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[2010] ZASCA 56
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Smyth and Another v Mew (270/09) [2010] ZASCA 56; 2010 (6) SA 537 (SCA) (1 April 2010)
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THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
In
the matter between
Case No: 270/09
RICHARD JAMES SMYTH First
Appellant
COCO HAVEN 1325 CC Second Appellant
and
BERNARD DARREN MEW Respondent
Neutral citation:
Smyth
v Mew
(270/09)
[2010] ZASCA 56
(1 April 2010)
Coram:
NAVSA, CLOETE, VAN
HEERDEN, BOSIELO JJA et SERITI AJA
Heard:
22
FEBRUARY 2010
Delivered:
1 APRIL
2010
Summary:
Close Corporations
Act 69 of 1984
â whether the judge in the court below erred in
granting a winding-up order instead of an order in terms of
s 36
of
the
Close Corporations Act that
the respondent cease to be a member
of the 2
nd
appellant and further that his membership be acquired by the 1
st
appellant.
ORDER
On appeal from: South Gauteng High Court (Johannesburg)
(De Waal AJ sitting as court of first instance):
The appeal is dismissed with costs.
JUDGMENT
BOSIELO JA (Navsa, Cloete, Van Heerden JJA and Seriti
AJA
concurring)
[1] Mr Bernard Darren Mew (Mew) applied to the South
Gauteng High Court on an urgent basis for a winding-up of the second
appellant,
Coco Haven 1325 CC (Coco Haven) in terms of s 68(d) of the
Close Corporations Act 69 of 1984 (the Act). In addition to opposing
the
application for a winding-up order, the first appellant, Richard
James Smyth (Smyth) launched a counter-application for (inter alia)
an order in terms of s 36 of the Act terminating Mew's membership of
Coco Haven and an order that Mew's membership's interest in
Coco
Haven be acquired by Smyth against payment to Mew of R400 000
(alternatively an amount to be determined by the court). The court
below granted an order for the final liquidation of Coco Haven and
dismissed Smyth's counter-application. The appellants are appealing
against that judgment with the leave of this court. Since the
judgment of the court below, Smyth has passed away and has been
substituted
by the executors of his estate.
[2] Coco Haven is a close corporation trading under the
name and style of The Corner House Pub (the pub) in Randburg,
Johannesburg.
Smyth and Mew are the only members of Coco Haven. Mew
became involved in Coco Haven in September 2007 when he paid Smyth
R200 000
for a 50% member's interest.
[3] In terms of an association agreement concluded by
Smyth and Mew on 5 September 2007, the management of the business was
vested
in Smyth who was employed by Coco Haven in a full time
capacity earning a salary of R25 000 per month. Mew was a 'sleeping
partner'
and was to receive an amount of R5 000 per month, 'profits
permitting'.
[4] The association agreement provided further that all
monthly accounting records were to be made available to the members
fortnightly
or upon request within a reasonable time. Furthermore,
Smyth who was the managing member could not, save with the authority
of a
resolution of the members, incur any capital expenditure in
excess of an amount of R5 000.
[5] Mew complained that since the inception of the
business, Smyth refused to allow him, as a member of Coco Haven, to
inspect its
accounting records, source documents, bank statements,
management accounts or books of account. At the same time, Smyth was
not paying
Mew the R5 000 per month agreed upon. Smyth averred that
this amount was accruing to Mew's loan account. According to Mew,
Smyth's
explanation for non-payment of this amount was that the
business was not making a profit, but was merely breaking even.
[6] In the course of all these developments, Mew
discovered that Smyth had, without his consent, bought a double cab
Mazda Drifter
4x4 motor vehicle for himself. It is common cause that
the monthly payments for this vehicle came from Coco Haven. These
payments
were not debited to Smyth's loan account. According to Mew
the registered owner of this vehicle is Ms M du Plessis who is
Smyth's
fiancée. It is common cause that Smyth was busy with
extensive structural alterations to the premises, without Mew's prior
approval.
