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[2010] ZAECPEHC 26
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Packaging And Stapling CC v Fromm Systems Africa (Pty) Ltd and Others (966/2010) [2010] ZAECPEHC 26 (11 June 2010)
IN THE HIGH COURT OF SOUTH AFRICA
EASTERN CAPE, PORT ELIZABETH
CASE NO: 966/2010
DATE HEARD: 13-05-2010
DATE
REASONS HANDED DOWN: 11-06-2010
“
REPORTABLE”
In the matter between
PACKAGING AND STAPLING CC APPLICANT
And
FROMM SYSTEMS AFRICA (PTY) LTD FIRST RESPONDENT
GLENN JACOBY
SECOND RESPONDENT
ANDRE STONE
THIRD RESPONDENT
_____________________________________________________________________
REASONS FOR
JUDGMENT
_____________________________________________________________________
Summary
– Close Corporation –
Members –
Proceedings by and against – Proceedings by member
(s)
on behalf of corporation against member,
Close Corporations Act 69
of 1984
,
sections 42
,
50
.
In terms of
the above sections a member is entitled to institute proceedings on
behalf of corporation against fellow member when
fellow member
breaches fiduciary duty to corporation in terms of
section 42
of Act.
Lack of formal resolution from corporation authorising proceedings
not affecting
locus
standi
of
member to institute proceedings.
Section 50(1)(b)
of
Close
Corporations Act does
not require a member who institutes legal
proceedings against errant member to inform such member of intention
to do so. Section
requires that only other fellow members should be
informed. Even so, giving such notice is no jurisdictional
requirement for
institution of such proceedings.
Applicant
herein, a Close Corporation
,
instituted interdict proceedings against respondents. Authority of
applicant’s attorneys to institute such proceedings
on behalf
of Close Corporation challenged on grounds of lack of authority in
terms of
Rule 7(1)
of High Court Rules. Court held that as against
second respondent no need for a resolution and that the proceedings
were instituted
in terms of sections 42 and 50 of the Act. Point
in
limine
was dismised with costs.
TSHIKI J:-
A)
Introduction
[1] This judgment relates to a point
in
limine
taken by respondents in terms of
Rule 7(1) of the Rules of this Court, challenging the applicant’s
attorneys’ authority
to act, for and on behalf of the
Applicant.
[2] In the main application, applicant has instituted urgent
interdict proceedings against all the respondents. The applicant’s
main complaint against the respondents is that they are conducting
themselves in a manner which is contrary to the terms of the
restraint of trade agreements entered into between the applicant and
the second as well as third respondents and the conduct complained
of
is said to be in the interests and/or benefit of the first
respondent. At the time of the institution of the application for
interdict the second and third respondents had recently resigned from
the employment of the applicant, and their resignations were
effective from 4 January and 26 February 2010 respectively.
[3] I may mention that the respondents have also
opposed the merits of the main application. This judgment though, is
only confined
to the objection in terms of Rule 7(1) mentioned
supra.
[4] For the sake of convenience I shall refer to the parties as they
are referred to in the main application.
[5] During argument of the point
in
limine
Mr Van Der Linde SC appeared for
the applicant, Mr M. Basslian appeared for the first respondent, Mr A
Beyleveld SC appeared for
the second respondent and Mr N.J Mullins
for the third respondent.
B)
Issues
[6] On 1
3 May 2010 when
the point
in limine
was argued I indicated to the parties’ representatives that I
would give an order on the following day [14 May 2010] and
in doing
so, if I find in favour of the applicant, I would consider whether or
not to grant an interim interdict order. In view
of the respondents’
opposition to the granting of the interim order on grounds,
inter
alia
, that the respondents have not
prepared for argument on the merits, I decided to refrain from
considering the granting or otherwise
of the interim interdict.
[7] I therefore granted the following order;
7.1 That the respondents’ point
in
limine
relating to Rule 7(1) is hereby
dismissed with costs.
7.1.1 Such costs shall be paid by the respondents jointly and
severally the one paying the others to be absolved.
7.2 That the main application is postponed
sine
die
.
7.3 Reasons for judgment will be furnished at a later stage.
[8] What next follows are the reasons I have promised.
