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[2013] ZANCHC 5
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Matsepe NO and Others v London and Others (1994/11) [2013] ZANCHC 5 (15 February 2013)
17
IN
THE HIGH COURT OF SOUTH AFRICA
(NORTHERN CAPE HIGH COURT, KIMBERLEY)
15 February 2013
CASE No: 1994/11
TSIU VINCENT MATSEPE N.O
............................................
1
ST
APPLICANT
SIMONE LIESEL MARGARDIE N.O
..................................
2
ND
APPLICANT
MOLELEKWA ASHWORTH TAU N.O
..............................
3
RD
APPLICANT
OTTLIE ANTON NOORDMAN N.O
....................................
4
TH
APPLICANT
AND
MR F O LONDON
..............................................................
1
ST
RESPONDENT
MR M P RANTHO
.............................................................
2
ND
RESPONDENT
MR A A JOSEPH
...............................................................
3
RD
RESPONDENT
MR M L MOKWENA
........................................................
4
RD
RESPONDENT
MS NTABISENG C KEMANE
..........................................
5
TH
RESPONDENT
_______________________________________________________________
JUDGMENT
Tlaletsi J
Introduction
[1]
The applicants are the liquidators of a
company known as Canton Trading 159 (Pty) limited (“the
company”) and they are
acting in their capacities as such. An
order for the provisional winding up of the company was granted by
this court on 21 February
2010. The final order for the winding up
was subsequently granted by this Court. The respondentswere at all
material timesdirectors
and shareholders of the company.
[2]
The applicants launched these proceedings on
notice of motion seeking orders to the effect that dividends paid to
the respective
respondents as shareholders of the company be repaid
to the company plus
mora
interest on the said amounts until
date of payment and that each respondent pay the costs of this
application separately.
Factual Background
[3]
It is common cause that the company was
purchased by the respondents in the beginning of the year 2009. They
traded as
Nyumbane Investments
. Their respective shareholding
in the company is as follows: First respondent 22.5%; Second
respondent 35%; Third respondent 5%;
Fourth respondent 22.5% and
Fifth respondent 15%.
[4]
It is further common cause that the
respondents received dividends from the company in the following
amounts and dates respectively:
4.1. First respondent:
R405 000.00
on 29 June
2009;
R506 250.00
on 21 December 2009; and
R506 250.00
on 21 July 2010. Total received:
R1 417 500.00 .
4.2. Second respondent
: R630 000.00
on 27 June
2009;
R787 500.00
on 22 December 2009 and
R787 500, 00
on 21 July 2010; Total:
R2. 205. 000.00.
4.3. Third respondent:
R90 000.00
on 29 June
2009;
R112 500.00
on 22 December 2009 and
R112 500.00
on 21 July 2010; Total
R315 000.00.
4.4. Fourth respondent:
R405 000.00
on 29 June
2009;
R506 250.00
on 18 December 2009.
R506 250.00
on
21 July 2010: Total;
R1. 417. 500.00.
4.5. Fifth respondent
: R270 000.00
on 27 June
2009,
R337 500.00
on 18 December 2009,
R337 500.00
on
21 July 2010. Total paid:
R945 000.00.
[5]
The applicants are claiming that the above
dividends be refunded to the company because the declaration thereof
was unjustified,
unlawful and contrary to the Articles of Association
(“the articles”)of the company read with the provisions
of the
Companies Act 61 of 1973
.
[6]
The applicants’ application is premised
on the following facts:
6.1. The company commenced trading during January 2009.
Only one set of financial statements for the company were prepared by
PricewaterhouseCoopers
and were signed by Second and Fifth
respondents on behalf of the company on 31 January 2011. The
financial statements were for
the period ending February 2010 and
were approved after the commencement of the liquidation proceedings
instituted against the
company. The aforesaid financial statements
were attached to the founding affidavit as “Annexure E”.
6.2. In the financial statements the directors of the
company reported,
inter alia,
that:
“
Going concern.
