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REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION, PRETORIA

(1)         REPORTABLE: NO

(2)         OF INTEREST TO OTHER JUDGES: NO

(3)         REVISED: NO

Date:     14 December 2021

CASE NO: 47449/20

 

In the matter between:

IAN VICTOR                                                                                  APPLICANT

and

MCG INDUSTRIES (PTY) LTD                                                     FIRST RESPONDENT

KYGOTRIX (PTY) LTD                                                                  SECOND RESPONDENT

ZUNGU INVESTMENTS COMPANY (PTY) LTD                          THIRD RESPONDENT

SASFIN PRIVATE EQUITY INVESTMENT

HOLDINGS (PTY) LTD                                                                  FOURTH RESPONDENT

KUMARIE SINGH                                                                          FIFTH RESPONDENT

                                                                            

JUDGMENT

Van der Schyff J

 

Introduction

 

[1]            This is an application in terms of s 163(1) and (2) of the Companies Act 71 of 2008 (CA or the Act) for relief in respect of the applicant’s shares in the first and second respondents and repayment of the applicant’s shareholder loans. In the alternative, the applicant seeks the winding-up of the first respondent in terms of s 81(1)(d)(iii) of the CA.

 

[2]            Counsel indicated in the joint practice note that the essential issue to be determined is whether the respondents have conducted themselves in the manner as contemplated in terms of s 163(1) and/or s 81(1)(d)(iii) of the CA.

 

Section 163(1) of the Companies Act

 

[3]            Section 163(1) of the CA provides as follows:

‘Relief from oppressive or prejudicial conduct or from abuse of separate juristic personality of company. — (1) A shareholder or a director of a company may apply to a court for relief if—

(a)       any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;

(b)       the business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; or

(c)       the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.’

 

[4]            An applicant seeking relief in terms of s 163 of the CA needs to make out a case that the conduct complained of is either oppressive or unfairly prejudicial, or that its interests are unfairly disregarded. In considering whether conduct meets any of these requirements, courts can consider the jurisprudence developed in respect of s 252 of the Companies Act 61 of 1973, alongside precedents dealing with the CA.[1] It is thus not only instructive, but imperative, to consider the principles laid down in caselaw to set the bar against which the respondents conduct is to be measured.

 

[5]            Satchwell J explained in Kudumane Investment Holding Ltd v Northern Cape Manganese Company (Pty) Ltd and Others:[2]

 

‘The general approach of the predecessor section 252 of the Companies Act was to give a construction to the words of the section which would advance the remedy provided by the section rather than to limit it. Thus we have seen reference to conduct which disables a minority shareholder from enjoying “a fair participation in the affairs of the company” or which is “burdensome” or which is “unfairly prejudicial, unjust or inequitable” or “doing them an injury in their business”.’ (Footnotes omitted).

 

[6]            In Aspek Pipe Co (Pty) Ltd v Mauerberger[3] Tebbutt AJ (as he then was) said that the word 'oppressive', as used in the comparable provision in the English Companies Act, had been defined as 'unjust or harsh or tyrannical' or 'burdensome, harsh and wrongful', or which involves 'at least an element of lack of probity or fair dealing', or 'a visible departure from the standards of fair  dealing’. In the present regime, where rights and duties of directors and shareholders are determined by statute or through shareholder’s agreements, it must be considered whether any prejudice caused to a minority shareholder resulted from a contravention of the rights and duties respectively provided for in these instruments.

 

[7]            In Grancy Property Ltd v Manala[4] the court held that the prejudicial disregardful conduct must be done unfairly. The mere fact that a decision causes prejudice to a minority shareholder, does not mean that it is prima facie unfair.

 

[8]            In Count Gotthard SA Pilati v Witfontein Game Farm (Pty) Ltd and Others[5] the court held that the test was whether the acts or omissions that unfairly prejudiced the applicant’s interest resulted in affecting the applicant in his position as a shareholder. The precise question was whether the harm which the applicant had suffered was something he was entitled to be protected from. The result of the act or omission must be unfairly prejudicial and not the act itself.

 

[9]            In Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd[6] the court considered the question as to what constitutes oppressive conduct. The specific question raised was whether, if directors exercise a power given to them by the company constitution, and meet the standard of conduct in s 76, a shareholder who is prejudiced by a decision can complain that it was unfairly prejudiced. The court held that circumstances would have to be exceptional for a decision taken in accordance with s 76 to cause unfair prejudice in terms of s 163 of the CA. Rogers J stated that:[7]

 

‘[55] What is important to emphasise, however, is that it is not enough for an applicant to show that the conduct of which he complains is 'prejudicial' to him or that it 'disregards' his interests. The applicant must show that the prejudice or disregard has occurred 'unfairly'. 'Oppression' likewise connotes an element at least of unfairness if not something worse.

