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1986
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[1986] ZASCA 129
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Gray and Others v Thesing Vastgoed BV and Others (267/85/av) [1986] ZASCA 129; [1987] 1 All SA 409 (A) (21 November 1986)
267/85/AV
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE DIVISION
)
In the matter between:
DOUGLAS WAGNER GRAY
1st Appellant
NICHOLAS BROWSE GRAY
2nd Appellant
ANNE DOROTHY GRAY
3rd Appellant
AND
THESING VASTGOED B V
1st Respondent
MICHAEL GINSBERG AMLER
& CO
2nd Respondent
KNORHOEK ESTATE (PTY) LTD
3rd Respondent
KNORHOEK FLORA (PTY) LTD
4th Respondent
CORAM
: CORBETT, GROSSKOPF, SMALBERGER, JJA, NICHOLAS et NESTADT,
AJJA
HEARD
: 6 November 1986
DELIVERED
: 21 November 1986
JUDGMENT NICHOLAS, AJA
This appeal is concerned with the validity of
an
agreement
2
agreement of sale of shares in a company, having regard to the
injunction in s. 38(1) of the
Companies Act
, No 61 of 1973, that no
company shall give any financial assistance for the purpose of pr in connection
with a purchase of any of
its shares.
The company concerned is KNORHOEK
ESTATE. (PROPRIETARY) IIMITED ("the company"), which is the owner of KNORHOEK
farm near Sir Lowry's
Pass in the Cape. Its authorized and issued share capital
is R400,00 divided into 200 shares of R2,00 each.
The agreement of sale (which I shall refer to as Annexure "A") was signed on
29 July 1980. Its subject-mat-ter was all the shares
in the company.
The sellers were the sole shareholders and directors
of
3
of the company,namely Mr. DOUGLAS WAGNER GRAY, who held
194 shares; Mr. NICHOLAS BROWSE GRAY, his son, who held five shares; and Mrs.
ANNE DOROTHY GRAY, his wife, who held one share.
The purchaser was THESING
VASTGOED B.V., a company which was represented by GEORGE NICOLAAS HONIG.
It
was recorded in the preamble to Annexure "A" that simultaneously with the
conclusion and execution of the agree-ment, the company
as lessor would enter
into a lease (which was annexed) with the pu'rchaser (THESING VASTGOED) in
respect of the company's immovable
and movable property. The lease ' will
hereinafter be referred to as Annexure "B" . It was provided that the lease
should form an
"integral part" of the agree-
ment
4
ment being Annexure "A", and it was further recorded
that
the agreement and the lease were "indivisible": the
lease could not come into operation and be binding on the
parties without
Annexure "A" having been duly concluded and
executed; and should Annexure "A"
be cancelled, the lease
would forthwith terminate and the leased premises
would be
vacated within one month from the date of termination.
In terms of clause 4 of Annexure "A" the purchaser
agreed to purchase 60 shares in the company at R2500,00 per
share; and it was provided in clause 8 that the purchaser
would be obliged to purchase the remaining 140 shares with-
in
5 in a period of 5 years reckoned from 1 June 1980 at
prices
computed according to the formula there set out.
Clause 7 provided that DOUGLAS WAGNER GRAY (who
will hereafter be referred
to simply as "GRAY")should remain
a director of the company until the
purchaser acquired and
paid for all the remaining shares of the company.
It
continued:
"The said ... GRAY shall be paid by the Company a director's fee and/or
Consultancy or Management fee in an amount totalling Eighteen
Thousand (Rl8
000.00) Rand per
annum, payable monthly in arrear ..."
In terms of clause 8(f), any payment for shares made by the purchaser after
the initial 60 shares had been purchased would reduce
pro rata
the
directors and/ór consultancy or management fee payable to GRAY; and in
clause 20 it was
recorded
6
recorded that in the event of GRAY's death before the
pur-
chaser had acquired the remaining 140 shares all the amounts
payable
to him would accrue to and become payable to his
deceased estate.
Clause 12 of Annexure "A" was in the following terms:
"12. (a) Simultaneously with the execution of this Agreement the Company
shall enter into a Lease with the Purchaser in respect of
both the movable and
immovable property as defined above. Such Lease shall, notwith-standing the date
of its execution be re-trospective
to the 1st June 1980 and shall endure until
such time as the Purchaser obtains the effective control of the Com-pany by
purchasing
the final 101 shares, or should this Agreement be terminated for any
other reason whatsoever, until such time as such prior termination
of this
Agreement.
