out the monthly statements
including the levy, with the consequence
that members had less time
to pay and ensure they were in good standing. The applicants deny
there was any undue delay, pointing
out that the members’
directors agreed at the meeting that the levy would be added to the
levy statement of October 2009
(as was minuted). And besides, the
statements were sent out on 25 September 2009, two days after the
board meeting and more than
a month before the scheduled EGM. I am
prepared to assume the correctness of the applicants’ version
on this issue, and decline
to make a finding that there was
deliberate delay. That though does not excuse the confusing
implementation of the levy and the
repercussions it might have had
for voting at the EGM and procedural fairness generally.
178. When members initially attended
the offices of the HOA during the course of October 2009 to make
arrangements regarding the
levy, they were presented with Annexure
SA18 which allowed for monthly repayments. Paragraph 4 of that
document states:
“
The above member
has no voting rights at any general meeting of the company until the
last payment is made and the levies is (sic)
paid in full”
Any member who made an arrangement for
deferred monthly payments of the special levy would thus have
understood that he was disenfranchised
until the full R1500 was paid.
Disquiet on the part of some members resulted in pressure being
brought to bear on the board, and
eventually, just before the EGM
convened, the chairman ruled that members who had made an arrangement
to pay monthly would be entitled
to vote. Considering that this was
done at the last minute, the respondents justifiably aver that it is
likely that some members
were under the misapprehension that they
were not entitled to vote. It is not clear how many members stayed
away from the EGM,
in spite of having made arrangements, on account
of their belief that they were disenfranchised on the basis conveyed
in paragraph
4 of Annexure SA18. It is conceded that 63 members were
disenfranchised because they had not made any arrangement.
179. According to the respondents
there was no necessity for the special levy because there were
sufficient funds at hand for the
HOA to fund the litigation. At the
time the levy was approved, the HOA had more than R2 million invested
in the bank. Its annual
expenses are in the region of R5,6 million.
The applicants say it was all the same prudent to raise the special
levy. That may
or may not be so, but the question I am called to
answer is whether the timing of and motivation for the levy was a
purposeful
manipulation aimed at discouraging members from attending
and voting at the EGM; additionally, or alternatively, whether it
impacted
unfairly on the rights of members to participate in the
management of the company.
180. On 2 October 2009, about the same
time members would have received the monthly levy statement
reflecting the special levy,
the chairman of the board circulated a
newsletter to the members in which he
inter
alia
warned them that the
ongoing dispute was incurring costs and that a further levy of R500
per member might be needed. He shared
with them his view that it was
likely that the developer might use its veto right to prevent any
amendment to the Articles. He
cautioned also that the costs of a
forensic audit could escalate to more than R1 million.
181. A board meeting was held on 5
October 2009. The meeting was adjourned for 24 hours without any
business being concluded as
a result of a disagreement about whether
van Eeden should be permitted to minute and record the meeting. Only
the directors nominated
by the developer attended the adjourned
meeting the next day, at which they imposed a further special levy of
R500 to facilitate
the arbitration process which would be added to
the levy statement of November 2009, after the scheduled EGM, and
would be immediately
payable. The levy did not have had any direct
ramifications for voting rights at the EGM in October, but
conceivably could have
had a daunting effect and might have affected
the rights of some members at the AGM scheduled for December 2009.
The respondents
once more submit that the true reason for the levy
was to dissuade members of the HOA from opposing the developer and
its nominated
directors and aimed at annulling the votes of member by
making it more onerous to be in good standing. This levy however (for
reasons
not clear to me) does not appear to have been collected as
yet.
182. I do not consider it necessary
to make a determination of whether or not the board acted
mala
fides
by initially obliging
each member to pay R1500 before being entitled to vote at the EGM.
In the atmosphere of increasing acrimony
between the members and the
board, a more prudent course might have been to delay the imposition
of the levy until after the EGM.
Be that as it may, regardless of
whether the decision was activated by
mala
fides
or not, the execution
of the decision was undoubtedly tainted by procedural unfairness of
an order justifying equitable relief.
183. The main problem with the levy,
besides the dubious motive for and the timing of its implementation,
was the confusing and
contradictory message relayed about the
consequences non-payment would have for members’ rights to vote
at the EGM. Annexure
SA 18 which was handed to members when they
made arrangements to pay the levy while allowing for payment by
instalments specifically
stated that the member “has no voting
rights at any general meeting of the company until the last payment
is made and the
levies is (sic) paid in full”. Little wonder
that the respondents saw the levy as a ruse aimed at
disenfranchisement. The
situation was not altogether redeemed when
the board changed its position, only after pressure had been brought
to bear, by allowing
members who had made arrangements to pay in
instalments the right to vote at the EGM. This was done at the last
minute on the
day of the meeting shortly before it commenced. In any
event the 63 members who had not made arrangements were still
disenfranchised.
It is impossible to determine how many members might
have stayed away from the EGM as a consequence of being informed by
Annexure
SA18 that they no longer enjoyed voting rights.