[56] Where the impugned conduct is unlawful, and the conduct has a consequence that is prejudicial to the applicant, the prejudice to or disregard of the interests of the applicant is likely to be, perhaps invariably will be, 'unfair' within the meaning of s 163. That section, like its forerunner, is thus available as a remedy for unlawful corporate conduct. There might be other remedies but s 163(2) provides the court with a wide array of equitable options, some of which would not otherwise be available.

[57] Matters become more difficult where the conduct complained of is lawful, ie within the powers of the relevant organ of the company (the general meeting or the board as the case may be) or within the power of the relevant official. Such cases potentially bring the invocation of the unfair-prejudice remedy into conflict with other principles of company law, such as majority rule and that the constitutional documents of the company are the compact between shareholders and the company by which they are all bound.’

Rogers J considered foreign law where it was found that the shareholders’ expectations that are to be considered in an unfair-prejudice claim are not those that a shareholder has as its own individual wish list, but those expectations which could be said to have been, or ought to have been considered as part of the compact of the shareholders.  He held that:

‘… as in England, a South African court should in my opinion take the principle of majority rule and the binding nature of the company's constitution as its starting point. In Sammel and Others v President Brand Gold Mining Co Ltd 1969 (3) SA 629 (A) Trollip JA said that the 'principle of the supremacy of the majority is essential to the proper functioning of companies' (at 678H; see also Louw and Others v Nel  2011 (2) SA 172 (SCA) ([2010] ZASCA 161) at 185 para 22; Grancy Property Ltd supra para 32). Where matters are left by the constitution to the judgment of the general meeting or the directors, and the shareholders or directors, as the case may be, have exercised the power within the parameters of any express or implied limitations, a court should be wary of substituting its own business judgment for that of the persons entrusted with that decision by the corporate constitution.’

The facts

 

[10]        The applicant is a minority shareholder of the first and second respondents, with a minority shareholding of 13% and 6.5% respectively. He is a former director and employee of the first and second respondents and was the managing director of the first respondent from 1 November 2013 to 8 December 2019. The third to fifth respondents are the majority shareholders in the first and second respondents. The shareholders concluded a written shareholders’ agreement. This is the full extent of the facts that the parties agree on. A reading of the papers reveals a plethora of material disputes of fact. The applicant, however, seeks final relief on motion. The facts must thus be adjudicated in accordance with the Plascon-Evans principle.

 

[11]        The applicant’s replying affidavit contains new allegations. The respondents subsequently filed a supplementary affidavit to answer to the new matter placed before the court. Neither party will be prejudiced if the new matter raised in reply, and the answer thereto as proffered in the supplementary affidavit are taken into consideration. Having said that, it is necessary to emphasise that an applicant is generally required to make out its case in the founding papers. In the written heads of argument, the applicant’s counsel includes submissions regarding the shareholder’s loan account for which summary judgment is applied for that are not borne out by the facts contained in either the founding or replying affidavit. These facts and submissions cannot be considered by the court as they are not stated under oath and the respondents were not provided with the opportunity to answer thereto.

 

[12]        The applicant, in its replying affidavit, took issue with the fact that the deponent to the founding affidavit avers that he has personal knowledge of the majority of the facts stated therein. The fact of the matter is that the deponent to the answering and supplementary affidavit is currently the Chief Executive Officer of the first respondent, and confirmatory affidavits were filed by representatives of the other respondents who have the necessary personal knowledge of the facts presented.

 

[13]        In applying the Plascon Evans principle and alert to the fact that a court must be vigilant to detect spurious disputes of fact,[8] the facts upon which this application is adjudicated are the following:

 

                        i.         The business operated by the first respondent includes the business and assets it acquired as a going concern from LR Plastic (Pty) Ltd. The second respondent acquired from LR Plastics (Pty) Ltd its immovable property;

                       ii.         The applicant, as the first respondent’s managing director, was responsible for the business’s financial viability;

                      iii.         The majority shareholders in the first respondent expressed concerns regarding the management of the first respondent’s business in May 2019;

                     iv.         The applicant was affronted by the correspondence in this regard.

