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[2019] ZAECELLC 19
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Swarts and Others v Hart and Others (EL791/2018) [2019] ZAECELLC 19 (3 September 2019)
IN
THE HIGH COURT OF SOUTH AFRICA
(EAST
LONDON CIRCUIT LOCAL DIVISION)
CASE NO.: EL 791/2018
In
the matter between:
MARINDA
MARI SWARTS
First
Applicant
COLIN
DAVID McALL
Second Applicant
ANDREW
DAVID PRITCHARD
Third Applicant
JACOBUS
JOHANNES LOMBARD
Fourth
Applicant
And
ANDREW
NEIL HART First
Respondent
BRINKMAN
NDAYI McALL CC
Second Respondent
THE
REGISTRAR OF COMPANIES AND
CLOSE
CORPORATIONS Third
Respondent
JUDGMENT
SMITH
J:
[1]
The applicants seek an order in terms of section
36 of the Close Corporations Act, No. 69 of 1984 (“the Act”)
that the
first respondent (“Hart”) shall cease, from the
date of the order, to be a member of the second respondent. The
latter
is a multi-disciplinary practice rendering architectural,
quantity surveying, and project management services in the
construction
industry. Section 36(1) of the Act provides, inter alia,
for cessation of membership if: a member is guilty of conduct likely
to
have a prejudicial effect on the operations of the business; a
member conducts him or herself, in relation to the corporation’s
business, in such a manner that it is not reasonably practical for
other members to carry on the business; or circumstances have
arisen
which render it just and equitable that the member should cease to be
a member of the corporation. If any of the aforementioned
factors are
established, the court may order the transfer of the member’s
interest, and determine an amount in respect of
that interest.
[2]
The first applicant is an architect and member of
the second respondent. The second applicant is a quantity surveyor,
and the third
and fourth applicants are also architects. All of them
are employed by the second respondent.
[3]
The first respondent (Hart) is an architect and
member of the second respondent. He is based at the second
respondent’s East
London office. Between them the first
applicant and Hart own the entire members’ interest in the
second respondent.
[4]
As mentioned above, the second respondent is a
multi-disciplinary practice which is mainly engaged in the public
sector where it
renders services to various provincial and national
organs of state.
[5]
The third respondent, namely the Registrar of
Companies and Close Corporations, has been cited as an interested
party only, and
no substantive relief is sought against him.
[6]
The relief sought by the first applicant is for:
the cessation of Hart’s membership in the second respondent;
his membership
interest to be acquired by her; the percentage of
interest to be transferred to be determined in case number 1248/2017;
and the
amount to be paid to Hart to be determined by one David
Robertson, a Chartered Accountant.
[7]
Subsequently, and apparently in response to the
Hart’s assertion that it is the Court that must determine the
amount in respect
of a member’s interest, the applicants
applied to amend their notice of motion to the effect that the value
of Hart’s
member’s interest must be determined by the
Court, after hearing oral evidence, alternatively, by an independent
accountant
appointed by the South African Institute of Chartered
Accountants, instead of by Robertson as originally prayed for.
[8]
After launching these proceedings, the applicants
instituted application proceedings under case number 1248/2017 in
which they sought
an order declaring their respective membership
interests in the second respondent to be as follows: first applicant
22.49%; the
second, third and fourth applicants each 18.34%; and Hart
22.49%. That application has since been finalised, and in a judgment
delivered on 29 March 2019, Griffiths J found that the applicants’
assertion in respect of the nominee holding of interest
on behalf of
second, third and fourth applicants, had no factual foundation.
[9]
In that application, as is the case in the
present proceedings, the first applicant contended that first
applicant and Hart held
a portion of their respective member’s
interest on behalf of the other applicants. A substantial portion of
the applicants’
founding papers in these proceedings has been
dedicated to establishing that Hart’s “disingenuous
insistence”
that he holds 50% of the member’s interests
in the second respondent, and his “malicious refusal” to
acknowledge
the agreement relating to the nominee holding on behalf
of the other applicants, have a prejudicial effect on the operations
of
the practise.
[10]
While this contention is but one of the grounds
which the applicants proffer in support of their assertion that they
are entitled
to invoke the provisions of section 36 of the Act, there
can be little doubt, even on a perfunctory reading of the founding
papers,
that the dispute regarding the alleged nominee holding has
been put up as the root cause of the contended breakdown in their
relationship.
