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[2022] ZAKZPHC 56
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Business Partners Limited v Fair Deal Select CC (4426/2021P) [2022] ZAKZPHC 56 (4 October 2022)
IN
THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION, PIETERMARITZBURG
Case
no: 4426/2021P
In
the matter between:
BUSINESS
PARTNERS LIMITED
APPLICANT
and
FAIR
DEAL SELECT CC
RESPONDENT
Coram: Koen
J
Heard: 7
September 2022
Delivered: 4
October 2022
ORDER
1.
A rule nisi is issued calling upon all
persons interested to show cause before this Honourable Court on 25
November 2022 at 9h30
or as soon thereafter as the matter may be
heard, why the respondent should not be finally wound-up, and why the
costs of this
application, and the applicant’s costs in
relation to the application to compel compliance with a subpoena
issued by the
respondent, should not be costs in the liquidation;
2.
This order operates with immediate
effect as a provisional order for the winding-up of the respondent;
3.
Service of this order is to be effected
by:
(a)
Publication forthwith in both the
Government Gazette
and the
Mercury
newspaper;
(b)
Service on the South African Revenue
Service;
(c)
Service on the registered address of the
respondent at 303 Crimby Avenue, Westcliff, Chatsworth;
(d)
Service on the employees of the
respondent, if any; and
(e)
Service on any registered trade union
that represents any of the employees of the respondent, if any.
JUDGMENT
Koen
J
[1]
The
applicant, Business Partners Limited, in its capacity as a creditor
of the respondent, Fair Deal Select CC, seeks an order for
the
provisional winding-up of the respondent.
[1]
It is not in dispute that a written demand for R2 645 498.75 was
addressed on behalf of the applicant to the respondent on 11 March
2021, and that the amount demanded remained unsatisfied thereafter
for a period of 21 days. In the ordinary course, that would
mean that
the respondent is deemed to be unable to pay its debts,
[2]
and as the other requirements for the provisional liquidation of the
respondent have been satisfied, a provisional winding-up order
may
follow. The respondent however disputes the amount of its alleged
indebtedness. The issue arising is whether the debt is disputed
by
the respondent on reasonable and bona fide grounds.
[3]
At the stage of an application for a provisional order of
liquidation, the
applicant
must show that the debt
prima
facie
exists, and it is for the respondent to show that it is bona fide
disputed on reasonable grounds.
[4]
[2]
The respondent is a property developer.
Its sole member is Mr Ramakhrishnan Pillay, who is also referred to
as Collin Pillay (Mr
Pillay). The respondent and the applicant have a
long business association going back, on what is alleged in the
papers, to before
2009. During that association, the respondent has
operated a number of accounts with the applicant. They include mainly
account
numbers 403575, 403576 and 407410, although there is also an
account with number 703414 in respect of the payment of a royalty.
It
is common cause that account 403575 has long been settled and is
irrelevant to the issues before this court. It will accordingly
not
feature further in this judgment.
[3]
Account 403576 was opened in respect of
a loan agreement concluded on 8 December 2009. Clause 3 of that loan
agreement provided:
‘
3.
PURPOSE FOR WHICH THE LOAN IS GRANTED
The
loan is granted for purposes of financing:
3.1
The business known as: Select
Construction
3.2
Situate at: 303
Crimpy Avenue
Westcliff
Chatsworth
4092
3.3
Nature of business: Property
Development.’
[4]
The loan was granted subject to various
securities being put in place. Mr Pillay provided a suretyship in
respect of the debts of
the respondent. A covering bond was
registered by Mr Pillay and his wife to secure all their indebtedness
howsoever arising. That
would include the suretyship obligations of
Mr Pillay. In addition, on 18 January 2016, the respondent caused a
covering mortgage
bond no B526/2016 to be registered over the
property described as Erf 1029 Queensburgh, in respect of ‘any
cause, including
but not restricted to moneys lent and advanced
and/or to be lent and advanced. . .’. The property mortgaged in
terms of this
bond is situated at 90 Coronation Road, Malvern. During
the latter half of 2017, the respondent was developing a sectional
title
scheme comprising six units on the property. The scheme is
known as Coronation, or also as Millereece.
