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2012
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[2012] ZAKZDHC 48
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Roestorf NO and Another v Johns (12036/07) [2012] ZAKZDHC 48 (28 August 2012)
In
the KwaZulu-Natal High Court, Durban
Republic
of South Africa
Case No : 12036/07
In
the matter between :
Jan
J Roestorf NO
.........................................................................................
First
Plaintiff
David
G Walshe NO
.................................................................................
Second
Plaintiff
and
Katherine
Natalie Johns
...................................................................................
Defendant
Judgment
Lopes J
[1] The plaintiffs in this matter sued
the defendant for payment of the sum of R2 742 521,35 being damages
sustained by the plaintiffs
when their shares and loan accounts in a
company in which they were shareholders together with the defendant
were destroyed. I
heard the evidence of five witnesses and the
plaintiff thereafter closed its case. The defendant now seeks
absolution from the
instance.
[2] The history of the parties insofar
as it is relevant may be described as follows :
(a)
Jan J Roestorf
and David G Walshe have been business partners for many years. They
conduct their business ventures via the vehicle
of two family trusts
one of which is the Jan Roestorf Formax Trust, and the other is the
David Walshe Formax Trust. Mr Roestorf
and Mr Walshe are each a
trustee in both trusts. The two trusts are the plaintiffs in this
action.
(b) As a result of Mr Rostorf’s
interest in motor cycles, during 2002 the two family trusts became
shareholders in a close
corporation which later became Two Wheel
Investments (Pty) Limited which traded as Tommy Johns Motorcycles
(‘Tommy Johns
Motorcycles’) in Old Main Road in Pinetown.
Tommy Johns had acquired significant status as a motor cyclist, and
Mr Roestorf
paid frequent visits to Tommy Johns Motorcycles and
discussed the conduct of the business with Tommy Johns. Mr Walshe, on
the other
hand, was very much a sleeping partner who had no knowledge
of, nor interest in, motor cycles at the time that the family trusts
became shareholders.
(c) Matters continued until the
unfortunate and untimely death of Tommy Johns in January 2004 in a
motor cycling accident. Tommy
Johns Motorcycles was then left in the
uncomfortable position that it had no leader and no dealer principal
for the BMW motorcycles
which it then traded.
(d) Mr Roestorf then agreed to involve
the daughter of Tommy Johns in the business. She is Katherine Natalie
Johns, the defendant
in this action. He saw this as a way of
preserving the name and legacy of Tommy Johns, and of giving the
defendant an opportunity
to grow her business acumen and fulfil the
role of dealer principal and the position of someone who was on hand
to run the business.
(e) Negotiations
were conducted and on the 2
nd
April of 2004 the defendant signed a contract of
employment with Tommy Johns Motorcycles. Things went well for
approximately the
first 18 months, whereafter the business went into
such a steep decline that it was eventually closed and liquidated in
2007. The
plaintiffs lay the blame for the failure of the business at
the feet of the defendant, and now seek to claim from her the sum of
R2 742 521,35 being damages sustained by the trusts for the loss of
their shares and loan accounts in the company consequent upon
its
liquidation.
[3] In the particulars of claim it is
alleged that the defendant, as an agent of the company, acted mala
fide, alternatively fraudulently,
alternatively negligently,
resulting in the cancellation of the dealership arrangements
concluded with Kawasaki and BMW Motorcycles.
As a result of the
cancellation of those dealerships Tommy Johns Motorcycles ceased
business on the 15
th
April 2007. The shares of the
plaintiffs have no residual commercial value and it is common cause
that the company was liquidated
after this action was instituted.
[4] The plaintiffs called five
witnesses. For the purpose of this judgment it is only necessary for
me to summarise their evidence
in the briefest possible terms as
follows :
Christopher Speight was the managing
director of KMSA Distributors (Pty) Ltd, the importer and
distributor of Kawasaki motor cycles
throughout South Africa. That
company concluded a dealership agreement with Tommy Johns
Motorcycles which it subsequently cancelled,
because of the conduct
of the defendant. Her conduct was described by Mr Speight as being
fraudulent and leaving him with no
other option than to cancel the
contract as every vestige of trust was gone.
Lachlan Harris was the general
manager of BMW Motorcycles, a division of BMW SA, the importer and
distributor of BMW motorcycles
in South Africa. BMW Motorcycles had
similarly concluded a distributorship agreement with Tommy Johns
Motorcycles. Mr Harris
stated that the agreement was cancelled by
BMW, also because of the conduct of the defendant, as a result of
what was described
as a breach by her of a relationship based on
trust.
Deon Botha was a chartered accountant
and director of Anderson Rocussen van der Bijl Inc. He testified
that the value of the plaintiffs’
shareholdings in Tommy Johns
Motorcycles had been reduced to zero from their original value of
R350 000, and that their loan
accounts had been rendered nugatory by
the close of the business.
