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[2012] ZASCA 53
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La Lucia Sands Share Block Ltd v Flexi Holiday Club and Others (171/11) [2012] ZASCA 53; [2012] 3 All SA 49 (SCA) (30 March 2012)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case No: 171/11
In the matter between:
LA
LUCIA SANDS SHARE BLOCK LTD
….........................................................
Appellant
and
FLEXI
HOLIDAY CLUB
….........................................................................
First
Respondent
TRAFALGAR
HOLIDAY RESORTS
…................................................
Second
Respondent
STAR
VACATION CLUB
…....................................................................
Third
Respondent
Neutral
citation:
La Lucia Sands Share Block Ltd v Flexi Holiday Club
(171/11)
[2012] ZASCA 53
(30 March 2012).
Coram:
MPATI P,
HEHER and MALAN JJA and BORUCHOWITZ and NDITA AJJA
Heard:
1 March
2012
Delivered:
30
March 2012
Summary:
Voluntary association – club operating time-share scheme –
whether club illegal association having regard to sections
30 and 31
of Companies Act 61 of 1973 – whether club formed or permits
the carrying on of business that has for its object
acquisition of
gain.
_____________________________________________________________________
ORDER
_____________________________________________________________________
On appeal from:
KwaZulu-Natal High Court, Durban (Van der Reyden J) sitting as
court of first instance:
1. The appeal is
dismissed with costs including the costs of two counsel where
employed;
2. The separated issues
identified in the Order of Court dated 28 February 2006, and as
amplified in the Order of Court dated 15
May 2009, are decided in the
first respondent’s favour with respect to first respondent and
no order is made with respect
to those issues in so far as the second
and fourth respondents are concerned;
3. The appellant is
ordered to pay the first respondent’s costs of the hearing and
the separated issues from the date of the
application to the date of
this order including any reserved costs in relation to the separated
issues;
4. All other questions of
costs are reserved for the trial court.
_____________________________________________________________________
JUDGMENT
_____________________________________________________________________
BORUCHOWITZ AJA (MPATI P,
HEHER, MALAN JJA and NDITA AJA concurring):
[1] This is an appeal
from a single judge of the high court, in action proceedings, with
leave of that court. The issue on appeal
is whether the first
respondent is to be recognised in law, having regard to the
provisions of ss 30 and 31 of the Companies Act
61 of 1973 (The Act).
[2] The first respondent
is a voluntary association known as Flexi Holiday Club (the club). It
operates a property time-sharing
scheme and has approximately 60 000
members. The second and third respondents are also clubs which
conduct time-sharing schemes
but they no longer have any interest in
this appeal.
[3] The appellant is a
share block company as defined in the Share Blocks Control Act 59 of
1980. It owns an immovable property
and a holiday resort in
KwaZulu-Natal where it operates a share block scheme. At all material
times the club held shares in the
appellant which entitled it to the
exclusive use of the units in the share block scheme. These shares
were disposed of by the appellant
when the club failed to pay certain
levies. Following such disposal the club instituted an action against
the appellant in the
KwaZulu-Natal High Court in which it claimed
return of the shares, alternatively damages arising from the
cancellation of the use
and occupation rights which attached to its
membership in the appellant.
[4] One of the principal
defences raised by the appellant was that the club had been formed
for the purpose of gain, or subsequent
to its formation had pursued
gain in contravention of the prohibition contained in s 30 of the Act
and that, consequently, it had
no lawful existence. The high court,
acting in terms of rule 33(4), ordered that this question be
determined separately by way
of a trial hearing. The court below (Van
der Reyden J) before whom the matter was ultimately heard, held that
there was no merit
in the appellant’s contention and that the
first respondent had the requisite
locus standi in judicio.
[5] The club operates
within a group of companies known as the Club Leisure Group (the
Group). The Group is effectively controlled
by the founding members
of the club, Mr Stuart John Lamont and Mr Anthony Nicholas Ridl.
Lamont is the chairman of the group and
Ridl
its managing director. They exercise such control through a
holding company, ie Club Leisure Holdings (Pty) Ltd the shares of
which
are held equally by Lamont and Ridl through trusts controlled
by them. In turn, Club Leisure Holdings holds the entire issued share
capital of Club Leisure Group (Pty) Ltd, which has three subsidiaries
Club Leisure Sales (Pty) Ltd, Vacation Properties (Pty) Ltd
and Club
Leisure Management (Pty) Ltd. The latter has a subsidiary known as
First Resorts Management (Pty) Ltd. The club has two
subsidiaries,
namely Club Management Holdings (Pty) Ltd and Flexi Club Management
Services (Pty) Ltd.