[11]
Mr
Beyleveld
SC, who appeared for the applicants, conceded that Griffiths J’s
judgment is dispositive of that issue. I accordingly do
not have to
concern myself with the substantial allegations relating to nominee
holdings.
[12]
In addition, the applicants also aver that the
second respondent’s East London branch, which is managed by
Hart, is being
run at a loss. They contend that Hart is obstinately
refusing to acknowledge this problem. He has also failed to follow
company
protocol regarding the appointment of staff and salary
increases, which he has implemented without consultation.
[13]
They also aver that he has taken a
disproportionate number of projects on risk, thereby causing the
practice to suffer financial
losses. In addition, despite having been
advised by the Department of Roads and Public Works not to tender in
a particular project
because the second respondent’s Mthatha
office (being the closest to the project), would submit a bid, he
nevertheless submitted
a tender bid at an unreasonable discount.
[14]
They further allege that there has also been a
complaint from a government department relating to poor performance
which Hart has
failed to address adequately. He also concluded a
lease agreement with the second respondent in respect of premises
owned by him,
despite the fact that those premises had not been
properly zoned for business use.
[15]
And, in a rather anecdotal manner, they point to
an intercepted email which confirmed a payment to Hart’s wife
as being proof
of the fact that he is conducting a “parallel”
business from the East London office.
[16]
They contend that the relationship between them
and Hart has consequently irretrievably broken down, hence the need
for the cessation
of his membership.
[17]
In his answering affidavit Hart denies any
agreement relating to nominee ownership, and asserts his entitlement
to insist on strict
compliance with the terms of the Association and
Operational Agreements.
[18]
In the light of the fact that the issue of the
nominee holding is no longer extant, it is perhaps helpful at this
stage to consider
the terms of the Operational Agreement which was
concluded in order to “create and record the terms of an
Operational Committee
to facilitate the management of the
Corporation’s business and as a framework for the structuring
of remuneration of the
Executives”.
[19]
The following then are the salient features of
that agreement: (a) the agreement records and regulates the
employment and remuneration
of executive employees; (b) it provides
for their retirement and circumstances under which their employment
may be terminated;
(c) it provides for the establishment of
management and executive committees, respectively ; (d) it records
the conditions under
which executives lend money to the business; (
e) and contain provisions relating to the resolution of disputes, in
particular
providing that disputes arising out of and pursuant to the
agreement “shall be submitted to informal arbitration’”
on the basis provided in the agreement.
[20]
The Association Agreement regulates the usual
matters, such as the respective members’ interests; employment;
management;
sureties; and loan accounts.
[21]
For the reasons which I have set out above, it is
also not necessary for me to consider and pronounce upon the validity
of Hart’s
comprehensive answers to the allegations pertaining
to nominee shareholding. His responses to the remaining grounds
relied upon
by the applicants have been equally comprehensive and
compelling. They can be summarised as follows: (a) regarding the
allegations
relating to the profitability of the East London office,
he challenges the first applicant’s bona fides, accusing her of
deliberately excluding certain financial information and distorting
the facts to support her “fallacious assertions”
regarding the profitability of that office; (b) he avers that the
first applicant contrived to hamper the productivity of the East
London office by deliberately withholding payments for rental and
electricity, poaching clients, and causing friction by paying
selective bonuses to other employees; (c) he asserts that it is
standard practice to undertake work on risk, since employees who
are
not gainfully employed elsewhere can be employed on a commission
basis to do the work; (d) he states that the complaint from
the
department was based on a misunderstanding, and the relevant
functionary had apologised after he had been apprised of the true
facts; (e) in the respect of the premises leased by the practice, he
states that it had been properly rezoned for professional
use; and
(f) regarding the payment to his wife he states that it had nothing
to do with architectural services but had rather been
in respect of a
proposal relating to a proposed leasing scheme that she had prepared
on behalf of one of the second respondent’s
business
associates, one Sotyato. That amount was subsequently paid to
Sotyato. The reference to J.M Hart Architects was an obvious
error
since the transaction had nothing to do with the practice.
