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[2011] ZASCA 105
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Stand 242 Hendrik Potgieter Road Ruimsig Pty) Ltd v Göbel NO and Others (2011 (5) SA 1 (SCA); [2011] 3 All SA 549 (SCA)) [2011] ZASCA 105; 246/10 (1 June 2011)
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THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no
: 246/10
In
the matter between:
Stand
242 Hendrik Potgieter Road Ruimsig (Pty) Ltd
........................
First Appellant
Nils
Brink van Zyl
..............................................................................
Second
Appellant
and
Christine
Petronella Göbel NO
.........................................................
First
Respondent
Karle-Heinz
Göbel NO
..................................................................
Second
Respondent
Paul
Hendrik Barnard NO
.................................................................
Third
Respondent
Vernon
Wilken NO
..........................................................................
Fourth
Respondent
Anna
Susanna Wilken NO
.................................................................
Fifth
Respondent
Gert
Ignatius Marais NO
...................................................................
Sixth
Respondent
Bubesi
Investments 196 (Pty) Ltd
..............................................
Seventh
Respondent
Neutral citation:
Stand 242 Hendrik
Potgieter Road Ruimsig Pty) Ltd v
Göbel
NO
(246/10)
[2011] ZASCA 105
(1 June 2011)
Coram:
BRAND, LEWIS, MAYA TSHIQI JJA and PETSE AJA
Heard:
16 MAY 2011
Delivered: 1 June 2011
Summary: The Turquand rule does not apply to s 228 of
the Companies Act 61 of 1973.
___________________________________________________________________
ORDER
___________________________________________________________________
On appeal from:
South Gauteng High Court
(Johannesburg) (Lamont J sitting as court of first instance):
The appeal is dismissed with costs.
___________________________________________________________________
JUDGMENT
___________________________________________________________________
LEWIS JA (BRAND, MAYA and TSHIQI JJA and PETSE AJA
concurring)
[1] The issue in this appeal is whether s 228 of the
Companies Act 61 of 1973 is qualified by the application of either
the Turquand
rule or estoppel. In brief, s 228 provides that the
directors of a company may not dispose of the whole or the greater
part of
its assets without the approval of the shareholders. The
questions raised have been debated over decades and there are
conflicting
answers given by the courts. But the debates and
authorities precede an amendment (in 2006) to the section that
requires that the
shareholders’ consent or ratification must
take the form of a special resolution. Before dealing with the
principles I shall
set out the background briefly. For the purpose of
this appeal the facts are largely not in dispute.
[2] On 30 January 2009 the second appellant, Mr N van
Zyl, acting for a company to be formed, Stand 242 Hendrick Potgieter
Road
Ruimsig (Pty) Ltd (Stand 242), the first appellant, purchased
immovable property from the seventh respondent, Bubesi Investments
196 (Pty) Ltd (Bubesi). The property was Bubesi’s sole asset.
Bubesi was represented by two directors, Mr Karl-Heinz Göbel
and
Mr V Wilken . The purchase price was some R31 million. The terms of
the contract are not germane to the appeal.
[3] The shares in Bubesi are owned in equal shares by
two trusts: the Karl-Heinz Göbel Trust and the Deutra Trust. The
first
three respondents are the trustees of the Göbel Trust and
the fourth, fifth and sixth respondents are the trustees of the
Deutra Trust. Göbel, the second respondent, is married to the
first respondent, Mrs C Göbel. And Wilken is married to
the
fifth respondent, Mrs A Wilken.
[4] On 2 February 2009 Göbel and Wilken signed a
document certifying that they were the directors of Bubesi, and that
the sale
had been approved by the shareholders ‘in a general
meeting in terms of section 228 of the Companies Act’ or that
the
property ‘does not constitute the whole or greater part of
the assets of the company’. Both statements (in the
alternative)
were false. As I have said, the property was the sole
asset of the company, and the other trustees of the shareholding
trusts asserted
that they were not aware of the sale.