[5]
On 19 October 2017, the parties
concluded a further loan agreement. It is very similar in its terms
to the loan agreement referred
to in paragraph 3 above. The purpose
of the loan is stated in similar terms to that of the previous loan,
the only difference being
that the ‘Nature of business’
is stated as ‘Residential Development’, and not ‘Property
Development.’
Nothing seems to turn on that difference. The
composition of the loan, and the purposes for which it would be paid
out, are specifically
stated to be ‘Other R232 109,00’,
‘Raising fee R51 300,00’, ‘Other R20 000,00’
(later
explained to be for ‘The Quantity Surveyor or
Representative’), another ‘Other R2 728 915,00’
and
‘Land and Buildings R1 467 676,00’. Account number
407410 was opened in respect of this loan.
[6]
The ‘Other R2 728 915,00,’
being the major part of the loan, is significant. It is reflected as
payable to the applicant.
The ‘Conditions for Payment’
applicable thereto state that it is:
‘
To
be paid upon compliance with all conditions precedent towards
contract number 403 576, except 8.4.13. Any shortfall shall
be
paid from the land and buildings allocation.’
Clause
8.4.13 of the loan agreement required that proof of payment by the
respondent of a minimum amount of R1 500 000 towards the
applicant’s
loan account number 403576 had to be submitted. Compliance with this
condition precedent was however not insisted
upon, as the amount of
R2 728 915 was paid/credited to account 403576 without the sum of R1
500 000 having been paid to account
403576. What the condition of
payment clearly contemplated was that the payment of R2 728 915 would
be in addition to the payment
of R1 500 000 in respect of the
respondent’s indebtedness to the applicant on account 403576.
It was further envisaged that
account 403576 might even after those
amounts having been credited be in debit, as the condition of payment
expressly recorded,
in respect of the balance on that account, that
‘any shortfall shall be paid from the land and buildings
allocation.’
With the amount of R1 500 000, being the subject
of the condition precedent not being paid, account 403576 would
remain with a
balance of at least R1 500 000, and probably more, as a
shortfall was envisaged. Whatever the amount owing on account 403576
might
have been, an aspect to which I shall return below, it is clear
that there was no agreement between the parties that the payment
of
the R2 728 915 would extinguish the respondent’s liability to
the applicant under account number 403576.
[7]
The following amounts were accordingly
disbursed from and/or applied in respect of account 407410 pursuant
to this loan agreement:
Payment
to account
403576 R2
728 915
A
raising fee payable to the applicant
R
51 300
Quantity
surveyor
fees R
20 000
Amount
retained out of which monthly interest payable
on
the loan amount advanced would be paid R
232 109
Amount
to be retained to pay over to the respondent or its
creditors
in respect of development (not R1 500 000)
R1
467 676
R4
500 000
The
debit of R2 728 915 on account 407410 found its corresponding entry
as a credit in account 403576. The respondent contends that
it
believed that this payment discharged any outstanding liability on
account 403576, but that could not be, as has been demonstrated
in
paragraph 6 above. If the payment of the R2 728 915 was to have
extinguished the balance on account 403576, then there would
have
been no need to exclude the anticipated payment of R1 500 000,
or to provide for ‘any shortfall’. There is
no scope, on
the wording of the condition of payment, for the respondent to have
been under such an impression.
[8]
Indeed, the copy of the statement in
respect of account 403576 annexed to the respondent’s answering
affidavit reflects the
credit of R2 728 915 on 9 November 2017, which
then left a balance of R2 625 752.15. Whether this statement can be
relied upon
is an aspect to be returned to below when considering
whether the debt is bona fide disputed on reasonable grounds.
[9]
Various debits and transactions were
effected on account 403576 after 9 November 2017 until 20 March 2019
(that is according to
a copy of the statement relating to that
account provided by the applicant with the consent of the respondent,
as the copy thereof
annexed to the respondent’s answering
affidavit was incomplete). On 20 March 2019 the balance on account
403576 was extinguished
by credits to that account of R1 733
070.09 and R53 167.46.
[10]
At some stage, various sectional title
units were seemingly developed on the property at 90 Coronation Road.