184. Moreover, there is a reasonable
likelihood that the rights of the members to and their interests in
participation in the governance
of the company were impinged on
negatively by the chairman’s letter of 20 October 2009
threatening a further levy of R500
and insinuating that there was a
measure of futility in attending the meeting because the developer
would probably resort to its
veto right to block the resolutions. In
fairness though, while the newsletter may have taken a partisan
position, it contained
no obvious misrepresentation. The newsletter
on its own is insufficient to conclude that it
mala fides
was aimed at
advancing the sole interests of the developer in breach of the
directors’ fiduciary duties. Nor was the admonition
it offered
totally illegitimate. The concerns mentioned were relevant factors
and deserved to be kept in mind. Yet, the circulation
of the
newsletter within the prevailing discordant atmosphere, taken with
the statement in Annexure SA18, most likely would have
had a
disconcerting and daunting effect. Together the two documents
introduced an element of unfairness which almost certainly
would have
dampened the democratic aspirations of the membership, resulting in
fewer members attending the EGM, thereby unfairly
encroaching on the
prospects of attaining the margin needed to pass the amendments to
the Articles.
185. The special levy was further
tainted by unfairness because it included the amount of R200 000
payable to two directors contrary
to the provisions of Article 13.2
which provides that the directors shall not be entitled to any
remuneration for the performance
of their duties unless the
association in general meeting otherwise decides. The unconvincing
reliance by the applicants on Article
28 allowing for the
indemnification of directors against “any liabilities
bona
fide
incurred” did
not help. They were seeking fees not the repayment of expenses. As a
result, the levy was unfairly and improperly
inflated. The initial
decision of the board, contrary to the Articles, to munificently
remunerate the directors out of member levies
for their time spent in
taking questionable action against the members, cast the directors in
a poor light (if not in breach of
their fiduciary duties),
demonstrating that despite their unwillingness to incur expenditure
on a forensic audit they were not
above seeking to unjustifiably
enrich themselves at the expense of the HOA and the members.
The auditors and the forensic audit
186. The call for a forensic audit
was first made after the member elected directors suggested one at
the meeting of directors
on 18 July 2007. At first glance the
minutes create the impression that a resolution was taken mandating a
forensic audit. However,
the minutes later record that the matter was
referred to the finance committee for further investigation and
feedback. That led
to the report of the finance committee tabled at
the directors’ meeting of 8 November 2007 in which a more
limited audit
was suggested.
187. Resolution 3 at the 2009 EGM
mandating the auditors to perform a forensic audit read:
“
The appointment of
Price Waterhouse Coopers Incorporated as auditors, and to perform a
forensic audit on the financials of The Wilds
HOA from inception of
The Wilds HOA, as per the recommendation of the Financial Committee.”
It will be remembered that the
previous auditors had resigned the day before the EGM, presumably to
avoid the resolution calling
for their dismissal on grounds of the
irregular accounting for the landscaping cost and the developer’s
levies. The agenda
was accompanied by a detailed audit scope;
directing
inter alia
that the audit must involve the performance of certain procedures to
obtain evidence about the amounts and disclosures in the financial

statements, including the assessment of the risk of material
misstatement in the financial statements, whether due to fraud or

error.
188. The appeal for a forensic audit
obviously arises from the discovery of the material irregularity
which resulted in the disciplining
of the auditor by the IRBA and the
resignation of the auditors. The understandable anxiety is that there
have been other analogous
irregularities at the expense of the HOA
and the members.
189. Resolution 3, as with all the
other resolutions, was passed at the 2009 EGM by 374 votes to 215.
The respondents submit that
the EGM, when resolving to conduct a
forensic audit, exercised its inherent, residual authority to oversee
the conduct of the board
of directors. Section 179 of the Act
empowers the general meeting to deal with matters as provided for in
the articles and the
Act, and any matters capable of being dealt with
by any general meeting of the company; which, on the authority of the
decision
in
Ben-Tovim
(
supra
),
includes assuming the powers of the directors when they are unable to
act. On that basis, the respondents submit, Resolution
3 was properly
taken, was competent and should be implemented. The board continues
to refuse to implement the resolution.
190. The applicants maintain that the
power to appoint forensic auditors is a power vesting in the board
and not in the members
in general meeting and that the general
meeting’s usurpation of that function is unlawful.
191. Article 26.1 provides that the
accounts of the HOA shall be examined and the correctness of the
income and expenditure accounts
and balance sheet shall be
ascertained by the auditors once at least in every financial year.
Article 26.2 provides that the duties
of the auditors shall be
regulated in accordance with Chapter X of the Act. Section 270(1) of
the Act bestows the power to appoint
auditors annually upon the
general meeting. It reads:
“
A company shall at
every annual general meeting appoint an auditor or auditors to hold
office from the conclusion of that meeting
until the conclusion of
the next annual general meeting of the company.”
In terms of section 271(1) of the Act,
the directors are only permitted to appoint or re-appoint an auditor
where the AGM fails
to do so; or where the first auditor (usually
appointed by the promoters) is not appointed by lodging a written
consent on incorporation
(section 269). The power to remove the
auditors vests primarily in the general meeting under distinctive
prescribed circumstances
(sections 277, 278 and 279). The primary
duty of the auditor is to report to the “members in such manner
and on such matters
as are prescribed by this Act and carry out all
other duties imposed on him by this Act or any other law” -
section 282.