[5] At the time of the sale Bubesi, the seller, was in
financial difficulty, and the proceeds of the sale were intended to
repay
the bondholder over the property. Shortly after the sale
various disputes arose between Bubesi and Stand 242. And, despite the
conclusion of the agreement of sale, Bubesi let the property to a
third party for a period of three years, and an alternative source
of
finance, related to the new lessee, was found.
[6] It thus became apparent to Van Zyl, representing
Stand 242, that Bubesi was not going to perform in terms of their
agreement.
They accordingly brought an urgent application in the
South Gauteng High Court against Bubesi for an order interdicting it
from
dealing with the property pending an action to be instituted
against it. The trustees of the shareholding trusts were not cited
as
parties. Bubesi opposed the application, relying inter alia on the
fact that s 228 had not been complied with. Jajbhay J, without
giving
reasons, granted the order sought on 30 July 2009.
[7] Apart from Göbel and Wilken, the trustees of
the shareholding trusts claimed not to have been aware of the sale,
or the
order sought, until after it was granted. The trustees and
Bubesi thus brought an urgent application (in the same court and
under
the same case number) seeking a declaratory order setting aside
that of Jajhbay J, and an order that there had been non-compliance
with s 228 and that the sale was thus unenforceable. Lamont J granted
the orders sought, but gave leave to appeal to this court.
[8] There was indeed no special resolution, either
authorizing or ratifying the sale to Stand 242, passed by the
shareholders of
Bubesie. Nor was there any evidence that the trustees
of the shareholding trusts of Bubesi were aware of or had consented
to the
sale. Stand 242 argued that the trustees were Wilken and Göbel
and their respective wives, who must have known of the sale
and thus
consented to it.
[9] It should be noted, however, that Stand 242 has
instituted an action for specific performance or damages against
Wilken and
Göbel for R10.2 million. The question of knowledge
and consent will no doubt be tested in that action. The questions
before
us are thus limited: does the Turquand rule allow the
circumvention of s 228 of the Act, or does estoppel preclude reliance
on
s 228?
[10] Section 228, as amended in
2006,
1
provides in so far as relevant:
‘
Disposal of undertaking or greater part of
assets of company
(1) Notwithstanding anything contained in its
memorandum or articles, the directors of a company shall not have the
power,
save by a special resolution of
its members
, to dispose of-
(a)
the
whole or the greater part of the undertaking of the company; or
(b)
the whole or the greater part of the assets of the company.
. . . .
(3) A special resolution of a company shall
not be effective in approving a disposal described in subsection (1)
or
(2) unless it authorizes or ratifies in terms the specific
transaction.’ (My emphasis.)
[11] As I have said, the authorities and writers that
have considered the question whether the Turquand rule, or estoppel,
obviates
the need for compliance with s 228 predate the amendment
which now requires a special resolution of shareholders for the
disposition
of the sole asset of a company. Whether the amendment
makes any difference to the question of principle is a matter to
which I
shall turn.
Section 228 and the Turquand rule
[12] The rule, in essence, is that a
person dealing with a company in good faith is entitled to assume
that the company has complied
with its internal procedures and
formalities. It emanates from
Royal
British Bank v Turquand
2
and has been accepted as part of
South African law at least since
The
Mine Workers’ Union v J P Prinsloo; The Mine Workers’
Union v Greyling
.
3
The purpose of the rule is based on
commercial convenience: business might well be impeded if parties
dealing with agents of a company
had to investigate in all instances
whether internal rules had been duly observed.
[13] Section 228 (and s 70
dec
(2)
of the Companies Act 46 of 1926, which was in the same terms) was
introduced for the protection of shareholders who have given
general
control of the company to its directors. It is the shareholders
themselves who should exercise control over the disposal
of the
company’s major assets. The authorities to this effect are
discussed by Cleaver J in
Farren
v Sun Service SA Photo Trip Management (Pty) Ltd
.
