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[2007] ZAWCHC 102
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Botha v George Switchboards CC and Another (11190/06) [2007] ZAWCHC 102 (23 February 2007)
IN THE HIGH COURT OF
SOUTH AFRICA
(CAPE OF GOOD HOPE
PROVINCIAL DIVISION)
CASE NO: 11190/06
DATE: 23 FEBRUARY 2007
In the matter between:
THOMAS FREDERICK
BOTHA
...........................................................................................
Applicant
And
GEORGE SWITCHBOARDS
CC
.......................................................................................
Respondent
And
JOHANNES
STEYL
...................................................................................................
Intervening
Party
JUDGMENT
DELIVERED THIS 23RD DAY OF FEBRUARY
2007
RILEY, AJ:
1. The applicant, Thomas Frederick
Botha, one of two members of the respondent, George Switchboards CC
(the intervening party being
the other) launched an application for
the liquidation of the respondent on 10th October 2006 which was
heard on 26th October 2006.
2. The intervening party lodged an
application to intervene, which was granted on 26th October 2006. In
terms of the order of this
court dated 26th October 2006 the
application was postponed to 22 November 2006. The intervening party
was given leave to file
an opposing affidavit on/before 13 November
2006 and
3. Instead of filing opposing papers to
the liquidation application, the intervening party launched a
counter-application for an
order that:
3.1 the applicant shall cease to be a
member of the respondent from the date of this order; and
3.2 the applicant is ordered to pay the
cost of this application as well as the cost of the liquidation
application.
4. The counter-application was brought
in terms of section 36(1) of the Close Corporations Act, No 69 of
1984 (hereinafter referred
to as “the Act”). The
applicant filed an answering affidavit to the counter-application
raising two points in limine,
namely that the intervening party
failed:
4.1 to provide any or sufficient
information to enable the court to exercise its discretion to make an
order as contemplated in
section 36(2) of the Act, which relates to
the reasonable purchase price in respect of the applicant’s
members interest;
and
4.2 to show that he would be in a
position to pay any purchase price that the court may order to be
paid in consideration for the
applicant’s members interest.
5. The intervening party filed a
replying affidavit the day before the hearing on 22 November 2006, on
which day, by agreement between
applicant and the intervening party,
the matter was postponed to the semi-urgent roll for hearing on 14
February 2007.
6. Even though provision was made for
the filing of affidavits opposing the liquidation application by
Friday 19 January 2007, no
further papers have been filed.
7. At the commencement of the
proceedings, Mr DC Joubert, counsel for the applicant, and Mr DJ
Coetsee, counsel for the intervening
party, advised me that both the
applicant and the intervening party were in agreement that should the
intervening party be unsuccessful
in obtaining the order sought in
terms of section 36(1) that I should make an order for the final
liquidation of the respondent.
8. Mr Joubert brought two separate
applications for the striking out of certain evidence from the
founding affidavit in the counter-application
deposed to by the
intervening party and in respect of the replying affidavit in the
counter¬application deposed to by the intervening
party.
9. For the reasons mentioned for the
decision I have come to it is not necessary to deal with the
applications to strike out separately.
10. The application for the liquidation
of the respondent and the counter-application by the intervening
party are set against the
following background.
11. The applicant and the intervening
party became business partners in 1995 when they purchased the
respondent’s enterprise.
They both hold 50% members interest in
the respondent.
12. The respondent is a manufacturer of
electrical goods and also used to trade as a wholesaler of electrical
goods and electrical
products. As business partners and co-members of
the respondent, they jointly managed the daily affairs of respondent.
Applicant’s
duties related to marketing and the wholesale
division, whilst the intervening party managed the production
division, client relations
and the financial aspects of respondent.
13. Over a period of time certain
changes took place within respondent and applicant became more
involved in the production division
and with the employees of the
respondent’s factory. The intervening party remained in charge
of finances, client relations
and contracts, quality control and
productions responsibilities. It is not disputed that this was the
intervening party’s
forte and that he did well in the area
under his control.
14. Over the course of the period that
the applicant and the intervening party operated the respondent, it
traded successfully and
there has been good profits and growth. It is
not disputed that respondent will continue to grow. At the time of
the hearing of
this matter it was argued that the annual turnover of
respondent was R22 million.
