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[2009] ZASCA 120
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Cuninghame and Another v First Ready Development 249 (238/08) [2009] ZASCA 120; [2010] 1 All SA 473 (SCA) ; 2010 (5) SA 325 (SCA) (28 September 2009)
THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case number: 238/08
In the matter between:
ANTHONY ROBERT JOHN
CUNINGHAME FIRST APPELLANT
WIMBLEDON LODGE (PTY) LTD SECOND APPELLANT
and
FIRST READY DEVELOPMENT 249 RESPONDENT
(ASSOCIATION INCORPORATED UNDER
SECTION 21)
Neutral citation:
Cuninghame v First Ready Development 249
(238/08)
[2009] ZASCA 120
(28 September 2009)
CORAM: Brand, Maya, Mhlantla JJA, Hurt
et
Tshiqi AJJA
HEARD: 21 August 2009
DELIVERED: 28 September 2009
SUMMARY: Section 21 of the Companies Act 61 of 1973 â
association with main object to conduct commercial hotel â not an
'association
not for gain' as contemplated by section â object
non-compliant with provisions of s 21(1)(b) â business
operation in
accordance with object thus unlawful in itself â
winding-up of association therefore found to be just and equitable in
terms
of s 344(h) of the Act.
_____________________________________________________
ORDER
_____________________________________________________
On appeal from
: Cape High
Court (Rose-Innes AJ sitting as court of first
instance).
1. The appeal is upheld. The costs of the appeal,
including the costs of two counsel, are to be costs in the
liquidation of the
respondent.
2. The order of the court a quo is set aside and
replaced by the following:
'(a) The respondent is placed under a final winding-up
order.
(b) The costs of the application, including the costs of
two counsel, are to be costs in the liquidation of the respondent.'
_____________________________________________________
JUDGMENT/S
_____________________________________________________
BRAND JA
(Maya, Mhlantla JJA
et
Hurt, Tshiqi AJJA
concurring)
[1] What eventually turned out to be most prominent
amongst the many issues that arose in this case, revolved around the
interpretation
of s 21 of the Companies Act 61 of 1973. As
indicated by its name, the respondent, was incorporated as an
association not
for gain under that section. The first appellant is
Mr Anthony Cuninghame. He is also the sole owner of second appellant,
Wimbledon
Lodge (Pty) Ltd. In September 2006 the appellants launched
an urgent application for the provisional winding-up of the
respondent
in the Cape High Court. Despite the designation of the
matter as 'urgent', it only came before Rose-Innes AJ in December
2007.
The reason for the delay was that, in the meantime, numerous
sets of affidavits were filed which, together with their annexures,
ran into more than 2 300 pages. Since by then the matter had
become fully ventilated, the appellants sought a final rather
than a
provisional winding-up order. That of course, meant that they had to
establish their case on a balance of probabilities
rather than on the
lower level of a
prima facie
basis,
which is the degree of proof required for a provisional order (see eg
Kalil v Decotex (Pty) Ltd
1988
(1) SA 943
(A) at 979A-E). In the event, Rose-Innes AJ found that the
appellants had failed to satisfy the onus which they attracted and
dismissed
their application with costs. The appeal against that
judgment, which has since been reported as
Cuninghame
v First Ready Development 249 (Association incorporated in terms of
s 21)
[2008] 4 All SA 88
(C), is with
the leave of the court a quo.
[2] Originally the application was brought on the basis
of both s 344(f) of the Companies Act â that the respondent
was unable
to pay its debts â and s 344(h) â that a
winding-up order would be just and equitable. The s 344(f)
ground was, however,
not pursued, either in this court, nor in the
court a quo. The reason is not difficult to find. The respondent
denied that it was
unable to pay its debts. This gave rise to factual
disputes which could not possibly be resolved on the papers. Since
the appellants
did not seek an order referring any dispute of fact
for the hearing of oral evidence it meant that, in accordance with
the standard
approach to motion proceedings, the matter had to be
decided, essentially, on the respondent's version of the disputed
facts. Other
disputes that were of significance in the court a quo
were no longer live issues on appeal. They emanated from the
respondent's
objection to the appellants'
locus
standi
. These issues
were decided in the appellants' favour (see paras 21-33 of the court
a quo's judgment) and not pursued by the respondent
on appeal.
[3] As has often been said about the only remaining
winding-up ground persisted in by the appellants, namely, that of
'just and
equitable' â it postulates not facts but a broad
conclusion of law, justice and equity. The contentions upon which the
appellants
sought to justify that broad conclusion, will be better
understood against the factual background that follows. It all
started
with what appears to have been a rather ambitious development
around a harbour in Gordon's Bay. Part of the development was the
Harbour's Edge Hotel, a conference hotel which was completed in 1997.