[6] Each of the companies
in the Group has a different function. The developer of the
time-share scheme operated by the club is
Vacation Properties (Pty)
Ltd. It acquires holiday accommodation and time-share interests which
it introduces into the club and
in return acquires from it in
exchange, points which it sells at a profit. Club Leisure Sales (Pty)
Ltd sells the points for Vacation
Properties (Pty) Ltd and generates
a profit in doing that. The club is managed by Club Leisure
Management (Pty) Ltd.
[7] It is common cause
that the Group as a whole generates very considerable profits. The
2007 pre-tax profit of the group was R60
million, a large portion of
which was generated by various subsidiaries in the group.
[8] Ridl explained that
the business model which the Group adopted was purposely designed to
isolate the club from the business
enterprises of the Group and to
ensure the existence of a risk free environment. He conceded that
considerable profits were made
by the companies that controlled and
managed the club, but denied that any profit or gain was made by the
club itself or its members.
[9] Ridl further
explained that the object of the club was to acquire holiday property
and accommodation for the use and enjoyment
of its members in
accordance with its rules. The club obtained its funds from
essentially two sources (subscriptions and user charges)
which were
recovered from members. The user charges were utilised to pay levies
which the club incurred in respect of the properties
and
accommodation interests held by it. The annual subscriptions were
used to pay the costs and running expenses of the club. Subscriptions
from members were held by Flexi Club Management Services (Pty) Ltd
which in turn outsourced the management of the club to Club
Leisure
Management (Pty) Ltd. In order to further minimise risk to members of
the club all bonded properties belonging to it were
held in the
club’s subsidiary Club Management Holdings (Pty) Ltd.
[10]
Sections
30 and 31 of the companies Act 61 of 1973 as amended provide, as far
as is relevant for present purposes, as follows:
'30. Prohibition of
association or partnership exceeding twenty members and exemption
No company, association,
syndicate or partnership consisting of more than twenty persons
shall be permitted or formed in the Republic
for the purpose of
carrying on any business that has for its object the acquisition of
gain by the company, association, syndicate
or partnership, or by
the individual members thereof, unless it is registered as a company
under this Act, or is formed in pursuance
of some other law or was
before the thirty-first day of May, 1962, formed in pursuance of
Letters Patent or Royal Charter.’
‘
31.
Unregistered
association carrying on business for gain not to be corporate bodies
No association of persons
formed after the thirty-first day of December, 1939, for the purpose
of carrying on any business that
has for its object the acquisition
of gain by the association or by the individual members thereof,
shall be a body corporate,
unless it is registered as a company under
this Act or is formed in pursuance of some other law or was before
the thirty-first
day of May, 1962, formed in pursuance of Letters
Patent or Royal Charter.'
[11] The underlying
purpose of s 30, which is based upon English precedent, was stated by
James LJ in
Smith v Anderson
(1880) 15 Ch D 247
(CA) at 273:
'[t]o prevent the mischief arising from large trading
undertakings being carried on by large fluctuating bodies,
so that
persons dealing with them did not know with whom they were
contracting, and so might be put to great difficulty and expense,
which was a public mischief to be repressed’. This dictum was
approved by this court in
Mitchell’s Plain Town Centre
Merchants Association v McLeod & another
[1996] ZASCA 67
;
1996 (4) SA 159
(A)
at 169I-J and
Director: Mineral Development, Gauteng Region, &
another v Save the Vaal Environment & others
1999 (2) SA 709
(SCA) para 8.
[12] The prohibition
contained in s 30 extends to associations that carry on businesses
that have gain as their objective as well
as to associations which
permit such business to be carried on. The effect of the word
‘permitted’ is that associations
which were not formed
for the purpose of gain but which subsequent to formation pursue
gain, contravene the section (see
Suid-Westelike
Transvaalse Landbou-Koöperasie Bpk v Phambili African Traders
Association
1976 (3) SA 687
(Tk) at 688G-H).
An
association which contravenes s 30 constitutes an illegal association
which cannot be recognised in law (
see
Wakefield v ASA Seeds (Pvt) Ltd
1976
(4) SA 806
(R) at 809I–810A;
African
National Congress & another v Lombo
[1997] ZASCA 1
;
1997
(3) SA 187
(A) at 198J-199A.
[13] Section 30 is
triggered when an association membership of which exceeds twenty
persons is formed ‘for the purpose of
carrying on any business
which has for its object the acquisition of gain by the …
association … or by the individual
members thereof …’.
This purpose is referred to by Nienaber JA as ‘the critical
purpose’.
