Hughes v Ridley and Others (6550/08) [2009] ZAKZPHC 26; 2010 (1) SA 381 (KZP) (12 June 2009)

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[2009] ZAKZPHC 26
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Hughes v Ridley and Others (6550/08) [2009] ZAKZPHC 26; 2010 (1) SA 381 (KZP) (12 June 2009)

REPORTABLE
IN
THE HIGH COURT OF
KWAZULU-NATAL,
PIETERMARITZBURG
Case
No 6550/08
In
the matter between :
EDWARD
GRAHAM RICHARD HUGHES
Plaintiff/Respondent
and
MALCOLM
BERWYN RIDLEY
First
Defendant/First Excipient
JOHN
DORY TRUCKING (PTY)
LTD
Second
Defendant/Second Excipient
LYNNE
WENDY RIDLEY
Third
Defendant/Third Excipient
______________________________________________________________
Delivered :
12 June 2009
J U D G M E N T
______________________________________________________________
LEVINSOHN AJP
[1]
This
is a judgment on exception.
[2]
The
plaintiff instituted an action against the three defendants claiming
the following relief in his particulars of claim :-
“(a) First
defendant is directed to render an account of the partnership
transport business (carried on in Second Defendant or
without) and an
account of the gross and net asset value thereof as at 29
th
November 2009.
(b) First defendant is directed to
debate the account with Plaintiff alternatively conduct a debatement
thereof before this Honourable
Court,
(c) First
Defendant is directed to make payment of one half of the net asset
value of the said transport business as at 29
th
November 2007.
(d) Second and Third Defendants are
directed to allow full and complete access to Plaintiff and First
Defendant to the business
records of Second Defendant for the purpose
of rendering the account and debating it as aforesaid.
(e) Costs of suit against First
Defendant and, in the event of Second and Third Defendant defending
this action against all Defendants
jointly and severally.”
[3]
In
support of the relief claimed the plaintiff averred the following.
[4] During 2002 the
plaintiff and the first defendant concluded an oral alternatively a
tacit agreement. In terms of this agreement
they would operate a
transport business for profit in equal shares.
[5]
The
plaintiff’s principal contribution to the contemplated transport
business was a close corporation, John Dory Transport CC
of which the
plaintiff was the sole member.
[6]
This
CC was possessed of assets including goodwill contacts, equipment and
staff. The first defendant in turn would contribute
working capital
and finance to the contemplated business.
[7]
It
was a further term of the agreement that the plaintiff would be
employed by the business as its operations manager while the
first
defendant as its administration and financial manager.
[8]
It
was further agreed that the contemplated business which is now
alleged to be a “partnership” would be operated in the form
of a
limited liability company.
[9] Upon
dissolution of the partnership the plaintiff and first defendant
would be obliged to account to each other in “respect
of the
financial value of the partnership transport business, whether it was
in the form of a company or any other form”. Paragraph
7.7
alleges :
“Upon dissolution or termination of
the partnership Plaintiff and First Defendant would be obliged to
account to each other respectively
in respect of the financial value
of the partnership transport business whether it was in the form of a
company or any other form;”
[10]
The
plaintiff proceeds to aver that he performed his obligations in terms
of the agreement. The contemplated company was formed
and the
business was carried out in its name. The third defendant was issued
with a nominal shareholding.
[11]
The
plaintiff alleges that the first defendant acted in material breach
of the agreement by causing the company to dismiss him.
These
actions are alleged to constitute a repudiation of the agreement
alleged and it is said that the existing partnership terminated.
[1
2] The
plaintiff unsuccessfully sought to wind up the company. He now
claims that pursuant to the alleged partnership agreement
he is
entitled to claim a statement of account and debatement thereof from
the first defendant and also certain consequential relief
from the
other defendants.
[1
3] The
defendants now except to the particulars of claim on the footing that
these are bad in law and lack averments which are necessary
to
sustain the plaintiff’s cause of action.
[1
4] The
defendants contend principally that the allegations made by the
plaintiff proclaim that the contemplated business would be
a limited
liability company and it is clear from the particulars of claim that
the business is that of the second defendant. Thus
the alleged
contributions were to be made to the second defendant and not to any
partnership.
[1
5] There
are further exceptions taken which are headed “second and third
exceptions respectively”. In the view I take of this