The whole hotel â subsequently known as the Villa Via,
Gordon's Bay
â was then registered as a sectional title scheme in accordance
with the
Sectional Titles Act 95 of 1986
. The sectional title units
essentially comprised of hotel rooms. Apart from these there were
also the commercial areas which included
the parking areas,
conference rooms, restaurants and so forth.
[4] At the commencement of the sectional title scheme,
agreements of sale were concluded between the developer, Casisles
Property
Investments CC and the individual purchasers of hotel room
units. One of these purchasers was Wimbledon. It bought two units and
thus became a member of the Harbour's Edge Body Corporate ('the HE
Body Corporate'). The room units were not primarily intended
for
occupation by their purchasers. In the main, the units were bought
for investment purposes while the rooms were destined to
be rented
out to guests as part of the hotel operation. Accordingly, the
standard deed of sale of a room unit incorporated a further
contract,
referred to as a rental pool agreement. Parties to the rental pool
agreement were the developer, ie Casisles, the individual
purchaser
and a management company, called Harbour's Edge Hotel (Pty) Ltd
('HEH'). The rental pool agreement envisaged that all
the owners of
units to be used as hotel rooms would participate in a rental pool.
In terms of the agreement the purchaser agreed
to let the hotel room
linked to his or her sectional title unit to HEH who took
responsibility for the administration and management
of the rental
pool. HEH also undertook to contract with a hotel operator to conduct
the actual running of the hotel. As a return
on his or her
investment, the purchaser would receive part of the total revenue of
the hotel. In order to facilitate these payments,
the rental pool
agreement provided that the total revenue received for hotel
accommodation, net of operating expenditure, would
be pooled and then
apportioned among the unit owners by HEH. The apportionment would
take place in accordance with an agreed formula
involving every
individual owner's predetermined 'income participation share', as
stipulated in his or her agreement of sale.
[5] The developer, Casisles, was controlled by the
Scharrighuisen family. So was the management company, HEH. At the
outset, HEH
contracted with a hotel operator, Villa Via Cape Town
(Pty) Ltd, to conduct the hotel business. On 15 June 1999 a number of
companies
controlled by the Scharrighuisens, including Casisles and
HEH, were however placed under provisional liquidation, which orders
were subsequently made final. In consequence, the effective control
of the entire development, including the management and
administration
of the rental pool, passed on to the liquidators
appointed for the various companies, while Villa Via continued to run
the hotel.
[6] What happened in practice was that the management of
the rental pool was taken over by a committee of the HE Body
Corporate,
on behalf of the liquidators of HEH. The committee
included Cuninghame and an attorney, Mr Meyer de Waal. The
proposition that
the management function of the rental pool should be
performed by an association incorporated under s 21 of the
Companies
Act, came from De Waal. In consequence the respondent was
acquired as a 'shelf company' for that purpose. Initially, the
members
of the respondent were made up of members of the former
management committee of the HE Body Corporate, all of whom were, of
course,
representatives of rental pool owners. So were the
respondent's first directors. This is how Cuninghame himself became
one of the
first members and directors of the respondent. He remained
a director until 14 August 2003 and was still a registered member at
the commencement of the present proceedings in the court a quo.
[7] On 21 May 2001 a deed of assignment was entered into
between HEH (in liquidation) â represented by its liquidators â
and
the respondent. In terms of the agreement, all the rights and
obligations of HEH, including those arising from the rental pool
agreements, were ceded and assigned to the respondent. Some time
later, during about 2002, the respondent's relationship with the
operating company, Villa Via, was terminated. Attempts to find an
alternative hotel operator proved to be unsuccessful. In the
result,
the respondent assumed the dual functions of managing the rental pool
and conducting the business of the hotel.