[9] As I indicated to the parties before granting
the order on the 14 May 2010, the arguments before me have raised
interesting
points for consideration and decision. There is paucity
of authority in the form of decided cases on the points raised, and
understandably
so, because the
Close Corporations Act
1
(therein
after referred to as the Act) is relatively new. In
addition, the reason that it was introduced was to cater for the
needs of
the small businesses and its cases are mostly tried by the
magistrate’s Courts rather than the High Courts.
[10] For the sake of clarity and convenience it
would be apposite for me to quote
verbatim
the provisions of
Rule 7(1)
as follows:
‘ Power of
Attorney
Subject to the provisions
of
sub rules (2) and (3) a power of attorney to act need not be filed,
but the authority of anyone acting on behalf of a party
may, within
10 days after it has come to the notice of a party that such person
is so acting, or with the leave of the court
on good cause shown at
any time before judgment, be disputed, whereafter such person may no
longer act unless he satisfied the
court that he is authorised so to
act, and to enable him to do so the court may postpone the hearing
of the action or application’.
[11] In the present case the applicant is a Close
Corporation registered in terms of the provisions of the Act.
2
[12] Like any other juristic person a Close Corporation acts through
its members who can only be natural persons. On receipt of
the
respondents’ challenge of authority to act on the part of the
applicant’s attorneys, applicant filed a Special
Power to sue
and defend which was signed by Mr Anthony Alexandria Jacoby
(hereafter referred to as Anthony) and dated 21 April
2010.
Applicant’s attorneys subsequently sent to the respondents’
attorneys a letter dated 26 April 2010 in which
a resolution
[annexure AJP 16] was annexed.
[13] I must state at this stage that the members
of the applicant are family members whose members’ interest
differ. The
deponent to the applicant’s founding affidavit
,
Anthony, is holding 60%, Mrs Lynn Jacoby, the wife of Anthony, holds
20% and Glen Jacoby, (the second respondent) their son, holds
20% of
members interest. Before the institution of the present application,
applicant had instituted a claim for damages (annexure
GJ2) against
the second respondent for breach of contract amounting to R 367
694-68. Those damages are a sequel to the second
respondent’s
resignation as an employee of the applicant. In terms of that
agreement the second respondent was to,
inter
alia
, sell his 20% membership interest
in applicant to Anthony and pay to him certain amounts of money, a
loan given to the second respondent
by Anthony.
C
) Grounds of
Objection
[14]
The crux of the
respondents’ objections is that applicant’s attorneys’
authority to institute the application
proceedings against the
respondents was lacking for the following reasons;
14.1 The second respondent who is still a member
of the applicant did not authorise the institution of the said
proceedings. He
was never informed by the other two members of their
intention to hold a meeting
of members
with a view to proceed with legal action against him, did not attend
such meeting and therefore, his consent, legal
or otherwise, is
lacking.
14.2 No proceedings could be validly instituted by
the applicant, a Close Corporation
, without
having complied with section 48 of the Corporations Act, which
provides for the manner in which resolutions are passed.
14.3 That reliance on section 54 of the Act by applicant and its
remaining members is misplaced because such provisions are irrelevant
to the issues at hand.
14.4 That section 50 (1)(b) of the Act requires that before any
proceedings can be instituted against any member or former member
it
is obligatory for the errant member to be informed of the intended
proceedings. This will also give him or her an opportunity
to
explain his or her conduct and may persuade the other members not to
institute the proceedings against him or her.
[1
5] Mr Van De Linde’s
contention is that the applicant’s attorneys have been
authorised in terms of sections 50(1)(b)
read with section 42(1),
(2)(a)(b) of the Act and that neither the above sections and nor
other section of the Act creates an obligation
on the members of the
Corporation to afford the guilty member an opportunity of explaining
himself before the Close Corporation
takes action against such
member.
Ratio Decidendi
[1
6] In so far as it is
relevant herein Section 50(1) of the Act provides as follows:
‘ Proceedings
AGAINST fellow-members on behalf of Corporation
Where a member or a former member of
a corporation is liable to the
corporation
to make an initial contribution or any additional
contribution contemplated in section (1) and (2)(a) respectively,
of section
24; or
on account of -
the breach of a duty arising from his or her
fiduciary relationship to the corporation in terms of section 42;
or
negligence in terms of section 43;
any other member of the corporation may institute
proceedings in respect of any such liability on behalf of the
corporation against
such member or former member after notifying all
other members of the corporation of his or her intention to do so’.