The income statements indicate that a loss of R3
894,298.00 was incurred for the 14 months ended 28 February 2010. The
entities
total liabilities exceeded the total assets with R8 394 298
as at 28 February 2010. Conton Trading 159 (Propietary) Limited’s
debts are payable on demand and certain creditors have already taken
legal action for the provisional liquidation of the company.”(sic)
At paragraph 4 of the report, the directors stated the
following:
“
Reportable irregularity
During the financial period dividends on two separate
occasions were declared and paid to the shareholders while the
liabilities
of the company exceeded the assets of the company, fairly
valued. The directors are negotiating with the shareholders to refund
these dividends to the company by way of subordinated loans whereby
all other creditors will first be paid until such time as the
assets
of the company, fairly valued exceeds its liabilities. The company
has also not held an annual general meeting within nine
months of the
company’s year-end as is requested by the Companies Act.”(sic)
6.3. The relevant provisions of the Articles of
Association relied upon by the applicants are:
“
8.3. The company in annual
general meeting may declare dividends but no dividend shall exceed
the amount recommended by the directors.
8.4. The directors may from time to time pay to the
members such interim dividends as appear to the directors to be
justified by
the profits of the company.
8.5. No dividends shall be paid otherwise than out of
profits or bear interest against the company.”
[7]
The statutory framework applicable in this
case is the
Companies Act 61 of 1973
since the liquidation
proceedings against the company were instituted prior 1 May 2011,the
latter date being the date on which
the new
Companies Act 71 of
2008
came into operation.
[8]
It is only Third respondent who is not
opposing this application. Fourth respondent deposed to an opposing
affidavit on his own
behalf and also on behalf of the rest of the
respondents. They in the main dispute that the dividends paid by the
company to the
respondents were not properly paid out. They contend
that there is a factual dispute in this regard and that it was
inappropriate
for the applicants to institute these proceedings by
way of notice of motion and that the application should be dismissed
on this
ground alone.
[9]
The respondents have set out a historical
background relating to the operations of the company and the
circumstances that led to
the winding up of the company.
9.1. They state thatduring May 2008 the company
presented a tender to the
Northern Cape Department of Transport,
Roads and Public Works
(“the department”) to provide
fleet management services to the Northern Cape Provincial government
(“the Province”).
The basis of the proposal made was that
the company would provide vehicles for the hire and transportation of
the employees of
the provincial administration and they would also
maintain such vehicles. It was anticipated that should such an
agreement be concluded,
the company would receive substantial
remuneration for its services from the department. The company and
the department concluded
what is known as
Public Private
Partnership Fleet Agreement
(“the PPPF agreement.”)
9.2. During the tender process an
income and cash
flow analysis
was drawn up for the company by a team of people
who were probably the leading experts in the field of fleet
management in South
Africa, most of them having worked for a
well-known
Imperial Car Hire
company. The team included Third
respondent who the company appointed as its Chief Executive Officer
(“CEO”) and on
whom the directors relied heavily in
regard to all issues relating to the management of the company and in
particular its financial
aspects.
9.3. The
income and cash flow analysis
demonstrated
that the free residue of funds available on a monthlybasis after all
expenses had been paid, was more than adequate
to enable the company
to make the monthly payments that would be owing to their financiers
in terms of the financial agreement.
They allege that after a few
months of being operational, the company was exceeding the
projections of the free residue available
after the payment of all
creditors including their financier.
9.4. It is the respondents’ case that in order for
the project to be successful the company was supposed to obtain the
finance
for the acquisition of the motor vehicles that were to be
hired by the department. The company accordingly purchased 588 new
vehicles
from
Nissan South Africa(Pty) Limited
(“Nissan”)
and Toyota Motors South Africa (Pty) Limited
(“Toyota”)
at the purchase prices of
R48 489 498.50
and
R34 531 146
respectively.