15. It is common cause that over a
period of time the relationship between applicant and the intervening
party deteriorated for
a variety of reasons and eventually culminated
in a joint decision in November 2005 that they should terminate their
business relationship.
It is further common cause that by November
2005 the parties were unable to cooperate constructively in the
running of the business.
The parties attempted to resolve the
termination of their working relationship without having to approach
the court for an order
for the winding up of the respondent, but to
no avail. The main dispute between the parties is the value to be
attached to applicant’s
50% members interest.
16. Almost a year has however gone by
and the parties have failed to reach an agreement in respect of the
value to be attached to
the 50% members interest applicant holds in
respondent. Mr Joubert. on behalf of the applicant, has contended
that his client has
done everything practically possible to resolve
the matter, but was forced to approach the court for the winding up
of the respondent
on the basis that it would be just and equitable to
do so.
17.
Section 68(4)
of the
Close
Corporations Act, No 69 of 1984
, provides that:
“A corporation may be wound up by
a court if -...
(d) it appears on application to the
court that it is just and equitable that the corporation be wound up
...”
18. The intervening party admits that a
deadlock exists between himself and the applicant. In considering
whether or not it is just
and equitable that a close corporation is
wound up a court is conferred with wide discretionary powers which
must of course be
exercised judicially taking into account all the
relevant circumstances. (See Meskin Henochsberg on The Companies Act
at p701).
19. I am mindful of the fact that it
would not be just and equitable to wind up a commercially solvent
company at the instance of
a member who is also a creditor as in the
present instance merely because of the existence of a deadlock
between the members of
a corporation. I accept that the existence of
a deadlock between members is but one of the factors to be taken into
account in
the light of all the circumstances.
20. With reference to the present
matter, it is important to have regard to the reported cases dealing
with the concept “deadlock”.
The principles regarding
winding up of a “domestic” company, i.e. a company with a
small membership where there is
deadlock as a result of a collapsed
relationship, is equally applicable to a close corporation. In Moosa
NO v Maviee Bhawan (Ptv)
Ltd & Another 1967(3) SA 131 (T) at
137-138, Trollip. J (as he then was) stated that:
“The ‘deadlock’
principle is founded on the analogy of partnership and is strictly
confined to those small domestic
companies in which, because of some
arrangement express tacit or implied there exists between the members
in regard to the company’s
affairs a particular relationship of
confidence and trust similar to that existing between partners in
regard to the partnership
business. Usually that relationship is such
that it requires the members to act reasonably and honestly towards
one another and
with friendly cooperation in running of the company’s
affairs. If by conduct which is either wrongful or not as
contemplated
by the arrangement one or more of the members destroy
that relationship, the other member or members are entitled to claim
that
it is just and equitable that the company should be wound up in
the same way as, if they were partners they could claim dissolution
of the partnership.”
The above approach was followed by our
courts in De Franca v Exhaust Pro CC {De Franca intervening) 1997(3)
SA 878 (SECLD) at 897A-B;
Geanev v Portion 117 Kalkheuwel Properties
CC & Others 1998(1) SA622 (T) 629I- 630F and Kanakia v Ritzshelf
1004 CC t/a Passage
to India 2003(2) SA 39 (D&CLD) at 46C-F and
54D-H.
21. In the present case the
“deadlock”\s illustrated by constant quarrelling between
the two members to the extent that
there is reference to physical
altercations, the members are not on speaking terms and essentially a
total collapse of the relationship
between the parties exist.
22. Mr Coetsee. who appeared on behalf
of the intervening party, contended that even if I found that a
deadlock exists between the
parties that I was not obliged to make an
order for the liquidation of the respondent.
23. Before dealing with the
intervening-party’s counter-application, it is necessary to
look at the law relating to section
36 of the Act relating to the
cessation of membership of a member of a close corporation by order
of court:
“36. Cessation of membership by
order of Court. -
(1) On application by any member of a
corporation a court may on any of the following grounds order that
any member shall cease
to be a member of the corporation.
