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[2020] ZASCA 183
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Sekepe Investments (Pty) Ltd and Others v Government Employees Pension Fund and Another (110/2019) [2020] ZASCA 183 (23 December 2020)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 110/2019
In
the matter between:
SEKEPE
INVESTMENTS (PTY) LTD FIRST
APPELLANT
THE
ALCHAMY (PTY) LTD
SECOND
APPELLANT
MAROBALO
INVESTMENTS (PTY) LTD THIRD APPELLANT
And
GOVERNMENT
EMPLOYEES
PENSION
FUND
FIRST RESPONDENT
MAGAE
MAKHAYA HOUSING
(RF)
(PTY) LTD
SECOND RESPONDENT
Neutral
citation:
Sekepe
Investments (Pty) Ltd and Others v Government Employees Pension Fund
and Another
(110/2019)
[2020] ZASCA
183
(23 December 2020)
Coram:
CACHALIA, MOCUMIE and MAKGOKA JJA
and POYO DLWATI and UNTERHALTER AJJA
Heard
:
3 November 2020
Delivered
:
This judgment was handed down electronically by circulation to the
parties’ representatives via email, publication
on the Supreme
Court of Appeal website and release to SAFLII. The date and time for
hand-down is deemed to be 09h45 on 23 December
2020.
Summary:
Specific performance –
standing – claims made to enforce rights of shareholders –
no derivative action required
– conditions for the advance of
the loans satisfied – shareholders’ agreement to fund
company arises from shareholder
resolution.
ORDER
On
appeal from:
Gauteng Division of
High Court, Pretoria (Rabie J sitting as court of first instance):
judgment reported
sub nom Sekepe
Investments Pty Ltd and Others v Government Employees Pension Fund
and Another
[2018] ZAGPPHC 785.
1
The appeal is upheld with costs, including the costs of two counsel,
where so employed.
2
The order of the high court is set aside and replaced by the
following order:
‘
The
application succeeds with costs and prayers 1-17 of the notice of
motion are granted.’
JUDGMENT
Unterhalter
AJA (Cachalia, Mocumie and Makgoka JJA and Poyo-Dlwati AJA
concurring)
[1]
The appellants and the first respondent, the Government Employees
Pension Fund (GEPF),
[1]
are the shareholders of the second respondent, Magae Makhaya Housing
(RF) (Pty) Ltd (MMH). MMH was incorporated to develop low-cost
housing projects. The shareholders of MMH concluded a shareholders’
agreement. Clause 10 of the shareholders’ agreement
provides
for the financing of MMH. It states that the funding of the company
was to be from the profits of the company, by way
of loans on
commercial terms, and, only insofar as may be agreed by the
shareholders, by way of shareholder loans to the company,
provided
that the shareholders were given timeous notice of the request for
funding. The shareholder loans to MMH are stipulated
to be in
proportion to the shareholders’ shareholdings. The first
appellant, Sekepe Investments (Pty) Ltd (Sekepe), holds
55%, the GEPF
25%, and the remaining shareholders 10% each of the shares in the
company.
[2]
The GEPF concluded separate loan agreements with the appellants. In
terms of these agreements, the GEPF
agreed, subject to conditions, to
lend considerable sums of money to the appellants to enable the
appellants to meet the calls
made by MMH to its shareholders for
funding. The GEPF thus undertook to lend money to the appellants so
that they, together with
the GEPF, would fund MMH. The loan
commitments made by the GEPF under the loan agreements amounted to
R500 million, inclusive of
the amount it would itself be advancing to
MMH by way of shareholder loan.
[3]
In September 2017, the board of MMH resolved that it required
shareholder funding for various projects.
The GEPF was represented at
the board meeting by two directors. Pursuant to the resolution, MMH
issued utilisation notices to the
GEPF calling upon it to advance
sums to the appellants, under the terms of their loan agreements with
the GEPF, so that the appellants,
in turn, could make shareholder
loans to MMH.
[4]
The GEPF did not make the loans available to the appellants. In
October 2017, the appellants’
attorneys sent letters to the
GEPF, demanding that the GEPF make payment of the shareholder loans
that it was liable to pay to
MMH, as a shareholder, being 25% of the
shareholder loan call. In addition, the appellants called upon the
GEPF to advance the
loans to them pursuant to the utilisation
notices, so that the appellants, in turn, could meet their
obligations to fund MMH.