[14]
The interrelationship between ss 30 and 31 was described by Nienaber
JA in
Mitchell’s Plain
at 166B-D as follows:
‘
Leaving
aside exceptions and exemptions and dealing only with the formation
of the association, the two sections can be synthesised
as follows:
(1) if the
membership of the association exceeds 20, the association must be
registered as a company if it is formed
for the critical purpose,
failing which it will have no
locus standi in judicio
; if its
membership is less than 20, it is not illegal if it is formed for the
critical purpose and is to operate as, say, a partnership;
(2) whatever
its membership, if the association is formed for the critical purpose
it must be registered as a company
in order to enjoy corporate
personality; if it is not formed for the critical purpose it may yet
enjoy corporate personality if
it possesses the characteristics of a
universitas
, ie if it is to operate as an
unincorporated voluntary association.’
[15] The business to
which reference is made in s 30 is the business carried on by the
association and not the business which may
be carried on by members
or entities other than the association. This is particularly relevant
in the present case as the appellant
seeks to place emphasis on the
business activities carried on by the companies in the Group that
manage and control the club’s
affairs. It is also evident from
the wording of the section that it is not the object of the
association but the object of the
business that must be the focus of
attention. What matters is the main object. However, a multiplicity
of objects may be taken
into account provided they ‘are
congruent and not contradictory’. See
South African Flour
Millers’ Mutual Association v Rutowitz Flour Mills Ltd
1938
CPD 199
at 204;
Mitchell’s Plain
at 168H-I.
[16] The term ‘business’
is of wide import and capable of a variety of meanings. See
Mitchell’s Plain
at 167E-F and cases cited therein. In
the context of s 30, our courts have accepted the definition of
Jessel MR in
Smith v Anderson
above that ‘anything which
occupies the time and attention and labour of a man for the purpose
of profit is business.’
[17] The meaning to be
attributed to the term ‘gain’ was definitively settled by
this court in
Mitchell’s Plain
at 169J-170B:
‘
The
key word is “trading”. It is the clue to the meaning of
“gain”. “Gain” in the context in
which it
appears in ss 30(1) and 31 means a commercial or material benefit or
advantage, not necessarily a pecuniary profit, in
contradistinction
to the kind of benefit or result which a charitable, benevolent,
humanitarian, philanthropic, literary, scientific,
political,
cultural, religious, social, recreational or sporting organisation,
for instance, seeks to achieve. The sections are
concerned with
commercial enterprises and “gain” must be given a
corresponding meaning (cf
South
African Flour Millers’ Mutual Association v Rutowitz Flour
Mills Ltd
(
supra
at 202-3). It is not a question of law; it is a matter of fact.’
[18] A practical test for
the determination of whether or not a business is being carried on
for gain is to be found in the following
statement by Simonds J in
Armour v Liverpool Corporation
(1939) Ch 422
at 437:
‘
Neither “business”
nor “gain” is a word susceptible to precise or scientific
definition. The test appears
to me to be whether that which is being
done is what ordinary persons would describe as the carrying on of a
business for gain
… .’
[19] It is,
at the outset, necessary to dispose of certain contentions advanced
by counsel for the appellant. He submitted that
although the club
possesses the main characteristics of a corporate body under the
common law (a
universitas
)
1
it was in fact not a
valid
universitas
as its object was
primarily the acquisition of gain. It was further submitted that the
club was not a club in the true sense. An
authentic club was
ordinarily member owned and controlled, whereas it is the trustees
who in the present case have absolute control
of the club. It is
neither necessary nor relevant to decide these questions. Whether the
club is a
universitas
or an authentic club was
not an issue before the court below.
[20]
The
central question which is dispositive of the appeal is whether the
club was formed or is carried on for the purpose of conducting
a
business that has for its object the acquisition of gain by either
the club or the individual members thereof.
[21] In advancing the
contention that the club was indeed engaged in the acquisition of
gain reliance was placed on the fact that
the club has an impressive
portfolio of holiday properties valued at several billion rand. These
properties were revalued each
year. Mr Vincent Faris, a chartered
accountant, who was called as an expert witness on behalf of the
appellant pointed out that
there had been an appreciation in the 2006
to 2007 financial years of holiday properties held by the club from
R2 274 billion to
R2 819 billion. Faris expressed the view that,
although the properties were not resold and remained unrealised, they
nevertheless
constituted an increase in wealth for the club.
[22] Mr Ridl whose
evidence was supported by Mr Craig John Davis, a chartered
accountant, disputed that the revaluation of the properties
each year
constituted a gain or increase in wealth. They explained that the
revaluation exercise was undertaken in order to take
account of
inflation and increased property values so as to ensure that parity
was maintained between existing and new members.
