Farren v Sun Service SA Photo Trip Management (PTY) Ltd (8055/2002) [2003] ZAWCHC 12; [2003] 2 All SA 406 (C); 2004 (2) SA 146 (C) (16 April 2003)

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[2003] ZAWCHC 12
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Farren v Sun Service SA Photo Trip Management (PTY) Ltd (8055/2002) [2003] ZAWCHC 12; [2003] 2 All SA 406 (C); 2004 (2) SA 146 (C) (16 April 2003)

IN THE HIGH COURT OF
SOUTH AFRICA
(CAPE OF GOOD HOPE PROVINCIAL DIVISION)
Case no.: 8055/2002
In the matter between:
YVETTE JOAN
FARREN
Applicant
and
SUN SERVICE SA PHOTO TRIP MANAGEMENT (PTY)
LTD
Respondent
(Registration
No. 87/04411/07)
JUDGMENT GIVEN THIS
WEDNESDAY, 16 APRIL 2003
­­­­­­­­­­
CLEAVER
J:
[1] This is an application to compel specific performance by the
respondent of the terms of a written agreement of sale concluded
with
the applicant on 27 August 2002. In terms of the agreement, the
respondent sold the immovable property known as 39 Skaife St,
Scott
Estate, Hout Bay (‘the property’) to the applicant for a purchase
consideration of R1 450 000.
[2] In a communication by e-mail on 13 September
2002 the applicant was informed by the sole director of the
respondent that the respondent
would no longer sell the property to
the applicant. This prompted the application before me which was
brought as a matter of urgency
on 24 October 2002. The applicant
seeks an order directing the respondent to take the necessary steps
to sign the requisite documentation
to pass transfer of the property
to the applicant, it being common cause that the applicant has made
provision to pay the deposit
of R100 000 due in terms of the deed of
sale and has obtained a loan to be secured by a mortgage bond over
the property for the amount
specified in the agreement
of sale. In terms of the order granted
on 24 October 2002 the respondent has been interdicted from dealing
with the property pending
the hearing of the application.
[3] Respondent has raised the following defences to the application,
namely
That the applicant is not entitled to the relief
sought because in terms of a written
addendum concluded by the parties on 27 August 2002 it was agreed
that instead of taking transfer
of the immovable property, the
applicant would acquire the shares in the respondent, which is the
owner of the immovable property.
That the agreement did not bind the respondent and is not a valid
agreement because the approval of the shareholders to the deed
of
sale had not been obtained in accordance with the provisions of
section 228 of the Companies Act.
Certain other defences were alluded to in the respondent’s
answering affidavit, but were ultimately not pursued.
THE ALLEGED AGREEMENT TO ACQUIRE SHARES IN THE
RESPONDENT
.
[4] The addendum to which I have referred reads as follows:
“
ADDENDUM TO OFFER TO PURCHASE
39 SKAIFE STREET, HOUT BAY ERF: 4939
It is the purchaser’s intent to purchase the PTY Company in
which the sole asset is the property known as 39 Skaife Street, Hout
Bay Erf: 4939
The seller hereby warrants to give all relevant documentation such
as financials within Ten (10) working days, when called to do so
by
the Transferring attorneys.
Both the seller and the purchaser hereby undertake to sign all
relevant documentation to bring to successful conclusion, the sale
of
the above-mentioned property.”
(I would mention that although the property is reflected as Erf 4939
in the addendum, it is reflected to as Erf 4875 in the Notice
of
Motion. I have assumed that the latter is the correct description.)