This was in contravention of clause 3.6 of the association
agreement. According to Smyth the money expended on the alterations
between
1 March 2007 and 29 February 2008 amounted to R793 057.82,
although Coco Haven's draft financial statements for the year ending
29
February 2008 reflected the costs of these improvements to be R269
703.
[7] According to Mew, he met with Ms Nicolene Botes, who
was a night manager at Coco Haven. Botes made a number of disclosures
to
Mew which were disturbing. Amongst others, she told Mew that Smyth
conducted the close corporation's business through a bank account
at
First National Bank in the name of Smyth's daughter. It is common
cause that the bank account was in the name of Nicola Ann Prinsloo,
t/a The Corner House. Ms Prinsloo is Smyth's daughter and she had
signing powers on this bank account. It transpired that the close
corporation had no bank account of its own, with the result that all
the money which the close corporation was banking was deposited
into
Prinsloo's account. No reference was made in the bank statements
relating to this account to the close corporation's registration
number and the statements indicate that the VAT registration number
of the account holder is 'not available'. In fact, it subsequently
emerged that the close corporation had failed to register for VAT,
PAYE, UIF, SDL and WCA.
[8] From other disclosures which Botes made to Mew it is
clear that Smyth did not have a proper cash management system in
place. All
the cash takings for the day were put in a bag at the end
of each business day and thrown through the window of the cottage on
the
premises occupied by Smyth and Du Plessis. Both Smyth and Du
Plessis had keys to the cottage and therefore had access to the
money.
Significantly, Smyth confirmed this state of affairs.
[9] Smyth admitted that he was not banking all the
takings from the business but was retaining large amounts of cash,
allegedly to
pay the operating costs of the close corporation. This
is notwithstanding the fact that, on Smyth's version, the business
had a turnover
in the region of R750 000 per month. The time period
report for 1 April 2008 to 23 September 2008 shows that the business
generated
sales of R3 728 823.60.
[10] Mew made various unsuccessful attempts to gain
access to Coco Haven's financial records. He was forced to resort to
court for
an order to give him access to these financial records. The
application was vigorously opposed by Smyth. The refusal by Smyth to
allow Mew access to Coco Haven's financial records increased the
tension and acrimony between the two. As a result both Smyth and
Mew
became embroiled in a number of abrasive legal skirmishes.
[11] Before Mew became a member of Coco Haven, Smyth had
signed a written agreement of lease on behalf of Coco Haven with Mr
and Mrs
Strachan (the Strachans) in respect of the premises where
Coco Haven conducted its business. The lease was to endure from 1
February
2006 to 31 January 2009. Smyth had the option to renew the
lease on written notice of at least eight months before the expiry of
the lease, but failed do so timeously.
[12] Smyth had agreed in terms of the agreement of lease
to pay the rent, municipal charges including rates and taxes as well
as charges
levied in respect of electricity and water consumed at the
leased premises.
[13] During February 2008, Mew concluded a written
agreement of sale with the Strachans in respect of the premises where
Coco Haven
conducted its business. Subsequent to the agreement of
sale, Mew was unable to take transfer of the property as it
transpired that
Smyth had not been paying rates and taxes and charges
for water and electricity. According to Mew the arrears amounted to
about R120
000. On being confronted, Smyth did not dispute that he
owed such charges. All that he disputed was the amount.
[14] Section 68(d) reads as follows:
'A corporation may be wound up
by a Court, if â
. . . .
(d) it appears on application to
the Court that it is just and equitable that the corporation be wound
up.'
[15] Section 36 of the Act reads as follows:
'(1) On application by any
member of a corporation a Court may on any of the following grounds
order that any member shall cease to
be a member of the corporation:
(a) Subject to the provisions of
the association agreement (if any), that the member is permanently
incapable, because of unsound
mind or any other reason, of performing
his or her part in the carrying on of the business of the
corporation;
(b) that the member has been
guilty of such conduct as taking into account the nature of the
corporation's business, is likely to
have a prejudicial effect on the
carrying on of the business;
(c) that the member so conducts
himself or herself in matters relating to the corporation's business
that it is not reasonably practicable
for the other member or members
to carry on the business of the corporation with him or her; or
(d) that circumstances have
arisen which render it just and equitable that such member should
cease to be a member of the corporation:
Provided that such application
to a Court on any ground mentioned in paragraph
(a)
or
(d)
may also be made by a
member in respect of whom the order shall apply.
