Evrard v Ross

• Jurisdiction: South Africa

Evrard v Ross
1977 (2) SA 311 (D)

1977 (2) SA p311

Citation	1977 (2) SA 311 (D)
Court	Durban and Coast Local Division
Judge	Leon J
Heard	September 2, 1976
Judgment	February 7, 1977

Flynote : Sleutelwoorde F

Company — Management — Shares — Giving financial assistance for the purchase of shares in contravention of sec. 38 (1) of Act 61 of 1973 — What constitutes — Tests — Onus — Company increasing mortgage bond to reduce loan account — Company not shown G to have rendered "financial assistance" within meaning of section.

Headnote : Kopnota

Where a defendant seeks to avoid performance of its obligations under an agreement with a plaintiff company on the ground that it contravened section 38 (1) of Act 61 of 1973, in that financial assistance had been given by the company for the purpose of or in connection with the purchase of shares in it, the onus is on the defendant to show on a balance of probabilities that there has been a contravention of the H section. In deciding whether financial assistance has been given, the enquiry should be directed towards ascertaining whether the company has been made the poorer. Certain further general observations which require to be stated are: the question as to whether the section has been contravened does not depend upon the manner in which the assistance is given; the prohibition is not confined to financial assistance to the purchaser but to financial assistance to whomsoever given; and the phrase "in connection with" the purchase of shares has a wider connotation than the phrase "for the purpose of". The principle that, in case of doubt, the Court should incline to a construction which would render the contract operative rather than inoperative,

1977 (2) SA p312

ut res magis valeat quam pereat, must be applied with caution, for the Court is not entitled to strain words because of the provisions of an Act which might affect the validity of the contract, or be influenced by those provisions in determining whether the contract is reasonably capable of a meaning which will not make the contract invalid. But if the Court comes to a A conclusion that the contract is reasonably capable of such meaning, it will apply the maxim.

Despite the criticisms which have been made of the "impoverishment test", the weight of authority would seem to favour the view that this will usually determine whether there has been a contravention of the section. The language of the section is very wide indeed but the cases show that the Courts have been extremely reluctant to stigmatize "innocent" B transactions. If due weight is given to the word "financial" in the section it would not be correct to hold that the company's financial resources have been employed where its true financial position has remained unchanged. It must be emphasized that the section in no way prevents the company from rendering assistance other than financial assistance.

The plaintiff had sold to the defendant the entire issued share capital in and the plaintiff's loan account against P (Pty.) Ltd. for R35 000. The purchase price was to be reduced by a cash payment and by increasing the amount due under a mortgage C bond passed by the company in favour of a building society. This additional amount, which was less than the amount owing under the loan account, was to be utilised in the reduction of the loan account. The defendant paid the cash payment. In an action by the seller, as plaintiff, for payment of the balance due under the agreement of sale, the defendant had contended that the agreement contravened section 38 (1) of the Companies Act, 61 of 1973.

Held, that it would be extremely artificial and unreal to D suggest that the amount owing by the company on loan account had not been reduced (by the additional amount borrowed under the mortgage bond) merely by reason of the fact that no demand has been made therefor.

Held, therefore, although it had been shown that the company had rendered assistance to the purchaser, that it had not been shown that it had rendered "financial assistance" within the meaning of the E section.

Case Information

Action on a stated case. The facts appear from the reasons for judgment.

P. A. M. Magid, for the plaintiff.

R. O. Donnellan, for the defendant.

Cur. adv. vult. F

Postea (February 7).

Judgment

Leon, J.:

The plaintiff has instituted proceedings against the defendant claiming payment of the sum of R5 910,60, interest G and costs. The action arises out of a written agreement between the parties.

After the particulars of the plaintiff's claim had been filed and served, but before the defendant had filed a plea, the parties, in terms of Rule 33 of the Uniform Rules of Court, agreed upon a written statement of facts in the form of a special case for the adjudication of the Court.

The special case is in these terms:

"1.