[5] Mr
Marais
,
who appeared on behalf of the respondent submitted, if I understood
him correctly, that the application was premature because the
addendum, properly interpreted, brought about a new contract in terms
whereof the nature of the agreement was altered. I do not
agree that
this is the interpretation to be placed on the addendum. In my view
its meaning is plain. After concluding the agreement
of sale, the
applicant had in mind to purchase the shares in the company owning
the property, if possible. Although an agreement
for the sale of the
property had been concluded, the parties agreed that if the applicant
still
wished
to purchase the shares in the company once she had received financial
statements and other relevant documentation of the company,
they
would sign the necessary documents for the sale of the shares. It is
thus an agreement in principle to sign another
agreement, but it is implicit in my
view that the parties would only proceed to sign another agreement if
the applicant wished
to
do so, once she had had sight of the financial statements of the
company and its other relevant documentation. Whether the addendum
would have been sufficient to constitute a binding agreement once the
applicant had been satisfied as to the financial state of the
company
and its documentation is not an issue I have to decide. The
respondent repudiated the agreement to sell the property on
13
September. That repudiation was not accepted by the applicant who
now asks that effect be given to the original agreement. In
doing so
she has elected not to pursue her intention to alter the original
agreement (an option which would have been for her benefit)
and in my
view she is perfectly entitled to adopt this course.
SECTION 228
[6] Section 228 of the Companies Act reads as follows
“
228.
Disposal
of undertaking or greater part of assets of company.
---
(1) Notwithstanding anything contained in its memorandum or
articles, the directors of a company shall not have the power, save
with
the approval of a general meeting of the company, to dispose of
--
the whole or substantially the whole of the undertaking of the
company; or
the whole or the greater part of the assets of the company.
(2) No resolution of the company approving any such disposal
shall have effect unless it authorizes or ratifies in terms the
specific
transaction.
(3) The requirements contained in this
section in respect of transactions falling within the provisions of
subsection (1), shall
be in addition to any other requirements,
including the limitation of voting rights, relating to such
transactions that may be imposed
by the Securities Regulation Panel
in terms of section 440C or in terms of any other law.”
[7] It is common cause that the approval of the
shareholders of the respondent in general meeting has not been
obtained for the disposal
of the property, which, on the
uncontroverted evidence tendered on behalf of the respondent, is the
sole asset of the respondent.
It is also common cause that Anya
Elisabeth Klages (‘Klages’), who signed the agreement of sale on
behalf of the respondent,
is the sole director of the respondent.
She holds a very minor interest in the company, namely 20 of the 30
100 issued shares with
the bulk of the shareholding being held by a
German company controlled by her mother. The capacity in which
Klages signed the agreement
of sale on behalf of the company is not
apparent from the document. Although I have referred to the document
as an agreement of
sale, it took the form of an offer to purchase
addressed by the applicant to the respondent. It contained a clause
to the effect
that when the offer was accepted the agreement would
constitute the entire agreement between the parties. The agreement
thus came
into being when Klages signed the
document
signifying acceptance of the offer.
This she did by signing her name above the reference to
“seller”
in the acceptance clause. It is not disputed that in doing so she
purported to act for the seller and, as she is the sole director
of
the seller, I will accept for the purposes of this matter that she
had the implied authority to conclude an agreement for the
disposal
of the seller’s property on behalf of the seller. The transaction
was accordingly
intra vires
the company. The reliance on section 228 appears in a further
(second) affidavit filed by Klages in which she avers that she did
not have the power to conclude a sale of the property to the
applicant or to anyone else and states
“
That there was no general meeting of the respondent called or
held to approve or ratify such transaction. Furthermore, the
transaction
was not so approved, and the shareholders have not
subsequently approved or ratified any sale of the property, or shares
in the respondent.”
[8] The line of
defence raised by the respondent brings
into sharp focus the dichotomy which exists between the provisions of
section 228 of the Companies
Act and the so-called
Turquand
rule, which has long been a part of our company law. The rule
derives from
Royal British Bank v
Turquand
(1856) E&B 248(119 ER 474)
(confirmed on appeal in 6 E&B 327
[1856] EngR 470
;
(119 ER 886))
and
was accepted as part of our law in
The
Mine Workers’ Union v J J Prinsloo;
The Mine Workers’ Union v J P Prinsloo; The Mine Workers’ Union v
Greyling
1947 (3) SA 831
(A). The rule
is generally expressed by saying that a person dealing with a company
in good faith is entitled to assume that all
internal formalities or
acts of management have been duly performed and carried out by the
company.