9.5. In order to obtain finance for the acquisition of
the said vehicles the company found it necessary to cede and assign
its right,
title and interest in and to the
PPPF
agreement with
the department to the financier who would provide the necessary
finance. Provision was also made in the
PPPF
agreementwith the
department for the company to be able to cede its rights with the
consent of the department which consent should
not be unreasonably be
withheld.
9.6. The respondents aver further that the company
approached an entity known as
Infrastructure Finance Corporation
Limited(“INCA”)
forfinancial assistance. INCAwas
willing to assist. However, the department unreasonably refused to
approve the cession to
INCA.
As a result of the actions of the
department
INCA
was unable to provide financial assistance for
the payment of the motor vehicles provided by
Nissan
and
Toyota
to the company. The company approached other financial
institutions.Namely, the
Industrial Development Corporation
(“IDC”) and the Development Bank of Southern Africa
(“DBSA”)
hoping that the department would cooperate.
The two institutions were also willing to assist. However, the
department refused to
approve the cession to these institutions and
as a result financial assistance could not be provided. The
respondent contendthat
the unreasonable refusal by the department
caused the company to be wound up.
9.7. The respondents contends further that despite the
conduct of the department, the business of the company was in
operation and
in a successful and effective manner and substantial
profits were generated. Furthermore, the consultant of the company Mr
Andries
Mulder (“Mulder”), together with the CEO were
satisfied that the excess funds available to the company in the
course
of its business constituted profits which could validly be
declared as dividends to shareholders and that such view was
objectively
correct.
9.8. It is the respondents’ contention that none
of the parties could have foreseen that the department would not
perform
in terms of its agreement with the company and that even
though the parties realised that there was in the beginning some
resistance
from the department when the moneys were not paid out
timeously as expected, all the parties believed that the department
would
in due course ultimately perform and the respondents and
everybody at the company accordingly went about their business which
included
the payment of all dividends and creditors as and when they
were able to do so.
9.9. As regards the financial statements annexed as
annexure “E” the respondents aver that First, Second,
Fourth and
Fifth respondents were not involved in the drawing up of
such financial statements. When the auditors were appointed, before
liquidation,
the fourth respondent introduced them to the relevant
members of staff from whom they could obtain any information as well
as documents
which they required in order to perform their audit.
Fourth respondent was therefore surprised to learn from the auditors’
own report that they did not have access to all the documents and
information they required. They state that none of the respondents
were approached by the auditors to provide the required information.
The respondents accordingly dispute the contents of the financial
statements and put the applicants to the proof thereof in so far as
it relates to the financial viability of the company as well
as their
opinion expressed in connection therewith.
9.10. The respondents state further that annexure E
cannot give this Court any insight into the financial position of the
company.
They mention that in fact before the declaration of
dividends the CEO of the company referred them to Management Accounts
which
he had drawn, which proved conclusively that the company had
made profits and was in a position to declare dividends from the
profits,
which it in fact did. According to the respondents the
company was therefore a viable and highly profitable company which
was prevented
from achieving its potential by the refusal of the
department to comply with its legal obligations.
9.11. The respondents deny that the dividends were
declared in contravention of the articles of the company or the
Companies Act as
they were entitled to declare the dividends. They
acted on the basis of express representations made to them by Third
respondent
and Mulder that the company had earned profits and that
the said representations were correct. They maintain that it was
appropriate
that dividends be declared as recommended.
Analysis
[10]
Section 90 of the
Companies Act, 61 of
1973
which is applicable in this case reads thus:
(1) A company may make payments to its shareholders subject
to the provisions of this section and if authorized thereto by
its
articles.
(2) A company shall not make any payment in whatever form to
its shareholders if there are reasonable grounds for believing
that-
(a) the company is, or would after the payment be, unable to pay
its debts as they become due in the ordinary course of business;
or
(b) the consolidated assets of the company fairly valued would
after the payment be less than the consolidated liabilities of the
company.