[5]
These demands went unheeded. The appellants launched an application
in the high court. The relief sought
was specific performance. First,
the notice of motion sought the payment of shareholder loans to MMH
under the shareholders’
agreement. Second, the appellants
sought to enforce the payment of the loans allegedly due by the GEPF
to the appellants under
the terms of the loan agreements and the
utilisation notices.
[6]
In its answering affidavit, the GEPF, in essence, advanced the
following defences. First, it raised
the issue of standing,
contending that if its failure to advance the sums sought (both in
terms of the shareholders’ agreement
as well as the separate
loan agreements) was a wrong done to MMH, then the application should
have been brought by MMH. And, if
that was not possible because the
GEPF would not consent to MMH doing so, then the appellants, as
shareholders, were required to
bring proceedings under s 165(2) of
the Companies Act 71 of 2008 (the
Companies Act) to
protect the legal
interests of MMH.
[2]
This, so went the argument, the appellants had failed to do.
[7]
Second, the GEPF contended that the conditions of clause 7 of the
loan agreements had not been satisfied,
nor had the GEPF been
provided with the documents required under the terms of clause 7, and
hence the GEPF had no obligation to
advance the loans sought of it.
Furthermore, it was said that the appellants had failed to comply
with clause 16 of the loan agreements
in that there had been no
production of financial statements, nor quarterly environmental,
social and governance reports.
[8]
Third, the GEPF contended that it was not in breach of its
obligations to make loans to MMH as a shareholder.
Clause 10 of the
shareholders’ agreement required that shareholder loans be made
simultaneously. The GEPF contended that
the appellants were in no
position to do so, which meant, as a result, that the GEPF had no
obligation to extend 25% of the funding
sought by MMH as a
shareholder loan in terms of the shareholders’ agreement.
[9]
The high court dismissed the application. Rabie J found that the
defences advanced by the GEPF were
sound, save that he considered it
unnecessary to resolve the standing defence raised by the GEPF.
[3]
[10]
With the leave of the high court, the appellants appeal to this
court.
Standing
[11]
The GEPF contended that the appellants brought the application in the
interests of MMH and sought relief on behalf
of MMH. The appellants,
as a consequence, lacked standing to do so. MMH was required to bring
the application in its own legal
interest for the relief sought in
the notice of motion. If MMH was not able to bring the proceedings
because the GEPF directors
of MMH declined to give their consent, so
the submission went, then the appellants should have brought a
derivative action on behalf
of MMH under the procedures set out in
s 165
of the
Companies Act. This
the appellants failed to do.
[12]
There are passages in the founding affidavit that state that the
application is brought in the interests of MMH
and that, under its
Memorandum of Incorporation, MMH cannot initiate litigation without
the unanimous resolution of its shareholders.
In addition, the notice
of motion is formulated on the basis that the GEPF is directed to pay
amounts to MMH, these amounts being
the advances on the loans due by
the GEPF to the appellants. The notice of motion also seeks to compel
the GEPF to pay amounts
to MMH in accordance with the GEPF’s
obligations under the shareholders’ agreement. The GEPF relies
upon these passages
in the founding affidavit, and the relief sought
in the notice of motion, to contend that the application is brought
in the interests
of MMH; and that, absent compliance with
s 165
of
the
Companies Act, the
appellants lack standing to bring the
application.
[13]
The agreements between the GEPF and the appellants are unusual. The
appellants appear to be nominal shareholders
in MMH. The loans are
advanced by the GEPF to the appellants solely for the purpose of the
appellants, in turn, advancing the same
amount as loans to MMH under
the shareholders’ agreement. Why the GEPF should wish to use
the appellants as a conduit through
which to fund the MMH indirectly,
in addition to doing so directly (as a party to the shareholders’
agreement), was not explained.
But none of the parties contended that
the shareholding of the appellants, nor the shareholders’
agreement or the loan agreements
were sham transactions. We must
therefore proceed on the basis that these agreements are valid.