To that end when the
value of properties appreciated, existing members would be issued
with additional points to ensure such parity.
They emphasised that
the nett position of members always remained neutral as their
accommodation rights did not change.
[23] It was also argued
that members could derive wealth by disposing of or trading in
points. Members could use their points to
earn income in addition to
the benefits of procuring cheaper annual holidays. Where additional
points were allocated pursuant to
the revaluation exercise, members
could sell their points at a rate higher than their original purchase
price and in so doing derive
gain. Counsel conceded that the club per
se did not operate with the object that its members could gain by
selling points. That
being so, such sales (and gains) arise not
because of the objects of the business but because of the election of
the members, uninfluenced
by the objects.
[24] Counsel for the
appellant submitted that in order properly to determine the nature of
the business of the club reference must
be made to the business
operations of the Club Leisure Group. This argument is in my view
misplaced. The club is a voluntary association
and the purpose for
which it was formed is to be found in its constitution. The rights
and powers of a voluntary association are
limited by the terms of its
constitution which confines its activities to what is expressly or
impliedly contained therein. Clause
3 of the constitution of the club
expressly provides that ‘the objects of the club are to acquire
holiday property for the
use and enjoyment of its members’. It
is the intention of the members of the club, as expressed in its
constitution, and
not the intention of its managers or controllers
that is relevant in order to determine the nature and the object of
the club’s
business.
[25] Reduced to its
essentials, the business of the club is to acquire holiday
accommodation and time-share interests for the benefit
of its members
and in exchange for such acquisitions to issue members with points.
The club is purely a vehicle for the holding
of holiday accommodation
or stock which it makes available to its members, and it does not
trade in the properties held by it.
It is clearly not the intention
of the club to sell or dispose of the properties in order to derive a
profit or gain. Members also
do not join the club for the purpose of
managing its affairs but rather to secure holiday accommodation and
to have access to the
club’s extensive portfolio of properties.
As Mr Olsen put it for the respondents, the members associate in the
club for the
flexibility that it provides. Nor do members join the
club in order to sell their points at a profit or to trade-in points.
[26] In
Director:
Mineral Development, Gauteng Region, & another v Save the Vaal
Environment & others
1999 (2) SA
709
(SCA) at 716 para 8, this court emphasised that the prohibition
contained in s 30(1) should be kept within its proper bounds and
that
the underlying purpose of the section should not be overlooked, which
is to prevent the mischief of trading undertakings being
carried out
by large fluctuating bodies so that persons dealing with them do not
know with whom they are contracting. The only
persons who essentially
have dealings with the club are its members and, in my view, the
mischief that the Act was designed to
obviate would not arise.
[27] On a proper
conspectus of the evidence and the aforementioned authorities, I do
not consider that ordinary persons would describe
the activities
carried on by the club as the carrying on of a business for gain as
envisaged in ss 30 and 31 of the Act. Accordingly
the appeal cannot
succeed.
[28] The parties have
agreed that, should the appeal be dismissed, the following order
should be made:
1. The appeal is
dismissed with costs including the costs of two counsel where
employed;
2. The separated issues
identified in the Order of Court dated 28 February 2006, and as
amplified in the Order of Court dated 15
May 2009, are decided in the
first respondent’s favour with respect to first respondent and
no order is made with respect
to those issues in so far as the second
and fourth respondents are concerned;
3. The appellant is
ordered to pay the first respondent’s costs of the hearing and
the separated issues from the date of the
application to the date of
this order including any reserved costs in relation to the separated
issues;
4. All other questions of
costs are reserved for the trial court.
___________________ P
BORUCHOWITZ
ACTING JUDGE OF APPEAL
Appearances:
Appellant:
A J DICKSON SC with N J TEE
Instructed
by:
George
Wolfe Attorneys
Johannesburg
Matsepes
Incorporated
Bloemfontein
Respondents: P OLSEN SC
Instructed by:
Hornby Smyly Glavovic Inc
Westville
Goodrick & Franklin
Bloemfontein
1
The
main characteristics of a
universitas
are that it exists as an entity
with rights and duties independent from the individual members’
rights and duties and has
perpetual succession. See
Morrison
v Standard Building Society
1932
AD 229-238
;
Ahmadiyya
Anjuman Ishaati-Islam Lahore (South Africa) v Muslim Judicial
Council (Cape)
1983
(4) SA 855
(C) at 860-861 and cases cited therein;
African
National Congress & another v Lombo
[1997] ZASCA 1
;
1997
(3) SA 187
(A) at 195I-196B.