Units 1,3, 4 and 5
were sold and transferred prior to 20 March 2019,
as on that date, according to a letter from Phipson-De Villiers
Attorneys dated
23 July 2021, which is more than two years after the
event, the following historical fact, under the heading ’90
Coronation
Road, Malvern: Business Partners’ was recorded:
‘
With
further reference to the above, we confirm the following amounts were
paid to Business Partners in respect of their release
figures when
the transfers were registered in the Deeds Office. . .’.
The
letter confirms that a total amount of R4 000 000 was paid.
[11]
It is the apportionment of this R4 000
000 payment, which has assumed significance in this application.
[12]
According to the account printout in
respect of account 407410, amounts of R1 700 000 and R110
968.35 were credited to
that account on 20 March 2019, and
R102 794.10 was credited to that account on 25 April 2019. These
credits total R1 913 762.45.
That left R2 016 237.55 of the
payment of R4 000 000.
[13]
According to a statement in respect of
account 703414, an amount of R300 000 was credited to that account on
20 March 2019, being
in respect of a royalty payment. The
corresponding debit was reflected in account 407410.
[14]
What remained of the R4 000 000 was an
amount of R1 786 237.55, which was credited to account 403576 on 20
March 2019 as two credits
of R1 733 070.09 and R53 167.46
respectively. Altogether these payments amount to exactly R4 000 000:
Amounts
paid to account
403576 R1
786 237.55
Royalty
payment R
300 000.00
Payments
credited to account 407410
R1
913 762.45
R4
000 000.00
[15]
Although the correctness of some
interest amounts which have been debited to account 403576 during
November 2017 to June 2018 have
been disputed by the respondent, the
above allocation of payments/credits, although some of the details
relating thereto emerged
only in the replying affidavit, has not been
contested in argument. But, importantly from the respondent’s
perspective, the
R4 000 000 which it alleged had not been accounted
for, has been properly accounted for.
[16]
In
its founding affidavit, the applicant relied on the loan agreement
concluded on 9 November 2017, that is account 407410, as the
underlying causa for the outstanding debt due to it and on which the
liquidation application is based. In its answering affidavit,
the
respondent alleged that had the R4 000 000 transferred by Phipson–De
Villiers Attorneys all been allocated to account
407410, it would
have extinguished that liability as well; hence it owes nothing to
the applicant in respect of account 407410.
Insofar as the applicant
explained that the R4 000 000 was used on 20 March 2019 to settle an
outstanding indebtedness on account
403576, the respondent complained
that a different indebtedness was now sought to be relied upon in
reply. It is of course trite
law that an applicant has to make out
its case in its founding affidavit,
[5]
and not in reply.
[17]
It is correct that the basis for the
applicant’s claim, as alleged in the founding affidavit, is
confined to the balance owing
in respect of account 407410. The
applicant cannot rely on amounts owing in respect of other accounts,
because these were not the
causa alleged in the founding affidavit.
However, the applicant’s case was not that there were any
outstanding debts owing
in respect of any other accounts and causes
of action, but that it had allocated the R4 000 000 received to the
payment of those
accounts, thus extinguishing whatever was owing on
those accounts, and leaving only the balance owing on account 407410,
on which
it relies for the provisional order. If the applicant was
entitled to allocate the payments/credits to the accounts in the
manner
it had done, then there was nothing wrong, in principle, in
its approach to rely only on the indebtedness remaining on account
407410. Counsel were agreed that the allocation of the R4 000 000 had
thus become the central issue for determination. This then
turns to
an enquiry into the issue whether such an allocation was permitted in
the light of the relevant applicable legal principles.
Neither party
had really addressed this issue in their heads of argument, but it
was dealt with fully in argument, after also allowing
the matter to
stand down over the short adjournment.
[18]
The
relevant legal principles regarding the allocation of payments
made/received in a debtor/creditor relationship, have been summarized
in
Ebrahim
(Pty) Ltd v Mahomed
[6]
and are stated by
Christie’s
Law of Contract in South Africa
[7]
as follows:
‘
(1)
The general principle is that the payment ought to be appropriated to
the debt which the debtor had the most interest in discharging,
that
is to say, the debt bearing most heavily on the debtor, and the rules
should be used as a guide towards that end, bearing
in mind the
circumstances of the particular case.
(2)
The limitations upon the creditor's right to appropriate must also be
recognised if the creditor has not appropriated. So an
admitted debt
must be paid before a disputed debt, a debt that is due must be paid
before one not yet due, and an enforceable debt
must be paid before
an unenforceable one.