[1
7] It is common cause
that the second respondent was not present at the meeting in which
the resolution to institute legal proceedings
against himself and his
fellow respondents was taken.
[18] The interpretation of the last portion of section 50 (1)(b) by
the respondents’ counsel as suggested in 14.4 supra cannot
be
countenanced. The argument seeks to suggest that no such proceedings
brought in terms thereof could be valid unless the member,
whose
conduct is complained of, has been notified. If one inputs such
interpretation it would make a nuisance of such provisions
because
the intended proceedings can be held to ransom by the errant member
should he or she be opposed to the proceedings being
instituted. In
my view, the well founded and only judicious interpretation of the
relevant portion of the section couched in the
words
‘
after notifying all other members of
the corporation
of his intention to do
so’ refers only to the other members of the corporation other
than the errant member. If it would be
obligatory to inform the
errant member, or to seek his or her consent before action is taken,
that would simply mean that upon
refusal to comply his or her
decision would close the matter
cadit
quaestio
and that would result in the
provisions being nugatory. Such interpretation could never have
been intended by the legislature.
[19] Section 42 of the Act provides as follows:
‘
Fiduciary Position of members
(1) Each member of a corporation
shall stand in a fiduciary relationship to the
corporation;
(2) Without prejudice to the generality of the
expression “fiduciary relationship” the provisions of
subsection (1)
imply that a member—
(a) shall in relation to the corporation act honestly
and in good faith, and in particular -
(i) shall exercise such powers as he or she may have to
manage or represent the corporation in the interest and for the
benefit
of the corporation; and
(ii) shall not act without or exceeded the powers
aforesaid; and
(b) shall avoid any material conflict between his own
interests and those of the corporation; and in particular -
(i) shall not derive any personal and economic benefit
to which he or she is not entitled by reason of his or her membership
of
or service to the corporation, from the corporation or from any
other person in circumstances where that benefit is obtained in
conflict with the interests of the corporation;
(ii) shall notify every other member, at the earliest
opportunity practicable in the circumstances, of the nature and
extent of
any direct or indirect material interest which he or she
may have in any contract of the corporation; and
shall not compete in any way with the corporation in
its business activities.
(3) A member of a corporation whose
act or omission has breached any duty arising from his or her
fiduciary relationship shall be
liable to the corporation for ---
(i) any loss suffered as a result thereof by the
corporation; or
(ii)
any
economic benefit derived by the member by reason thereof.’
[2
0] Comparing a Close
Corporation with a Company in
Northview
Shipping Centre (Pty) Ltd v Revelas Properties Johannesburg CC and
Another.
3
Lewis JA stated at para 25 as
follows:
“
Moreover, a close corporation
is intended to be a simple entity, akin to a partnership, but with
limited liability. The structure
of the close corporation is
designed for individual entrepreneurs or for a limited number of
people (10) to conduct business.
There is no board of directors and
each member has the power to bind the close corporation as discussed
above. The complex requirements
of company law are not intended to
apply to them”.
It follows from the above that the Court, when
interpreting the provisions of the Act, has to bear in mind that the
legislature
was creating a small business juristic person whose
provisions should make it easy for the parties to enforce and protect
the rights
, obligations and interests of
the Close Corporation even against its own members.
[21] In Volume 3 of
Henochsberg
4
,
Meskin
states:
“
The intention of the
Legislature in enacting these provisions [sec 42] is to provide a
statutory cause of action for a corporation
in respect of breach of
fiduciary duty by a member thereof. The section should be read with
section 50(1)(b)(i) in terms of which
any other member of the
corporation may enforce such cause of action by legal proceedings on
behalf of the latter. The two sections
together constitute a
legislative prescription of that which obtains in the case of a
company at common law”
.
I agree with the views expressed by Meskin
supra.
On reading the provisions of section
42 read with section 50(1)(b) of the Act, it is difficult for me to
comprehend the basis of
the respondents’ argument that the
applicant could not have instituted the interdict proceedings against
the second respondent
without inviting him, for either his presence
and/or his consent.
Cilliers et AL
5
state as follows:
‘
The duties of members of a
close corporation are defined in wide terms and it seems as if these
duties may even apply to persons
who are not members of the Close
Corporation but who manipulate the actual members’.