(2) A Court granting an order in
terms of subsection (1) may make such further orders as it deems fit
in regard to â
(a) the acquisition of the
member's interest concerned by the corporation or by members other
than the member concerned; or
(b) the amounts (if any) to be
paid in respect of the member's interest concerned or the claims
against the corporation of that member,
the manner and times of such
payments and the persons to whom they shall be made; or
(c) any other matter regarding
the cessation of membership which the Court deems fit.
[16] It was common cause that Mew and Smyth had serious
irreconcilable differences and the relationship between them had
broken down
irretrievably. Mew alleged that it was important that a
liquidator be appointed so that (inter alia) a thorough investigation
of
Coco Haven's financial affairs could be conducted to determine its
financial position.
[17] Smyth agreed that the relationship between them had
broken down irretrievably, although he attributed this to Mew. He
accused
Mew of conduct which was likely to have a prejudicial effect
on the carrying on of their business. He avered that by purchasing
the
property on which the business is being conducted for himself,
Mew acted in breach of his fiduciary duty to Coco Haven. Smyth avered
further that the apparent unwillingness on the part of Mew to renew
the lease in favour of Coco Haven was prejudicial to the continuation
of their business. He accused Mew of acting mala fide
.
Smyth was unequivocal that, given the
prevailing circumstances, there was no possibility that he and Mew
could continue to work together
in future or to remain co-members in
the close corporation.
[18] Smyth stated that it would be just and equitable if
the court were to make an order that Mew cease to be a member of Coco
Haven
and that he be allowed to take over his membership at R400 000
or any other amount which the court might find to be reasonable. This
assertion is based amongst others on the fact that he had
single-handedly built the business from a struggling small business
to
a lucrative one; that the business employed 42 people who would
lose their jobs if Coco Haven were to be liquidated and lastly, that
it was better to keep a thriving business than to have it liquidated.
[19] Smyth relied on a valuation done by Coco Haven's
accounting officer and auditor, Mr Haasbroek (Haasbroek), in an
amount of R400
000 which he stated should be paid to Mew in return
for the latter's member's interest. It is common cause that in
determining the
value of the member's interest Haasbroek did not
consult Mew. His valuation was based exclusively on the information
supplied to
him by Smyth and Ms Woolmer, Coco Haven's bookkeeper.
Smyth asserted that the valuation was acceptable as it was done in
terms of
clause 8 of the association agreement, signed by both
parties.
[20] Having analysed the evidence the learned judge
found that there was indeed a complete breakdown of the working
relationship between
Smyth and Mew. Relying on a dictum
by Nepgen J from
De
Franca v Exhaust Pro CC
(
De
Franca intervening
)
1997 (3) SA 878
(SE) at
891E, the learned judge found that indeed 'the breakdown in their
relationship is so complete that any confidence and trust
they may
have had in each other no longer exists'.
[21] Concerning the issue whether to grant the
winding-up order in terms of s 68(d) of the Act or the compulsory
buy-out of Mew by
Smyth in terms of s 36 the learned judge,
relying on
Kanakia v Ritzshelf 1004 CC t/a
Passage to India & another
2003 (2) SA 39
(D) at 48E-F, found that Smyth had to adduce evidence that the relief
which he sought should be granted. However, having accepted,
without
deciding, that Smyth had discharged the onus for the purposes of
establishing conduct falling within the purview of s 36(1)(b),
(c)
and (d), the learned judge found that Smyth had not adduced
sufficient evidence to enable him to exercise his discretion in
Smyth's favour in terms of s 36(2) of the Act. The learned judge was
not content with the fact that Smyth relied solely on the valuation
made by Haasbroek. He found Haasbroek's valuation not to be reliable
as it was based entirely on the information submitted to him
by Smyth
and Coco Haven's bookkeeper, Ms Woolmer.