(3)
In favorem libertatis
, a judgment debt on which a writ of
execution has been obtained will normally rank first
for
payment, followed by a judgment debt, followed by a debt subject to
parate executie
, followed by a debt subject to any other
penalty in the sense of some additional enforceable obligation which
the debtor can avoid
by paying the debt when it falls due.
Inter
alia
, the accruing of interest and an acceleration clause rank as
penalties for this purpose, but the fact that one debt is on a liquid
document on which provisional sentence might be granted does not.
(4)
A debt that is secured by a mortgage or pledge or a surety should be
paid before an unsecured debt, a debt for which the debtor
is solely
liable before one for which it is jointly or jointly and severally
liable, and one for which it is liable as principal
before one for
which it is liable as surety.
(5)
If the debts are equal in all other respects, the payment should be
appropriated to the oldest, that is to say, the first contracted
.’
(Footnotes omitted.)
[19]
Common to both loan agreements under
accounts 403576 and 407410, as a standard term and condition, is
clause 7.2:
‘
7.2
Any payment received from the Borrower shall, in the first instance,
be utilised against interest and sundry expenses,
and thereafter
against the principal debt.’
[20]
This
provision simply restates the common law position dealing with the
appropriation of payments in respect of a single debt owing,
comprising of capital and interest. The principle is also confirmed
in
Standard
Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in
liquidation).
[8]
The provision does not deal with the situation of competing debts. In
that regard, the legal principles summarized in
Christie’s
Law of Contract in South Africa
above apply.
[21]
There is no evidence that the respondent
had specified that the R4 000 000 payment should be appropriated to
account 407410. That
much was accepted on behalf of the respondent.
Had it done so, as a condition of payment, such condition could have
been refused
by the applicant. There is also no evidence that the
respondent had the most interest in discharging the debt on account
407410,
or that it weighed more heavily on it, than the other debts
paid from the R4 000 000. The respondent has not shown that the
balance
on each account was not due, owing and payable. It is not a
case that the debt on account 407410 was due but that on account
403576
it was not, or that the latter debt was unenforceable. Indeed,
the debt on account 403576 was the older debt.
[22]
It was argued on behalf of the
respondent that the debt under account 407410 was secured by the
mortgage bond. But that is not entirely
correct. The mortgage bond is
a general covering bond, so it would cover any debt outstanding by
the respondent to the applicant,
including the royalty payment. It is
so that the R4 000 000 was earned from the proceeds of land and
buildings being constructed
and sold, as contemplated for part of the
finance to be provided pursuant to the loan agreement relating to
account 407410 (R1
467 676, later apparently reduced even further to
R542 000), but the major portion of that loan (R2 728 915) was
used in respect
of payment of the respondent’s liability under
account 403576. The loan was accordingly not restricted to the
property development,
such as to give rise to some form of implied
condition that the proceeds from the sales of sectional title units
were to be used
solely to discharge the amount owing in respect of
account 407410.
[23]
It accordingly seems clear that the
guiding principle was that the payment of R4 000 000 should
be credited to interest
and the oldest debt, which is what the
applicant seemingly did. It appropriated the payment first to cover
the interest on each
of the two debts, being not only the more
onerous obligation, but also what the common law and clause 7.2 of
the standard terms
and conditions of the loan agreements dictate.
Thereafter the balance was applied in respect of the capital
outstanding on the
oldest debt, being that outstanding on account
403576 to result in a nil balance on that account. What remained was
applied in
respect of account 407410 and the royalty payment.
[24]
Insofar as the payment of the royalty is
concerned, although the terms relating to that indebtedness are
terse, it was a debt that
was due. Whether the royalty debt attracted
interest is not clear. The R300 000 payment did not repay any
interest, only capital.
But even assuming that, contrary to the
indebtedness on accounts 403576 and 407410, it might not have
attracted interest and would
thus be less onerous to the indebtedness
in account 407410, if the R300 000 had been appropriated to account
407410, it would still
have left a substantial balance due and owing
on account 407410, in excess of that required by law for the
liquidation of a company.