4
In
Farren
the court held that the Turquand rule
did not operate to override the provisions of s 228. While a contract
entered into without
the shareholders’ consent was not void,
Cleaver J held,
5
it could not be enforced until the
shareholders had consented or ratified the contract for the disposal
of the major part of the
company’s assets. The reason for this
is the purpose of s 228: to protect shareholders.
[14]
Farren
is the only decision that has held
that the Turquand rule is inapplicable in so far as compliance with s
228 is concerned. There
is, however, an obiter dictum of Van Zyl J in
Levy & others v
Zalrut Investments (Pty) Ltd
6
which indicates that there is no
reason why the Turquand rule should not apply to s 228 (that case
dealt with whether there was
compliance with s 228 on the basis that
there was unanimous consent of the shareholders). Van Zyl J said that
there was no indication
‘that the public interest or public
policy played any part in the intention of the Legislature when it
enacted . . . s 228’.
Accordingly there was no reason why a
party to a contract, in good faith, need be adversely affected should
the company’s
internal procedures not be followed.
[15] In commentary on this view
various writers have argued that since no public interest is
involved, the equities lie in favour
of the innocent third party
where the shareholders have given control to the directors. Should
the directors act without the shareholders’
consent, an action
lies against them for breach of their duties. Other commentary has
suggested that the purpose of s 228 is to
protect the rights of
shareholders and that the application of the Turquand rule would
defeat those rights. The respective views
are discussed
comprehensively in
Farren
and I do not propose to repeat them
here.
7
[16] In my view, the clear meaning of s 228 is that the
shareholders must give their consent to, or ratify, the disposal of
the
sole asset, or the major assets, of a company. If the purpose of
s 228 is the protection of the shareholders, then the application
of
the Turquand rule would deprive them of that protection. The section
would then serve no purpose. It would be cold comfort to
a
shareholder, when the company loses its substratum, to be told to sue
the directors who have acted without approval.
[17] In
Farren
Cleaver J
considered that the meaning of the words in s 228 were unambiguous:
they could not be read so as to allow the Turquand
rule to prevail
over the rights of shareholders.
8
This is the view adopted by the court
below: without the consent of the shareholders the directors had no
authority to sell the
property, the sole asset of the company, and
the sale was unenforceable. Lamont J held that until the statutory
requirement (enacted
only after
Farren
was decided) of a
special resolution was met, the contract for the sale of the Bubesi
property was unenforceable.
[18] That brings me to the amendment
to s 228 which now requires that the consent or ratification must be
given by a special resolution
which, to be effective, must be
registered within one month of the passing of the resolution.
9
As Henochsberg states:
10
‘
Unfortunately, the amendments to s 228 do
not address the controversy as to whether a third party to whom an
invalid disposal is
made is entitled to enforce it against the
company by means of the application of the rule in the
Turquand
case since the invalidity or
“non-effectiveness” of the special resolution does not
entail that the related contract
between the company and the third
party is, as between them, void or unenforceable . . . .’
[19] Bubesi argued that the introduction of the
requirement that consent or ratification take the form of a special
resolution underscored
the purpose of s 228 – the protection of
shareholders. This seems to have been the view also of the court
below, for Lamont
J said that the requirement of a special
resolution, that must be registered to be effective, indicated that
the consent to the
disposition of the property is more than an
internal management act that the Turquand rule is designed to cover.
Third parties,
said the court, are not entitled to assume that
shareholders participate in management.
[20] Stand 242, on the other hand,
pointed out that the reason for the amendment to s 228 was to protect
minority shareholders.
J L Yeats, in a note on the amendments
effected to the Act in 2006,
11
refers to the explanatory memorandum
to the amendment bill, and points out that the requirement of a
special resolution to embody
the consent to the disposal of a
company’s main asset or assets, is designed to protect minority
shareholders, especially
where a company is the target of a takeover
bid.