[22] The learned judge found that Smyth had failed to
adduce sufficient evidence to prove that it would be just and
equitable for
the learned judge to exercise his discretion in his
favour and make an order in terms of s 36(1) that Mew cease to be a
member of
Coco Haven and further, in terms of s 36(2), that Smyth
acquire his interest upon payment of a particular amount. In the
result,
the learned judge dismissed the counter application and
granted a final winding-up order in terms of s 68(d) of the Act.
[23] Before us counsel for Smyth submitted that the
court a quo had
erred
in refusing to grant the counter application. It was submitted that,
as the parties had bound themselves in terms of clause
8 of the
association agreement to a particular method of calculating a
member's interest, the learned judge was wrong in refusing
to accept
the valuation by Coco Haven's accounting officer and auditor,
Haasbroek. Counsel argued that, even if Haasbroek's valuation
is
found to be unreliable, the court was bound to accept it as the
parties had agreed to be bound by it. It was submitted further
that,
as Mew had failed to attack the valuation on any of the recognised
grounds, namely fraud, collusion, capriciousness or manifest
injustice, it was not open to the court to reject it.
[24] In the main, counsel for Mew argued that the
evidence showed clearly that Smyth was guilty of serious financial
mismanagement,
in that (inter alia)
he
incurred personal expenses amounting to R90 722,90 which were paid
for by Coco Haven and made unauthorised payments to his erstwhile
partner for his membership interest in the amount of R500 458,08
which was not allocated to Smyth's loan account. Further, that he
incurred huge expenses in respect of improvements which were done to
the premises without a resolution as required by the association
agreement. In conclusion, she submitted that as Smyth had failed to
adduce sufficient evidence to satisfy the court that it was just
and
equitable to order a cessation of Mew's membership, as opposed to a
winding-up, the court below was correct in dismissing the
counter-application and ordering that Coco Haven be liquidated.
[25] It should be clear from the provisions of s 36(1)
and (2), as quoted above, that the court retains a discretion,
firstly whether
to grant an order for the cessation of a member's
interest in the corporation, and secondly as regards the disposition
of such member's
interest and the terms and conditions under which
such disposition should occur.
[26 Counsel's reliance on clause 8 of the association
agreement is misplaced in that this clause simply does not provide
for a valuation
of the business by Coco Haven's accounting officer
and auditor in the event of a compulsory buy-out in terms of s 36 of
the Act.
The court was accordingly not bound by Haasbroek's
valuation. The court had to be placed in a position which would have
enabled it
to exercise its discretion and carry out its functions in
terms of s 36(2) and, in particular, to decide what financial
adjustments
should be made: see
De Franca
at
894F-G;
Geany v Portion 117 Kalkheuwel
Properties CC & another
1988 (1) SA 622
(T) at 631H-632A;
Kanakia
at
48E-F. Such discretion can only be exercised if there is sufficient
information before the court to enable it to 'make such further
orders as it deems fit' in regard to the matters referred to in s
36(2):
De Franca
at
896H;
Gearny at
631H-I.
The member who makes the application in terms of s 36(1) must place
the necessary evidence before the court: see
Gearney
at 631 H and
Kanakia
at 48E-F.
[28] I agree with the court below that Smyth failed to
do so. Based on the above, I have no doubt that the court below was
correct
in finding that, given the circumstances of this case, a
winding-up was not only just and equitable as required by s 68)(d) of
the
Act but was inevitable.
[29] In the result I make the following order:
The appeal is dismissed with costs.
________________
L O BOSIELO
JUDGE OF APPEAL
APPEARANCES:
For appellant: J F ROOS SC
Instructed by:
J J S Manton Attorneys, Johannesburg
Webbers, Bloemfontein
For respondent: K Bailey SC
Instructed by:
Tanya Brenner Attorney, Northcliff
McIntyre & Van Der Post, Bloemfontein