matter it is
unnecessary to traverse those exceptions.
[16] In
order
to properly get to grips with the legal issues that arise herein it
is necessary to re-state trite principles of our law of
partnership
and companies. In the often quoted case of
Joubert
v Tarry
1914 – 1915 TPD the Court accepted Pothier’s formulation of the
essentialia
of partnership.
“Now, what
constitutes a partnership between persons is not always an easy
matter to determine. The definitions which have been
quoted to the
Court differ to some extent. But I think we are safe if we adopt the
essentials which have been laid down by Pothier
on Partnership, borne
out as these are by the definitions which he gives of partnership.
These essentials are fourfold. First,
that each of the partners
brings something into the partnership, or binds himself to bring
something into it, whether it be money,
or his labour or skill.
The second essential is that the business should be carried on for
the joint benefit of both parties. The third is, that the
object
should be to make profit. Finally, the contract between the parties
should be a legitimate contract.”
[17]
This
definition has been accepted by the Appellate Division in
Purdon
v Muller
1961(2)
SA 211 at 218 C – G per Ogilvie-Thompson JA (as he then was).
[18]
I
focus on the second and third requirements that a partnership must be
carried on for the joint benefit of both parties and the
object of
the partnership is to make a profit. Wessels J (as he then was) in
Joubert
’s
case
supra
said at 282
“We have here
two persons who undertake a joint business ……… they are
partners.”
[19]
Insofar
as the element of profit is concerned, that must be the immediate aim
of the parties to an agreement.
[20] What is immediately apparent on a
reading of the particulars of claim is that the allegations made
therein superficially disclose
that an agreement was concluded which
is consistent with that of a partnership. However, that conclusion
becomes somewhat bedevilled
by the averments that the “carrying on
of a business” element is to be through the medium of a limited
company.
[21] Now once again
trite principles of the law come into play./ In the very well known
case of
Dadoo,
Ltd and Others v Krugersdorp Municipal Council
1920
AD 530
at 550 Innes CJ said the following : -
“A registered
company is a legal
persona
distinct
from the members who compose it. In the words of LORD MACNAGHTEN
(
Salomon
v Salomons & Co.,
1897,
A.C., at p 51), ‘the company is at law a different person
altogether from the subscribers to its memorandum; and though
it may
be that, after incorporation, the business is precisely the same as
it was before, and the same persons are managers, and
the same hands
receive the profits, the company is not in law the agent of the
subscribers or a trustee for them’. That result
follows from the
separate legal existence with which such corporations are by statute
endowed, and the principle has been accepted
in our practice. Nor
is the position affected by the circumstance that a controlling
interest in the concern may be held by a
single member. This
conception of the existence of a company as a separate entity
distinct from its shareholders is no merely
artificial and technical
thing. It is a matter of substance; property vested in the company
is not, and cannot be, regarded
as vested in all or any of its
members.”
[22] The
fundamental principle that the company is a separate corporate entity
has important consequences. The company’s assets
and liabilities
are separate
from
that of its members. If the company is liquidated its creditors can
only seek to satisfy their claims out of the assets of
the company.
They cannot look to shareholders to make good. However, on the
other hand, if the business was being carried on
as a partnership the
situation is entirely different. The creditors could satisfy their
claims not only from the assets of the
partnership in the first
instance but also pursue the individual partners jointly and
severally. They could sequestrate not only
the partnership but the
individual partners as well. Another important difference is that
the profits made by the company do
not accrue to the shareholders but
rather to the company itself. Members’ rights to receive a share
of the profits as dividends
are determined by the articles of
association of the company. Mere membership of the company does not
qualify one to act on behalf
of the company. It is the articles of
association that appoints the representatives of the company. The
latter can bind the
company. This in contrast to a partnership
where an individual partner can bind the partnership if he or she is
acting within
the scope of such partnership business.
[23]
If
two persons agree that they wish to form a company, that each is to
become a shareholder, each is to make a separate specific