                       v.         The applicant was suspended as the first respondent’s managing director on 30 July 2019 and eventually dismissed on 9 December 2019 pursuant to having been found guilty of serious misconduct as set out in an Arbitration Award dated 26 November 2019;

                     vi.         The applicant’s dismissal as managing director was not unlawful;

                    vii.         Although the applicant raises certain complaints regarding the different charge sheets filed in the misconduct proceedings, the arbitrator did not deem this significant, neither does this court;

                   viii.         The deponent to the answering affidavit, Mr. Grimsley, was appointed as the first respondent’s CFO. The applicant’s contentions that Mr. Grimsley’s appointment was done without proper procedure being followed, and without consultation of the senior management of the first respondent, and the further contention that the salary negotiations between Mr. Grimsley and the second and third respondents were untoward, are not supported by the facts. The fact that the relationship between the applicant and the respondents deteriorated rapidly just before Mr. Grimsley was formally appointed does not in itself indicate that there was anything untoward in the appointment;

                     ix.         The applicant, in addition, resigned as a director of the first respondent. Although he alleges that this was a forced resignation, he does not explain how he was forced to do so and the facts do not support a similar finding in circumstances where the applicant was found guilty of charges of dishonesty, misconduct, conduct detrimental to the first respondent’s interests and negligence;

                       x.         The first respondent elected not to purchase the applicant’s shares in the first and second respondent after being presented with a forced offer to purchase in accordance with clause 26 of the MOI;

                     xi.         In terms of the shareholder agreement, loan accounts are only repayable subject to the availability of funds and on demand made by at least 75% of the shareholders. Payment is to be made first to those shareholders who advanced more money to the first respondent on a pro rata share. The conditions for repayment of the applicant’s loan account have not been met. In addition, a subordination agreement is in place in favour of FirstRand Bank Limited regarding the applicant’s loan account;

                    xii.         In respect of the second respondent, the shareholders loan is not yet repayable and in addition the applicant agreed that only a portion of the loan be repaid to him;

                   xiii.         The facts support a finding that there was nothing untoward the sale of the second respondent’s immovable property. A 2015 property valuation cannot be regarded to represent the property’s value in 2019. The property was in the market since 2018, after the decision to sell was taken in 2017. The facts do not support a finding that the immovable property was sold for 25% less than its true value. The applicant raised his concerns regarding the sale of the property at a shareholders’ meeting held on 18 March 2020, but was outvoted;

                  xiv.         The cancellation of the lease agreement between the first and second respondents did not attract a penalty, a fact the applicant was aware of prior to instituting the application;

                    xv.         The first respondent’s subsequent relocation to an alternative business premise resulted in a significant reduction in monthly operational costs while improving business efficiency and optimising the business set-up;

                  xvi.         The fourth respondent issued summons against the applicant as a surety for the first respondent’s indebtedness. The applicant’s contention that he was ‘strong armed’ into signing the surety is not substantiated by any facts;

                 xvii.         The applicant was aware of the first respondent’s proposed restructuring prior to the institution of the application. He did not take issue with it before the institution of the application.

 

[14]        The applicant’s general, somewhat emotive, contentions that the respondents did ‘everything in their power to get rid of’ him as shareholders and managing director, that they advanced a dubious, personal agenda and suspended him unfairly and unlawfully are not substantiated by the facts. The facts indicate that a breach of trust occurred between the applicant and the respondents, that the relationship between the parties went south and that the applicant wants to sell his shares in the respondents. The respondents declined the applicant’s forced offer of sale. The applicant is distrustful of the refusal of the offer and afraid that the first respondent’s business is being diverted and restructured to his exclusion and detriment.

 

[15]        The applicant sets out to make out a case that he is prevented from participating fairly in the affairs of the company. He laments that ‘the majority can do as they seem fit’. This statement must, however, be seen against the background that a shareholders meeting was arranged where the sale of the second respondent’s immovable property was discussed. The applicant was provided with ample opportunity to raise his concerns, he was not excluded from the process. The majority rule principle, however, prevails, and the mere fact that he could not convince the majority shareholders of his point of view does not per se amount to the majority shareholders acting in an oppressive manner. The applicant failed to make out a case that his interests were unfairly disregarded or that any unfair prejudice followed the sale of the immovable property. His reliance on a valuation obtained in 2015 as sufficient proof that the immovable property was sold substantially below the market value, is misplaced in the context where the property was in the market since 2018. The applicant’s claim that the first respondent refused to provide him with draft statements and management accounts is not substantiated. The respondents denied this allegation and attached email correspondence to the supplementary affidavit filed  indicating that the management accounts for the 2020 financial year end were forwarded to, and received by the applicant. Further correspondence refuting the averment that the respondents refused to provide the applicant with the required statements are also provided. The applicant failed to prove that he was ‘ostracized’.