[8] The appelllants' case is that Casisles originally
undertook to place the commercial areas, including the parking
garage, the
conference centre and the restaurants, under the control
of the HE Body Corporate, as part of the common property, for the
benefit
of the rental pool owners. As it happened, however, the
Scharrighuisen family transferred these areas, in the form of
commercial
sectional title units, to corporate entities under their
control. Subsequent to the liquidation of these entities, as part of
the
whole Scharrighuisen conglomerate, their liquidators sold the
commercial units to a company, Meridian Bay Restaurant (Pty) Ltd
('Meridian Bay'). The appellants' contention that the commercial
areas should form part of the common property led to litigation
initiated by Cuninghame in the name of Wimbledon. The application
for the appointment of a
curator ad litem
for
the HE Body Corporate, as a preliminary step in that litigation,
eventually came to this court where it was decided in favour
of
Wimbledon (see
Wimbledon Lodge (Pty) Ltd v
Gore NO
[2003] 2 All SA 179
(SCA)). Despite
the appellants' success in the preliminary skirmish, the dispute
about the ownership of the commercial units has
not as yet reached
the stage of final determination. At present the commercial units
therefore still belong to Meridian Bay.
[9] From the outset, the hotel was planned as a
conference hotel. Because the commercial areas, including the
conference centres,
the wellness centre and the restaurants, did not
form part of the common property they had to be rented from the owner
of the sectional
title units comprising these areas. Originally the
owners of the commercial units were entities controlled by the
Scharrighuisen
family. These units now belong to Meridian Bay. The
rental paid under the leases has always been treated as an
operational expense.
Not unexpectedly, this led to a conflict of
interest between the rental pool owners of hotel rooms, on the one
hand, and Meridian
Bay on the other. This is so, because
self-evidently every increase in the rental for the commercial areas
brought about a decrease
in the net accommodation revenue available
for distribution amongst the rental pool owners.
[10] The conflict between the two groups was exacerbated
when those with an interest in Meridian Bay were elected as members
and
directors of the respondent. More pertinently, the directors of
Meridian Bay were Messrs Georgios Stavrou, Alexander Acavalos and
Anthony de la Fontaine. During about 2002 and 2003 all three of them
became members of the respondent. On 13 April 2002 Stavrou
was
elected as a director of the respondent. Later on he was replaced by
Acavalos. The other two directors of the respondent at
the
commencement of these proceedings were Messrs Craig Needham, who is
the managing director, and Mr Bryan Logan. Although Needham
and Logan
have no direct interest in Meridian, they are accused by the
appellants of aligning themselves with the Meridian interests.
These
allegations of an alliance in favour of Meridian were emphatically
denied on behalf of the respondent.
[11] What remains a mystery on the papers is how the
rental pool owners lost the control which they had over the
respondent. The
reason for the mystery lies in the respondent's
articles of association. Because the respondent is, by virtue of
s 21, a company
limited by guarantee, it has no shareholders;
only members. In terms of the respondent's articles, membership is
controlled by
its board of directors in the sense that the Board can
both elect a member and refuse the admission of any person to
membership.
The directors, on the other hand, are elected by the
members. It follows that once a particular interest group has come
into power,
it will be hard to break the circle of control. That, so
the appellants contend, is what has now happened. In effect, they
say,
the Meridian Bay alliance had gained perpetual control over the
respondent's affairs which includes both the management of the rental
pool and the conduct of the hotel operation as a whole.
[12] Departing from their thesis that the control of the
respondent had been hijacked by the Meridian Bay alliance, the
appellants'
contention was that the new controller had caused the
respondent to deviate from its original object to the extent that
the respondent
had lost its whole
raison
d'être
. Whereas the original object of
the respondent was to administer the rental pool scheme for the
benefit of the room owners, so
the appellants averred, it had now
been converted into the commercial operator of a hotel. What is more,
so the appellants contended,
the respondent is conducting the hotel
business for the benefit of those of its members who have an interest
in Meridian Bay and
against the interest of the rental pool owners
for whose benefit it originally came into existence. In consequence,
so the appellants
concluded, the business of the respondent is
conducted in contravention of both s 21(1)(b) and s 21(2)(a)
of the Companies
Act and is thus unlawful.
[13] A further complaint raised by the appellants in
their founding papers relied on the alleged mismanagement of the
respondent's
affairs by its new controllers. The grounds for this
complaint were essentially threefold. First, that the leases entered
into
on behalf of the respondent for the commercial areas were
unnecessary and the rental paid to Meridian Bay, exorbitant.
Secondly,
that its new controllers involved the respondent in
needless litigation, which caused the respondent to incur legal
costs, essentially
for their own benefit, that were both wasteful and
excessive. Thirdly, that the controllers of the respondent had
misappropriated
funds which accrued to the rental pool and which
ought to have been distributed to the hotel room owners. But for the
mismanagement
complained of, so the appellants contended, the rental
pool owners would have made a substantial profit on their investment
in
hotel room units. In marked contrast to this, they said, their
actual position was that they were suffering a loss in having to
pay
in on their levies due to the HE Body Corporate.