contribution to the company and the company is to carry on a
business, that agreement is in my view not consistent with a
partnership.
The formation of a limited liability company
presupposes an agreement by the individuals concerned to submit to
the articles
of association of such limited liability company. If
they so wish, they may conclude a shareholders’ agreement which
will regulate
their relationship
inter
se
.
Thus, viewing the above definition of partnership and also the
specific principles of company law, it is not two individuals

carrying on a business jointly and for profit. What we find is
rather a company which is wholly separate from the individuals
who
operate it which carries on the business, owns the assets, incurs
liabilities to its creditors, makes profits or losses and
is able to
declare such profits as dividends to be distributed to its
shareholders. Thus, it is company law which regulates and

determines the respective rights and obligations.
[24] In my view
this is what occurred herein, given a simple interpretation of the
particulars of claim. Applicant and first respondent
agreed that
they would form a company. The company would carry on the transport
business. It was obviously contemplated that
from the moment of its
formation shares would be issued. The applicant and the first
respondent would then become members of
the company and their rights
and obligations
inter
se
would
be submerged within the company structure.
[25] It would
follow therefore that the rights and obligations of shareholders
inter
se
would principally be governed by the articles of association or a
shareholders’ agreement where such has been concluded. Any
breach
would give rise to remedies in the company law context. In this
regard the remedy of winding up on the grounds of just
and equitable
come to mind. That is a remedy which lies in the hands of a member
of the company who, for example, alleges a deadlock
or loss of
probity and the like. The leading cases, both in South Africa and
England, proclaim clearly that in considering whether
to wind up a
private company on the basis of just and equitable the Court would be
entitled in an appropriate case to apply by
analogy principles of
partnership. In other words, the Court would recognise that the
individual members of the company are possessed
of rights which fall
outside the company structure. Equity dictates that these rights
and obligations be accorded recognition.
Lord Wilberforce in his
speech in
Ebrahimi
v Westbourne Galleries and Others
[1973]
AC 360
set forth this principle very clearly at p 379 to 380 and I
quote extensively from the speech : -
“
My
Lords, in my opinion these authorities represent a sound and rational
development of the law which should be endorsed. The
foundation of
it all lies in the words 'just and equitable' and, if there is any
respect in which some of the cases may be open
to criticism, it is
that the courts may sometimes have been too timorous in giving them
full force. The words are a recognition
of the fact that a limited
company is more than a mere legal entity, with a personality in law
of its own: that there is room in
company law for recognition of the
fact that behind it, or amongst it, there are individuals, with
rights, expectations and obligations
inter
se
which are not necessarily submerged in the company structure. That
structure is defined by the Companies Act and by the articles
of
association by which shareholders agree to be bound. In most
companies and in most contexts, this definition is sufficient
and
exhaustive, equally so whether the company is large or small. The
'just and equitable' provision does not, as the respondents
suggest,
entitle one party to disregard the obligation he assumes by entering
a company, nor the court to dispense him from it.
It does, as
equity always does, enable the court to subject the exercise of legal
rights to equitable considerations; considerations,
that is, of a
personal character arising between one individual and another, which
may make it unjust, or inequitable, to insist
on legal rights, or to
exercise them in a particular way.
It
would be impossible, and wholly undesirable, to define the
circumstances in which these considerations may arise.
Certainly
the fact that a company is a small one, or a private company, is not
enough. There are very many of these where the
association is a
purely commercial one, of which it can safely be said that the basis
of association is adequately and exhaustively
laid down in the
articles. The superimposition of equitable considerations requires
something more
,
which
typically
may include one, or probably more, of the following elements: (i) an
association formed or continued on the basis of a
personal
relationship, involving mutual confidence - this element will often
be found where a pre-existing partnership has been
converted into a
limited company; (ii) an agreement, or understanding, that all, or
some (for there may be 'sleeping' members),
of the shareholders shall
participate in the conduct of the business; (iii) restriction upon
the transfer of the members' interest
in the company - so that if
confidence is lost, or one member is removed from management, he
cannot take out his stake and go elsewhere.
It is these, and
analogous, factors which may bring into play the just and equitable
clause, and they do so directly, through
the force of the words
themselves. To refer, as so many of the cases do, to
'quasi-partnerships' or ' in substance partnerships'
may be
convenient but may also be confusing. It may be convenient because
it is the law of partnership which has developed the
conceptions of
probity, good faith and mutual confidence, and the remedies where
these are absent, which become relevant once such
factors as I have
mentioned are found to exist: the words 'just and equitable' sum
these up in the law of partnership itself.
And in many, but not
necessarily all, cases there has been a pre-existing partnership the
obligations of which it is reasonable
to suppose continue to underlie
the new company structure. But the expressions may be confusing if
they obscure, or deny, the
fact that the parties (possibly former
partners) are now co-members in a company, who have accepted, in law,
new obligations.
A
company, however small, however domestic, is a company not a
partnership or even a quasi-partnership and it is through the just