The rental payable by the Purchaser to the Company shall be the sum of
Twenty-five Thousand (R25 000,00) Rand per annum
plus
7
plus such further sums as may be found necessary to discharge the
Company's
liabilities in respect of mortgage bond interest, insurance and Divisional
Council rates.
The Company shall be committed to utilise the aforesaid sum of R25 000,00 as
follows:-(i) Director's and/or Con-
sultancy and/or managing
fees ,to DOUGLAS WAGNER GRAY R18 000,00 (ii) Interest on mortgage bonds -
approximately 5 000,00
(iii) Insurance on fixed property,
approximately 1 000,00
(iv) Divisional Council rates
(Approximately)
1 000,00
(b) The payment of the aforesaid sum of
R18 000,00 shall be paid monthly in arrear; the first payment of R1500,00 to
be made on the 30th June 1980 and thereafter on the last
day of each and every
succeeding month. (Subject however to the earlier relevant provisions of this
Agreement).
The
8
The said George Nicolaas Honig herewith interposes and binds himself as
surety for and co-principal debtor with the Purchaser in respect
of all the
Purchaser's obliga- tions in terms of the Agreement of Lease referred to
above.
(c) In the event of the Company for what-
ever reason being required to
pay any
income tax on the income received by it
by way of the rental
referred to above,
such tax shall be the liability of the
Purchaser and
shall be forthwith discharged
by the Purchaser so as to ensure that
the
full sum of R1500,00 shall monthly be paid
to the said Douglas Wagner
Gray and to en- sure further the full discharge of the
other liabilities of
the Company in re-
spect of mortgage interest, insurance and
Divisional
Council rates and taxes;
(d) The Purchaser shall be given possession
and vacant occupation of the
main dwelling
house on the immovable property and present-
ly occupied by
Douglas Wagner Gray on the
1st November 1980 ... "
The
9 The lease (Annexure "B") is between GRAY "in his capacity
as Director of KNORHOEK ESTATE (PTY) LTD, he being duly authorised thereto
by a
Resolution taken at a meeting of the Board of Directors of the said company", as
lessor, and HONIG "in his capacity as Trustee
for a Company in the course of
formation" as lessee.
In terms of clause 2 of Annexure "B", the company let its immovable property
(being KNORHOEK farm) for a period of 5 years from 1
June 1980
"... subject
10
"... subject however to the proviso that in the event of the
Company known as Thesing Vastgoed B.V. purchasing or acguiring the majority
shares in the Company known as Knorhoek Estate (Pty) Ltd in terms of an
Agreement signed simultaneously with this lease then an'd
in that event this
Agreement of Lease shall terminate on the day when the said Thesing Vastgoed
B.V. acquired such con-trolling interest
in the Lessor Company."
Clause 3 provided as follows:
"3. The rental payable by the Lessee to the
Lessor in respect of the leased premises
shall be the sum of R25 000,00 per annum, plus such further sums as are
referred to in Clause 12(a), after (
sic
) the said sum being arrived at in
accordance with the provisions of the agreement entered into by and between the
shareholders of
the lessor Company and Thesing Vastgoed
B.V.
11
B.V.. The said rental shall be payable monthly in arrear."
(It is
clear that the "clause 12(a)" referred to is clause
12(a) of. Annexure
"A").
It was provided in clause 5 -
"Notwithstanding anything to the contrary herein contained or referred to it
is specifically agreed and recorded that in the event
of the agreement entered
into between the shareholders of the Lessor Company and the said Thesing
Vastgoed B.V. being terminated
for whatsoever cause, then and in that event this
Agreement of Lease shall likewise come to an end and shall be of no further
force
and effect and the Lessee and its employees shall be obliged to vacate the
leased premises within a period of 30 days after such
termination ..."
In
12
In terms of clause 7, HONIG would be personally considered to
be thelessee in the event of the company not being formed with-in a
reasonable
time, and,if it was formed, HONIG would bind himself as surety and co-principal
debtor for all the com-pany's obligations.
HONIG did not proceed with the formation of the company referred to in
Annexure "B". Instead he acquired an existing company, CARLISLE
PROPERTIES (PTY)
LIMITED (CARLISLE), which became the lessee under Annexure "B". HONIG duly
obtained possession of the farm and continues
in possession thereof. The first
monthly payments in re-spect of rental were made by HONIG to the company. From
September 1980, however,
and apparently without demur by either the company or
GRAY, CARLISLE paid the monthly
amount
13 amounts of R1500,00 in respect of his "fee" direct to
GRAY.