The auditor must report on the annual financial
statements which the directors are required to lay before the AGM in
terms of section
286 of the Act. Meskin,
Henochsberg
on the Companies Act
, 535
explains the rationale for an auditors’ report as follows:
“
The auditor’s
report is the medium by which an auditor completes the performance of
his duties to whom he is appointed to
represent, i.e. the members
…..The object of having the auditor report to the members
directly, and not to or through the
directors … is to secure
to the shareholders independent and reliable information respecting
the true financial position
of the company at the time of the audit.”
192. Mr.
Ellis
SC has sought to persuade
me that the appointment of an auditor to perform a forensic audit
falls outside the competency of members
in a general meeting, in
particular because Article 14.1.2 confers a general right upon the
directors to engage on behalf of the
HOA the services of
professionals, including accountants and auditors. Thus, although
seemingly conceding the power of the general
meeting to appoint the
auditors to carry out their usual functions, when something
extraordinary is called for, he submits, such
falls in the exclusive
remit of the board. I am unable to agree. The fact that Article
14.1.2 grants the directors a right to
engage auditors or other
experts to perform specific tasks when needed does not deny the
general meeting a right to call for a
forensic audit. The primary
duty of the auditor is to the general meeting to enable it to
exercise supervision and to hold the
directors to account. The
statutory power of the general meeting to appoint and remove
auditors, and the concomitant duty of the
auditor to report to the
general meeting for the purpose of the members exercising oversight,
ex consequentibus
,
and by implication, would permit everything necessary and accessory
to achieve that result. To hold otherwise would be to accept
that
where the auditors report a fraud or irregularity in the financial
statements the general meeting will be without power to
request
further and deeper investigation. Such would imprudently render the
oversight power of less consequence and value.
193. For that reason I am satisfied
that the general meeting was entitled to adopt the resolution
mandating the auditors to conduct
a forensic audit in accordance with
the proposed audit scope. Even if I am mistaken in this conclusion,
at the time the resolution
was passed there did not exist a board
able to convene a quorum in terms of the Articles and thus the
meeting was free to exercise
its residual authority to mandate the
auditors to conduct a forensic audit. The failure by the board to
implement the resolution
is another instance of conduct unfairly
prejudicial in the management of the company’s affairs. The
members are entitled
to fair participation in the management of the
company and that includes the conduct of a forensic audit at their
instance when
there has been a material audit irregularity,
potentially at considerable expense to the company, at the instance
of the developer,
an entrenched dominant shareholder.
194. Mr.
Ellis
SC depicted the
proposed forensic audit as a mere “fishing expedition”
that will bring to light nothing at great expense.
The only error or
irregularity pointed to is the one that has already been unearthed.
He downplayed the improper rationale for
not disclosing the costs of
the landscaping and the set-off in the financial statements, labeling
the lapse a mere “mistake”.
He may well be right on both
counts. But if the general meeting has the right to go fishing by
way of forensic audit and has
taken a lawful and proper decision to
do so, it is wrong and unfair of the directors to frustrate the
implementation of that decision.
The mistake, if that, was at
significant cost to the members and was happened upon after some time
in a manner that was hardly
confidence inspiring. The members
rightfully want to assure themselves that there have been no other
mistakes of like order.
195. Added to that, even if the
general meeting had no power to mandate the auditors to conduct a
forensic audit, it is within
the power of this court, having
concluded that the affairs of the company are being conducted in an
unfairly prejudicial manner,
where it considers it just and equitable
to do so, to make such an order in terms of section 252 of the Act
with a view to bringing
the unfairness complained of to an end. Mr.
Ellis
SC
has urged me not to do so. The problem, he says, has already been
rectified. All the facts have been rehashed and debated
ad
nauseam
. A forensic
investigation, he submitted, will merely be the opinion of an expert
which will most probably result in future litigation
and will not
bring an end to the matter. The submission, with all due respect,
misses the mark. In the first place, relief ordered
under section 252
need not bring the matter to an end. It must have as its aim the
resolution of the matter. The facts show beyond
all doubt that a
significant part of the membership is suspicious that the books have
been cooked. Considering the serious irregularity,
they have
reasonable grounds for that suspicion. The fact that the board and
developer have been willing to incur litigation expenses
running into
millions of rand, rather than conduct a less expensive forensic audit
has not helped to put that suspicion aside.
A forensic audit will
either dispel or confirm that suspicion once and for all. Moreover,
and importantly, a substantial number
of the members want a forensic
audit. The irregularity perpetrated by the developer and the board
has resulted in a loss of confidence
which hopefully a forensic audit
might restore. Consequently, it will be just and equitable to order
the auditors to conduct a
forensic audit.
The breakdown in the functioning of
the company and the relationship between the members and the board
after the 2009 EGM
196. The events immediately after the
EGM and at the fractious AGM on 2 December 2009 demonstrate that the
relationship between
the developer nominated directors and the
members involved in the litigation had reached a level of hostility
making it impossible
to conclude the business of the AGM. There was
no functional board of directors in the period between the EGM and
the AGM.
197. The resolution of the disputes
about whether the 2009 AGM was adjourned or called off, and whether
the developer was entitled
or not to nominate directors on the day
after the AGM, and the resultant debate about the existence or lack
of a properly mandated
board of directors, with the further possible
outcome that the 2010 AGM called on 1 December 2010 was also
unlawful, would necessitate
the determination of a number of factual
issues which would prove arduous without oral evidence about what
transpired at the 2009
AGM. I accordingly hesitate to try to resolve
them. Their ultimate resolution may very well have important legal
consequences.