Mr Roestorf gave evidence as to his
relationship with Tommy Johns leading up to his involvement in the
business. He and Mr Walshe
became shareholders in Tommy Johns
Motorcycles via the vehicle of their family trusts. He testified to
the breakdown of the relationships
which existed between Tommy Johns
Motorcycles, KMSA Distributors (Pty) Ltd and BMW SA. He also spoke
to his efforts to attempt
to save the business.
Mr Walshe gave evidence as to how he
had eventually become involved in trying to save the business
because Mr Roestorf was in
Australia and unable to be present at the
business in order to attempt to turn things around.
[5] Mr
Harrison
who appears for
the defendant now applies for absolution from the instance. He does
so on two bases :
that the rule in
Foss v Harbottle
[1843] EngR 478
;
(1843)
2 Hare 461
(67 ER 189)
dictates that the correct person to have sued
for the loss of the plaintiffs’ shares and loan accounts was
the company
itself and not the shareholders; and
that on the facts there is no
evidence on which a court could or might find in favour of the
plaintiffs.
[6] The rule in
Foss v Harbottle
was summarised in
Prudential Assurance Co Ltd v Newman Industries
Ltd and Others (No 2)
[1982] CH 204
at 210 F – 211 A as
follows :
‘
The classic
definition of the rule in
Foss
v Harbottle
is
stated in the judgment of Jenkins L.J. in
Edwards
v Halliwell
[1950]
2 All E.R. 1064
as follows. (1) The proper plaintiff in an action in
respect of a wrong alleged to be done to a corporation is, prima
facie, the
corporation. (2) Where the alleged wrong is a transaction
which might be made binding on the corporation and on all its members
by a simple majority of the members, no individual member of the
corporation is allowed to maintain an action in respect of that
matter because, if the majority confirms the transaction, cadit
quaestio; or, if the majority challenges the transaction, there
is no
valid reason why the company should not sue. (3)There is no room for
the operation of the rule if the alleged wrong is ultra
vires the
corporation, because the majority of members cannot confirm the
transaction. (4) There is also no room for the operation
of the rule
if the transaction complained of could be validly done or sanctioned
only by a special resolution or the like, because
a simple majority
cannot confirm a transaction which requires the concurrence of a
greater majority. (5) There is an exception
to the rule where what
has been done amounts to fraud and the wrongdoers are themselves in
control of the company. In this case
the rule is relaxed in favour of
the aggrieved minority, who are allowed to bring a minority
shareholders’ action on behalf
of themselves and all others.
The reason for this is that, if they were denied that right, their
grievance could never reach the
court because the wrongdoers
themselves, being in control, would not allow the company to sue.’
[7] The rule was
considered in a number of South African cases. In
McLelland
v Hulett and Others
1992 (1) SA 456
(D)
Booysen J considered the application of the rule in circumstances
where the plaintiff, a 10% shareholder, sued for a loss suffered
by
the company as a result of the failure of the majority shareholders
and directors to conclude a particular transaction. The
plaintiff’s
loss was easily ascertainable as a percentage of the loss to the
company as a result of the failure to conclude
the transaction.
[8] Dealing with
the rule in
Foss v Harbottle
,
Booysen J stated at page 466D :
‘
Whilst
it is accepted that, generally, a shareholder’s rights are
defined with respect to the company which is interposed
as a barrier
between the shareholder and the commerce in which the company is
involved, this view is too narrow in the present
context. A reliance
on this “technical” status of a shareholder ought not to
be allowed as a matter of policy, whether
one is examining the
enquiry as to (a) the existence of a legal duty in a delictual claim
such as this; or (b) the applicability
of the rule in
Foss
v Harbottle
(supra).’
[9] At page 467B-H Booysen J continued
:
‘
The
rule in
Foss
v Harbottle
is
not an absolute rule ... Whilst it is clear that the primary rule
that a company must sue for a loss such as that in question
in this
case, and not the shareholder, is a logical reflection of the concept
of limited liability, in practice the real reason
why the rule must
exist is linked more fundamentally to the separate existence of the
company, with the result that, if the shareholder
is allowed to sue,
any wrongdoer will be subject to “double jeopardy”.
Where, as in the present
case, that risk is non-existent and a shareholder is left with a
diminished patrimony, the continued application
of the rule would
amount to an unwarranted and technical obstruction to the course of
justice. There is no basis for saying that
the rule in
Foss
v Harbottle
has been received into our law
without the exceptions together with which it is framed. Having
regard to the peculiar facts in this
case, I take the view that that
aspect of the rule which requires the relief to be sought for the
company does not apply.’
