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IN THE HIGH COURT OF SOUTH AFRICA

(WESTERN CAPE HIGH COURT, CAPE TOWN)

CASE NO: 15633/2010

In the matter between:

MMA ARCHITECTS CC …...............................................................................Applicant

and

LUYANDA MPAHLWA ….....................................................................First Respondent

LUYANDA MPAHLWA DESIGNS PACE AFRICA

(PROPRIETARY) LIMITED …..........................................................Second Respondent

THE STANDARD BANK OF SOUTH AFRICA LIMITED …....................Third Respondent

Judgment handed down on 8 June 2011

S Olivier AJ

1. This is an urgent application, launched on 15 July 2010, first set down for hearing on 17 August 2010, which came before me on 5 May 2011, for what was contended¹ to be interim relief, pending the determination of an action to be instituted. The third respondent played no role in the application before me and no further reference to it is made herein. The relief sought, in broad summary, was as follows:

(a) that the first respondent be removed as a signatory to the banking accounts in Cape Town of the applicant;

(b) that both the respondents be interdicted and restrained from:

(i) competing with the business of the applicant; or trading in any business which is similar to the business of the applicant;

(ii) withdrawing funds from the applicant's Cape Town banking
accounts;

(iii) utilising the VAT registration number of the applicant; or

(iv) withdrawing funds from the second respondent's bank account.

(c) a mandamus that the applicant be furnished with:

(i) copies of all tax invoices issued on behalf of the applicant by
the respondents bearing its VAT registration number;

(ii) copies of all VAT returns issued on behalf of the applicant by the respondents bearing the applicant's VAT registration number;

(iii) copies of all VAT returns issued on behalf of the second respondent;

(iv) copies of all tax invoices issued on behalf of the second
respondent.

(d) that the respondents pay the costs of the application on the attorney and client scale.

2. The background to the dispute between the parties is as follows.

3. During 1995 Mr Mphethi Malunga Morojele set up practice as an architect under the name "Mphethi Morojele Architects". The practice flourished.

4. Mr Morojele and the first respondent, Mr Luyanda Mpahlwa - the latter is similarly a qualified architect - have been professionally associated with one another since 1997. At the time Mr Mpahlwa was in exile in Germany where he had been living for fifteen years. He was practising as an architect in Germany and during 1997 he sought an association or partnership with architects based in South Africa. The two agreed to join forces and they became involved in the construction of the South African embassy in Berlin. In 1998 they established MMA Architects CC, the present applicant.

5. The parties subsequently set up the Cape Town branch of MMA Architects. As Mr Morojele himself states, it was always envisaged that Mr Mpahlwa would operate MMA Architects' Cape Town branch and he has, in fact, done so for the last ten years

6. Mr Morojele does not claim to have made any direct contribution to the growth of the practice in Cape Town, nor does Mr Mpahlwa claim any contribution to the growth of the practice in Johannesburg. It is not in dispute that they very rarely had any joint management meetings, much to the dissatisfaction of Mr Mpahlwa. The Cape Town practice grew and represented proportionally more of the income of MMA Architects. Mr
Mpahlwa became increasingly dissatisfied with the fact that he was only a 24% member of MMA Architects, whereas the branch he was running as at 2008 was generating more than 70% of MMA Architects' revenue. As from
2006 Mr Mpahlwa made various proposals to restructure their business

7. Only the third of the available options found favour with all parties - this was to split MMA Architects, with the Cape Town office being severed entirely from the business of MMA Architects. It was agreed that Mr Mpahlwa would cease to be a member of MMA Architects and would take over the Cape Town office as a going concern. It is, in essence, the status of this agreement which lies at the heart of the dispute between the parties. Mr Mpahlwa contends that by September 2008 it was agreed, after much discussion, that he would acquire the Cape Town branch, would transfer his 24% member's interest in MMA Architects to the other members, and that he would pay a purchase price which comprised a "cash" and settlement of his existing loan account.

8. MMA Architects, in essence, do not dispute the existence of this agreement. On MMA Architects version an agreement was entered into on 9 February 2009 that it would repurchase Mr Mpahlwa's 24% interest in MMA Architects by no later than 28 February 2009. On 22 May 2008 a valuation of Mr Mpahlwa's 24% interest was determined in the amount of R4 349 955, whilst the value of the Cape Town branch was determined at R8 488 000. After the declaration of a dividend (R2 million) and the payment of a bonus (R1 million), and setting all amounts due off, the one against the other, an amount of R1 138 045 would fall due and become payable by Mr Mpahlwa to MMA Architects on 30 April 2009. In addition thereto Mr Mpahlwa would settle his loan account of some R867 584.

9. MMA Architects contend that further deliberations resulted in the heads of agreement between the parties never being signed. It contends that "the transaction was never completed'.

10. MMA Architect's case is firmly predicated upon Mr Mpahlwa's membership of MMA Architects. MMA Architects contends that Mr Mpahlwa is acting in breach of his fiduciary duties owed to MMA Architects by operating the business of the second respondent. The stance adopted by MMA Architects is reflected in Mr Morojele's affidavit where he states that: "It is clear that the first respondent is in flagrant breach of his fiduciary duties to the applicant, and that he has elected to implement the agreement between the parties without being prepared to pay a consideration for same as initially agreed."

11. The argument advanced by Ms Clarke, who appeared on behalf of MMA Architects, was that members in a close corporation stand in a close relationship to each other and that they owe their fiduciary duties to the close corporation. She relied upon section 42 of the Close Corporations Act, 69 of 1984, as amended, the relevant provisions of which are as follows:

"42. Fiduciary position of members

(1) Each member of a corporation shall stand in a fiduciary relationship to the corporation...