and equitable clause that obligations, common to partnership
relations, may come in.”
(Emphasis added)
[26]
The
Westbourne
Galleries
’
case has been followed by our Courts.
See
Hulett
and Others v Hulett
[1992] ZASCA 111
;
1992
(4) SA 291
SCA at
307 H
Apco
Africa (Pty) Ltd and Another v Apco Worldwide Inc
[2008] ZASCA 64
;
2008 (5) SA 615
SCA at 623, paragraph [17].
[27]
Counsel
for the plaintiff in his written heads of argument quoted the
following passage from Cilliers & Benade,
Corporate
Law
,
Third Edition, at page 14 : -
“In the event of an underlying
partnership intention between the parties, that intention may be
recognised by the courts even
though the parties formed accompany to
carry their intention into effect.”
[28] He
went on to submit that “this principle has been recognised by the
Supreme Court of Appeal (Appellate Division)” in two
cases, namely
Bellairs
v Hodnet and Another
1978
(1) SA 1109
(AD) at 1130 and the
Hulett
case,
supra.
In my opinion counsel has misconstrued this case law.
Bellairs
case
was decided on its own particular facts. The Court applied
partnership principles by analogy to the relationship of the two

individuals concerned, namely Bellairs and Hodnet, as well as to the
company in question. The Court found that the fact that
they
conducted their business through a company did not in any way detract
from an existing fiduciary duty that Bellairs owed to
his
co-shareholder. In the
Hulett
,
case,
supra
,
Hoexter JA recognised that applying the
Westbourne
Galleries
case,
supra,
that
principles of partnership law applied to the respective shareholders’
relationship.
[29] In
my view the statement made by the learned authors quoted by counsel
should not be understood to go any further than emphasising
as Lord
Wilberforce did in
Westbourne
,
that because of particular background circumstances the rights and
obligations of the individual members of the company can be

determined by principles of law analogous to partnership. For
example, this may apply in a situation where one member seeks to
wind
up the company on the basis of just and equitable. The Court will
then examine all the circumstances particularly having
regard to the
background relationship of the individual members and it may then
apply equitable principles akin to partnership.
[30] It
follows therefore that I have concluded that on a proper construction
of the particulars of claim the plaintiff has not
alleged a cause of
action which can give rise to the relief that he claims. More
particularly he has not succeeded in alleging
that a partnership
agreement properly so-called came into being. The allegations as
indicated above are consistent with an intention
to form a company
and that company was to carry on business as an independent and
separate entity.
[31] The following order is issued : -
(a)
The
first exception is upheld.
(b) The plaintiff is given leave to
amend its particulars of claim within ten (10) days from the date of
this order.
(c) The
plaintiff is directed to pay the costs of the exception, such costs
to include the costs consequent upon the employment
of two counsel.
DATE O
F
JUDGMENT :
12JUNE
2009
DATE OF HEARING :
20
FEBRUARY 2009
COUNSEL FOR APPELLANT :
MR
B. ACKER SC
with him
MR M. J. D. SMITHERS
INSTRUCTED BY :
TOMLINSON
MNGUNI JAMES,
PIETERMARITZBURG
COUNSEL FOR RESPONDENT :
A.
J. DICKSON SC
INSTRUCTED BY :
MACRITCHIE
& BUCK ATTORNEYS, DURBAN
C/O AUSTEN SMITH,
PIETERMARITZBURG