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REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NUMBER : 30364/2016

Not reportable

Not of interest to other judges

Revised.

17/2/2017

In the matter between

SUMMERTIME ENTERPRISES (Pty) Ltd                                                              Applicant

and

EUAN ROBERTSON MC HARG                                                                First Respondent

JOAN ELIZABETH MC HARG                                                              Second Respondent

MATTHEW ADAM MC HARG                                                                   Third Respondent

BOPA-LOCK CLOSE CORPORATION t/a

TOOLMAC AGENCIES                                                                           Fourth Respondent

JUDGMENT

ANDRÉ GAUTSCHI AJ :

[1] This is an application to enforce restraints of trade against the first, second and third respondents and to declare the first respondent a delinquent director.

[2] In terms of an agreement dated 12 March 2014, the first respondent sold the business of his close corporation, Macbolt Industrial Supplies CC, to the applicant[1] for R4 million, payable by way of R2 million in cash, and the issue of 50% of the ordinary issued share capital in the applicant, being the equivalent of the remaining R2 million.  The business was that of industrial hardware supplies, in particular bolts, nuts and tools.

[3] The agreement provided that the first respondent would continue for the transitional period between the Effective Date (1 April 2014) and the Implementation Date (1 May 2014) to operate the business for and on behalf of the applicant. He would also be employed in the business for one year. One year after the Effective Date the first respondent was entitled to sell his shares and claims on loan account to the remaining shareholders in the applicant. If he managed to achieve the warranties recorded in the agreement, which included a warranted profit after tax of at least R1.6 million exclusive of VAT, he was entitled to be paid R2 million for his shares, otherwise he would be entitled to half the actual profit after tax for his shares.

[4] In terms of the sale agreement, the first respondent was restrained, for a period of five years following the later of his termination of employment with the business or the exercise of his option sell his shares in the applicant. The relevant part of the restraint is that he would not participate in any industry in direct or indirect competition with the business within the Republic of South Africa, save that he was entitled to sell the Bopalock product and could not be restrained in respect of such sales or any customer relations or business dealings which he may have established in connection with that product.

[5] Because the Macbolt business was a family business, the second respondent (the first respondent's wife) and the third respondent (their son) were similarly restrained, but for shorter periods.

[6] The first respondent complains that instead of receiving the R4 million he expected, he only received R1.4 million (having loaned R600 000 to the applicant), and a dispute has developed about the amount to be paid for his shares. Accordingly, he has set up business through the fourth respondent (Macbolt Industrial Supplies CC which has changed its name) in competition with the applicant.

[7] The applicant seeks to restrain the first, second and third respondents.  I intend to dispose briefly with the relief sought against the second and third respondents. There is no evidence that the second respondent is in breach of the restraint, since the applicant has not established that she is employed by the fourth respondent.  The claim against her must therefore be dismissed and she will be entitled to costs. The third respondent was restrained merely for 18 months, and that restraint has expired. However, it had not expired by the time the application was launched and was set down on the unopposed roll and before it became opposed. It is established that the third respondent is employed by the fourth respondent, and, should the first respondent fail in his attempt to avoid the restraint, it would follow that the third respondent would also have failed.  In that event, the applicant would be entitled to its costs against him.

[8] It is not in dispute that the first respondent is bound by the restraint of trade clause, and has breached and remains in breach of that restraint. The onus is on him to avoid the effect of the restraint by showing that it is unreasonable and against public interest to enforce it. For that the first respondent needed to place facts before me, which he has failed to do.

[9] It was argued on behalf of the first respondent that there was no protectable proprietary interest on the part of the applicant, because in the year of his employment in the business following the sale he had learnt nothing new and there was nothing to restrain. That is a fallacious approach. The restraint is as a result of the purchase of the business, not as a result of the first respondent's continued employment in the business. It is logical that a purchaser of a business as a going concern with all its goodwill and trade connections, will seek to restrain the seller from simply opening up a similar business in competition with the purchaser within the area of the operation of the business sold. There is clearly a proprietary interest, and the first respondent has placed no facts before me to contest this fact.