[9] In
Rolled Steel
Products (Hldgs) Ltd v British Steel Corp B S & C
1986 Ch 246
;
1985 (3) All ER 52
(CA) at 285; 78 it was held that the
person invoking
the
rule
was
at least obliged to plead that he did not know of the irregularity
and was entitled to assume that the relevant provisions of
the
companies’ constitution had been properly and duly complied with.
The applicant’s founding papers contain no such allegations,
but in
fairness to the applicant, the section 228 defence appears to have
been raised for the first time only in the respondent’s
answering
affidavit. In reply thereto the applicant says
“it is significant
to note that in addition to being the sole director of Respondent and
confirming her authority to depose to an
affidavit on a Respondent’s
behalf, Klages describes herself as a seller of the property as will
more fully appear from annexure
‘YJF1’ to which this Honourable
Court is respectfully referred. I submit with respect that the
inescapable conclusion therefrom
is the fact that at all time
material hereto Klages represented that she had the necessary
authority to bind the Respondent herein.”
Further on she says that:
“…
Klages has at all times material hereto held out that she
had authority to bind the Respondent and until now has never stated
that
she lacked and/or required authority to negotiate and conclude
the agreement.”
Although one may have expected the applicant to record more clearly
that she did not know of the irregularity and was entitled to
assume
that the relevant provisions of the company’s constitution had been
properly and duly complied with, I will accept that
the applicant’s
averments, however scanty, are sufficient.
[10] It now
seems
to be generally accepted that section 228 of the Companies Act (and
its predecessor, section 70
dec
(2)
of the 1926 act) was introduced for the protection of the
shareholders in a company who have placed the control of the company
in the hands of its directors.
Sugden and Others v Beaconhurst Dairies (Pty)
Ltd and Others
1963 (2) SA 174
(E) at
179G; and
Levy and Others v Zalrut
Investments (Pty) Ltd
1986 (4) 479 (T)
at 485B.
In
Lindner v National
Bakery (Pty) Ltd and Ano
1961 (1) SA
372
(O) the court reasoned that the object of section 70
dec
(2)
“…
appears
to be to prevent the directors from obtaining a general authority to
enter into any agreement for the disposal of the undertaking
of a
company or of the whole or greater part of its assets as they, the
directors, might in future deem advisable.
The object of the section is therefore evidently that the
shareholders are to exercise control over the disposal of the
undertaking
or greater part of the assets of the company.”
(At 379C-D)
[11] In my view it is clear that the mere
fact that the agreement had not been
authorised or approved by the shareholders does not make it invalid
or void. This must be so
because section 228 (2) makes provision for
the subsequent ratification of an agreement by shareholders. In this
connection I am
in respectful agreement with the view expressed by
Magid
J in
Ally and Others NNO v Courtesy
Wholesalers (Pty) Ltd
1996 (3) SA 134
(N) at 145E-G. The question, however, is whether I am entitled to
order the respondent to pass transfer of the property in the absence
of the resolution prescribed by section 228. I am not aware of any
case in which a court has ruled definitively on whether an innocent
purchaser should be protected where the transaction was, as in the
present case,
intra vires
the company, but without the authority or approval of the
shareholders as required by section 228. There is however strong
support
for this view in an
obiter
portion of
the
judgment of
Van Zyl
J in
Levy and Others v Zalrut
at
487B-D:
“
There
is likewise no indication that the public interest or public policy
played any part in the intention of the Legislature when
it enacted
the said s 228. A third party involved in a transaction relating to
the said disposal will hence undoubtedly be able
to enforce such
transaction, provided he is not aware thereof that the company in
general meeting has in fact not approved of the
transaction. This is
in accordance with the rule in the well-known case of
Royal
British Bank v Turquand
(1856) 5 E&B
248
[1855] EngR 531
;
(119 ER 474)
(confirmed on appeal in 6 E&B 327
[1856] EngR 470
;
(119 ER 886))
,
which was accepted as part of our law in
The
Mine Workers’ Union v J J Prinsloo
;
The Mine Workers’ Union v J P
Prinsloo
;
The
Mineworkers’ Union v Greyling
1948 (3)
SA 831
(A).”