[25]
The respondent would have received
statements reflecting the balance owing to it from time to time –
that is a simple commercial
reality. If it had not, it could and
undoubtedly as a matter of probability would have requested such
statements. Although Mr Pillay
referred to a time when he was
indisposed, his illness did not cover the whole period since 2019.
The doctor’s certificate
which he annexed in respect of a
charge of R918.20 raised by a neurosurgeon, was dated 22 October
2019. That was several months
after the payment of the R4 000 000 had
been received and apportioned on 20 March 2019.
[26]
Further, the respondent had brought an
application for condonation in which one of the grounds advanced was
that some of the delay
which occurred in filing its heads of argument
was due to the fact that, after receiving the heads of argument from
the respondent’s
counsel, the respondent’s attorney
‘forwarded them to the Respondent’s member as he has a
legal advisor who is
assisting him and advising him in this matter’.
The attorney continues that
‘
Client
detected an error in one of the figures which were referred to in the
Heads of Argument and unfortunately neither I nor client
were able to
contact our Counsel regarding the correction as Counsel was detained
in Pietermaritzburg High Court in an urgent application.’
What
is clear from these allegations is that the sole member of the
respondent, Mr Pillay, is not an ignorant person who might not
have
taken an interest in the outstanding obligations owed by the
respondent to the applicant. On the contrary, he takes an active
interest in the actual figures appearing in the heads of argument;
a
fortiori
where statements would have been sent by the applicant
reflecting the indebtedness remaining due to the applicant by the
respondent.
If there was a misallocation of the R4 000 000 as alleged
by the respondent, then one would have expected an immediate
objection
from the respondent.
[27]
The printout on account 403576 annexed
to the respondent’s answering affidavit as an annexure to
correspondence received from
its accountant, could only have emanated
from the respondent, meaning that it would have had possession
thereof, at some stage
after March 2019. That statement reflects the
credits to that account which resulted in a nil balance, which means
that the respondent
would have been aware that these amounts were
credited to that account on 20 March 2019, at a time, when on the
respondent’s
version, it maintains it thought the debt owing on
that account had been extinguished in 2017. If that was Mr
Pillay’s
belief, then it is also difficult to understand why
he, on 27 September 2019 concluded the ‘Addendum to the loan
agreement’
of 19 October 2017, restructuring the repayments
which inter alia recorded:
‘
Amendment
to the finance charges in terms of clause 5, and extension of the
repayment terms in clause 6 of the Loan Agreement (Term
Loan 407410)
The
outstanding balance and repayment terms in the Loan Agreement (Term
Loan 407410) be extended and be repayable as follows:
R1
000 000 – payable on 01 February 2020; and,
R1
118 476 together with interest – payable on 01 September 2020.’
[28]
At that time, the respondent on the
above calculations owed the applicant some R2 118 476 with
interest, which is remarkably
close after taking into account
interest, to the figure (R2 645 498.75 as at 26 February 2021) which
was demanded by the applicant
from the respondent and on which the
application for provisional liquidation is based. The admission of
liability and the calculations
based on the above appropriations are
accordingly consistent, which carries significant probative force. It
is improbable that
Mr Pillay would have signed this addendum if, as
at March 2019, he believed that account 407410 was in credit.
[29]
On 13 September 2019, Mr Pillay had
written to the applicant in relation to the release of unit 6 at 90
Coronation Road from the
mortgage bond in favour of the applicant,
requesting that the applicant reduce its release fee. That is
indicative of the fact
that the respondent knew that there was an
amount outstanding on the loan account. It accords with the terms of
the final addendum
referred to earlier.
[30]
On 5 January 2021, Mr Pillay again
requested that the applicant restructure the loan agreement. There
would have been no reason
to do so unless he knew that there was an
amount outstanding and that account 407410 had not been settled in
full, as he alleges,
by the payment of the R4 000 000.
[31]
As the applicant was entitled to
appropriate the payment of R4 000 000 in the manner it did, the
extent to which the appropriation
of the R4 000 000 did not
extinguish the indebtedness on account number 407410 remained as an
outstanding debt which the applicant
could invoke as the basis for
its application for liquidation.