(3) For the purposes of this section 'payment' includes any
direct or indirect payment or transfer of money or other property
to
a shareholder of the company by virtue of the shareholder's
shareholding in the company, but excludes an acquisition of shares
in
terms of section 85, a redemption of redeemable preference shares in
terms of section 98, any acquisition of shares in terms
of an order
of Court and the issue of capitalisation shares in the company.
(4) A shareholder shall be liable to the company for any
payment received contrary to the provisions of subsection (2).”
In so far as these are motion proceedings, any dispute
of fact would be decided in line with the authoritative approach
adopted
in
Plascon-Evans Paints Ltd v Van Riebeeck Paints (Pty)
Ltd
[1984] ZASCA 51
;
1984 (3) SA 623
(A)
.
[11]
The legal position applicable is was that
the company could make payment of interim dividends to its
shareholders provided the
requirements set out in subsection (2) are
met and also if authorised by the articles of the company. As shown
above clause 8.4
of the articles of the company authorised the
directors to pay to members such interim dividends as appear to the
directors to
be justified by the profits of the company. Clause 8.5
of the articles prohibit payment of dividends from any source other
than
the profits or bear interest against the company. Section 90(4)
imposes liability on the shareholder to the company for any payment
received contrary to the provisions of section 90(2).
[12]
There are two fundamental issues that
require determination in this matter, namely, whether the company had
made a profit at the
time when the interim dividends were declared
and secondly, whether the respondents acted reasonably in declaring
the interim dividends.
The determination of these issues has a
bearing on the question whether the interim dividends were properly
and or legally declared
by the respondents.
[13]
It is evident that the company started its
business during January 2009 and five months later, in June 2009,
declared its first
interim dividend. Subsequent interim dividends
were declared in December 2009 and July 2010. When these interim
dividends were
declared the company had already created a debt with
Nissan
and
Toyota
and had not obtained any financial
assistance from any of the financial institutions it had
approached.These facts were known to
the directors who happen to be
the sole shareholders of the company at the time when dividends were
declared. It was expected of
the respondents to keep these factors in
mind when taking the decision to declare dividends at the respective
times.
[14]
In my view the respondents’ defence
that they do not accept the contents of the financial statements
prepared by PricewaterhouseCoopers
because they were not involved in
the compilation thereof is untenable. It is the respondents who
appointed PricewaterhouseCoopers
to prepare the financial statements.
The said financial statements weresigned and approved by Second and
Fifth respondents on behalf
of the company. The contention therefore
that the respondents have no knowledge of the financial statements
cannot be true.
[15]
It is significant to note that the
respondents themselves acknowledged that they were not supposed to
have declared the interim
dividends and took a resolution on 10
November 2010, long before the liquidation application was brought
against the company, to
negotiate with the recipients of the
dividends “
to refund these dividends to the company by way
of subordinated loans.”
This resolution is not without
consequence and was to be implemented by the company. The
acknowledgment can only mean that the respondent
knew that the
dividends were not supposed to have been declared and paid out since
the company had not made any profit at the time.
Put differently, the
directors knew that the financial position of the company did not
justify the declaration and payment of the
dividends and in order to
correct this reportable irregularity, resolved to negotiate refunds
with the shareholders.
[16]
The applicants have stated in their replying
affidavit that the company lodged a claim for
inter alia
,
value added tax with the
South African Revenue Services (SARS)
to claim the refund of the value added tax on the motor vehicles
obtained from
Nissan
and
Toyota
when in fact they had
not paid the purchase price. An amount of R12 138 906-22 was paid by
SARS to the company before the first
dividend was declared and the
applicants suggest that this money was used to finance the interim
dividends. I am unable and it
is also not necessary to decide this
issue for present purposes. However, the seriousness of this
allegation, if correct, cannot
be ignored.
[17]
With regard to the contention by the
respondents that they relied on the adviseand the representations
made by itsCEO and Mulder,
I find it strange that the respondents
have not filed affidavits by the two to confirm the allegations
attributed to them. It is
also not disclosed whether the said
representations were verbal or in writing and if in writing a copy
thereof is not provided.