[14] As pointed out in the judgment by the court a quo
(para 37) the courts, both in England and South Africa, have over the
years
evolved broad categories of circumstances in which they would
grant a winding-up order on the just and equitable ground (see eg
Rand Air (Pty) Ltd v Ray Bester Investments
(Pty) Ltd
1985 (2) SA 345
(W) at 350A-I).
Although these categories do not constitute a complete and closed
list, they do serve the purpose of useful practical
guidelines. In
the court a quo and in this court, the appellants sought to rely on
three of these categories, namely:
(a) illegality of the respondent's business objects;
(b) disappearance of the respondent's substratum; and
(c) misconduct in the management of its affairs.
In the event, the court a quo held against the appellant
on all three grounds.
[15] In considering the correctness of that decision, I
propose to deal first with the appellant's contention that the
respondent's
whole operation is unlawful in that it constitutes a
contravention of s 21(1)(b) and s 21(2)(a) of the Companies
Act.
The relevant part of s 21 provides:
'21.
Incorporation
of associations not for gain
.
(1) Any association â
(a) formed or to be formed for
any lawful purpose;
(b) having the main object of
promoting religion, arts, sciences, education, charity, recreation,
or any other cultural or social
activity or communal or group
interests;
(c) which intends to apply its
profits (if any) or other income in promoting its said main object;
(d) which prohibits the payment
of any dividends to its members; and
(e) . . .
may be incorporated as a company
limited by guarantee.
(2) The memorandum of such
association shall comply with the requirements of this Act and shall,
in addition, contain the following
provisions:
(a) The income and property of
the association whencesoever derived shall be applied solely toward
the promotion of its main object,
and no portion thereof shall be
paid or transferred, directly or indirectly, by way of dividend,
bonus, or otherwise howsoever,
to the members of the association or
to its holding company or subsidiary: Provided that nothing herein
contained shall prevent
the payment in good faith of reasonable
remuneration to any officer or servant of the association or to any
member thereof in return
for any services actually rendered to the
association.'
(b) . . .
[16] The central element of s 21(1)(b) turns on
'the main object' of the association which must, self-evidently, I
think, be
determined with reference to its memorandum of association.
Reference to the respondent's memorandum of association reflects
that,
during its corporate existence, its main object underwent the
following changes.
As a shelf company its main object was described as
'housing development for the under-privileged'.
After the respondent had been acquired by the HE Body
Corporate to serve as manager of the rental pool, its main object
was amended
to read:
'To conduct its main business on behalf of the owners of
the furnished hotel apartments, or on behalf of any scheme and/or
rental
pool to which the said owners may belong.'
Its 'main business' was defined in turn as: 'to manage,
operate, administer, let and market furnished hotel apartments on a
non-profit
basis.'
Later on, when the respondent's functions were extended
to include both the management of the rental pool and the operation
of
the hotel, its main object was again amended to read:
'To conduct its main business on behalf of the owners of
the furnished hotel apartments, conference facilities and restaurant
facilities,
or on behalf of any scheme and/or rental pool to which
the said owners may belong.'
At the same time its 'main business' was amended as:
'to manage, operate, administer, let, market and lease furnished
hotel apartments,
conference and restaurant facilities'.
[17] As I see it, the main object of the respondent
therefore changed from managing a rental pool on a non-profit basis
to the management
of the hotel business as a whole, which essentially
reflects how the actual business of the respondent effectively
changed over
time. Relying on these changes, the appellants sought to
make out the following case in their founding affidavit:
'Section 21(1)(b) of the
Companies Act, provides that an association incorporated in terms of
that section must have as its main
object the promotion of religion,
arts, sciences, education, charity, recreation or any other cultural
or social activity or communal
or group interests. It is clear from
the section that such an association must be one not for gain and
that its main object must
be a charitable, benevolent or
philanthropic one. An association whose main object is a purely
commercial one or intended to achieve
a purely commercial purpose and
to make a profit is not in compliance with s 21(1)(b) of the
Companies Act. The main object
of [the respondent] referred to above
is clearly one which is intended to achieve a purely commercial
purpose, namely, the operation
and administration of furnished hotel
apartments and the management and operation of conference, wellness
and restaurant facilities.
This is not an object which is provided
for in s 21(1)(b) of the Companies Act.'
[18] The respondent's answer to this contention, as
formulated on its behalf in its opposing papers, was as follows:
'. . . Section 21(1)(b) of the
Companies Act provides that an association incorporated in terms of
that section must have as its
main object the promotion of inter alia
communal or group interests. Clearly the room owners fall into [that]
category. . . .