Nevertheless, in view of the orders I propose to make
in terms of section 252 of the Act, there is no need to resolve them
at
this stage. I would therefore postpone
sine
die
prayer 7 of the second
amended notice of motion seeking a declarator that the 2009 AGM was
null and void. The parties may avoid
further litigation on this
question by punctiliously observing the orders I propose to make.
198. For most of 2010 the four
directors nominated by the developer on 3 December 2009, the day
after the aborted AGM, continued
to manage the affairs of the
company, despite the objections of the respondents as expressed in
their attorney’s letter dated
24 March 2010. The applicants’
failure to respond to the letter prompted the respondents to file the
amended notice of motion
on 7 May 2010 seeking orders declaring three
of the respondents to be the directors of the HOA, and van Eeden to
be the acting
chairperson, or alternatively for an interim board to
be constituted allowing for more equal representation and an
independent
chairperson. The prayers declaring the three respondents
to be directors and van Eeden chairperson were not persisted with in
the second amended notice of motion. Nevertheless, from this point
onwards the relationship between the parties was conducted entirely

on a litigious basis.
199. Steps taken by the applicants
after August 2010, aimed sensibly at normalising the situation,
encountered some resistance.
The new directors fruitlessly invited
members to join sub-committees and convened an AGM on 1 December 2010
at which only 32 members
(out of a possible 1120) besides the
developer attended. It is not possible to account definitely for the
poor attendance. It
may be that a measure of fatigue has set in, or
the members have chosen to await the outcome of this litigation.
200. Additionally, the point needs to
be made that the best efforts of the respondents to rally the
membership have never yielded
more than 374 votes, representing a
mere 30 percent of the present membership. A substantial portion of
the membership has shown
itself to be apathetic and perhaps even
satisfied with the current state of affairs and the entrenched
position of the developer.
In such circumstances, it would be
unfitting for the court to amend the Articles by decree when the
bargain struck by the parties
obligates a special resolution. Still,
to bring the problems in this company to end it will be prudent to
establish the conditions
for a fair exercise of the democratic will
of the company.
The appropriate remedy and the
entrenched control and veto power of the developer
201. The unfair conduct of the
applicants in thwarting the aspirations of a part of the membership
to convene an EGM and the unfair
refusal to implement the lawful and
legitimate resolutions of the general meeting are the essence of the
problem. The suspicions
arising from the accounting irregularities
have caused and compounded the difficulty. The level of frustration
and acrimony has
been heightened by the developer being able to rely
upon the entrenched control bestowed upon it by the Articles to
frustrate the
democratic ambitions of the 30% of the membership who
want to participate in and gain greater control of the management of
the
affairs of the company.
202. The relief sought by the
respondents in the counter-application is extensive in its reach, and
is frankly out of proportion
to what is needed to address the
unfairly prejudicial, unjust and inequitable conduct. The court
should only do what is just and
equitable in order to put right and
cure for the future the unfair prejudice which the complaining party
has suffered at the hands
of those unfairly conducting the affairs of
the company -
Re Bird
Precision Bellows Ltd
[1986] Ch 658
, 669.
203. Besides asking for a forensic
audit to investigate possible accounting irregularities, the
respondents want the auditors to
investigate all the facts and
circumstances surrounding the promises of the developer relating to
the proposed clubhouse and other
facilities. In addition, they want
the court to amend the Articles of Association, which the general
meeting was not able to do
because the requisites for a special
resolution were not achieved. They ask for a further EGM and an
order directing the board
to implement any resolutions it may adopt
within 30 days after the appointment of a new board. In the
alternative they seek a new
governing structure or judicial
management.
204. For the reasons already stated,
it is appropriate to direct the auditors to conduct a forensic audit
into the financial affairs
of the company since inception. I am less
persuaded though that the scope of the audit should extend to
investigating the developer’s
non-performance of its
contractual obligations in relation to the development of the
promised facilities. Mr.
Ellis
SC has submitted that the
aim of extending the audit to these issues is to collect facts upon
which a claim against the developer
for the installation of those
facilities may be based. The only possible claim which could be
envisaged is a claim based on contract
between the developer and the
individual buyers. It is doubtful whether the HOA would have the
standing to institute such a claim.
Although there are judicial
dicta
supporting the proposition that the shareholder’s remedy
against unfair prejudice might be resorted to in order to enforce

obligations arising under collateral agreements, those obligations
should relate to the way in which a corporate power is being

exercised. A distinction must be kept between conduct of the company
and the conduct of a shareholder acting in its private capacity,
as
in this instance, in pursuance of its commercial interests. The
performance or non-performance by the developer of promises
it may or
may not have made when marketing the property for sale to the
individual members is not an act or omission of the company
nor does
such amount to conducting the affairs of the company. Whatever
unfairness may attend the developer’s behaviour
on this score
there is no jurisdictional basis for granting any remedy under
section 252 of the Act in relation to it. Nor has
any contractual
cause of action been pleaded in these proceedings.
205. Prayer 5 of the second notice of
motion asking the court to amend the Articles in accordance with
Resolution 1 at the 2009
EGM, as I have just indicated, is also
lacking in proportionality. As I have already pronounced, it is
permissible for a court
to issue an order under section 252 of the
Act to amend articles if it considers it just and equitable to do so.