On 4 July 1984, after the agreement had been in operation for 4 years,
and after HONIG has spent a con-siderable amount of money on
improving the farm,
GRAY, NICHOLAS BROWSE GRAY and ANNE DOROTHY GRAY as first, second and third
plaintiffs respectively, issued a
summons out of the Cape of Good Hope
Provincial Division of the Supreme Court in which THESING VASTGOED and three
other interested
parties were cited as defendants. They claimed an order -
(a) Declaring that the agreement, being
Annexure "A", is null and void and
of no
force and effect, as it is in conflict
with the provisions of
Section 38(1)
of the Companies Act, 61 of 1973.
(b) Declaring that the
agreement of Lease (namely Annexure "B") is of no force and
effect and that
THESING VASTGOED and
CARLISLE are forthwith to vacate the
premises leased
to them in terms of
Annexure
14
Annexure "B"
and an order granting additional relief.
The
essence of the plaintiffs' cause of action was contained in paragraph 11 of the
Particulars of Claim:
"11.1 Plaintiffs aver that the agreement,
Annexure "A" hereto, is in conflict with the provisions of Section 38(1) of
the Companies Act, 61 of 1973 more particularly in that
the effect of the
agreement was for the company to give financial assist-ance for the purpose of
the purchase by (first) Defendant
of Plaintiffs', shares in the company.
11.2 In amplification of the averment made
in sub-paragraph 11.1 above, Plaintiffs aver that:
11.2.1 First Plaintiff has and does not act(sic)
consultant for the
Company;
11.2.2
It was never intended by
Plaintiffs and(first) Defendant that he should so act;
and
11.2.3
The provisions of Paragraphs 7 and
8(f) of the agreement were designed in order to pay Plaintiffs interest on the
pur-chase price
of their shares in the
company
15
company, out of the assets of the company.
11.2.4 "
In its plea, THESING VASTGOED denied each and every allegation
contained
in this paragraph.
The action was tried by SCHOCK J. In his
judgment delivered on 20 June 1985, the learned judge held
that the
substance of the matter was that the funds for
paying GRAY were to be
supplied by THESING VASTGOED,
and it was not envisaged that the company would
give. any
financial assistance for the purpose of acquiring the shares.
He
accordingly dismissed the plaintiffs' claims. Costs
were awarded on the
attorney and client basis in terms of a
provision in Annexure "A" that the successful party in any
legal proceedings taken by either party against the other
arising out of the agreement should be entitled to costs on
the
16
the attorney and client basis.
Leave having
been granted by the trial Court, the plaintiffs now appeal. THESING VASTGOED,
which is cited as first respondent, was
the only respondent represented at the
hearing of the appeal.
The historical background to the transaction, as it appears from the
evidence, was this.
GRAY formerly carried on farming operations on KNORHOEK.
.: In about 1975 he leased the property. When the lease expired in 1980,
GRAY
was in poor health and he did not intend to return to farming. The property was
accordingly placed in the hands of an estate
agent for dis-posal. The estate
agent introduced HONIG (who resided in
Sandton, Johannesburg) as a potential purchaser.
In April 1980, GRAY's attorney, Mr. M M de Villiers,
produced the draft of an agreement between the company and
HONIG
17
HONIG, which was to serve as a basis for negotiation
between
them. . The draft provided for the sale of the
farm to HONIG for R500
000,00, which was to be payable in
instalments. Interest on the balance of
the purchase price
outstanding from time to time was to be paid from the date
of
possession (1 May 1980) at the rate of 10%
per annum
.
Shortly afterwards DE VILLIERS produced another draft..
This provided that GRAY, acting on behalf of the company,
sold the farm to HONIG in his capacity as agent of a company
which he would designate. Two instalments totalling R150 000
were to be paid in cash, and a liability for R350000,00 was
to be secured by a first mortgage bond, which was to provide
for the payment of interest at 10%
per annum
on any outstand-
ing balance. The purchaser was to have the right to commence
farming
18
farming operations on the property for its own account on 1
May 1980.
Thereafter, another attorney, Mr. L N MILLER, who appears to have
had some experience in international finance, was brought into the
picture by
HONIG, because it was now contemplated that the proposed transaction would be
funded by financial rands. However, a South
African resi-dent could not use
financial rands and so it was necessary that the purchaser should be a
non-resident. This was THESING
VASTGOED , HONIG's company, which was
incorpo-rated under the law of the Netherlands, and had its regis-tered office
at Bergen in
the Netherlands. MILLER considered that the agreement would have to
be "restructured" because, he said,in terms of the Exchange Control
Regulations
a
19
a non-resident was not permitted to incur a debt
to a resident.