[14]
Once this is so, the issue of standing is properly considered by
asking whether the appellants’ application
was predicated upon
the rights of the appellants or the rights of MMH.
[15]
The loan agreements were concluded between the GEPF and each of the
appellants. Under those agreements, the GEPF
agreed to advance
amounts to the appellants as loans. The appellants, subject to the
terms and conditions of the loan agreements,
enjoyed the right to the
advances promised to them by the GEPF. The appellants were obliged to
apply the amounts advanced to the
capital calls of MMH. But those
obligations do not derogate from the appellants’ rights, in the
first instance, to the advances
lent to them by the GEPF. It is true
that the ultimate recipient of the advances is MMH. Accordingly, the
enforcement by the appellants
of their rights to the advances will,
in turn, benefit MMH and be in its interest. That flows from the fact
that MMH triggered
the capital call upon its shareholders and the
advances under the loan agreement were the chosen means by which the
capital was
to be made available by the appellants.
[16]
None of this derogates from the fact that the appellants asserted
their rights to have the GEPF make the advances
to them. Nor should
it be forgotten that the assertion of these rights and securing the
advances burdens the appellants under the
loan agreements with the
respective obligations to pay interest and repay the advances as
indebtedness owing to the GEPF, albeit
on terms that few commercial
lenders would accept. That is, that the appellants would pay interest
and capital when and if they
received dividends from MMH. However,
once the appellants seek the specific performance of the obligations
owed to them under the
loan agreements, they plainly have standing to
do so. That the proceeds of the advances will accrue to MMH does not
alter the standing
of the appellants to enforce their rights.
[17]
The relief sought by the appellants in the notice of motion, that
seeks to direct the GEPF to make payments to
MMH in terms of the
shareholders’ agreement, stands on a somewhat different
footing. The parties to the shareholders’
agreement are the
shareholders and MMH. Clause 10 of the shareholders’ agreement
regulates the funding of MMH. The shareholders
agree to fund MMH by
way of shareholder loans in proportion to their shareholding. True
enough, MMH must request this funding.
But if the shareholders agree
to this request, then the shareholders become obliged to fund MMH by
way of shareholder loans, proportionate
to their shareholding, and to
do so simultaneously.
[18]
These stipulations give rise to rights as between the shareholders.
Once the shareholders agree to fund MMH, the
funding takes place
according to agreed proportions and by way of the simultaneous duty
on each of the shareholders to make the
funding available. Each of
the shareholders owes a duty to make the funding available. That is a
duty owed by each shareholder
to MMH and also to every other
shareholder. It follows that the appellants enjoy the right under the
shareholders’ agreement
to exact compliance with the duty to
fund resting upon all shareholders, and hence upon the GEPF. Here,
too, the appellants as
shareholders are enforcing their rights to
specific performance. MMH is the recipient of the funding, but the
duty to fund is not
only owed by each shareholder to MMH. It is also
owed to every other shareholder, and, for this reason, it is
enforceable by the
shareholders
inter se.
That being so, the
appellants enjoy standing to seek to compel compliance by the GEPF
with its funding obligations under the shareholders’
agreement.
[19]
Accordingly, the standing defence fails.
The
requirements to advance the loan amounts
[20]
The GEPF contends that the appellants failed to meet the requirements
of the loan agreements and, absent compliance,
there was no duty
resting upon the GEPF to advance the loans to the appellants.
[21]
In its answering affidavit, the GEPF largely contented itself with a
repetition of the provisions of the loan agreements
to advance its
position that there had been non-compliance by the appellants, rather
than deposing to the facts as to what documents
were in the
possession of the GEPF and what was missing. A defence cannot be made
out simply by reproducing the terms and conditions
of an agreement
and asserting that the conditions have not been fulfilled. This is
most especially the case, as I shall explain
below, when the GEPF had
received relevant documents from the appellants and failed to reflect
these in its answering affidavit.