(2) Without prejudice to the generality of the expression 'fiduciary relationship', the provisions of subsection (1) imply that a member -

(a) shall in relation to the Corporation Act honestly
and in good faith, and in particular-

(i) shall exercise such powers as he may have to manage or represent the corporation in the interest and for the benefit of the corporation;

(b) shall avoid any material conflict between his own interests and those of the corporation, and in particular-

(i) shall not derive any personal economic benefit ... where the benefit is obtained in conflict with the interests of the corporation;

(ii) ...

(iii) shall not compete in any way with the corporation in its business activities

...

(4) Except as regards his duty referred to in subsection (2)(a)(i), any particular conduct of a member shall not constitute a breach of a duty arising from his fiduciary relationship to the corporation, if such conduct was preceded or followed by the written approval of all the members where such members were or are cognisant of all the material facts."

12. Unlike a company, where the distinction between the shareholder - who owes no fiduciary duty to the company - and the director - who is responsible for the control and management of the company, and who owes, at common law, a fiduciary obligation to the company - the concept of membership in a close corporation has conflated the concepts of directorship and membership

13. In Phillips v Fieldstone Africa (Ptv) Ltd and Another 2004 (3) SA 465 (SCA) Heher summarised the position in South African law as regards to fiduciary obligations as follows

[30] The principles which govern the actions of a person who occupies a position of trust towards another were adopted in South Africa from the equitable remedy of English law. The Roman and Roman-Dutch law provided equivalent relief. In Transvaal Cold Storage Co Ltd v Palmer 1904 TS 4 at 19 - 20 and 34-5 the sources were considered and the conclusion was expressed that the extension and refinement of the Civil Law by English courts was a development of sound doctrine suited to 'modem conditions'. The fullest exposition in our law remains that of Innes CJ in Robinson v Randfontein Estates Gold Mining Co Ltd (supra² at 177 - 80). It is, no doubt, a tribute to its adequacy and a reflection of the importance of the principles which it sets out that it has stood unchallenged for 80 years and undergone so little refinement.

Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other's expense or place himself in a position where his interests conflict with his duty. The principle underlies an extensive field of legal relationship. A guardian to his ward, a solicitor to his client an agent to his principal afford examples of persons occupying such a position. As was pointed out in The Aberdeen Railway Company v Blaikie Bros (1 Macq 461 at 474), the doctrine is to be found in the civil law (Digest 18.1.34. 7), and must of necessity form part of every civilised system of jurisprudence. It prevents an agent from properly entering into any transaction which would cause his interests and his duty to clash. If employed to buy, he cannot sell his own property; if employed to sell, he cannot buy his own property; nor can he make any profit from his agency save the agreed remuneration; all such profit belongs not to him, but to his principal There is only one way by which such transactions can be validated, and that is by the free consent of the principal following upon a full disclosure by the agent.... Whether a fiduciary relationship is established will depend upon the circumstances of each case... . But, so far as I am aware, it is nowhere laid down that in these transactions there can be no fiduciary relationship to let in the remedy without agency. And it seems hardly possible on principle to confine the relationship to agency cases.'

The principles so stated remain true, not only for this country, but also in many Commonwealth (and United States) jurisdictions.

[31] The following short summary attempts to encapsulate the present level of development. The rule is a strict one which allows little room for exceptions³ It extends not only to actual conflicts of interest but also to those which are a real sensible possibility.⁴ The defences open to a fiduciary who breaches his trust are very limited: only the free consent of the principal after full disclosure will suffice.⁵ Because the fiduciary who acquires for himself is deemed to have acquired for the trust,⁶ once proof of a breach of a fiduciary duty is adduced it is of no relevance that (1) the trust has suffered no loss or damage;⁷ (2) the trust could not itself have made use of the information, opportunity etc⁸ or probably would not have done so;⁹ (3) the trust, although it could have used the information, opportunity etc has refused it or would do so;¹⁰ (4) there is not privity between the principal and the party with whom the agent or servant is employed to contract business and the money would not have gone into the principal's hands in the first instance;¹¹ (5) it was no part of the fiduciary's duty to obtain the benefit for the trust;¹² or (6) the fiduciary acted honestly and reasonably;¹³ (although English and Australian Courts make some allowance for equity in calculating the scope of the disgorgement in such cases). The duty may extend beyond the term of the employment.¹⁴

and all participation in the claimant company's affairs. For all the influence he had, he might as well have resigned."³³

19. It should, however, always be remembered that a director cannot abdicate his responsibilities or abandoned his status without formally resigning. Accordingly, it must be only in the most exceptional circumstances that a director can avoid the no conflict rule by pleading impotence when it is his duty to act in the interests of the company and avoid the conflict. The same would no doubt apply to a member of a close corporation.

20. It seems to me that where section 42 imposes fiduciary obligations upon a member, such obligation must be given content in the context of the facts and taking into account the principles set out above. Context, after all, is everything In Aktiebolaget Hassle and Another v Thomed (Rv) Ltd³⁴ Nugent JA quoted with approval the remark made by Lord Steyn in R v Secretary of State for the Home Department, Ex parte Daly.³⁵ 'context is everything'. Nugent JA continued:

'And so it is when it comes to construing the language used in documents, whether the document be a statute, or a contract, or, as in this case, a patent specification-'

21. Mr Mpahlwa contended that he is only a member in name; that he had renounced and relinquished his member's interest with the full knowledge and consent of the other members, and with that knowledge and consent took over the Cape Town branch, including its clients. He pointed out, with reference to various annexures to his answering affidavit, that MMA Architects and Mr Morojele no longer viewed him as a member of MMA Architects and, moreover, that they were also of the view that he had successfully acquired the Cape Town branch.

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