South Africa: Eastern Cape High Court, East London Local Court

[7] Section 49 of the Close Corporations Act provides as follows:

“Unfairly prejudicial conduct

(1) Any member of a corporation who alleges that any particular act or omission of the corporation or of one or more other members is unfairly prejudicial, unjust or inequitable to him or her, or to some members including him or her, or that the affairs of the corporation are being conducted in a manner unfairly prejudicial, unjust or inequitable to him or her, or to some members including him or her, may make an application to a Court for an order under this section.

(2) If on any such application it appears to the Court that the particular act or omission is unfairly prejudicial, unjust or inequitable as contemplated in subsection (1), or that the corporation’s affairs are being conducted as so contemplated and if the Court considers it just and equitable, the Court may with a view to settling the dispute make an order as it thinks fit, whether for regulating the future conduct of the affairs of the corporation or for the purchase of the interest of any member of the corporation by other members thereof or by the corporation.”

[8] As indicated earlier in this judgment it is not in dispute that first respondent is indebted to the applicant to the value of applicant’s loan account. It is equally not in dispute that applicant demanded payment of the value of his loan account, and that same has not been paid to him. The question therefore, is whether by so doing, namely by not paying to the applicant the value of his loan account, the respondent’s action or omission in this regard is unfairly prejudicial, unjust and inequitable to him as envisaged in Section 49 of the Close Corporations Act.

[9] It is trite that Section 49 gives the court a wide discretion to make such order as it thinks fit in the case of unfairly prejudicial conduct against a member. As to what the section is meant to achieve, the following was stated by Jones J in Gatenby v Gatenby and Others [1996] 2 All SA 333 at 338 b-e:

“The object of section 49 is to come to the relief of the victim of oppressive conduct. The section gives the court the power to make orders “with a view to settling the dispute” between the members of a close corporation if it is just and equitable to do so. To this end the court is given a wide discretion. It may “make such order as it thinks fit” , within the framework of either “regulating the future conduct of the affairs of the corporation” or “the purchase of the interest of any member of the corporation by other members thereof or by the corporation”. These are far reaching powers. One member can be compelled to purchase the interest of another at a fair price, whether he wants to or not.”

[10] The application is assailed on the basis that it is not concerned or does not concern applicant as a member of the first respondent but as an individual creditor of first respondent and in this regard he does not enjoy protection under Section 49. This also in view of the fact that he has expressed the intention to make an application in terms of Section 36 at a later stage. Section 36 deals with the cessation of membership by order of court upon application by a member of the corporation. If anything the case referred to by the respondents to support their submissions in this regard, support the contrary view in that matter – McMillan NO v Pott 2011 (1) SA 511 at page 525 [29] Binns-Ward AJ as he then was states:

“In my judgment there is considerable cogency in the considerations urged by the applicant’s counsel. It is indeed clear that McMillan participated in the joint venture and advanced his capital contribution for the purchased of the issued shareholding in the company, only on the basis that this would provide him with employment and the opportunity to ‘grow’ the company’s business, primarily for his own benefit. His later decision, to establish the McMillan Family Trust and to direct that the 30 per cent interest he was entitled to in the company should be registered in the trust’s name, did not affect the essential basis of this initial investment and continued participation in the joint venture. Likewise, the basis on which the trust obtained and held its shares in the company was indistinguishable from McMillan’s joint venture involvement in the company. The trust had no commercial reason to continue to hold shares in TBM if McMillan was not to be a director of the company and in charge of the day-to-day running of its business.”

It is my considered view that likewise in casu, the applicant’s advancement of loan to first respondent cannot be separated from his membership of first respondent and consequently the running of the affairs / conduct of first respondent. By their own admission, respondents allege that the loan account of all the members contribute the working capital of the corporation. (See para 15 of respondent’s heads of argument) This in my view is a further indication that applicant’s loan in the first respondent and his membership are indistinguishable. That being the case the issue of the payment of applicant’s loan falls under the ambit of Section 49.

[11] I also do not see how the issue of the cessation of applicant’s membership cannot be dealt with separately from the payment of the value of his loan. Because in the case of the cessation of his membership the question of the value of his member interest will come into play. However to avoid the anomalous situation where applicant withdraws his portion of the working capital and yet continue to benefit as a member of first respondent, it will be appropriate to put him to terms as far as applying for the cessation of his membership in first respondent in terms of Section 36 is concerned.

[12] Respondents also contend that loan repayment can only be made as provided for in Clause 13 of the draft association agreement. It is common cause that the said agreement was never signed by the members. I am of the view and it is my judgment that it does not form an agreement between the members. As such, no reliance can be placed on it. The same goes for the contention that this application has been brought prematurely because the dispute between members has not been referred to arbitration as provided for in the draft association agreement.

[13] As far as the value of the loan in question is concerned paragraph 31 of the answering affidavit deposed to by second respondent, reads as follows:

“31.1. The draft financial statements referred to by Applicant as “LEJ” were not attached to the papers served on me and I am not certain as to exactly what draft Applicant is referring to. It does however appear in the February 2012 financial statements that Applicant’s loan account is R2,534,168.00 (TWO MILLION FIVE HUNDRED AND THIRTY FOUR THOUSAND ONE HUNDRED AND SIXTY EIGHT RAND). This figure is not accurate as, since those financial statements were prepared, further amounts owing by Applicant to First Respondent have been ascertained.”

There is however no indication of what those amounts relate or why they had not been ascertained since applicant left the employ of the first respondent in October 2011.

[14] It is common cause between the parties that as things stand, all trust between them has been destroyed. That is not practical for them to work together. (See para 45-48 of founding affidavit, as well as 30.2 of the answering affidavit). It is my considered view that it will be unfairly prejudicial, unjust and inequitable for the first respondent to retain applicant’s loan in it in the circumstances.

[15] I am satisfied that the applicant has succeeded in showing that he is entitled to the relief sought in prayer 1.1.1 of the notice of motion in the amount admitted by the respondents. And that will be just and equitable to grant the order sought by the applicant.

[16] Accordingly:

1. First respondent is ordered to pay to the applicant the sum of R2 534. 168.00 in full and final settlement of applicant’s loan account in the first respondent, within fourteen (14) days of the date of this order.

2. First respondent is ordered to pay interest at legal rate on the amount due to applicant in respect of his loan account, a tempore morae, to date of payment.

3. Applicant is ordered to lodge an application in terms of section 36 of the Close Corporations Act within ninety (90) days of the date of this order.

4. Respondents, jointly and severally the one paying the other to be absolved, are ordered to pay costs of this application.

_____________

N G BESHE

JUDGE OF THE HIGH COURT

APPEARANCES

For the Applicant                 :             Adv: S H Cole

Instructed by                        :            MONAGHAN ATTORNEYS

                                                                9 Winsor Road

                                                                Vincent

                                                                EASTLONDON   

                                                                Tel.: 043 – 642 5889

                                                                Ref.: MAT2506

For the Respondents           :              Adv: Paterson SC

Instructed by                        :            ABDO & ABDO ATTORNEYS

                                                                33 Tecoma Street

                                                                Berea

     East London        

                                                                Tel.: 043 – 700 7900

                                                                Ref.: MR C ABDO/Samantha/ l36

Date Heard                           :               20 August 2013

Date Reserved                      :               20 August 2013

Date Delivered                     :               10 June 2014