Cohen, NO v Segal

• Jurisdiction: South Africa
• Judge: Boshoff J
• Judgment Date: 28 April 1970
• Hearing Date: 17 March 1970
• Court: Witwatersrand Local Division

Boshoff, J.:

In this action the liquidator of the Johannesburg Timber Co. (Pty.) Ltd. in liquidation is in effect claiming from the defendant F a refund of money which it is alleged was constructively paid out of the company to the defendant and one Harber by the operation of set-off as the result of the wrongful declaration of a dividend, which declaration was ultra vires the company inasmuch as there were no profits at all from which a dividend could be declared. The claim is being brought against the defendant because at the time of the declaration of the G dividend he was a director and shareholder of the company. He and Harber were the sole directors and shareholders of the company, but shortly after the liquidation of the company the estate of Harber was sequestrated.

The pleadings are somewhat meagre and will be better understood after the facts of the case have been stated.

H The defendant did not call witnesses and such evidence as was tendered on behalf of the plaintiff stands uncontradicted. Dudley, who was the auditor of the Johannesburg Timber Co. (Pty.) Ltd. since its inception, was a bad witness and unsatisfactory in several respects, but the Court was careful to accept only so much of his evidence as was corroborated by the circumstances of the case and the minutes of the company which are by virtue of sec. 66 of the Companies Act, 46 of 1926, as amended, evidence of the proceedings at the meetings of the company.

Boshoff J

I now turn to the facts of the case.

The Johannesburg Timber Co. (Pty.) Ltd., to which I shall refer as the company, was incorporated in April, 1935 and conducted the business of timber merchant, sawmiller and moulding manufacturer. In 1945 the A defendant acquired 500 shares which was one third of the equity of the company and also became a director of the company. The remaining two-thirds of the equity belonged to one M. Harber. Harber was in control of the business of the company and after his death David Leslie Harber inherited his shares and was appointed director of the company on 12th April, 1965. From then on he was in control of the business of the B company. The business was at one stage a profitable one and was evidently on the decline when D. Harber took charge of it. Under his control the decline was accelerated. In the financial year ending on 30th June, 1966 a profit of R5,040 was shown from which had to be deducted an amount of R2,781 as a loss incurred on discounted bills which left a balance of R2,259. The deficiency in the assets was R4,390.

C The company conducted its business in its own premises at 74 Eloff Street Extension, also known as Stand 61, Village Deep, Johannesburg. The value of the land with the buildings thereon, in the books of the company, was reflected in the balance sheet of the financial year ending 30th June, 1966, as R31,451.

D In September, 1966 this property was sold for R79,000. There were bonds registered against the property and, after deducting the amounts owing on the bonds, the agents' commission and rates due on the property the net profit on the sale was R35,108.71. The defendant and D. Harber wanted to benefit personally by the profit on the sale and sought the E advice of Dudley, the auditor of the company, thereon. He advised them against taking it out of the company by way of a salary as it would then be subject to taxation, but recommended that it be taken out by way of a dividend if the financial position of the company warranted it. The position of the company had to be investigated and he accordingly F advised that the net proceeds of the sale be placed in an ordinary building society savings account in the meantime. He prepared the draft resolution and on 2nd September, 1966 the directors passed the following resolutions:

'Resolved that the company shall place in ordinary building society savings accounts the net amount it will receive from the sale of the land and buildings situated at 74-79 Eloff Street Extension, being Stand 61, Village Deep, after deducting commission and the amount due to the bond holders.

G Resolved further that the financial position of the company shall be reviewed and if possible a dividend to the shareholders will be declared.'

Shortly thereafter, on 12th September, 1966 the directors passed another resolution in which it was resolved to deal with the proceeds of the sale in the following manner:

'The difference between the purchase price after deducting the agent's H commission, any rates...