[12] The judgment of
Van Zyl
J in
Levy
and Others v Zalrut
gave rise to a
flurry of academic writings, all of which highlighted the problem
which exists if the
Turquand
rule is to apply to circumstances hit by the operation of section
228. In a note on the case published in THRHR 1987 (50) at 226
Prof
P E J Brooks raised the question as to whether the application of the
rule in the context of section 228 is reconcilable with
the
conclusion reached by
Van Zyl
J
that the section
“is clearly directed
at protecting the interests of shareholders”.
After all, a decision to enforce a contract concluded without the
approval of or ratification by any
shareholders in general meeting can
hardly be said to be in the interests of those shareholders who do
not approve it. This was followed
by an article entitled
“Die
Uitwerking van artikel 228 van die Maatskappywet 61 van 1973 op die
Turquand Reël
by Michele von Willich
in 1998 Modern Business Law 7. This article, which was based on the
author’s LLM thesis contains a valuable
summary of the law in
England, Canada, France, the Netherlands and Germany and highlights
the fact that only Canada has a statutory
provision similar to our
section 228. She also sketches the background to the introduction of
section 228 in the statute. Section
70
dec
(2)
of the Companies Act No 46 of 1926 contained provisions almost
identical to section 228 and in a note published in 1971 SALJ at
351,
Basil Wunsh, writing prior to his elevation to the bench, expressed
the view that
“
The
approval of a general meeting of a company required by s 70
dec(2) is an ‘act of internal management’ and the case of
directors disposing of the undertaking of a company without such
approval
is indistinguishable from the position in Turquand’s case,
save that the limitations on the directors’ powers are derived from
the statute.”
His view was therefore that an innocent party
contracting with a company would be entitled to invoke the provisions
of the rule notwithstanding
section 228. A similar view was
expressed by Prof M J Oosthuizen
in
a note on
Novick and Another v Comair
Holding Ltd and Others
1979 (2) SA 116
(W) published in 1979 TSAR at 169.
Von Willich concludes her treatise by returning to
the cardinal issue to which regard must be had when interpreting
statutes, namely
the intention of the legislature. She points out
that transactions which are forbidden by statute are
prima
facie
considered to be void (in
accordance with the maxim
quid fit
contra legem est ipso iure nullum
) but
accepts that the intention of the legislature could also be that
although the transaction may be forbidden, it is not necessarily
visited with voidness. In this connection, she refers to the
interpretation given to section 141 of the Companies Act, namely that
an offer of shares to the public for purchase without being
accompanied by a written statement containing certain prescribed
information
will not be void. Since the contravention of section 141
is also an offence, she argues that contravention of section 228,
which
is not an offence, should also not be regarded as being void.
In attempting to establish the intention of the legislature, she
submits
that since the
Turquand
rule had become firmly established in our law, the
legislature would have made it clear
that an innocent third party would not be entitled to rely on the
rule had that been the intention
of the legislature. She concludes
by submitting that in weighing the interests of the innocent third
party against those of the
shareholders, the interests of the former
should prevail since the wronged shareholders would be entitled to
claim damages from the
errant organ or agent of the company for
breach of fiduciary duty. In her view section 228 should be
repealed.
[13] The opposite view is taken by Prof J S A
Fourie in an article entitled
“Verkoop
van die onderneming van die maatskappy – het artikel 228 van die
Maatskappywet nog betekenis?”
published
in TSAR 1992-1. For him, as for Von Willich, the answer is to be
found in the intention of the legislature enacting
section 228. I agree with him that the
issue is not so much whether a
transaction entered into in contravention of section 228 is void or
voidable. It is clearly unlawful
in the sense that it is concluded
in contravention of the section; it also has no legal effect, but
that can be cured by subsequent
ratification by the shareholders in
general meeting.