[10]
McLelland
is
distinguishable from the present matter because :
in
McLelland
a 10% minority
shareholder was suing the defendants who held the majority of the
shares between them, and they could effectively
therefore have
blocked any attempt by McLelland to persuade the company to
institute an action to recover its losses;
the action in
McLelland
was
apparently instituted well after the liquidation of the company, as
the resolution to wind-up the company was dated the 20
th
April 1988, and the case number according to the case register is
3761/89.
[11] In the present matter the facts
are somewhat different. It is the majority shareholders, holding 75%
of the shares who wish
to recover the loss in the value of their
shares and their loan accounts from the 25% minority shareholder.
There is no reason
why they could not have passed a resolution
authorising the action on behalf of the company to recover the losses
sustained by
the company as a result of the actions of the defendant.
[12] In addition to the aforegoing, it
is common cause that the action was instituted before the liquidation
of the company. In
their evidence both Mr Roestorf and Mr Walshe
confirmed that they have had no contact with the liquidators of the
company. What
is clear is that no attempt was made by them to pursue
any avenue on behalf of the company against the defendant.
[13] With regard to the possibility of
‘double jeopardy’ it was submitted by Mr
Shepstone
who appeared on behalf of the plaintiffs that, given the lapse of
time, there was no possibility of the institution of any action
against the defendant by the liquidators. But with no information
before me with regard to the conduct of the liquidators or their
intentions to recover any amount from the defendant, a decision one
way or the other would be speculation on my part. It was incumbent
on
the plaintiffs to demonstrate that they are the proper plaintiffs in
this action. They have not led any evidence to deal with
the concept
of ‘double jeopardy’.
[14] I am also alive to the fact that
there are a finite number of possible plaintiffs in this action and
that the relationship
between the shareholders may be viewed as one
akin to a partnership. All that, however, does not detract from the
fact that the
bringing of the action by the plaintiffs was in breach
of the rule in
Foss v Harbottle
.
[15] Mr
Shepstone
submitted the
following :
The rule in
Foss v Harbottle
relates generally to derivative actions and this is not a derivative
action. That is so, but to rule solely on that basis would
be to
ignore the principal proposition in the rule that where a wrong is
done to a corporation, prima facie the corporation is
the proper
plaintiff in any action.
That the rule in
Foss v Harbottle
is not an absolute rule. In this regard Mr
Shepstone
relied
on the dicta of Booysen J in
McLelland
at 467 H that the
continued application of the rule, where a shareholder is left with
a diminished patrimony, would amount to
an unwarranted and technical
obstruction to the course of justice. That is not the case here
because the plaintiffs had every
opportunity to authorise the
company to institute an action. They could also have liaised with
the liquidators of the company
to ensure that, for example, an
action in terms of s 424 of the Companies Act, 1973 was instituted.
They chose not to do so but
instead instituted this action even
prior to the liquidation of the company.
[16] I accept without question that
the plaintiffs had a financial interest in the business of the
company. But the fact that their
shareholding was affected by the
conduct of the defendant does not give them a right of action per se
against the defendant. In
my view they have not demonstrated that
this action falls outside the rule, or within any of the exceptions
envisaged in
Foss v Harbottle.
[17] The application for absolution
must therefore prevail.
[18] Aside from the rule in
Foss v
Harbottle
, there would appear to be a further reason why it is
wrong to allow an action to be brought by the plaintiffs. The reason
is given
by Richard R Lee (1957) 35 North Carolina LR 279 – 284
:
‘
The
real objection to permitting a shareholder to recover directly for
his proportionate share of the damage inflicted upon the
corporation
of which he is a member is not that the injury was done to the
corporate entity rather than to him, but that the result
of such
recovery is a return of corporation assets to shareholders without
first satisfying corporate creditors.’
[19] Without any evidence with regard
to the liquidation of Tommy Johns Motorcycles, it is impossible to
say whether or not all
creditors were paid, or whether or not there
was a dividend remaining to be paid to the shareholders, a factor
which could have
affected the plaintiff’s quantum of damages.
If the action lies in the first instance in the hands of the company,
then if
all the creditors were not paid, any amount recovered by the
company could have gone to the creditors who suffered a shortfall.
To
allow the present action would be to circumvent the liquidation
process in its entirety and award a dividend to shareholders
which,
on the full facts of the matter had they been known to me, may not
have been warranted.
[20] With regard to the question of
costs, there is no reason why the costs should not follow the result.
I would, in any event
and in the exercise of my discretion to award
of costs, order the plaintiff to pay the defendant’s costs.
[21] I accordingly make the following
order :
(a) The defendant is absolved from the
instance.
(b) The plaintiffs are to pay the
defendant’s costs of suit.
Date of hearing : 18
th
June
2012
Date of judgment : 28
th
June 2012
Counsel for the plaintiffs : Mr
Shepstone (instructed by Shepstone & Wylie)
Counsel for the defendant : G Harrison
(instructed by Thorpe & Hands Inc)