It would be acceptable
to do that when the articles are structured in
a way denying the members effective participation. However, an order
amending the
articles should be issued only as a last resort. The
articles are the contract bringing about the association and the
basis for
the members doing future business together. By becoming a
shareholder in a company a person agrees to be bound by the decisions

taken in accordance with the provisions and prescriptions of the
articles. A court accordingly should hesitate to re-write the
bargain
struck by the members with each other, especially where the impetus
to do so is at the instance of a minority of the members
(albeit a
substantial minority, in this case about 30%) who think the terms of
the agreement are unfair or no longer serve their
interests. The Act
requires that the articles be changed by a special resolution, which
means 75 percent of the votes at a general
meeting with a quorum of
25 percent of total membership. A court ordinarily should pause
before overriding those prescriptions,
unless there are illegitimate
or unfair impediments rendering the achievement of a special
resolution impracticable; and even then
it should intervene only to
the extent necessary to remove the impediment.
206. The developer’s control of
the company entrenched by the different provisions of the Articles
described earlier, and
which were the target of Resolution 1 at the
2009 EGM, are a barrier to a more egalitarian structure. The
entrenchment of control
in the Articles is not without legitimacy and
was justifiable in view of the substantial investment and risk
undertaken by the
developer, who owns more than two hundred erven in
the estate and all of the land which will form the subject property
of the remaining
phases of the development. The developer is a member
of the HOA in its capacity as developer but also in its capacity as
the registered
owner of its erven; thus its 215 votes. In terms of
Article 4.4 the developer will cease to be a member of the HOA only
at the
end of the development period.
207. The entrenched control of the
developer, as explained before, is achieved through the right to
elect the majority of the directors
for the duration of the
development period, the quorum requirements for decisions of the
board of directors and its veto power
in Article 23.1.4 to block any
decision of the general meeting, including the election of directors
and the amendment of the Articles
by special resolution. No person
may be elected a director without the approval of the developer. And
the corporate structure is
cast in stone unless and until the
developer agrees otherwise. The intention was to entrench the
developer’s control for
the development period. The entrenched
control was thus always intended to be temporary. With the downturn
in the market, the
development has slowed and the developer’s
entrenched control is enduring for a period longer than some members
would prefer.
208. The exertions by the respondents
and their supporters to amend the Articles to remove the entrenched
control of the developer
were frustrated not because the developer
used its veto right but because they did not get enough votes to
carry the resolution.
Their lack of success in that regard probably
owes something to the confusion the applicants created about the
consequences non-payment
of the special levy would have for the right
of members to vote. The dampening effect was exacerbated by the
chairman’s
letter of 2 October 2009 advising members that the
developer was likely to use its veto to prevent the amendments. There
is a distinct
likelihood that these interventions engendered apathy.
It is these acts of unfairness that are deserving of redress.
209. Absent the veto there would be no
hurdle in the way of the respondents canvassing the membership and
encouraging them to attend
a meeting to pass a special resolution.
The fact that they have so far only demonstrated support of
approximately 30% of the membership,
as I have said, could mean
either that the membership has become despondent and apathetic or
that the majority of the membership
are satisfied with the
status
quo
and live easily with
the developer’s entrenched position. Accepting the possibility
of the latter, I see no justification
for the alternative relief
sought in the second amended notice of motion. It would be an
over-reach to establish a different governing
structure or to impose
judicial management by judicial
fiat
.
What is needed is a fair democratic contest over the preferred
structure of the company for the future. The unfairness surrounding

the accounting irregularities will hopefully be attended to by a
forensic audit. And the injustice associated with the convening
of
the 2009 EGM and the failure to implement its resolutions will be
cured best by ordering another EGM for the limited purpose
of
considering amendments to the Articles, but allowing for that contest
to take place on a more level playing field by suspending
the
developer’s veto power for the duration of that meeting and in
relation to the resolutions taken at it. In that way there
will be
meaningful participation by the members.
210. It is correct that the developer
has never exercised the veto power. It has however on two occasions
threatened to use it.
The first was in the letter of the chairman to
the members dated 2 October 2009. The second occurrence is recorded
in the minutes
of the meeting of directors held on 23 April 2010
where Mr. Rudi Boschoff, the representative of the director is
minuted as stating:
“
dat die
ontwikkelaar van hierdie punt af vorentoe van sy VETO REG volgens die
Huiseienaarsvereniging se Artikels van Assosiasie
gebruik gaan maak.
Alle besluite moet op skrif aan die ontwikkelaar deurgegee word vir
sy ondertekening en goedkeuring van implementering.”
It seems that Mr. Boschoff was under
the mistaken impression that the developer’s veto right
extended to the decisions of
the board as well.
211. The authorities cited earlier
support the principle that a threatened use of a veto can constitute
conduct entitling members
to an order under section 252 of the Act.
Apart from that, the continued entrenched existence of the veto has
become an unfair
obstacle to effective member participation in the
affairs of the company. The veto may have had its place in the early
phase of
the development. Now when there are almost 1200 other
members of the company, it is inherently unfair to retain it without
the
concurrence of the members. The developer now has an equity stake
of only 15% in the first phase. There is perhaps no longer
justification
for it to be privileged with a power to veto every
single decision of the general meeting, including any decision to
change the
governance structures to allow fair participation and fair
control over the collection and use of levies. What is at stake in
the
current state of affairs is a variant of the principle: no
taxation without representation. From a practical standpoint too, the

continuation of the veto without the endorsement of the increasing
membership will spawn further conflict and litigation.