[14] If it is accepted that the objective of the
legislature was to protect the shareholders, then surely that
intention should be
given effect to, for otherwise
“admitting
the application of the
Turquand
rule may resolve the dilemma, but will nullify the efficacy of
section 228 and will defeat the object of the legislature”
(L Hodes –
“Disposal of assets –
s228”
1978 The South African Company
Law Journal F-6, F-13). As pointed out by Prof Fourie, Von Willich’s
view, by implication, is that
the legislature intended to curb the
authority of directors well knowing that the
Turquand
rule would effectively neutralise the provisions of section 228 and
that this could never have been the intention. I agree.
[15] Supporters of the view that the
Turquand
rule should prevail argue that if the provisions of section 228 had
been contained in the articles of association of a company, an
innocent party would have been entitled to invoke the rule.
Therefore, since the provisions of section 228 amount to nothing more
than internal arrangements which are to be complied with by the
directors, they should be treated in the same way in which they would
have been treated had they been contained in the articles of
association. In my view this is too simplistic an argument. For
reasons
which the legislature considered sound, it was decided that
the provisions in question should be embodied in a statute, thus
giving
them far more weight. In
Lindner
National Bakery the
court expressed
itself as follows in regard to section 70
dec
(2)
of the previous act:
“
On
the other hand it is difficult to escape the argument that where the
Legislature, in order to achieve its object that the directors
shall
not sell without the consent of the shareholders, has laid down in
clear terms the procedure to be followed when a company
seeks to sell
its undertaking or the greater part of its assets, that procedure
must be followed, even though the consequences of
giving effect to
the prescribed procedure may be such as to justify the surmise that
Parliament did not appreciate the full effect
of its pronouncement.
See
Rex v
Bennett and Co. (Pty.) Ltd. and Another
,
1941 T.P.D. 194
at p. 200.”
(At 380A-B)
[16] In a further article on section 228 and the
Turquand
rule
in TSAR 1992-3 at 545 Basil Wunsh repeated his earlier view as to
section 70
dec
(2) of the previous act. In addition to points
made in the earlier article, he submits that the following factors
should also be
taken into account and reinforce his view that the
rule should prevail over the provisions of the statute:
The absence of a penalty.
The
ratio
of the
Turquand
rule
and the general application of the presumption
omnia
praesumuntur rite ac solemniter esse acta
as
a rule of substantive law.
That there are no considerations of policy or public interest
involved.
As to (1), the absence of a prescribed penalty in
the event of a statutory contravention is often taken to be an
indication that no
public interests are involved, but to my mind that
fact does not tip the scales in favour of the
Turquand
rule in the circumstances under discussion. I also do not agree that
in relation to section 228 it can be said that the
omnia
presumption applies equally to section 228 as it does to the internal
arrangements of the company, for this argument also disregards
the
intention of the legislature.
[17] Some proponents of the rule argue that since
the section was introduced for the protection of the shareholders of
a company,
the rule should prevail since there are no public
interests involved. This is the view of Prof Blackman in his chapter
on companies
in LAWSA Vol 4 Part 2 (First Reissue). But, as Prof
Fourie has pointed
out,
sections 220-234 of the act all contain provisions which curtail the
powers of directors. The
Turquand
rule was not relied on in
Neugarten and
Others v Standard Bank of South Africa Limited
1989 (1) SA 797
(A), in which
the
court held that sections 226(1) and (2) were introduced solely for
the protection and benefit of the members of a company. The
section
prohibits a company directly or indirectly from making certain loans
or providing security to or for a director or manager
of itself or of
its holding company or of another subsidiary of the holding
company without the consent of all the
members or the passing of a special resolution.
Wunsh seeks to distinguish the
judgment from the situation when it is attempted to invoke the
Turquand
rule so as to override section 228 for the following reasons.
Section 226(4) of the act makes the errant director of officer
guilty of an offence;
Without the prescribed consent or special
resolution the transaction are
ultra
vires
the company;
The mischief aimed at is far more serious that at which section 228
aims; and
The validating formality is the written consent of all the members
which can easily be called for and produced; or a special resolution
which is registered and is such is a public document.