[F]urthemore . . . there is nothing in s 21 of
the Companies Act prohibiting the company from making a profit. The
only prohibition
is that no profits can be distributed amongst the
members of a s 21 company. Accordingly I deny that the main
object and the
main business of [the respondent] is not in accordance
with the provisions of s 21(1)(b) . . .'
And:
'I reiterate that [the
respondent] is entitled to make a profit and by so doing advance the
interests of the room owners as a group.
This falls within the
contemplation of s 21(1)(b) of the Companies Act. . . . [The
respondent] conducts a commercial hotel
operation for the sole
interests of the group of rental owners.
'
[19] When the s 21(1)(b) issue was raised with the
respondent's counsel at the hearing of the appeal, they essentially
persisted
in the answer thus formulated. With reference to this
answer I agree that there is nothing in s 21 which prohibits an
association
not for gain from making a profit. On the contrary,
s 21(1)(c) specifically provides that the association is obliged
to apply
its profits (if any) to promote its main object. For the
rest, however, I cannot agree with the respondent's answer. If the
expression
'group interests' in s 21(1)(b) is to be construed
without any limitation, the preceding references in the section to
religion,
arts, sciences and so forth could hardly have any meaning.
As I see it, an association of persons seeking to promote, eg
religion,
arts, sports and so forth would of necessity qualify as a
group with a common interest. Conversely, it could probably be said
of
the shareholders and members of most â if not all â companies
that they are a group with a common interest. With commercial
companies that common interest will usually lie in the purpose of
profit or gain. It is true that most companies, and particularly
commercial companies, will not comply with the other requirements of
s 21. But that is not the point. The point is that if
the
reference to 'group interest' is to be afforded the wide meaning
contended for by the respondent it will for all intents and
purposes
render s 21(1)(b) nugatory. To my way of thinking, the phrase to
'communal or group interests' must therefore be
construed
eiusdem
generis
with that which comes before it. This
raises the question: can it be said that the preceding words share a
genus or common denominator?
I think they do. As I see it, they all
refer, as the appellants suggested, to associations pursuing
charitable, benevolent, cultural
or social activities, as opposed to
commercial enterprises. In order to comply with s 21(1)(b) the
object of the association
must therefore be a communal or group
interest of the kind contemplated in the earlier part of the section
and not a commercial
enterprise.
[20] Furthermore, s 21(1)(b) must, in my view, be
interpreted in the context of 'an association not for gain'. As
correctly
pointed out on behalf of the respondent, the expression is
only used in the heading and not in any provision of s 21.
Nonetheless,
and even though headings and marginal notes are said not
to be passed by the legislature, they are often used to determine the
meaning of ambiguous or doubtful statutory expressions (see eg
Cockram,
Interpretation of Statutes
,
3ed 63 et seq and the cases there cited). Even more significant in
the present context, I think, is that there are other sections
in the
Companies Act (eg s 24 and s 49(3)) which refer to an
entity incorporated under s 21 as 'an association not
for gain'.
[21] The concept 'not for gain' is not defined in the
Act. Nor has it, as far as I know, been judicially considered in the
context
of s 21. But it has been considered with reference to
other sections, as appears from the following statement by Nienaber
JA in
Mitchell's Plain Town Centre Merchants
Association v McCleod
[1996] ZASCA 67
;
1996 (4) SA 159
(A) at
169
in fine
-170:
'"Gain" in the context
in which it appears in ss 30(1) and 31 means a commercial or
material benefit or advantage
. . . in contradistinction to the kind
of benefit or result which a charitable, benevolent, humanitarian, .
. . or sporting organisation,
for instance, seeks to achieve. The
sections [ie 30(1) and 31] are concerned with commercial enterprises
and "gain" must
be given a corresponding meaning.'
[22] In
South African Flour
Millers' Mutual Association v Rutowitz Flour Mills Ltd
1938
CPD 199
, Davis J (with Centlivres J concurring) had to determine the
meaning of 'a business for the acquisition of gain' in the context
of
the predecessor to s 31 in the 1926 Companies Act. In the course
of his judgment he referred (at 202) with approval to
the following
statement by Jessel MR in
Re Arthur Average
Association for British, Foreign and Colonial Ships, Ex parte
Hargrove & Co
(1987) 10 Ch App 542
at
545:
'Now, if you come to the meaning
of the word "gain", it means acquisition. It has no other
meaning that I am aware of.
Gain is something obtained or acquired. .