[21] Yeats is of the view that the
amendment makes no difference to the application of the Turquand rule
to s 228. If a special
resolution has been passed and registered,
then of course the third party would have access to it, or possibly
be deemed to have
constructive notice.
12
But if the special resolution is not
yet registered when enquiries are made, or the resolution ratifies
the decision of the shareholders
after enquiries are made, then the
third party will be in no better position. (Of course if a resolution
is not registered within
six months of its passing, then it lapses: s
202 of the Act.) I accept that the requirement of a special
resolution in this context
thus does not assist the third party.
[22] Accordingly, in my view the
requirement of a special resolution does not change the principle as
to the application of the
Turquand rule to s 228. As I have said
earlier, the Turquand rule should not apply to s 228, for if it did,
the section would not
serve the purpose of protecting shareholders as
it is intended to do. I consider that Lamont J in the high court,
when following
Cleaver J in
Farren
,
was correct.
Estoppel
[23] Stand 242 argued also that it
had been misled into believing that Wilken and Göbel had the
necessary authority to conclude
the sale, and had relied on the
document signed by them that stated that the disposal of the property
‘has been approved
by the Shareholders in a General Meeting in
terms of s 228 of the Companies Act: or the . . . property does not
constitute the
whole or the greater part of the assets of the
company’. Counsel for the appellants did not persist in the
argument based
on estoppel, accepting that it was not the
shareholders themselves who had made the representation. Moreover,
the document was
prepared by the conveyancer for Stand 242, not the
sellers’ representative. In any event, the full facts are not
before us.
And most importantly, estoppel cannot operate to allow a
contravention of a statute:
City
of Tshwane Metropolitan Municipality v RPM Bricks (Pty) Ltd
.
13
[24] In the circumstances, I find that the Turquand rule
does not override the requirements of s 228 of the Act, and that
estoppel
did not operate to preclude the respondents from relying on
it. Accordingly, the order of Lamont J in the high court must stand.
[25] The appeal is dismissed with costs.
______________
C H Lewis
Judge of Appeal
APPEARANCES:
APPELLANTS: R Stockwell S C
Instructed by
Whalley & van der Lith Inc,
Johannesburg;
Bezuidenhout Inc,
Bloemfontein.
RESPONDENTS: J P Blignaut
Instructed by
Lynette Steyn,
Roodepoort;
Naude’s Attorneys,
Bloemfontein.
1
Amended
by
s 21
of the
Corporate Laws Amendment Act 24 of 2006
, which came
into effect in 2007.
2
Royal
British Bank v Turquand
[1855] EngR 531
;
(1856) 119 ER 474
(5 E & B 248),
confirmed on appeal:
[1856] EngR 470
;
(1856) 119 ER 886
(Ex Ch) (6 E & B 327).
3
The
Mine Workers’ Union v J P Prinsloo; The Mine Workers’
Union v Greyling
1948 (3) SA 831
(A).
4
Farren
v Sun Service SA Photo Trip Management (Pty) Ltd
2004
(2) SA 146
(C) para 10.
5
Paragraph
11.
6
Levy
& others v Zalrut Investments (Pty) Ltd
1986 (4) SA 479
(W)
at 487B-F.
7
See
also
Henochsberg on the Companies Act
(ed J A Kunst, Professor P Delport and
Professor Q Vorster) Vol 1 at 441ff.
8
Paragraph
17.
9
Section
199 of the Act deals with the requirements for the passing of a
special resolution and s 200 with the registration.
10
Above
at 443.
11
J
L Yeats ‘The Drafters’ Dilemma: Some comments on the
Corporate Laws Amendment Bill, 2006’
(2006) 123
SALJ
601
at 610ff
.
12
Yeats
above at 613.
13
City
of Tshwane Metropolitan Municipality v RPM Bricks (Pty) Ltd
2008
(3) SA 1
(SCA) paras 11-13 and 16.