[10] Whilst the restraint may seem unduly long (five years) and unduly wide from a geographical point of view (the whole of South Africa), the first respondent has again placed no facts before me to show that the period or area are unreasonably long or wide. In short, the first respondent has done nothing in his answering affidavit to discharge the onus which rests upon him to avoid the consequences of the restraint.

[11] The only semblance of a defence is that the first respondent complains that instead of receiving R4 million for his business, he has received only R1.4 million, and that there is a dispute about the balance of the money. He is therefore forced to go back to work, in the only business which he knows. That is not an excuse. If he is entitled to more money, he must sue for the money, and not breach the restraint. If he is not entitled to more money, then he simply entered a bad bargain, and that also does not allow him to breach the restraint.

[12] The applicant has sought wide ranging relief in the notice of motion, involving also the misuse by the first respondent of confidential information.  No case has been made out for that part of the relief.  The applicant is however entitled to relief against the first respondent to restrain him from competing with the business or dealing with its clients.

[13] The applicant then seeks to declare the first respondent a delinquent director in terms of section 162(5)(c) of the Companies Act No 71 of 2008 ("the Act").  That section provides:

"(5) A court must make an order declaring a person to be a delinquent director if the person-

…

(c) while a director-

(i) grossly abused the position of director;

(ii) took personal advantage of information or an opportunity, contrary to section 76(2)(a);

(iii) intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, contrary to section 76(2)(a);

(iv) acted in a manner -

(aa) that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director's functions within, and duties to, the company; or

(bb) contemplated in section 77(3)(a), (b) or (c);

(d) …”

[14] Section 76(3) of the Act provides:

"(3) Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director-

(a) in good faith and for a proper purpose;

(b) in the best interests of the company; and

(c) with the degree of care, skill and diligence that may reasonably be expected of a person-

(i) carrying out the same functions in relation to the company as those carried out by that director; and

(ii) having the general knowledge, skill and experience of that director."

[15] The first respondent is presently, and has been since 1 April 2014, a director of the applicant, but is engaged in the fourth respondent which competes directly with the applicant. That is, at the least, a breach of trust in relation to the performance of the first respondent's functions as a director within and duties to the applicant, and is an exercise of his functions which is not in good faith or for a proper purpose or in the best interests of the applicant. Counsel for the respondents conceded that if the restraint is enforceable against the first respondent, then he is liable to be declared a delinquent director in terms of section 162(5)(c).  It seems to me that that concession is correctly made.

[16] In the result I make the following order:

1. The first respondent is interdicted and restrained, until 2 December 2020, from:

1.1 participating in any industry in direct or indirect competition with the business formerly conducted by Macbolt Industrial Supplies CC (“the business”) within the Republic of South Africa;

1.2 dealing with the business’ clients directly or indirectly whether as a member of a close corporation, shareholder of a company, beneficiary or trustee of a trust, whether or not such trust holds shares in any other juristic person, or entity in the related similar industries, suppliers or clients of the business.

2. The first respondent is declared to be a delinquent director in terms of section 162(5)(c) of the Companies Act No 71 of 2008.

3. The first respondent shall pay the costs of this application, insofar as such costs relate to the first respondent.

4. The application against the second respondent is dismissed with costs.

5. The third respondent is directed to pay the costs incurred by the applicant in the application until 30 November 2016, insofar as they relate to the third respondent.

ANDRÉ GAUTSCHI

ACTING JUDGE OF THE HIGH COURT

Date of hearing	:	15 February 2017
Date of judgment	:	17 February 2017
Counsel for the applicant	:	Mr N Alli
Attorney for the applicant	:	Saleem Ebrahim Attorneys Johannesburg
Counsel for the respondents	:	Mr HD Baer
Attorney for the respondents	:	Boela van der Merwe Attorneys Germiston (Mr M Coertzen)

 

[1] The parties to the agreement and the draftsman were seemingly confused, because the business of the close corporation ought to have been sold by the close corporation, and not by its sole member.  However, as I see it, nothing turns on this.

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