. . I take the words as referring to a company which is formed to
acquire something,
or in which the individual members are to acquire
something, as distinguished from a company formed for spending
something, and
in which the individual members are simply to give
something away or to spend something, and not to gain something . . .
It seems
to me that the Act broadly means this: all commercial
undertakings shall be registered. It distinguishes . . . between
commercial
undertakings on the one hand . . . and
what we may call literary or charitable associations on the other
hand,
in which persons associate, not with a view to obtaining a
personal advantage, but for the purpose of promoting literature,
science,
art, charity or something of that kind.'
[23] It is true, as pointed out by the respondent, that
in ss 30 and 31 the concept of a company having as 'its object
the
acquisition of gain', is used in conjunction with 'carrying on
business' and that the mischief which s 21 seeks to address
is
different from those at which ss 30 and 31 are aimed. But in
construing ss 30 and 31 the expression 'carrying on business'
has been given such a wide meaning â even wider than 'trade' â
(see eg
South African Flour Millers Mutual
Association v Rutowitz Flour Mills Ltd (supra)
at
204;
Mitchell's Plain Town Centre Merchants
Association v McCleod (supra)
at 167E-F) that
it takes the matter no further. And the difference in the mischief at
which the respective sections are aimed does
not provide an answer to
what I consider to be the vital question in the present context. It
is this: why must the legislature
be understood to have ascribed a
different meaning to exactly the same expression within the compass
of a few sections in the same
Act? Without more, I do not believe
there is a rational answer to this question.
[24] A further signpost to the understanding of
s 21(1)(b) in the same direction comes into sight, I think, when
one investigates
the mischief at which the section was aimed.
According to the main report of the Commission of Enquiry into the
Companies Act (R.P.
45/1970 of 15 April 1970) â which led, inter
alia, to the enactment of s 21 â the objective, as stated in
para 25.02 (c)
of the report, was to exclude from the ambit of
s 21, companies which 'are engaged in ordinary business
enterprise both commercial
and industrial' and which 'are being
carried on in competition with ordinary tax payers'. Though these
companies were not allowed
to pay dividends, so the report stated,
'it has been observed that in some cases very substantial salaries
[were] being paid'.
On the other hand, so the commission found, (in
para 25.04(e)) 'the case of associations intending to carry on
business for gain
which yet wish to comply with the conditions of
s 21 is . . . so limited that it may be ignored.' The reason for
the reference
to 'communal or group interests', seems to stem from
the further consideration by the Commission (in para 25.02(d)) that
the additional
requirement in s 21 of the 1926 Companies Act, to
the effect that the charitable or social purposes pursued by the
association,
should also be mainly 'in the interest of the public';
had been found to be unduly restrictive. The latter requirement, so
the
Commission found, had the unintended consequence of excluding,
for example, local sports organisations from the ambit of s 21.
This also appears from the finding in para 20.6 that the old s 21
was 'too restrictive and that the Act should provide a company
form
suitable for all charitable, religious, cultural and other such like
associations without the stringent condition of having
to be in the
general public interest'.
[25] On my understanding of s 21(1)(b) it therefore
excludes purely commercial enterprises, which means that the
respondent's
commercial hotel business falls outside the ambit of
what the object of a s 21 association may lawfully be. What is
more,
even if s 21(1)(b) should be interpreted â as I see it,
incorrectly â so as to include the pursuit of any group interests
as a legitimate object, it would at least require a group with common
interests. It stands to reason that if the members of the
'group'
identified in the memorandum of the particular association were to
have conflicting interests, the reference to 'group
interests' would
constitute a contradiction in terms. This, I believe, is exactly the
position we find with reference to the memorandum
of the respondent.
[26] In accordance with the latest amendment to the
respondent's main object in its memorandum of association, it refers
to the
interests of both the rental pool owners and the owners of the
commercial areas. The respondent's argument is that these two groups
have a common interest in that they both want the conference hotel to
be conducted as a profitable business. Though obviously correct
as
far as it goes, the statement reflects a superficial analysis of the
real situation. The real situation is that there is an
inherent
conflict between the rental pool owners and Meridian Bay as the owner
of the commercial units. As I have said earlier,
the conflict seems
to be unavoidable. The rental paid for the commercial units is
deducted from the total hotel revenue as part
of operational
expenses. The balance is then distributed among the room owners.
Logic dictates that every increase in the rental
for the commercial
areas would bring about a decrease in the net amount available for
distribution amongst the rental pool owners.