The respondents merely make a vaguestatement
that they were advised that the company was viable. Even if one was
to accept that
the representations were made the respondents were
expected to apply their minds to the advise and not just merely
accept and act
on the representations especially when they knew of
the debt to Nissan and Toyota.
[18]
The income and cash flow figures that the
respondents are relying on to support the contention that the
businessman of the company
was viable at the time are not reliable
since they were mere projections intended for the tendering process.
The respondents were
supposed to have relied on the true position of
the company’s financial position at the relevant times. The
cashflow projections
are not and cannot be regarded as profits made
by the company. They may have been prepared by a team of experts in
the motor vehicle
hire business. However, this aspect does not
advance the respondents case since these expects worked on the basis
of the company
successfully obtaining financial backing and not a
company with a debt of among others,
±R83 million.
[19]
The respondents as directors of the company
could not have had a reasonable belief that the company was a viable
and profitable
company and that the dividends could be declared out
of the profits. Theydid not act reasonably and in good faith when the
dividends
were declared because they were already armedwith the
knowledge of the existence of debt at the time and theytried all they
could
to get the department to approve the cession.
[20]
It was contended on behalf of the
respondents that there is no basis in law obliging the respondents to
repay the dividends under
thesecircumstances. As authority for this
submission, counsel relied on the decision of
Lord Alverston
e,
CJ
in
Lucas and Other v Fitzgerald and Others
(1903) 20 TLR
16
(KB)
where it was held, inter alia, that “
a director
who receives money innocently cannot be compelled to refund it,
either under section 165 of the Companies Act, 1862,
which is similar
to section 10(1) of the Companies (Winding Up) Act, 1890, or as money
had and received, or on any other grounds.”
Although
counsel could not submit that the provisions of the 1890 legislation
applicable in that case are or were similar to the
provisions of our
1973 Companies Act as well as the articles of association, I still
find that case distinguishable from the facts
and the circumstances
of this case. Unlike in this case, the two directors
qua
shareholders who were absolved from refunding the dividends paid to
them, were not present at the meeting when the dividends were
declared. At a subsequent meeting when the minutes of the previous
meeting were confirmed they were present and before the confirmatory
resolution was taken they asked the chairman whether he had consulted
the managing director, and the chairman answered emphathically
in the
affirmative. The
Lord Chief Justice
held that:
“
these two defendants must
be taken to have believed that a proper investigation which justified
the payment had taken place, and
there was nothing to suggest to them
that a perfectly just expectation of profits had not been formed
.”
And that:
“
Upon the evidence I come to
the conclusion that there was nothing which [the defendants] knew or
ought to have known to suggest
to him that the directors had acted
otherwise than properly in declaring the dividend. The declaration of
interim dividends depends
much more upon estimates and opinions than
the declaration of a final dividend which is made upon the
information contained in
a formal balance-sheet
.”
Of great importance is that it was further held that
there had to be a profit available for the dividend and if not, the
interim
dividend was an
ultra vires
payment.
[21]
In
casu
, the respondents were at all
times aware that the company had created a huge liability by
obtaining motor vehicles from Nissan
and Toyota without any payment.
They, as it was expected of them, did all that was necessary to
obtain financial backing. They
tried all what they could to persuade
the department to approve the required cessions without success. They
were all present at
the meetings where dividends were declared. There
is no averment on their papers to suggest that they made the
necessary enquiries
to confirm that the declaration was justified.
There is therefore no suggestion that there was an attempt to apply
their minds
to the viability of the company and its declaration of
the dividends. Furthermore the CEO and Mulder who are said to have
made
the representations on the availability of the profits and
advised them to declare the dividends have not confirmed what is
attributed
to them. The fact that the CEO who is the third respondent
elected not to oppose the application and contradict the averments
made
by the applicant is significant.