212. While it is within the competence
of the court to amend the Articles to delete Article 23.1.4, the
better course, in my assessment,
is rather to enable the membership
to achieve that result after debating the merits of doing so and
effecting it by a special resolution
without fear of the resolution
being rendered nugatory by the exercise of the veto. In other words,
the membership should be afforded
an opportunity to amend the
Articles (including the removal of the veto right) in an EGM for the
purpose and duration of which
the veto will be suspended.
213. A just and equitable order
therefore will be one convening another EGM for the limited purpose
of considering amendments to
the Articles of Association in
accordance with Resolution 1 tabled at the 2009 EGM, including an
order suspending Article 23.1.4
for the duration of the meeting and a
further order that any such amendments adopted shall not be altered,
added to or amended
in any way for a period of three years without
the leave of the court. To level the playing field further I will
order that members
who have paid up their levies as contemplated in
Article 23.4 will be entitled to vote, but that the special levies
imposed by
the board at its meeting of September and October 2009
should not be taken into account for determining a member’s
status
as paid-up. Additionally, the developer should be entitled to
exercise its votes as developer and as the registered owner of erven,

notwithstanding the fact that the dispute regarding the non-payment
of its levies as part of the alleged set-off remains unresolved.

Because Phase 2 of the development has yet to commence, only the
registered owners of erven in Phase 1 and the developer should
be
entitled to vote. To avoid further tension and strategic
positioning, it will be just and equitable for the meeting to be
convened by and chaired by an independent professional, who will
oversee the election of a new board of directors in terms of the

Articles as amended, if amended, and which specifically would require
amendment of Articles 10.4 and 11.1 to permit the election
of
directors at an EGM.
214. My finding that the resolution
terminating the contract with the management agent ought properly and
fairly to have been implemented
would justify an order terminating
that contract. More than eighteen months have passed since the
resolution was adopted. Prudence
dictates that I make no order
altering that relationship until another general meeting is held. If
a new board of directors is
elected, it will be best placed to decide
on the way forward.
215. Mr.
Ellis
SC, referred in argument to
Swissborough
Diamond Mines v Government of South Africa
1999
(2) SA 279
(T) at 324C in support of the submission that the proposed
relief had not been pleaded with sufficient precision. Affidavits in

motion proceedings serve as pleadings defining the issues and there
is no call in the affidavits for the veto power to be suspended.
The
objection is not well founded. The second amended notice of motion
(in prayer 6) seeks the convening of an EGM and the election
of a new
board. And although the notice of motion does not seek an order
suspending Article 23.1.4, it does in prayer 5 seek an
amendment
deleting it entirely. The court has a wide discretion under section
252 of the Act to make any order it thinks fit.
Common sense dictates
that when the competent relief sought is for a veto power in the
Articles to be deleted there can be no objection
to the court
granting the lesser remedy of a temporary suspension of the exercise
of that power.
The special plea of arbitration,
lis pendens and the application to set aside the second amended
notice of motion as an irregular
step
216. I have left these preliminary
issues to last because I consider them to be without merit. I am
obliged nonetheless to give
brief reasons for dismissing them.
217. The special plea of arbitration
was not pursued with much eagerness by the applicants. The relevant
clause, Article 41.1, provides
that any dispute arising out of or in
connection with the Articles must be determined in terms of the
clause, that is, it must
be referred to arbitration. It excludes
instances where an interdict or urgent relief is sought. It is
debatable whether an application
for relief in terms of section 252
of the Act (even if related to issues about the Articles) can be
catogorised as a “dispute
arising out of or in connection with
the Articles”. The dispute concerns unfairly prejudicial
conduct. But leaving that
aside, the special plea falls foul of
section 6(1)
of the
Arbitration Act 42 of 1965
. The provision
provides that the right to apply for the stay of proceedings
commenced by a party to an arbitration agreement must
be exercised
before that party delivers any pleadings or takes any other steps in
the proceedings. Where a defendant/respondent
(in this case the
applicants as respondents in the counter-application) takes a further
step before filing its special plea, it
has waived its right to make
application for a stay -
Conress
(Pty) Ltd v Gallit Construction (Pty) Ltd
1981
(3) SA 73
(W) at 75H. The plea was raised only in July 2010, after
the applicants had filed their answering affidavit to the
counter-application
and when the papers were in excess of 1700 pages.
In such circumstances, they waived their rights to apply for a stay.
In the
premises the special plea falls to be dismissed.
218. There has been a muted
suggestion, not pursued with any vigour, that the disputes in these
proceedings are
lis pendens
by virtue of the referral of the disputes in the first application to
arbitration, which has not been finalized. There is no merit
in the
contention. The issues and decisions at stake differ. The arbitrator
is not called on to determine whether the affairs of
the company are
being conducted unfairly. And in any event the parties are different.
Only the first respondent is a party to the
arbitration, the other
respondents are not.