There is a dispute on
the papers as to whether the rental paid to Meridian Bay is fair. The
appellants contend that the rental
that the new controllers of the
respondent had agreed to pay Meridian Bay is exorbitant. The
respondent, on the other hand, produced
expert evidence that the
rental is market related and reasonable. This dispute cannot be
resolved without a referral to evidence.
Nonetheless, the conflict of
interest between the two groups cannot be gainsaid. When challenged
to identify the group interest
that the respondent seeks to promote,
Needham, who deposed to the answering papers on behalf of the
respondent, unequivocally stated
that the respondent 'conducts a
commercial hotel operation for the sole interests of the group of
rental owners'. That, of course,
is in direct conflict with the
respondent's object as defined in its memorandum, which refers to the
owners of the commercial areas
as well. What I find significant is
that even Needham did not see his way open to describe the group
identified in the respondent's
memorandum as having a homogenous
interest. That is why I say that even if s 21(1)(b) must be
understood to include the promotion
of any group interests, the
respondent would still not comply with that requirement. Both its
main object and its business would
still be in contravention of
s 21(1)(b) and therefore unlawful.
[27] What we also know is that it is this very conflict
of interest between the two groups referred to in the respondent's
main
object which lies at the heart of these proceedings. It is
because of this conflict that the liquidation application was brought
and supported, in the main, by rental pool owners and opposed, in the
main, by those who seek to protect the interests of Meridian
Bay. If
the respondent had been a company with shareholders, the rental pool
owners, whose interests the respondent originally
set out to pursue
and who constitute the majority in numbers, would probably have
changed the membership of the board. But because
the respondent's
membership, as a s 21 association, is controlled by its
directors who are in turn elected by the members,
the perception
prevails that the respondent's business is conducted in the interest
of Meridian Bay and in conflict with the interests
of the rental pool
owners.
[28] During argument all these indicators to the
understanding of s 21(1)(b) were raised with counsel for the
respondent. At
the time, they did not indicate that they required any
further opportunity to consider their response. Three days after the
hearing,
the Cape Town attorney for the respondent, quite
unexpectedly in the circumstances, wrote a rather indignant letter to
the registrar
of this court in which he contended, inter alia, that
his client was not given a fair hearing. But, despite the indignant
tone
of the letter, the attorney essentially sought leave to file
what he referred to as 'a note on the point of law' raised in
argument.
That leave was duly granted. In consequence, the
respondent's counsel filed a 'note' extending over 58 pages. To that
'note' I
now turn.
[29] A theme that runs through the note and the letters
by the respondent's attorney is that the appellants did not rely on
the
respondent's non-compliance with s 21(1)(b) and that this
was an issue raised
mero
motu
by
this court during argument without prior notice to the parties. As my
earlier quotation from the appellants' founding affidavit,
however,
shows, the respondent's non-compliance with s 21(1)(b) was
squarely raised by the appellants. The respondent's further
contention that the issue was thereafter conceded by the appellant
appears to be factually incorrect. On the contrary, it was expressly
raised, albeit rather obliquely and under a different rubric, in the
appellants' heads of argument on appeal. But be that as it
may, the
respondent was granted ample opportunity to deal with the issue and
it did so extensively. What I find unfortunate is
the accusatory tone
by the respondent's legal representatives, who should know better. It
clearly stems from a misconception of
what a hearing in this court
entails. This is explained with admirable clarity by Harms JA in
Thompson
v South African Broadcasting Corporation
[2000] ZASCA 76
;
2001
(3) SA 746
(SCA) para 7 when he said:
'The
function of oral argument, especially in a Court of appeal, is
supplementary to the written argument. If a party chooses not
to
raise an obvious issue in his heads, he does so at his peril. The
Court is entitled to base its judgment and to make findings
in
relation to any matter flowing fairly from the record, the judgment,
the heads of argument or the oral argument itself. If the
parties
have to be forewarned of each and every finding, the Court will not
be able to function.'
[30] What is more, even if it is accepted for the sake
of argument that the appellants had indeed conceded a point of law in
their
favour, the respondent's object and its business is, on my
interpretation of s 21(1)(b), unlawful. In this light any
suggestion
that this court should allow an unlawful business to
continue because the other side had made a concession of law which is
found
to be incorrect, would, in my view, be untenable. This is an
a
fortiori
situation
of the one described as follows by Ngcobo J in
Cusa
v Tao Ying Metal Industries
[2008] ZACC 15
;
2009
(2) SA 204
(CC), para 68:
'Where a point of law is
apparent on the papers, but the common approach of the parties
proceeds on a wrong perception of what the
law is, a court is not
only entitled, but is in fact also obliged,
mero
motu
, to raise the
point of law and require the parties to deal therewith. Otherwise,
the result would be a decision premised on an
incorrect application
of the law. That would infringe the principle of legality.'