H By written agreement dated 29 September 1975 and 30 October 1975 (a copy whereof is hereto annexed marked 'A') the plaintiff sold to the defendant the entire issued share capital in and the plaintiff's loan account against Pynicky (Pty.) Ltd. (hereinafter referred to as 'the company') for a purchase price of R35 000.

2.

he effective date of the said sale was 1 November 1975.

3.

In terms of clause 3 of the said agreement the said purchase price was to be reduced by the items set out in sub-clause A thereof and

1977 (2) SA p313

Leon J

increased by the items set out in sub - clause B thereof.

4. (a)

The total of the amounts by which the purchase price aforesaid fell to be reduced in respect of the items reflected in clause 3A of the said agreement was the sum of R19 083,40.

(b)

The total of the amounts by which the A purchase price aforesaid fell to be increased in respect of the items reflected in clause 3B of the said agreement was the sum of R0,00.

5.

The adjusted purchase price of the said shares and loan account was accordingly the sum of R15 916,60.

6.

B The defendant duly paid to the plaintiff the amount of R10000 on account of the purchase price in accordance with the provisions of clause 4 (a) of the said agreement but has not paid any further amount.

7.

In terms of clause 11 of the said agreement the defendant was obliged to pay interest on the balance of the purchase price owing C from time to time at the rate of 10 per cent per annum from 1 November 1975 to date of payment.

8.

As at the effective date:

(a)

the amount owing by the company under the mortgage bond referred to in clause 3A (d) of the said agreement was the sum of R19 012,26;

(b)

the amount owing by the company to the D plaintiff in respect of his loan account was the sum of R7 267,25.

9.

The parties are agreed that there are no surrounding circumstances which will assist in the interpretation of the said agreement.

10.

he defendant contends that the provisions of clause 13 of the agreement constitute a contravention of sec. 38 (1) of the E Companies Act, 61 of 1973, and that the agreement is accordingly void and unenforceable so that the plaintiff is unable to compel the defendant to pay any amounts alleged to be owing thereunder.

11.

he plaintiff contends that, by reason of the fact that his loan account against the company as at the effective date exceeded the amount by which the company's indebtedness under F the said mortgage bond was to be increased, the provisions of clause 13 of the said agreement do not constitute a contravention of sec. 38 of the Companies Act and that accordingly the plaintiff is entitled to recover from the defendant the balance of the purchase price owing by the defendant.

12.

In the event of this honourable Court upholding the G defendant's contentions, judgment should be entered in the action in favour of the defendant with costs.

13.

In the event of this honourable Court upholding the plaintiff's contentions, the action may have to proceed on certain disputed factual issues."

After I had heard argument in this matter I was in some doubt H as to whether all the relevant information was before the Court. This question was raised with counsel with the result that the special case was amplified in the manner set forth below.

"1.

At the request of the Court the special case dated 31 August 1976 is amplified as hereinafter set forth.

2.

There is attached hereto marked 'B' a copy of the interim financial statements of the company as at 31 October 1975, which was the day

1977 (2) SA p314

Leon J

before the effective date.

3. (1)

According to annexure 'B':

(a)

the book value of the company's immovable property was R26 202,30 (the said book value represented A the cost of the said immovable property to the company);

(b)

the authorised share capital of the company was R4 000 divided into 4 000 shares of R1 each;

(c)

the issued share capital of the company was R50 divided into 50 shares of R1 each.

(2)

B For the purposes of the transaction between the parties, however:

(a)

it may be accepted that the parties valued the company's immovable property at R35 000;

(b)

the market value of the issued shares plus the seller's loan account in the company as at the C effective date of the deed of sale (annexure 'A') was therefore represented (subject to what is stated below about the additional loan to be secured by mortgage bond in terms of clause 13 of annexure 'A') by the nett result of the calculations required to be performed in terms of clause 3 of the deed of sale;

(c)

D on the aforesaid basis, the value of the issued share capital in the company was R15 916,60 (the figure referred to in para. 5 of the special case) less R7 267,25 (the amount owing by the company to the plaintiff in respect of his loan account - see para. 8 (b) of the special case), i.e...