[22]
The applicants bear the onus of establishing the
grounds mentioned in section 36 (1) of the Act. In
Geaney
vs Portion 117 Kalkheuwel Properties CC and others
1998 (1) SA 622
(TPD), Kirk-Cohen J held, at 631H, that :
”
A member of a
close corporation seeking to invoke the provisions of section 36(1)
(d) quite obviously bears and
onus
to prove the relief he seeks. He must set out the relevant facts to
place the Court in a position:
(1) to decide
whether on the facts it can and should grant an order in terms of ss
1(a), (b), (c), and (d);
(2) to carry out its
functions in terms of ss (2) and, in particular, to decide what
financial adjustments to make.”
[23]
In the course of his argument Mr
Beyleveld
accepted that Griffith J’s pronouncement on the nominee
shareholding issue meant that the relief sought in terms of paragraph
1.2 of the notice of motion (namely the determination of the
percentage of member’s interest) was no longer sustainable.
It
is for this reason that the amended notice of motion sought to delete
that paragraph. Mr
Beyleveld’s
argument accordingly proceeded on the basis that the residual
position should be adopted, namely that Hart holds 50% of the
members’
interest.
[24]
He nevertheless submitted that apart from Hart’s
refusal to acknowledge that he holds a percentage of his member’s
interest
as nominee, there are other disputes which have arisen
between the parties and which have escalated to an extent where there
is
virtually no meaningful communication between them.
[25]
He submitted further that, in addition, even
though Hart denies that the trust relationship between the parties
has broken down;
he himself complains that he is being treated
unfairly by the applicants in numerous respects. The totality of the
evidence, however,
points to the fact that the relationship between
the members has in fact broken down irretrievably, and their
inability to communicate
meaningfully is prejudicially impacting on
the effective running of the business. It is thus imperative that
Hart ceases to be
a member of the second respondent on any one or
more of the grounds mentioned in sections 36 of the Act, or so the
argument went.
[26]
Mr
Beyleveld
has also applied that in the alternative, in the event that the Court
finds that the matter cannot be resolved on the papers, it
should be
referred for the hearing of oral evidence.
[27]
Mr
Paterson
SC, who acted for Hart, submitted that even though the judgment in
case no. 1248/2017 has disposed of the issue relating to the
nominee
shareholding, the assertion that Hart has refused to acknowledge the
nominee holding of his member’s interest is
inextricably linked
to, and taints all the other allegations. He argued that all those
complaints have their roots in that allegation.
[28]
This submission, in my view, has great merit. On
a reasonable reading of the founding papers one gains the impression
that Hart’s
refusal to acknowledge the nominee holding was the
main thrust of the application and the main ground for the invocation
of section
36. All the other problems, which appear to have been
brought about by a lack of communication, had their roots in that
dispute,
and had undoubtedly been proffered merely as adjuncts to
that main complaint.
[29]
Mr
Paterson
has correctly submitted that Griffiths J’s judgment has
far-reaching consequences for this application. First, it means that
Hart’s insistence upon the strict observance of the terms of
the Association and Operational Agreements, was justified. And
second, the remaining conflicts appear mainly to relate to
disagreements regarding the management of the business. The question
then arises as to whether the grounds mentioned in section 36 of the
Act have been established on a balance of probabilities.
[30]
It is trite that if the matter is decided on the
papers, then it must be resolved on Hart’s version. As I have
mentioned earlier,
his answers to the applicants’ allegations
are comprehensive and plausible. I am accordingly satisfied that they
are not
so far-fetched and uncreditworthy that they can be rejected
out of hand.
[31]
If the matter is approached on this basis, then
it is clear that the disputes between the parties (if one ignores the
issue relating
to nominee shareholding) relate to management issues
that can, and should, be resolved through normal business
conventions, or
the terms of the Association and Operational
Agreements.
[32]
In order for the Court to grant relief in terms
of section 36 (1) (b) of the Act, it must be satisfied that the
member is guilty
of conduct that “taking into account the
nature of the corporation’s business”, is likely to have
a prejudicial
effect on the carrying on of the business.
[33]
And as I have mentioned previously, the onus is
on the applicants to establish this ground on a balance of
probabilities. The “guilt”
which the applicants have
sought to impute to Hart related to his alleged “obstinate and
disingenuous” refusal to acknowledge
the nominee shareholding
agreement. There can be little doubt that had the applicants been
able to establish that allegation in
the matter before Griffiths J,
Hart’s “guilt” would in all probability have been
established. Conversely, the
fact that Griffiths J found the
allegations to have been without a factual basis, means that the
applicants have failed to establish
the requirement of that
subsection on a balance of probabilities.