(a) Subject to the provisions of the
association agreement (if any), that the member is permanently
incapable, because of unsound
mind or any other reason, of performing
his or her part in the carrying on of the business of the
corporation;
(b) that the member has been guilty of
such conduct as taking into account the nature of the corporation’s
business, is likely
to have a prejudicial effect on the carrying on
of the business;
(c) that the member so conducts his or
her in matters relating to the corporation’s business that it
is not reasonably practicable
for the other member or members to
carry on the business of the corporation with him or her; or
(d) that circumstances have arisen
which render it just and equitable that such member should cease to
be a member of the corporation:
Provided that such application to a
court on any ground mentioned in paragraph (a) or (d) may also be
made by a member in respect
of whom the order shall apply.
(2) A court granting an order in terms
of subsection (1) may make such further orders as it deems fit in
regard to -
(a) the acquisition of the members’
interest concerned by the corporation or by members other than the
member concerned; or
(b) the amounts (if any) to be paid in
respect of the member’ interest concerned or the claims against
the corporation of
that member, the manner and times of such payments
and the persons to whom they shall be made; or
(c) any other matter regarding the
cessation of membership which the court deems fit.”
24. In his discussion on section 36(1)
of the Act, Meskin Henochsberg on the
Close Corporations Act. Issue
3, com 82, states that:
“A corporation is essentially a
partnership between the members which as such (and unlike a
partnership at common law) is
a separate legal persona. The
legislature’s recognition of this fact is the reason for the
enactment of these provisions.
Its purpose is to empower the court to
dissolve the association between the members without winding up the
corporation on the ground
that such would be just and equitable, as
envisaged by
S. 68(d)
, in circumstances which, in the context of a
partnership, would warrant its dissolution.”
25. In Kanakia v Ritzshelf 1004 CC t/a
Passage to India, supra at 48E Jali, J stated the following as far as
section 36 of the Act
is concerned:
“The provisions of section 36 may
be invoked by a member of the close corporation. A member who makes
the application under
section 36( 1) has the onus of proving that he
is entitled to the relief which he seeks and it is incumbent upon him
to place before
the court the necessary evidence not only to enable
the court to decide whether it should grant an order in terms of
section 36(1)(a),
(b), (c) or (d), but also to make any further order
envisaged in section 36(2). (See Geanv v Portion 117 Kalkheuwel
Properties
cc & Others, supra, at631H- 632A).
It is apparent that the enactment of
the aforesaid provisions was to empower the court to dissolve the
association between members
without winding up the corporation on the
grounds that such would be just and equitable as envisaged by section
68(d) in circumstances
which, in the context of a partnership, would
warrant its dissolution. (See Meskin Henochsberg on
Close
Corporations Act. Voi
3 (para 36.1)”.
26. Similar sentiments are expressed by
Nepgen, J in Pe Franca v Exhaust Pro CC (De Franca Intervening).
supra, at 896, where he
stated:
“in fact it is in my view that it
is highly probable that by enacting section 36 of the Act one of the
purposes of the legislature
was to create a mechanism whereby the
inevitability of winding up can be avoided where a ‘deadlock’
situation exist
between members. Even if that was not the specific
intention of the legislature section 36 of the Act clearly has such
result.
A member who makes the application envisaged by section 36(1)
bears the onus of proving that he is entitled to the relief which
he
seeks and it is incumbent on him to place before the court the
necessary evidence not only to enable the court to decide whether
it
should grant an order in terms of section 36(1)(a), (b), (c) or (d),
but also to make any further order envisaged by section
36(2) ...
Similarly a member who opposes an application by another member for
the winding up of the corporation on the grounds
that a remedy other
than winding up is available to the application or that the applicant
is acting unreasonably bears a similar
onus of proof to that
envisaged by section 347(2) of the Companies Act. The applicant
should also set out by way of notice of motion
or other appropriate
manner the precise relief sought.”
(1) (See Meskin Henochsberg on The
Close Corporation Act. Vol 3, Issue 2, com 83).
27. Mr Coetsee. however, argued that
the intervening party had made out a case for an order in terms of
section 36(1) of the Act
on the basis that:
27.1 the applicant had absconded from
the business; and
27.2 that even though applicant had
absconded respondent was making a profit;
27.3 respondent provided employment for
41 people; and
27.4 the intervening party had been
operating the business on his own for six months.
28. He argued further that the
intervening party need not establish conduct of the nature referred
to in section 49 of the Act,
namely conduct affecting him, but rather
that applicant’s conduct is affecting the business of the
respondent.
