Capitex Bank Ltd v Qorus Holdings Ltd and Others

• Jurisdiction: South Africa
• Judge: Malan J
• Judgment Date: 22 January 2003
• Docket Number: 6531/2002
• Hearing Date: 18 November 2002
• Counsel: P J van Blerk SC (with him P J Strathern) for the excipients (the second and third defendants). A Subel SC for the respondent (the plaintiff).
• Court: Witwatersrand Local Division

Malan J:

[1] This is an exception to the plaintiff's declaration brought by the second and third defendants on the basis that it lacks the H necessary averments to sustain a cause of action. The plaintiff's claim is brought on the basis of an agreement concluded on 4 September 2001 in terms of which the first defendant purchased from the plaintiff 4 445 450 shares in the issued share capital of the first defendant itself for a consideration of R6 million together with interest. I

[2] The second, third and fourth defendants have bound themselves in favour of the plaintiff as sureties and co-principal debtors for the obligations of the first defendant to the plaintiff in terms of the principal agreement. J

Malan J

[3] The first defendant failed to make payment to the plaintiff as provided by the principal agreement (the 'agreement of A sale') in consequence of which the defendants jointly and severally became liable to the plaintiff.

[4] The grounds of exception are formulated as follows:

'3

At law a company is prohibited from purchasing its own shares otherwise than in accordance with the provisions of s 87 of the B Companies Act 61 of 1973 (''the Act''), alternatively in accordance with the provisions of s 87 as read with s 85 of the Act.

4

In the premises:

4.1

the agreement for the purchase of its own shares is invalid; C

4.2

alternatively to 4.1, the plaintiff's declaration lacks the averments necessary to establish that the agreement is valid.'

Essentially, the defendants rely on the invalidity of the agreement of sale ex facie the declaration. It follows that, if the agreement of sale is invalid, the claims against the defendants cannot be enforced. D

[5] The declaration makes no reference to either s 85 or s 87 of the Act although the recordal in the principal agreement states:

'2.2.1

On 18 January 2001 Qorus [the first defendant] passed a special resolution authorizing the purchase of the sold shares for a purchase price of R6 000 000 plus interest thereon; E

2.2.2

the aforesaid resolution was registered on 17 July 2001 and is attached hereto marked ''A''.'

In the resolution reference is made that the approval of the shareholders is a general approval as envisaged by s 85(2) and (3) and also to the provisions of ss 85 - 88 of the Act. However, this reference to the resolution in the annexure to the agreement of sale cannot cure any omission in the declaration itself. If specific F allegations of validity are required to be made they must be made in the declaration itself.

[6] Section 85(1) provides:

'Subject to the provisions of this section and any other applicable law, a company may by special resolution of the company, if G authorized thereto by its articles, approve the acquisition of shares issued by the company.'

Section 87 states:

'(1) Save as is provided in ss (2), a company that proposes to acquire shares issued by it shall - (a) deliver or mail a copy of the written offering circular . . . (b) H lodge a copy of the offering circular with the Registrar. . . .

(2) The provisions of ss (1) shall not apply - (a) if, and to the extent that, the shares are acquired in terms of the special resolution passed in terms of s 85(1); (b) in the case of a company whose shares are listed on a stock exchange . . . to the acquisition by that company of shares in terms of transactions effected . . . in accordance with the rules and listing requirements of that exchange.' I

These two and other sections were introduced into the Companies Act by the Companies Amendment Act 37 of 1999 and changed dramatically the capital maintenance rule and the perceived protection it afforded shareholders.

[7] Rajak Sourcebook of Company Law 2nd ed (1995) when describing the J

Malan J

maintenance of capital principle stated at 761: A

'The original view of the company's capital as a guarantee fund for creditors - that the money subscribed in exchange for the issue of shares should be retained in specie be used, if necessary to pay the debts which the company could not - is probably due to early unease about the limited liability of shareholders. This rule...