219. At the commencement of the
hearing the applicants sought an order (on notice duly given) that
the second amended notice of
motion be set aside as an irregular
step. I dismissed the application and ordered the costs to be costs
in the cause. I indicated
that I would provide brief reasons for my
order in this judgment.
220. The second amended notice of
motion persists with the most significant relief sought in the
earlier versions, but in addition
it included prayers for the 2009
AGM and its decisions to be declared null and void and a prayer for
an order directing the convening
of an EGM within 60 days to address
the consequences of any court order including the election of a new
board of directors. The
amendment dropped the prayers for an order
declaring some of the respondents’ directors and van Eeden
acting chairperson.
The decision to do that was prudent. The better
course is to provide, as I propose to do, for a new fair election.
As already
discussed, I consider it neither necessary nor desirable
to pronounce upon the validity of the 2009 AGM.
221. The applicants’ objection
to the delivery of the second amended notice of motion was that it
constituted an irregular
step in that the amendment was not duly
effected as prescribed in
Rule 28.
The point is well taken. However,
I was prepared to condone the irregular step, (if indeed the
application was good, which it may
not have been because the
applicants took a further step by filing an affidavit in response to
it on 1 March 2011), principally
because the applicants had suffered
no prejudice. The amended relief sought is more carefully tailored
and less intrusive than
that in the earlier versions, and although
the order declaring the 2009 AGM might have had significant
consequences had I been
willing to make it, the applicants had a
proper opportunity to canvass the issues in substantial heads of
argument filed before
the hearing.
Costs
222. The point of departure with
regard to costs is that costs should follow the result. Sapire AJ
when making the order that
an EGM be held on 28 October 2009 reserved
the question of costs in respect of both the urgent application and
the counter-application.
223. The respondents have been
successful in the counter-application and all else being equal are
entitled to their costs. The
applicants submit that they were
substantially successful in the urgent application in that they were
able to stop the meeting
which was convened for 14 September 2010. I
disagree with that interpretation of what was achieved. The prayer in
the notice of
motion did not seek to postpone the meeting until the
technical defects in the requisition were rectified, if indeed there
were
any. Instead it sought an interdict restraining the convening
and holding of the meeting. In that it did not succeed. On the
contrary,
the court ordered the meeting to proceed at a later date
and by implication condoned any defects there might have been in the
requisition.
Alternatively, the applicants conceded that the
requisition was adequate in that they consented to the order
directing the meeting
to be convened without any reservation.
Consequently, the respondents attained substantial success and are
entitled to their costs
in the urgent application as well.
224. Mr.
du
Plessis
SC, who appeared
for the respondents, has submitted forcefully that much of the
litigation could have been avoided and the papers
would have been
less prolix had the developer assumed a more understanding and less
aggressive posture. As he put it, this is
a case about normal
working families, who bought property in a residential estate based
on a design concept which they were led
to believe would include
certain joint amenities, the provision of which was expressly stated
to be part of the purchase price,
and which, almost a decade later,
have not been realised. The funds of the company, to which residents
are compelled to belong
as members, and to which they must pay
levies, have been used by the developer to finance capital outlays
and to fund litigation
against them. By virtue of the developer’s
control over the board of directors and its veto power in the general
meeting,
members have no effective means of participating in the
managerial affairs of the company, with the result that their
concerns
about financing capital development have been swept aside
and their attempts to seek redress met with litigation. In such
circumstances,
Mr.
du
Plessis
SC submitted, the
company (the first applicant) itself had no interest in the
litigation where the real objective, in both the urgent
application
and the defence of the counter-application, was to preserve and
continue the entrenched control of the company by the
developer in
conditions where it had become unfairly prejudicial, unjust and
inequitable to do so. The majority of the members
of the company did
not resist the requisitioning of the EGM or the resolutions tabled at
it. Indeed every participating member
except the developer has
consistently voted in favour of change. The only opponent to change
is the developer, who has consistently
acted oppressively and
unfairly to thwart an expression of the democratic will. For those
reasons, Mr.
du Plessis
SC
has urged me to award costs against the developer and his nominated
directors (the second to the sixth applicants) but not against
the
first applicant, the HOA.
225. There is a compelling logic to
the submission which finds support in both general principle and
authority. Prof Blackman
(Blackman
op
cit
9-54-2) in relation to
this question observed:
“
It is a general
principle of company law that the company’s money should not be
expended on disputes between shareholders.
The general rule is that
the company has no business whatever to be involved in such an
application, on the principle that the
company’s moneys should
not be expended on disputes between shareholders, and in particular
its moneys ought not to be used
to defend the majority shareholders
in what is essentially a dispute between them and other shareholders.
The use of the company’s
funds by the majority in defending the
application is a misuse of the company’s funds, confers a
distinct financial advantage
on majority, and prejudices and
discriminates against the applicant; it is both unfair and infringes
the basic principle that the
powers and funds of a company may be
used only for the purposes of the company.”