[22]
Ultimately, the GEPF’s complaint was this. Clause 6 of the loan
agreements made the advances subject to clause
7. Clause 7 stipulated
for various conditions, one of which is that the documents must be
provided as required by the further conditions
of utilisation
contained in clause 7.3. Clause 7.3 states that the lender, that is
the GEPF, will only be obliged to advance the
loans if, in its
opinion, on the date of the utilisation notice and the utilisation
date, the repeating representations (a defined
term) are correct in
all material respects. The repeating representations are defined to
mean the warranties and representations
in clause 15. Among the
warranties and representations listed in clause 15 is the warranty
that the appellants had prepared their
financial statements in
accordance with generally accepted accounting principles or in
accordance with IFRS,
[4]
as consistently applied (‘the financial standards warranty’).
This, the GEPF contended, had not been done by the appellants,
and
hence no advances were due to them.
[23]
What occurred was this. In October 2017, the appellants’
attorneys sent letters to the GEPF referencing the
utilisation
notices, stating that the appellants had complied with the loan
agreements, and demanding payment of the advances under
the loan
agreements. No response was forthcoming, and the appellants launched
the application they had threatened. The GEPF’s
answering
affidavit was deposed to by its then Chief Executive Officer, Dr
Daniel Matjila, on 16 February 2018.
[24]
What the answering affidavit did not reference was the correspondence
that had passed between the GEPF’s
attorneys and the attorneys
of the appellants. In the GEPF’s attorneys’ letter dated
26 January 2018, it was stated
that the appellants were in breach of
their obligations in terms of clause 16 of the loan agreements in
failing to provide audited
financial statements as at the end of the
financial year. It was further stated that the appellants had not
provided the GEPF with
quarterly management accounts or quarterly
environmental, social and governance reports, as clause 16 required.
Mention was also
made of a failure to comply with the information
undertakings, a tautologous reference to clause 16. Nothing was said
about any
failure to comply with clauses 7.3 and clause 15 as the
basis upon which the advancement of the loans was declined.
[25]
The appellants’ attorneys replied on 9 February 2018. With some
indignation, they pointed out that compliance
with clause 16 had
never been raised by the GEPF prior to the launch of the appellants’
application. However, the management
accounts for the 11 months
ending 31 January 2018 were attached, as also the financial
statements for the 14 months ended 28 February
2017. The letter also
observed that, save for some small amounts, the loans from the GEPF
to the appellants flowing to MMH constituted
the financials of the
appellants. Further, it was said that the GEPF had never prescribed
for quarterly management accounts. Nor
would it make sense, given
that the purpose of the appellants was to channel money to MMH, not
for the appellants to provide environmental,
social and governance
reports. The broader point made in the letter is that the GEPF was
opportunistic in its endeavour to find
a basis not to advance the
loans.
[26]
No proper explanation has been furnished as to why the GEPF failed to
reference and deal with this correspondence
in its answering
affidavit. The correspondence and its attachments form part of the
replying affidavit.
[27]
What is plain, however, is that the financial standards warranty was
satisfied, as evidenced by the financial statements
and management
accounts attached to the letter of the appellants’ attorneys.
The only documents that the GEPF identified
that it had not received,
pertinent to clause 7.3 and the repeating representations, were the
financial statements and the management
accounts. And these it now
had.
[28]
As to the alleged breach of clause 16, this clause does not set out
conditions that must be met before the GEPF
is obliged to make the
loans. Those conditions, as indicated, are stipulated in clause 7.1
and 7.3, read with clause 15. There
the GEPF’s only factual
complaint concerned the financial standards warranty, which had been
met. As to clause 16.2 and 16.3,
the GEPF was provided with the
audited financial statements. If they were out of time, the GEPF may
claim for breach, but it is
hard to see what of consequence could be
claimed. The quarterly management accounts and environmental, social
and governance reports
had to be prescribed by the GEPF. There is
nothing to show that it did so. Nor has it responded to the
invitation made by the appellant’s
attorneys as to whether
there is reason to do so.
[29]
It follows that the GEPF has failed to make out a defence that it was
not obliged to advance the loans to the appellants
for the reason
that the antecedent conditions required to claim specific performance
had not been fulfilled.
Loan
payments to MMF
[30]
The GEPF relied upon the provisions of clause 10 of the shareholders’
agreement to contend that it was not
obliged to pay the loans. Clause
10 requires that if MMH was to be funded by shareholder loans, that
must be agreed by the shareholders.