Whatever value the points put forward by Wunsh may
have, they are not in my view a sufficient indication that it was the
intention
of the legislature to permit
the
Turquand
rule to prevail over
the
provisions of the section. In this regard I consider that the
following passage from the judgment of E M
Grosskopf
JA, who delivered the
majority judgment in
Bevray Investments
(Edms) Bpk v Boland Bank Bpk en Andere
[1993] ZASCA 57
;
1993 (3) SA 597
at 622
in fine
to 623D to be particularly instructive.
“
Die
reël dat die Wetgewer se bedoeling in eerste instansie in die
letterlike betekenis van sy woorde gesoek word is so geyk, en die
redes daarvoor so klaarblyklik, dat dit skaars beklemtoning verg.
Die Wetgewer bepaal wat veroorloof word en wat verbied word.
Die
onderdaan kan alleen die Wetgewer se wil vasstel uit die woorde wat
gebruik word. In ´n geval soos die onderhawige, as ´n
direkteur of
´n maatskappy-sekretaris of ´n ouditeur wil weet of ´n bepaalde
lening ´n oortreding van art 226 is, behoort hy
die antwoord te kan
vind in die woorde van die Wet, en, indien hulle duidelik is, behoort
dit nie vir hom nodig te wees om te bespiegel
of die Wetgewer nie
miskien iets anders bedoel het nie, of om rond te krap in die
wetgewende
geskiedenis van die bepaling
nie. Daar word
gevolglik
dikwels beklemtoon dat dit net
in uitsonderlike gevalle is waar afgewyk mag word van die letterlike
betekenis van die woorde van wetsbepalings—‘(s)legs
´n duidelike
en onbetwyfelbare bepaalde bedoeling van die Wetgewer, en nie ´n
bloot veronderstelde bedoeling nie, kan ´n afwyking
van die gewone
betekenis van woorde regverdig…’ (
per
Botha AR in
Du Plessis v Joubert
1968 (1) SA 585
(A) op 595A). Sien ook
S
v Tieties
(
supra
)
op 464A: ‘…a Court…may only do so where this is necessary to
give effect to what can with certainty be said to be the true
intention of the Legislature’ en op 464E ‘provided it can be
indisputably established that the Legislature intended something
different from the ordinary meaning conveyed by the words used…”
In my view it cannot in the present case be
indisputably established that the legislature intended something
different from the ordinary
meaning conveyed by the words used. I
must therefore respectfully disagree with the
obiter
remarks by
Van Zyl
J in
Levy
and Others v Zalrut
inasmuch as they
can be said to support the application of the
Turquand
rule so as to negate the provisions of
section 228. In my view the legislature intended the provisions of
the
section
to prevail.
[18] In conclusion I should add that a major part
of the applicant’s case as argued before me was that she was
entitled to succeed
on the grounds of estoppel, the submission being
that because Klages brought the applicant under the impression that
she was entitled
to bind the respondent the respondent was estopped
from denying her authority. This is of course not the test for
estoppel – it
is only the principal’s actions which can give rise
to estoppel being raised against the principal. While it could have
been argued
that by appointing Klages as the sole director and
allowing her to act for the company, the respondent had created the
impression
that she could bind the company, the onus to be discharged
in order to establish estoppel is far greater than that which is
necessary
to establish the operation of the
Turquand
rule. It is in my view in any event not necessary to go into the
issue for as pointed out by Prof Fourie the general principle,
as
formulated in LAWSA is
“
Estoppel
is not allowed to operate in circumstances where it would have a
result which is not permitted by law. A defence of estoppel
will
therefore not be upheld if its effect would be to render enforceable
that what the law, be it the common law or statute law,
has in the
public interest declared to be illegal or invalid.”
(Para 387)
(Now in Volume 9 (first re-issue) at para 470.)
See also
Strydom v
Land-en Landbou Bank
1972 (1) SA 801
(A) in which the Appellate Division held that estoppel will not be
permitted if by doing so a result would be achieved which is contrary
to the intention of the
legislature.
As far as section 228 is concerned, an agreement concluded on behalf
of the company in contravention of the section
has no legal effect
unless and until it is ratified by the shareholders. If the
Turquand
rule cannot apply, then for the same reason, estoppel cannot apply.
In the circumstances the application is dismissed with costs.
__________________
R B CLEAVER