29. Mr Coetsee argued that applicant’s
conduct towards the intervening party has caused respondent to be
affected and that
since the applicant’s departure respondent
has been doing better than before.
30. Mr Joubert contended, on behalf of
applicant, that it was not clear on which subsection of section 36
the intervening party
relied on. He correctly argued that based on
the facts of this case that the provisions of section 36(1 )(a)
requiring permanent
incapacity is eliminated as the intervening
party’s’s cause of action.
31. In regard to the further
subsections of section 36 it is clear that to succeed the intervening
party is required to show a degree
of culpability on applicant’s
part. There exists numerous disputes of fact between the parties as
to who and/or what precisely
the cause is of the breakdown in their
business relationship. I am, however, satisfied that the disputes of
fact are such that
it does not require me to refer this matter for
oral evidence if I have regard to the evidentiary rule applied in the
case of Plascon-Evans
Paints Ltd v Van RiebeeckPaints (Ptv) Ltd
1984(3) SA 623 (A).
32. On the evidence I find that
applicant’s explanation that he had withdrawn from the business
as the situation had become
completely intolerable due to the lack of
communication and the tension between them, the arguments between
them and the undermining
of his authority, is completely reasonable.
In any event on the intervening party’s own version,
applicant’s absence
from the business has not affected the
business prejudicially at all. On the intervening party’s
version the business has
in fact done better in the absence of
applicant. I am accordingly not satisfied that the intervening party
has proved culpability
on the part of the applicant as envisaged by
the provisions of subsections (b), (c) and (d) of section 36.
33. I now turn to the issue relating to
the payment of 50% members interest held by applicant in the
respondent. One of the solutions
to the deadlock was for applicant to
sell his members interest in the respondent to the intervening party.
The parties are in agreement
that this was the only practical way to
deal with the problematic situation they found themselves in. The
parties could, however,
not reach an agreement as to the value to be
attached to the 50% membership interest held by applicant in the
respondent.
34. What appears from the papers is
that the parties had considered selling the respondent to a third
party at a purchase consideration
of R10 million. Nothing, however,
came of those negotiations. The intervening party then offered
applicant R5 million less his
half share of respondent’s
liabilities in settlement of his 50% members interest. The applicant
was, however, adamant that
he would accept no less than R5 million
for the 50% of his members interest. This caused a "deadlock"
between the parties
as to the value of applicant’s 50% members
interest.
35. The intervening party averred that
applicant was holding up the settlement process by refusing to sign
the 2006 financial statements,
whilst applicant averred that since he
required further information relating to how the financials were
prepared that he was not
prepared to sign it. I am not convinced that
the signing off of the 2006 audited financial statements would have
assisted or resulted
in the determination of a value to be attached
to the applicant’s 50% members interest in respondent.
36. What is clear is that up until the
stage that the matter was argued in court that neither of the parties
had obtained an independent
valuation of the 50% members interest of
applicant in the respondent. Mr Joubert argued in this court that
since it was the intervening
party who requested the cessation of
applicant’s membership and since he, by implication, wanted to
acquire the 50% members
interest, that the onus was on him to obtain
such a valuation, to present to this court.
37. In the present matter the
intervening party has merely asked the court to make an order that
applicant ceases to become a member
of the respondent. Mr Coetsee
argued that once I exercise my discretion in favour of ordering a
cessation of applicant’s
members interest that I should then
exercise my discretion to make further orders as is provided for in
section 36(2) of the Act.
He argued that based on the financial
reports for the years 2004 and 2005 I should find that the net asset
value of the respondent
is not R10 million, but in fact R5.8 million
as at 31 March 2006. He stated that I should rely on the signed
financial reports
for the years 2004 and 2005, as well as unsigned
financial reports for the year 2006. This, he argued, would place me
in a position
to make a finding as to whether the intervening party
should pay applicant his members interest and , if so, how much.