[22]
The defence that there is a dispute of fact
is in my view more a matter of perception than genuine. It is common
cause that the
dividends were declared; that there were no profits at
the time; that there was a liability to
Nissan
and
Toyota
which was not being serviced; the directors signed and approved the
financial statements; they resolved to refund the dividends
paid and
the shareholders have not refunded the dividends despite the
resolution and the demand from the applicants.
[23]
There is no indication on the papers as to
the kind of evidence that would be tendered by the respondents if the
matter is referred
to trial to show that the respondents applied
their minds to the alleged representations made to them by Mulder and
Third respondent.
There is no explanation why this said evidence
cannot be placed before this Court at this stage. There is also no
mention or suggestion
that third respondent and Mulder will be called
as witnesses by the respondents. On the respondents’ own
version, they cannot
trace the records of the company as well as the
management accounts.
[24]
The only document that is available is the
income and case flow analysis projections which is in my view
irrelevant to the issue
at hand. The analysis itself indicate that a
profit of R632 527.26 would be made during the second year.
Furthermore a profit of
over a million rand would have been made only
after a period of three years according to the projections. However,
contrary to
the projections, the respondents declared a dividend of
over one million rand within five months of operation.
[25]
It was submitted that Fourth respondent
should not be ordered to repay the dividends he received because he
was no longer a director
of the company at the time of declaration of
the dividends,as he resigned as a director shortly after the company
was obtained.
That cannot be the case because s 90(4) of the
Companies Act
, 1973 creates a liability to the company by a
shareholder
who has received any payment contrary to the
provisions of subsection (2). It is also notable that the same
respondent was employed
by the company as a fleet manager playing an
active role in the activities of the company. He has also deposed to
the answering
affidavit on behalf of all the respondents who are
opposing the application thereby demonstrating his in depth knowledge
of the
activities of the company.
[26]
The third respondent is not opposing the
application despite being duly served. There is no reason why an
order should not be made
against him as well.
[27]
I am satisfied that in the circumstances of
this case the use of motion proceedings was appropriate. The
procedure adopted by the
applicants has expedited the proceedings and
done away with the unnecessary delays associated with action
proceedings. The respondents
had an opportunity to place their case
before this Court. They have done so without being prejudiced. There
are no disputes of
facts warranting a referred of this matter to
trial or oral evidence.
[28]
The late filing of the Replying Affidavit by
the applicants has been explained and the explanation is reasonable.
The respondents
have, in my view not been prejudiced by the short
delay. The delay should therefore be condoned.
[29]
There is no reason why the costs should not
follow the result. I am however not persuaded that this is a matter
where the respondents
should be ordered to pay the costs separately.
The application was instituted against all the respondents and those
who opposed
filed their papers jointly. The third respondent who
chose not to oppose the application should be absolved from paying
the costs
of an opposed application.
Order
In the result the following order is made:
The late filing of the replying affidavit is
condoned.
First respondent is ordered to pay to the applicant
an amount of R1, 417, 500.00.
Second respondent is ordered to pay to the
applicants an amount of R2, 205, 000,00.
Third respondent is ordered to pay to the applicants
an amount of R315, 000,00.
Fourth respondent is ordered to pay to the
applicants an amount of R1, 417, 500,00.
Fifth respondent is ordered to pay to the applicants
an amount of R945, 000,00.
Each respondent is ordered to pay interest on the
aforesaid amount at the rate of 15.5% a
temporemorae
.
Third respondents is to pay the costs on an
unopposed basis.
The First, Second, Fourth and Fifth respondents are
ordered to pay the costs of the application jointly and severally
the one
paying the others to be absolved.
___________________
TLALETSI, J
NORTHEN CAPE HIGH COURT, KIMBERLEY
Appearances:
For the applicants: Adv P Zietsman
Instructed by: Van De Wall &Vennote
For the respondents: Adv N Segal
Instructed by:
Cranco Karp &Vennote