[34]
Reliance on subsection 36 (1) (c) requires of the
applicants to establish conduct by Hart “in matters relating to
the corporations
business” that makes it not reasonably
practical for the other members to carry on the business of the
corporation with him.
Mr
Paterson
has in this regard also correctly submitted that Griffiths J’s
judgment means that Hart’s insistence on the observance
of the
terms of the Association and Operational Agreements was reasonable.
The applicants have accordingly also failed to establish
this
jurisdictional fact on a balance of probabilities.
[35]
The ground mentioned in subsection 36 (1) (d),
namely “that circumstances have arisen, which render it just
and equitable
that such member should cease to be a member of the
corporation”, can also not survive the impact of Griffith J’s
pronouncement
on the nominee holding issue. It can, by no
stretch of the imagination, be contended that a member who has
justifiably insisted
on the implementation and observance an
Association Agreement, can be justly and equitably removed as a
member.
[36]
Mr
Beyleveld
also
subsequently referred me to the Supreme Court of Appeal judgment in
Freedom Stationery (Pty) Ltd and Others v
Hassan and Others
2019 (4) SA 459
(SCA) which
concerned the interpretation of section 252 of the Companies Act, 61
of 1973. That section was subsequently repealed
by the new
Companies
Act, no, 71 of 2008
, but was substantially re-enacted in
section 163
of the new Act. Van der Merwe JA held that once it had been
established that there has been “oppressive or unfairly
prejudicial
conduct” within the meaning of ss. 252 (1) or (3)
of the Act, the Court has wide powers to make an order that it
considers
just and equitable in the circumstances. The Court may, for
example compel a minority shareholder to purchase the shares of a
majority
shareholder, or grant relief against “an oppressor”
who is not a shareholder of the company. And the powers of the Court
are not restricted to orders relating to the pursuance of the objects
contained in a company’s memorandum of incorporation.
This
decision was obviously proffered in support of Mr
Beyleveld’s
submission that the Court has wide powers to grant relief under
section 36 (1) (d), if the facts establish that it would be just
and
equitable that a member should cease to be member of a corporation.
The facts of
Freedom Stationary
are, however, distinguishable. As I have mentioned above, without the
allegations relating to the nominee shareholding, the remaining
disputes are not of such a nature that they cannot be resolved in
terms of existing agreements. Furthermore, those allegations
relate
essentially to Hart’s insistence on the strict compliance with
those agreements. In these circumstances it would indeed
be unjust
and inequitable for the Court to order the cessation of his
membership.
[37]
In the light of my finding that none of the
grounds mentioned in section 36 has been established, it is not
necessary for me to
deal with the arguments relating to the
appropriate mechanism for the valuation of Hart’s member’s
interest.
[38]
I also do not believe that there are any
prospects that the hearing of oral evidence will disturb the
probabilities. As I have mentioned
earlier, without the nominee
holding issue, the remaining disputes relate to the management of the
practice, and must be addressed
in terms of the Association and
Operational Agreements. This is the case regardless of which version
is accepted. The application
for referral for oral evidence must
accordingly also fail.
[39]
Regarding the matter of costs, there remains the
issue as to which party ought to be held responsible for the costs of
a previous
appearance on 13 June 2019, when the matter could not
proceed through no fault of any of the parties. What had apparently
happened
was that as a result of a misunderstanding, the matter,
despite having been properly set down for hearing (and both counsel
having
been ready to argue), the parties were informed that the
matter had only been set down provisionally, and that there was not a
judge available to hear the matter. In my view none of the parties
can be blamed for the costs occasioned by that postponement.
I think
that it is only appropriate and fair, in such circumstances, that
each party should bear his or her own costs.
[40]
In the result the application is dismissed, with
costs, excluding the costs occasioned by the postponement on 13 June
2019.
__________________________
J.E
SMITH
JUDGE
OF THE HIGH COURT
Appearances
Counsel
for the Applicants
:Advocate A Beyleveld SC
Attorneys
for the Applicants
:Clark Laing Incorporated
18
Stewart Drive, Berea
East
London
Counsel
for the Respondents
:Advocate
TJM Paterson SC
Attorneys
for the Respondents
:Stirk Yazbek
Attorneys
18
Vincent Road, Vincent
East
London
Date
Heard
: 27/06/2019
Date
Delivered
:
03/09/2019