He cited various Australian
authorities that support this proposition viz:
Coombs
v Dynasty (Pty) Ltd
[1995] FCA 1447
;
(1994)
14 ACLR 60
, 94 (FedC of A);
Re
DG Brims and Sons Pty Ltd
(1995)
16 ACSR 559
, 592 SC (Q1a); and
Foxuto
Pty Ltd v Bosnjak Holdings Pty Ltd
(No3)
(1999) 30 ACSR 20
SC (NSW). There will be exceptions where the
company is a necessary party because of its discrete interests. The
test whether
such participation and expenditure is proper is whether
it is necessary or expedient in the interests of the company as a
whole;
and in considering that test, the starting point is “a
sort of rebuttable distaste for such participation and expenditure,

initial skepticism as to its necessity or expediency” -
Re
a company (No 1126 of 1992)
[1994]
2 BCLC 146
, 156. Usually, the company should be viewed as a nominal
party in
section 252
disputes without any interest in the matter, the
dispute being in substance one between shareholders.
226. I agree with Mr.
du
Plessis
SC that the dispute
in the present case is in substance one between the developer (as a
member by virtue of its entrenched position
in the Articles and as
the registered owner of erven) and the respondent members
representing a substantial minority of the total
membership. The
other applicants (the developer nominated directors) have aligned
themselves with the cause of the developer acting
to protect his
privileged member status. In
Re
Kenyon Swanson Ltd
[1987]
BCLC 514
521 (cited in Blackman
op
cit
9-56 footnote 2) it was
held that directors should not resist an application against the
person they prefer to be in control of
the company and able to
appoint and remove its directors. They are not entitled at the
expense of the company to take part in
a dispute to prevent
diminution of that control. Such expenditure by the directors, the
court described as a malfeasance.
227. The costs order sought by the
respondents in paragraph 13 of the second amended notice of motion is
accordingly the appropriate
order to make. Considering the
complexity of the evidence and issues, as well as the importance of
the matter to all concerned
in the life of the company, the use of
two counsel and senior counsel was justified.
The Order
228. The following orders are issued:
1. The auditors of the company are
directed to perform a forensic audit on the financials of the first
applicant from its inception
in accordance with the forensic audit
scope attached to Annexure “RB21” to the founding
affidavit and to report its
findings to the members of the company at
the extraordinary general meeting convened in terms of paragraph 2 of
this order, or
at any subsequent general meeting as determined by the
members.
2. The first applicant is ordered to
convene an extraordinary general meeting within 60 days of this order
for the purpose of considering
and voting by special resolution upon
the proposed amendments to the Articles of Association contained in
Resolution 1 in Annexure
“RB21” to the founding
affidavit, and any additional amendments to Articles 10.4 and 11.1 to
allow for the election
of new directors.
3. The Pretoria Society of Advocates
is directed to appoint an independent advocate to serve as
chairperson at the extraordinary
general meeting, who will be
permitted to charge the first applicant a reasonable fee for his or
her services.
4. Should the first applicant fail to
take steps to convene the extraordinary meeting within 21 days of
this order, the respondents,
in accordance with any direction given
by the chairperson appointed in terms of paragraph 3 of this order,
may convene the meeting
and may recover any reasonable expenses
incurred to that end from the first applicant.
5. Article 23.1.4 of the Articles of
Association of the first applicant is hereby suspended for the
duration of the extraordinary
general meeting convened in terms of
either paragraph 2 or 4 of this order, and the sixth applicant shall
not enjoy a veto right
with regard to any decision taken in respect
of any amendment and/or addition to or deletion from the Articles of
Association of
the first applicant or in respect of the election of
any director at such extraordinary general meeting.
6. Any amendments as contemplated in
paragraph 2 read with paragraph 5 of this order shall not be altered,
added to or amended in
any way whatsoever for a period of three years
from the date of the extraordinary general meeting without the leave
of this court.
7. The members of the first applicant,
in the event of the Articles of Association having been duly amended
to allow for the election
of directors at an extraordinary general
meeting, shall elect new directors of the company in accordance with
the amended Articles
at the extraordinary general meeting.
8. It is ordered for the purposes of
the voting contemplated in paragraphs 2 and 7 of this order that only
the registered owners
of erven in Phase 1 of the development and the
sixth applicant shall be permitted to vote. Such members shall not be
entitled to
vote unless they are paid-up as contemplated in Article
23.2 of the Articles of Association; except that for the purpose of
determining
if a member is paid up the special levies imposed by the
directors at the board meetings on 23 September 2009 and 5 October
2009
shall not be taken into consideration. The sixth applicant shall
be permitted to vote irrespective of it not being fully paid up.
The
chairperson of the meeting may at his sole discretion permit any
other member who is not paid-up to vote.
9. The first applicant is interdicted
from making any payment to any current or former director of the
first applicant of any fee
for services rendered in respect of any
litigation between the parties, unless and until such payments are
approved by the general
meeting.
10. Prayer 7 of the second amended
notice of motion is postponed
sine
die
.
11. The second to sixth
applicants are ordered to pay the respondents' costs in the
application and counter application (including
the costs reserved by
Sapire AJ on 11 September 2009), such costs to include the costs
occasioned by the employment of two counsel
and senior counsel.
JR MURPHY
JUDGE
OF THE HIGH COURT
Date
Heard: 22-25 March 2011
For
the Applicant: Adv R. du Plessis SC and Adv S. Davies, Pretoria
Instructed By: Geldenhuys & Meyer c/o Rorich Wolmarans &

Luderitz Inc.
For
the Respondent: Adv P. Ellis SC and Adv L. Meintjies, Pretoria
Instructed
By: Henderson, Kuiper Isaacson & Rooseboom