MILLER accordingly drew up "Heads of Agreement", which bore
the date 23 May 1980 and were to serve as the basis for a final agreement
to be
drawn up later. In terms of the Heads of Agreement THESING VASTGOED would
pur-chase from GRAY 60 shares in the company, with
an option to purchase the
balance of 140 shares in accordance with the formula there set out. The company
was to enter into a lease
with THESING VASTGOED at a rental of R25 000,00 per
annum, with a provision for an amount of R18 000 to be paid to GRAY as
director's
salary/ interest/ management fee.
After negotiations the parties then concluded An-
nexure "A"
20 nexure "A" on 29 July l980. It was therein recorded that
the agreement was subject to the approval of the Exchange Control Authorities
of
the South African Reserve Bank as
the purchaser wished to pay for the
purchase price of the entire issued share capital of the company by the
financial rand procedure.
THESING VASTGOED duly obtained the requisite
approval.
As appears from paragraph 11 of the Particulars of Claim which is set out
above, the attack on the validity of Annexure "A" was based
on the provision for
the payment to GRAY of an amount of Rl500,00 per month or Rl8 000,00
per
annum
.
It is clear from Annexure "A" itself, and from the
evidence
21 evidence, that the amount of R18 000,00 was not related to
any services to be performed by GRAY.
Thus, in terms of clause 8(f),the "fee"
was to be reduced in proportion to any further shares purchased by THESING
VASTGOED; and it
was further provided that in the event of GRAY dying before the
purchase by THESING VASTGOED of the remaining shares, the payments
which would
have ac-crued to him woúld become payable to his deceased estate. It was
not contemplated that " GRAY would perform
any services for the company and he
did not do so. The company was inactive and there was nothing to be done by a
director or a consultant.
The provision was made ' because GRAY insisted
upon
22
upon it. He required the payment in order to provide for his
living expenses until such time as he received the full purchase price
which he
could then invest.
Consequently, the description of this payment in clause 7
of Annexure "A" as "a director's fee and/or Con-sultancy or Management fee"
was
not a true description.
In the first drafts of the agreement, provision was made for the payment of
interest which would have provided GRAY with the income
he required. When the
basis of the sale was changed after the advent of Mr. MILLER, a stipulation for
interest would have been inappropriate,
because there would then be no capital
sum owing. So the parties agreed on the false label. It is not clear why it was
thought necessary
to
23
to give the payment a label at all. It was suggested that" it
was for purposes connected with income tax, or because of the Exchange
Control
Regulations, but it is not necessary to go into this aspect: the facts are that
a label was given, and it was a false label.
It was argued on behalf of the appellants that where a company undertakes a
fictitious obligation towards a seller of shares, in order
to effect payment of
part of the purchase price out of its own assets, section 38 is clearly
contra-vened. The proposition is unexceptionable.
See
Albert v Papenfus
,
1964 (2) SA 713
(E) and
Goss v E C Goss & Co (Pty) Ltd and Others
,
1970 (1) SA 602
(D and CLD).
It is correct that in the present case the considera-
tion
24 tion for the payment by the company to GRAY, the seller
of the shares, was non-existent or fictitious consideration. Nevertheless,
for
reasons which will appear I am of the opinion that the proposition is not
applicable on the facts of this case.
The important question is, what
precisely was the obligation (if any) which the company undertook towards
GRAY.
Annexure "B" did not itself provide for such payments. The only provision was
that contained in clause 12(a) of Annexure "A", to which
the company was not in
name a party.
Annexures "A" and "B" are separate documents. The
parties
25 parties to Annexure "A" are named as the three GRAYS as
sellers and THESING VASTGOED as purchaser; and the parties to Annexure
"B" are
described as GRAY acting on behalf of the company, and HONIG in his capacity as
trustee for a company to be formed. Nevertheless,
it is plain that they are not
discrete contracts, but are cross-linked and are interdependent.
The three sellers in Annexure "A" were the sole shareholders and directors of
the lessor company in An-nexure "B"; and from a practical
point of view HONIG
was the purchaser under Annexure "A" and the lessee under An-nexure "B".
In terms of the preamble to Annexure "A", Annexure "B" was to be concluded
and executed simultaneously with, and
was
26
was to form "an integral part" of,Annexure "A". It was
recorded that Annexure "A" and Annexure "B" were "indivisible", and clause
5 of
Annexure "B" provided that in the event of the agreement recorded in Annexure
"A" being terminated the agreement of lease would
likewise come to an end.
Clause 12 of Annexure "A" purports to set out the
contents of the lease.