In the present case the conduct complained of by
the applicant against the second and the third respondents, is that
they are soliciting business for the first respondent and
to the
prejudice of the applicant. Such conduct clearly invites the
remaining members of the applicant to take any appropriate
action
even against the other respondents who are not members but could
have, by conduct, manipulated the second respondent to
the prejudice
of the applicant.
[2
2] As against the
other two respondents, a decision by them was made at a meeting in
which Anthony and his wife resolved to ratify
the institution of the
legal proceedings against the first and third respondents. Section
48 of the Act allows the majority members
present at a meeting to
make a resolution which, in this case, was sent to the respondents’
attorneys under cover of a letter
dated 26 April 2010. There is
nothing in section 48 to suggest that a resolution cannot be made
with a view to validate or ratify
steps or action already taken by
the members of the corporation. In terms of section 48(2)(b) of the
Act matters are decided at
meetings of the corporation by majority
vote, each member having the number of votes that corresponds with
the percentage of his
or her member’s interest in the
corporation. The two members of the Corporation who signed the
resolution both constitute
80% of the members’ interest and
therefore meet the requirements of the Act
6
.
The whole purpose of the enactment was to protect the interests of
the Close Corporation against its members who, due to their
internal
knowledge of the activities of the corporation, could take advantage
of the Close Corporation to the latter’s prejudice.
[23] In my view, whatever criticism by the
respondents of the applicant’s resolution has no merit. They
do not dispute that
Anthony and his wife had signed the resolution or
that
the two members had no right to sign
it. The latter are the members of the applicant who, in exercising
their majority vote as
aforesaid, could resolve to take action
against all the respondents herein. In any event where, as in the
present case, the respondents
have offered no valid evidence at all
to suggest that the applicant’s attorneys have no authority to
act for the applicant,
only the minimum of evidence is required to
prove the required authority to act
7
.
Prima facie
the resolution appears to have been concluded and signed by Anthony
and his wife and I find no reason not to accept it as constituting
the required authority to instruct attorneys to institute proceedings
against the respondents.
[2
4] A similar argument
was raised in
Cuyler and Another v
Shiers and Another, Cuyler v C & S Marketing and others
8
where at page 123 E-F
Shakenovsky AJ
responded as follows to such argument:
“
It is common cause that
Cuyler, being a member of C and S, did not notify Shiers pursuant to
the provisions of section 50(1) as
above stated. However, Mr Brett
in my view correctly and properly conceded that the giving of such
notice was not a jurisdictional
requirement and, consequently, he did
not contend that there has been non-compliance by Cuyler with the
provisions of the section
in this regard”.
In this case Cuyler had instituted interdict
proceedings in terms of section 50(1) read with section 42 of the
Act, interdicting
the respondent member from competing unlawfully
against the Close Corporation of which he was a member
.
The Court held that section 50(1) read with section 42 of the Act
authorises the institution of such proceedings by a member
without
the requirement of a resolution. Equally in our case, in terms of
the Act, it is not a jurisdictional requirement for
the complaining
member(s) to notify the other members before instituting the legal
proceedings against the errant member.
[2
5] It, therefore,
follows that although the applicant has indicated his reliance on
section 54 of the Act for instituting the proceedings
against the
second respondent, there are sufficient facts which justify the
argument by Mr Van De Linde that the actions of the
applicant and/or
its deponent are derived from the provisions of section 50(1) read
with section 42(1) (a) and (b) of the Act.
Anthony and his wifes’
claim to have been authorised by section 54 of the Act is misplaced
and cannot be justified but their
actions are perfectly correct and
are protected by the provisions of section 50 (1) read with section
42(1) (a) and (b) of the
Act.
[26] Counsel for all respondents sought to rely on
a number of decisions
9
including the judgment of this Division
10
in support of their submissions that the applicant’s attorneys
had no authority to act for the applicant. Upon close scrutiny
it
becomes clear that the decisions relied upon by respondents are
distinguishable from the case under discussion. This is evinced
by,
inter alia
,
the contents of the extract from the judgment of
Nepgen
J
in the case quoted in footnote no8
where at 890 F-I the leaned judge stated as follows:
“
It is indeed so that section
50 of the Act relates to situations where a close corporation’s
own rights are at issue but this
has nothing to do with proceedings
such as the present. It is quite clear that what is provided for in
Section 50 of the Act is
that a member of the Close Corporation may
institute proceedings on behalf of the close corporation in respect
of another member’s
or a former member’s liability to the
Close Corporation where such liability arises on account of a breach
of the duty flowing
from the fiduciary relationship that exists or
existed. Without going into any great detail in this regard, there
can be little
doubt that the comment by Cilliers and others, Close
Corporation Service para 4.2 section 50 of the Act is to enable
proceedings
to be instituted on behalf of the Close Corporation
against fellow members was devised in order to provide for simple and
effective
means to protect the interests of
the Close Corporation thus
avoiding “the uncertainty inherent in Common Law derivative
action and the time consuming and risky
procedure envisaged in
section 266 of the Companies Act”.