 

[16]        I am of the view that the papers indicate that the applicant’s main complaint is that the forced offer of sale of his shares was declined. Can the refusal to purchase the applicant’s shares be said to be oppressive or unfairly prejudicial? The first respondent’s Memorandum of Incorporation (MOI) provides for a forced offer of sale. Although the MOI provides for a forced offer when the applicant resigned as managing director of the first respondent, there is no concomitant obligation on the company or other holders to purchase the offered shares. The MOI does not oblige the company or holders to buy any shares, it creates a right akin to a right-of-first refusal. The refusal to take up the opportunity to buy the applicant’s shares is not oppressive, neither is it unfairly prejudicial. It does not constitute a departure from the standards of fair dealing or a violation of the conditions of fair play on which every shareholder is entitled to rely. The applicant failed to indicate how his interests were unfairly prejudiced by the first respondent’s refusal to take up the forced offer, other than the obvious fact that there was a breakdown in relations between him and the majority shareholders and he does not want to be involved in the commercial relationship anymore and wants to make a clean break. The MOI provides for the sale of shares in clause 16 thereof and the applicant does not explain why he did not offer or sell his shares to another party in light of the first respondent’s refusal to accept the forced offer. It cannot be gainsaid that the decision disregards the applicant’s interests insofar as his intention to exclude himself for the commercial relationship with the respondents is concerned. The applicant, however, did not make out a case that the respondents are preventing him from selling his shares to another party, as provided for in clause 16 of the MOI.

 

[17]        One is tempted to argue that the mere fact that the applicant wants to part ways with the respondents in circumstances that can be compared to an acrimonious divorce, renders the relief sought just and equitable. The Supreme Court of Appeal (the SCA), however, recently held in Gent and Another v Du Plessis[9] that a court is not empowered to grant relief in terms of s 163(2) where no case is made out under s 163(1). The SCA confirmed that a shareholder’s resentment at having been outvoted or an alleged loss of confidence in the manner in which a company’s affairs is conducted do not fell into the purview of s 163 of the CA. The SCA disagreed with the full court’s view that matters of this nature can be approached on the basis that the relationship between the parties had broken down irretrievably and that it was not in the parties’ best interest to remain ‘in the same bed’. As a result, the applicant did not make out a case for the relief sought against the second respondent in terms of s 163 of the CA.

 

[18]        This is, however, not the end of the matter as far as the applicant’s shareholding in the first respondent is concerned. The applicant avers that the fourth respondent, in an attempt to oppress him as a minority shareholder, resorted to issuing summons against him in his personal capacity for its loan with the first respondent, without also issuing summons against the first respondent. The applicant bound himself jointly and severally as co-principal debtor and signed a suretyship for the fourth respondent’s loan to the first respondent when the applicant was the managing director of the first respondent. It is at issue whether this loan represents monies lend and advanced to the first respondent or whether it was a shareholder’s loan. The fourth respondent is a majority shareholder in the first respondent. The applicant acknowledges that the fourth respondent’s decision to proceed with litigation against the applicant and not also the first respondent, falls within the fourth respondent’s rights as holder of a suretyship.  

 

[19]        The fourth respondent is indeed, as submitted, permitted to follow any legal course available to it against the applicant regarding monies owed to it by the first respondent. The applicant avers that the fourth respondent’s ‘rationale behind doing so is only for me to incur large amounts of legal costs in defending the said action and to issue a third party notice to the first respondent’. Where conduct is lawful, extraordinary circumstances must exist before a court will find that conduct is oppressive or unfairly prejudicial or disregardful of a minority shareholder’s interests. The applicant did not make out a case that unfairness exists in the fourth respondent using his legal right in a manner which could be regarded as contrary to good faith.[10] The applicant failed to convince that his interests as a minority shareholder are unfairly prejudiced by the fourth respondent’s decision to call up the suretyship and sue him for the loan that the fourth respondent alleges is due and payable. Although it can be accepted that it is unpleasant and cumbersome to be embroiled in litigation, the mere fact that the fourth respondent issued summons against the applicant who concluded a suretyship agreement, does not amount to oppressive or unfairly prejudicial conduct.

 

[20]        There is no reason for costs not to follow success.

 

 

ORDER

In the result, the following order is made:

1.    The application is dismissed with costs.

 

 

E van der Schyff

Judge of the High Court

 

Delivered:  This judgement is handed down electronically by uploading it to the electronic file of this matter on CaseLines. As a courtesy gesture, it will be sent to the parties/their legal representatives by email. The date for hand-down is deemed to be 14 December 2021.

 

Counsel for the applicant:                               Adv. F W Botes SC

With:                                                                Adv. L van Gass        

Instructed by:                                                   Steenkamp Van Niekerk Inc.

For the respondents:                                       Adv. W Pye

Instructed by:                                                   Cliff Decker Hofmeyr

Date of the hearing:                                         12 November 2021   

Date of judgment:                                            14 December 2021   

 

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