Annexure "B", however, does not con-
tain all of the provisions of the lease
to which reference
is made in Annexure "A". Thus, clause 12(c) imposes
on |
THESING VASTGOED the liability for any income tax the company might be
required to pay on the income received by it by way of rentals;
and clause 12(d)
deals with the date on which possession of the main dwelling house on the
immovable property was to be given. Although
Annexure "B" is silent on both
these
27 these points it was clearly the intention that in the one case
THESING VASTGOED should incur a liability to the com-pany, and in
the other case
it should acquire a right ás against the company.
In my opinion,
therefore, clauses 12(c) and 12(d) must, as a matter of construction, be treated
as if they had been specifically incorporated
in the lease.
Similarly in regard to the provision in clause 8(f):
"Any payment for shares made by the purchaser after the initial 60 shares
have been purchased shall reduce
pro rata
the directors and/or
consultancy or management fee payable by the Com-pany to Douglas Wagner Gray
..."
There is no similar provision in Annexure "B". Nor does
Annexure
28 Annexure "B" contain any provision for a corresponding
reduc-tion in the rental payable to the company by the lessee. There can,
nevertheless, be no doubt, in my opinion, that having regard to the way in which
the rental was determined in terms of clause 12(a)
(to which specific reference
is made in clause 3 of the lease), the parties to both Annexure "A" and Annexure
"B" intended that GRAY
should be paid only the amount as reduced
pro
rata
, and that there should be a corresponding reduction in the rental
payable to the company. At the date when Annexures "A" and "B"
were signed, no
rental was being received from the farm. The company's only income was a small
amount by way of in-terest. It had
no assets apart from the immovable property,
which was mortgaged. It had recurring liabilities for
interest
29
interest on the mortgage bonds, insurance premiums and rates.
It was conte'mplated in Annexures "A" and "B" that the rental receivable
under
the lease should be balanced by the company's commitments. It was specifically
provided in clause 12(a) that the rental should
be increased by such further
sums as were necessary to discharge the company's liabilities, and it must have
been intended that if
the liabilities were reduced, the rental would be
correspondingly reduced.
Similarly,the provision in clause 12(a) regarding the commitment to utilize
the rental received by the company in a particular way,
is to be treated as if
it had been specifically incorporated in the lease.
In my opinion, therefore, the two agreements, re-garded as an integral whole
and as indivisible, are to be interpreted as imposing
on the company an
obligation to make the payments thereunder to GRAY out of rental received. The
result is that the company became
entitled to receive the rent, but at the same
time it undertook a commitment to
" utilize
30
"utilize the aforesaid sum" for payments of the amounts
set
out in clause 12(a), including R18 000,00 in respect of
GRAY's
fee.
It is clear from the words quoted that the company's
commitment was limited to the making of payment from rentals received: if the
lessee defaulted in its payments of rent, the company would have no obligation
in respect of GRAY's "fee".
The question then is whether the company's commitment amounted to the giving
of financial assistance for the purpose of or in connection
with the sale of the
company's shares.
In my opinion, it did not. The company was merely
to be a vehicle for the transmission of the R18 000,00 from
HONIG to GRAY. The position from the point of view of
financial
30 A
financial assistance was no different from what it would
have been if HONIG had undertaken to make payment to GRAY direct, which direct
payment was in fact made by Carlisle after Sep-tember 1980.
Counsel for the appellants emphasized that it was
common
31
common cause that Annexure "B" was a valid agreement of
lease.
The argument was that under it the company provided a
quid
pro guo
for the rental payable and that "this factor
effective-
ly destroys any suggestion that it acted as a mere conduit".
I
do not agree. Under the lease the company did, it is true,
acquire a right to
the rental, but at the same time it com-
mitted itself to pay out of it the
amount of R18 000,00
per
annum
to GRAY. It was clear,
therefore, that the company
could acquire no beneficial interest in that
portion of the
rent, and that by paying it over to GRAY it would not be providing financial
assistance.
It was sought to argue at the hearing of the appeal that the grant of the
lease itself constituted the giving of financial assistance
by the company. That
contention is
not
32 not open to the appellants. It was not raised in the
Par-ticulars of Claim and it was not investigated at the trial.
In my view,
therefore, SCHOCK J was clearly right, and the appeal should be dismissed. The
appeal constitutes legal proceedings taken
by the appellants arising from
An-exure "A" and in terms of the provision of Annexure "A" referred to above;
THESING VASTGOED is
entitled to costs as
between attorney and client.
The appeal is dimissed. The appellant is ordered to
pay the first respondent's costs as between attorney and
client.
CORBETT, JA
GROSSKOPF, JA
H C NICHOLAS, AJA SMALBERGER, JA Concur
NESTADT, AJA