The agreement must be separate
from the shareholders’ agreement. In addition, the agreement
must include the interest any
loan will attract and when the loan is
repayable. The GEPF submitted that such an agreement did not take
place, and that in the
absence thereof, there could be no obligation
on it to advance loans to the appellants. The only point of such
advances was to
place the appellants in a position, in turn, to lend
these monies, as shareholders, to MMH. Finally, it was said that
clause 10
required the shareholders to make the loans to MMH
simultaneously. Since the appellants were in no position to make
loans to MMH,
the GEPF was excused from doing so.
[31]
These submissions are unavailing. A round-robin resolution was passed
by the shareholders of MMH,
[5]
drafted on 4 November 2016. Although something was made of the fact
that the copy of the resolution does not bear the signatures
of the
GEPF’s representatives, in its answering affidavit the GEPF
does not deny it agreed to the resolution. The resolution
stipulates
the maximum amounts that may be advanced to MMH by way of shareholder
loans, and that the loans are to be interest free.
The shareholders
therefore did, by separate agreement, decide to fund MMH by way of
shareholder loans and agreed the interest rate
to be zero. Clause 10
of the shareholders’ agreement states that the shareholders’
loans shall ‘only be repayable
when the shareholders agree’
.
This means that,
until the shareholders agree, the loans are not repayable.
Accordingly, the absence of agreement in the resolution
as to when
the loans would be repayable did not invalidate the agreement that
the shareholders would make loans to MMH. It simply
meant that the
loans were not repayable until the shareholders agreed to this.
[32]
Finally, as to the requirement of simultaneous payment, the only
reason the appellants could not make good their
loans as shareholders
to MMH was that the GEPF had declined to advance loans to the
appellants. Given that it is was always understood
that the GEPF was
to lend the appellants the money, to enable the appellants to make
their shareholder loans to MMH, the GEPF cannot
rely upon its own
failure to make the required advances to contend that the appellants
are not in a position to make the shareholder
loans simultaneously
with the GEPF. In any event, the orders sought by the appellants in
the notice of motion will ensure that
the shareholder loans are made
to MMH simultaneously.
Conclusion
[33]
The GEPF’s defences to the grant of specific performance cannot
prevail. The appellants are entitled to the
relief sought in the
notice of motion. Costs should follow the result, including the costs
of two counsel.
[34]
The following order is made:
1
The appeal is upheld with costs, including those of two counsel.
2
The order of the high court is set aside and replaced by the
following order:
‘
The
application succeeds with costs and prayers 1-17 of the notice of
motion are granted.’
____________________
D
N Unterhalter
Acting
Judge of Appeal
APPEARANCES
For
Appellants:
D van den Bogert (with him C Jacobs)
Instructed
by:
M.R.
Phala Attorneys., Benoni.
Honey
Attorneys, Bloemfontein.
For
First Respondent: K Tsatsawane SC (with him E
Mkhawane)
Instructed by:
Cliffe Dekker Hofmeyr Inc., Johannesburg
Friedland Hart Solomon Nicholson, Pretoria
Symington & De Kok, Bloemfontein.
[1]
The Government Employees
Pension Fund is a pension fund established in terms of the
Government Services Pension Act 57 of 1973.
It is represented by its
investment arm, the Public Investment Corporation SOC Ltd, a
state-owned company created in terms of
the Public Investments
Corporation Act 2004.
[2]
That is, by means of a derivative action.
S 165(2)
of the
Companies
Act provides
that:
‘
A
person may serve a demand upon a company to commence or continue
legal proceedings, or take related steps, to protect the legal
interests of the company if the person—
(a)
is a shareholder or a person entitled to be registered as a
shareholder, of the company
or of a related company;
(b)
is a director or prescribed officer of the company or of a
related company;
(c)
is a registered trade union that represents employees of the
company, or another representative of employees of the company; or
(d)
has been granted leave of the court to do so, which may be
granted only if the court is satisfied that it is necessary or
expedient
to do so to protect a legal right of that other person.’
[3]
See
Sekepe Investments Pty Ltd and Others v
Government Employees Pension Fund and Another
[2018] ZAGPPHC 785, especially para 41.
[4]
International Financial
Reporting Standards.
[5]
See
s 60(1)
(b)
of the
Companies
Act.