[32]
The
alleged irregular interest calculations complained of for November
2017 (R18 012.21), December 2017 (R17 668.59), January
2018 (R18
451.13), February 2018 (R18 658.77), March 2018 (R17 042.74), April
2018 (R2 052.70), May 2018 (R18 119.58) and
June 2018 (R18
922.64), totalling R128 928,36, even if disregarded in their
entirety, would still leave a debt due by the respondent
to the
applicant considerably in excess of R200.
[9]
[33]
Although the respondent in its answering
affidavit has stated that, if it is found to be indebted to the
applicant in any amount
whatsoever, that it will pay such amount over
immediately, and arrangements therefor already having been made,
failing which it
will consent to its winding-up, it has not annexed
its latest financial statements or indicated that it is possessed of
available
liquid resources to give effect to what it has indicated it
would do.
[34]
The applicant has shown that
prima
facie
the respondent is unable to
pay its debts within the meaning of s 69 of the Close Corporations
Act. There is no reason why a provisional
order for its winding-up
should not follow. The respondent, for the reasons stated above, has
not shown that such indebtedness
is disputed on bona fide and
reasonable grounds.
[35]
The respondent has also brought an
application to compel the furnishing of certain documents requested
by a subpoena. I express
no view as to the correctness of such a
procedure. The founding affidavit in that application was signed on 1
September 2022, the
notice of motion is dated 31 August 2022, and the
papers were issued by the registrar on 6 September 2022. The
answering affidavit
reveals that the subpoena had been responded to
with the applicant providing whatever documents it could on 29 August
2022. The
respondent sought an order that the costs of that
application be costs in the liquidation, alternatively that the
applicant pay
the costs of this application in the event of it being
opposed.
[36]
This application was ill-conceived and
should be dismissed with costs. This costs order in favour of the
applicant, shall form part
of the rule I intend issuing for
interested parties to show cause why, insofar as that may be
necessary, it should not form part
of the costs of the liquidation.
[37]
The following order is granted:
1.
A rule nisi is issued calling upon all
persons interested to show cause before this Honourable Court on 25
November 2022 at 9h30
or as soon thereafter as the matter may be
heard, why the respondent should not be finally wound-up, and why the
costs of this
application, and the applicant’s costs in
relation to the application to compel compliance with a subpoena
issued by the
respondent, should not be costs in the liquidation;
2.
This order operates with immediate
effect as a provisional order for the winding-up of the respondent;
3.
Service of this order is to be effected
by:
(a)
Publication forthwith in both the
Government Gazette
and the
Mercury
newspaper;
(b)
Service on the South African Revenue
Service;
(c)
Service on the registered address of the
respondent at 303 Crimby Avenue, Westcliff, Chatsworth;
(d)
Service on the employees of the
respondent, if any; and
(e)
Service on any registered trade union
that represents any of the employees of the respondent, if any.
KOEN
J
APPEARANCES:
For
the applicant: Ms
L.K. Olsen
Instructed
by: Edward
Nathan Sonnenbergs Inc
c/o
Stowell and Co
Pietermaritzburg
For
the respondent: Mr
G Harrison
Instructed
by: Logan
Naidoo and Associates
c/o
Mastross Inc
Pietermaritzburg
[1]
The
respondent’s heads of argument were filed late. It brought a
substantive application for condonation which was not opposed,
and
condonation was granted.
[2]
Section
66(1)
of the
Close Corporations Act 69 of 1984
, read with s 345(1)
of the Companies Act 61 of 1973.
[3]
Kalil
v Decotex (Pty) Ltd and another
1988
(1) SA 943 (A).
[4]
Hülse-Reutter
and another v HEG Consulting Enterprises (Pty) Ltd (Lane and Fey NNO
Intervening)
1998
(2) SA 208
(C) at 218D–219C.
[5]
Poseidon
Ships Agencies (Pty) Ltd v African Coaling and Exporting Co (Durban)
(Pty) Ltd and another
1980
(1) SA 313 (D).
[6]
Ebrahim
(Pty) Ltd v Mahomed and others
1962 (1) SA 90
(N) at 97F-100A.
[7]
G Bradfield
Christie’s
Law of Contract in South Africa
7
ed (2016) at 497.
[8]
Standard
Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in
liquidation)
[1997] ZASCA 94
;
1998
(1) SA 811
(SCA) at 829H – 832G.
[9]
See
s 69 of the Close Corporation Act 69 of 1984.