38. In the event of an application in
terms of section 36 proceedings, the court must also be placed in the
position to be able
to consider whether or not to make an order in
terms of section 36(2) of the Act which decision, according to the
judgment in De
Franca v Exhaust Pro CC, supra, at 896G-H:
"... can only be exercised if
there is sufficient information before the court to enable it ot
decide whether or not to make
such order. ”
39. In Geanev v Portion 117 Kalkheuwel
Properties cc & Others, supra, Kirk-Cohen, J stated at 631H that:
“A member of a close corporation
seeking to invoke the provisions of section 36( 1)(d) quite obviously
bears an 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 subsections (1)(a), (b),
(c) and (d);
(2) to carry out its functions in terms
of subsection (2) and, in particular, to decide what financial
adjustments should be made
..."
further at 632B-C:
“The furthest the second
respondent has gone is to tender an amount which he claims to be
equal to the applicant’s loan
account... The second respondent
has not placed any evidence before this court upon which an order can
be made in terms of section
36(2) ...”
40. I agree with Jali, J in Kanakia v
Ritzshef 1004 cc t/a Passage to India, supra, where he states at
50I-50A:
“If the second respondent wants
to purchase the applicant’s interest, he should offer an amount
which he can prove to
be the correct amount payable in lieu of the
applicant’s interest.
I agree with MrHarcourt that this
approach by the second respondent smacks of a member of a close
corporation who wants the court
to hand over the close corporation to
him without paying any consideration for the members interest. It is
clear that, in terms
of the provisions of the Acton which he relies,
he bears the onus of making out a case to this court as to the basis
of his order
and the nature of the order which he seeks."
41. In the present case I agree with Mr
Joubert that the intervening party has not only failed to provide
sufficient information
other than referring to the financial
statements as at 31 March 2004, 31 March 2005 and 31 March 2006, but
has conceded that “the
amount of such payment for the
applicant’s members interest has not yet been determined
42. I find that this concession on its
own is fatal to the intervening party’s counter¬application.
A court should not
be required to speculate or guess what the value
of a members interest is. The value of the 50% members interest
should be clear
from the information provided by the intervening
party. I would certainly not be exercising my discretion judicially
should I determine
the value of applicants 50% members interest based
on the information provided to me by the intervening party.
43. Mr Joubert contended that there was
a second compelling reason why the intervening party’s
application should fail. He
was of course correctly referring to the
requirement that an applicant who asks for an order in terms of
section 36(1) of the Act
must show that he has the financial means to
pay whatever consideration the court finds to be appropriate. (See in
this regard
De Franca v Exhaust Pro cc. supra, at 894I-895B).
44. In the present case, the
intervening party has not only failed to provide evidence of his
ability to pay such consideration,
but admits that he is “at
this stage not able to state that I would be able to pay that price
in cash”. This statement
in itself illustrates the uncertainty
about the intervening party’s ability to comply with the
obligation he has in terms
of section 36(2) should the court have
made an order in terms of section 36(1) of the Act.
45. If this court is to grant the order
sought in the counter-application the court must be satisfied that
all the evidence which
is placed before the court leads the court to
the conclusion that it would be appropriate for it to grant such an
order.
46. I am not satisfied with the
evidence that the intervening party has placed before me as I am
unable to make a determination
of the value of applicant’s 50%
members interest. I am accordingly satisfied that for the reasons
mentioned above that the
counter-application, in terms of section 36
of the Act, must fail.
47. I am convinced that based on the
facts and circumstances hereinbefore set out that the relations
between the applicant and the
intervening party has broken down
irretrievably and that the deadlock cannot be resolved. Accordingly,
I find that based on the
principles referred to hereinbefore that it
is just and equitable on this basis to wind up the respondent.
48. I find that applicant has shown a
prima facie case for a provisional winding up order in respect of the
respondent.
49. In the result, I make the following
order:
49.1 The respondent close corporation
is hereby placed under provisional liquidation in the hands of the
Master of the High Court.
49.2 A rule nisi is hereby issued
calling upon all interested persons to show cause, if any, to this
court on Thursday 12th April
2007 at 09h30:
49.2.1 why the respondent close
corporation should not be placed under a final liquidation order; and
49.2.2 why the cost of the application
should not be costs in the liquidation.
49.3 Service of this order is to be
effected as follows:
49.3.1 at the registered head office of
the respondent;
49.3.2 by one publication forthwith in
each of the Cape Times and Die Burger; and
49.3.3 by registered post on each of
the known creditors of the respondent (including SARS) with claims in
excess of R5000,00.
The counter-application is dismissed
with costs.
Riley AJ