[2
7] It follows from the
above extract that the facts of the
De
Franca
judgment supra are clearly
distinguishable and no reliance can be placed on that judgment to
persuade me to decide in favour of
the respondents herein.
[28] The decision in
Mall’s
case
supra relates to a situation where
a company, being an artificial person unlike an individual,
institutes proceedings in Court
through its agents. Where such
authority to institute the proceedings is disputed the person who
instituted the proceedings on
behalf of the company must prove his
authority for doing so. This can be in the form of a resolution made
by the company. The
distinction between Mall’s case and the
case in issue, with respect to the second respondent, is that the
institution of
the proceedings in the present case is based on the
provisions of the
Close Corporations Act and
not on common law.
[
29] On the question of
deposing to an affidavit in motion proceedings the deponent need not
be authorised to do so. It is only
the institution of the
proceedings and the prosecution thereof which must be authorised.
11
[
30] The allegations
against the second respondent by applicant, if established, fall
within the prohibition in
section 42
of the Act. As against all the
respondents, applicant is entitled to protect its own business
interests and therefore can only
do so in the manner it has proceeded
herein. There is, therefore, no merit in the respondents’
objection to the applicant’s
attorneys to act for the latter in
these proceedings.
[
31] It is for the above
reasons that the point
in limine
was dismissed with costs.
______________________
P.W TSHIKI
JUDGE OF THE HIGH COURT
Appearances:
For the Applica
nt
:
Adv Van De Linde SC instructed by Nelson Attorneys –
Port Elizabeth
For the first Respondents
:
Adv Basslian instructed by Myers inc. ℅ Boqwana
Loon &
Connellan-Port Elizabeth
For the second R
espondent
:
Adv Beyleveld instructed by Michael Randell Attorneys-
Port
Elizabeth
For the third Respondents
: Adv
Mullins instructed by Booysen & Rossouw
Attorneys
– Port Elizabeth
1
Act 69 of 1984
2
Sections 12-14 of the Close Corporation Act 69 of
1984.
3
See Northview Shipping Centre (Pty) LTD v Revelas
Properties Johannesburg CC and Another
2010
JOL 25189
(SCA). See also Espag and
Another v Hattingh
2010 (3) SA 22
SCA at 26 para 11
4
Henochsberg on the Close Corporation Act 69 of
1984 Vol (3) Com - 100
5
On Close Corporations Services, issue no.26-
pages 4-5 para 404 –
See also Lessing 1989
S.A Mercantile Law Journal 242, 245 – 247.
6
See Cilliers et al, commentary on Close
Corporations Service, Part I issue no 26 pages 4 – 19
See also
section
48(2)(b)
of the
Close Corporations Act 69 of 1984
.
7
Dowson & Dobson Ltd v Evans & Kerns
(Pty) Ltd
1973 (4) SA 136
(E), Mall (Cape) (Pty) Ltd v Merino
Ko-operasie Bpk 1957(2) SA 347 (C).
8
1999 (3) SA 118
(WLD) at 123 E-F [Cuyler in this
case had instituted interdict legal proceedings on behalf of a Close
Corporation against another
member of the Corporation, interdicting
him from competing unlawfully and trading against the applicant
Close Corporation.]
9
See Mall (Cape) (PTY) Ltd v Merino Ko-operasie
BPK 1957(2) SA 347(C)
10
De Franca v Exhaust Pro CC (De Franca
Intervening) 1997(3) SA 878 (SE) also reported at ([1996] 4 ALL SA
503.
11
See Ganes v Telcom Namibia LTD 2004(3) SA 615
(SCA) also reported at
[2004] 2 ALL SA 609
(SCA). See also
Plettenberg Bay Country Club v Bitou Municipality
[2006] 4 ALL SA
395
(C) at 398 para 5 & 6.