[31] After noting the respondent's protestations of
alleged unfair treatment, the note proceeds to record the debate
about the interpretation
of s 21(1)(b) as it developed during
argument at the hearing of the appeal. The recordal reflects a clear
understanding by
the respondent's legal representatives of the
difficulties raised by members of this court with regard to the
interpretation the
respondent sought to attribute to s 21(1)(b).
By and large, these difficulties are echoed by what I have said
earlier in this
judgment. The note then goes on to deal with the
difficulties. Insofar as I consider the answers given in the note to
be pertinent,
they have been incorporated in my earlier deliberations
on the interpretation of s 21(1)(b). Apart from these, the note
also
contained a number of other arguments which are, in my view, of
no consequence. After due consideration, I decided not to record
these rather lengthy expostulations which do not take the matter any
further. As I see it, it will serve no purpose other than
to extend
the length of this judgment. Suffice it, in my view, to illustrate
the point by three examples.
[32] First, there is the argument that since the
amendment of s 10 of the Income Tax Act 58 of 1962 in 2000, an
association
incorporated under s 21 no longer enjoys an
automatic income tax advantage. Though factually correct, I do not
believe that
this argument is of any consequence in the present
context. The proposition that a reduction of the benefits derived
from incorporation
under s 21 by the Income Tax Act must somehow
be taken to have resulted in the automatic diminution of the
requirements for
such incorporation in terms of the Companies Act, is
in my view, simply unsustainable.
[33] Secondly, there is the argument that we must take
judicial notice of the fact that there are numerous associations with
purely
commercial objects that were incorporated under s 21
which will obviously be affected by the interpretation of s 21(1)(b)
in that it will render their objects unlawful. Apart from the fact
that I can hardly take judicial notice of something that I simply
do
not know, this is another argument that, in my view, takes the matter
no further. We can hardly avoid what we consider to be
the proper
meaning of a statutory provision because it will cause considerable
inconvenience to a substantial number of people.
If that is true, it
is something to be taken up with the legislature.
[34] Thirdly there is the argument that the new
Companies Act 71 of 2008
â which has been enacted but is not yet
operative â would seem to allow for the equivalent of the present
s 21
association to become involved in purely commercial
activities. But that, if anything, would seem to go against the
respondent's
construction of the present
s 21.
It is a trite
principle of statutory interpretation that a change in wording must
usually be understood to indicate a different
intent on the part of
the legislature.
[35] In the result there is nothing in the note which
causes me to change my view of what I consider to be the proper
interpretation
of
s 21.
On that interpretation, the respondent
is conducting an unlawful business which should be terminated by way
of a liquidation order.
This renders it unnecessary to consider the
further grounds advanced by the appellants as to why the winding-up
of the respondent
would be just and equitable. I am mindful of the
special considerations contained in
s 21(2)(b)
for the
winding-up of
s 21
associations which are reflected in the
respondent's memorandum. But it is clear, in my view, that these
provisions presuppose
that the respondent is a genuine
s 21
association which, I believe, it is not. In consequence the
respondent stands to be liquidated in the ordinary course.
[36] As to the matter of costs, the respondent contended
that if the appeal were to succeed on the
s 21(1)(b)
ground, the
appeal record of 2 300 pages would be unwarranted, which should
be reflected in the costs order of this court.
In my view, however,
this contention could only have been endorsed if all the other issues
were decided against the appellant whereas,
of course, they were not.
In the result:
1. The appeal is upheld. The costs of the appeal,
including the costs of two counsel, are to be costs in the
liquidation of the
respondent.
2. The order of the court a quo is set aside and
replaced by the following:
'(a) The respondent is placed under a final winding-up
order.
(b) The costs of the application, including the costs of
two counsel, are to be costs in the liquidation of the respondent.'
â¦â¦â¦â¦â¦â¦â¦
.
F D J BRAND
JUDGE OF APPEAL
Counsel
For Appellant
:
G
W Woodland SC
A
M Smalberger
Instructed
by: Herold Gie Inc
Cape
Town
Correspondents: McIntyre
& Van der Post
Bloemfontein
For
Respondent: B K Pincus SC
G
Walters
Instructed
By: Bornman & Hayward
c/o
Walkers Inc
Cape
Town
Correspondents: Naudes
Bloemfontein