Jacobson and Another v Liquidator of M Bulkin & Co Ltd

• Jurisdiction: South Africa
• Judge: Le Grange J
• Judgment Date: 10 September 1975
• Court: Transvaal Provincial Division
• Hearing Date: 01 April 1975

Le Grange, J.:

This matter is before the Court on exception.

The respondent, to whom I shall refer as the plaintiff, H instituted an action against four persons, all of whom, it is alleged, were at all material times shareholders in and directors of a company, M. Bulkin & Co. (Pty.) Ltd. A final order liquidating the company was granted by this Court on 5 December 1972. The plaintiff, the liquidator of the company, claims payment from the four defendants of the sum of R112 219,14 which, it is alleged, is the amount of the loss which the company sustained as a result of a breach of duty by its former directors in 1969 in entering into a transaction in contravention of sec. 86 bis (2) of the Companies Act, 46 of 1926. The

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first defendant, Mr. Bulkin, has defaulted in filing a plea. The second defendant, Jacobson, and the third defendant, Opert, are the excipients in this matter. The fourth defendant, Oliver, I was informed by counsel for the parties, abides the judgment of the Court. A fifth defendant, Van der Walt who, it is alleged, bought certain shares from the company in 1969, was joined because he might have an interest in the proceedings but A no relief is claimed against him in the action.

In the particulars of claim annexed to the combined summons it is alleged that in April 1969, immediately prior to the conclusion of an agreement between, inter alia, the company and Van der Walt, the loan accounts of the second defendant, the B third defendant and the fourth defendant in the books of record of the company were in credit in the following amounts:

Jacobson	R12 535,88
Opert	12 622,49
Oliver	12 622,49

At that time the company was the beneficial owner of the total C issued share capital of a company called Michaletos Properties (Pty.) Ltd.

It is alleged that on or about 21 and 23 April the company and all the defendants signed first an agreement and then an addendum thereto. The terms of the agreement so supplemented, are summarised in para. 6 of the particulars of claim:

'(a)

the company sold to the fifth defendant the total D issued share capital of Michaletos;

(b)

the second, third and fourth defendants sold to the first defendant all the ordinary shares held by them in the company;

(c)

the company agreed to lend and advance to the second, third and fourth defendants the sum of R50 000 each, E the said sums to be set off against their existing loan accounts;

(d)

the fifth defendant undertook to pay the sum of R150 000 to Messrs. Craggs, Kossuth and Ochse in terms of clause 5 thereof and the said sum was to be paid by them to the second, third and fourth defendants on the F terms set out in clause 16;

(e)

the price, to be paid by the first defendant to the second, third and fourth defendants for the ordinary shares held by them in the company was to be the amount owing by the second, third and fourth defendants to the company arising from the loans and set-offs aforesaid; and

(f)

the first defendant was to take over and assume G liability for the indebtedness of the second, third and fourth defendants to the company.'

In terms of the agreement the purchase price of the shares was R156 000. Immediately prior to the conclusion of the agreement the company owed its subsidiary, the Michaletos company, R16 H 000. In terms of the agreement Van der Walt took over this liability, thereby reducing the cash amount payable by him for the shares to R140 000. Initially Van der Walt agreed to pay R150 000 to Craggs, Kossuth and Ochse for the purpose of payment to the retiring shareholders. Of this amount R140 000 represented the cash portion of the purchase price and R10 000 was part of a loan of R20 000 which Van der Walt agreed to advance to Bulkin in terms of the agreement.

It is alleged in para. 7 of the particulars of claim that in terms of an oral agreement concluded on 18 June 1969 Van der Walt was released from his

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obligation to pay R150 000 to Craggs, Kossuth and Ochse. In lieu of that obligation Van der Walt paid R10 000 to Jacobson and signed an acknowledgment of debt for R40 000 in favour of Jacobson's wife, paid R10 000 to Opert and handed him an A acknowledgment of debt for R40 000 and signed an acknowledgment of debt for R50 000 in favour of Oliver.

It will be remembered that prior to the agreement each of the retiring shareholders was in credit with the company in a sum of approximately R12 600; in all an amount of R37 780,86 stood to their credit. After the loan account of each had been debited with the R50 000 lent to him by the company each B retiring shareholder stood, on balance, indebted to the company in the sum of approximately R37 400 each, the total amount of their indebtedness being R112 219,14. In terms of clause 12 of the agreement Bulkin was obliged to assume liability for the indebtedness of the retiring shareholders and his loan account in the books of record of the company was, accordingly, debited with the sum of R112 219,14 and the retiring shareholders were released from their loan indebtedness.

C On 18 June 1969 the company transferred the Michaletos shares to Van der Walt and on 29 August 1969 the retiring shareholders transferred all the ordinary shares held by them in the company to Bulkin and ceased to be directors.

Paras. 8, 9 and 10 of the particulars of claim read:

8. (a)

D By reason of the facts stated in para. 7 above, the company enabled the first defendant to pay to the second, third and fourth defendants the price of their shares in the company, namely the amount of R112 219,14, and agreed to accept the first defendant as its debtor on loan account in E the said amount, and thereby directly or indirectly gave financial assistance to the first defendant by means of a loan or otherwise for the purpose of and/or in connection with the purchase by him of the said shares.

(b)

The circumstances contemplated by the proviso to sec. 86 bis (2) of the Companies Act, 46 of 1926, were not applicable.

(c)

F In the premises the company contravened the provisions of sec. 86 bis (2) of the said Act and is not entitled in law to recover the said sum of R112 219,14 or any part thereof from the first defendant under the agreement and has suffered loss in that amount.

9.

G The first, second, third and fourth defendants, in breach of their duties as directors of the company, caused the company to enter into the agreement, to carry out the transactions referred to in para. 7 hereof, and to suffer the said loss.

10.

The first, second, third and fourth defendants are in the premises jointly and severally liable to pay the H said sum of R112 219,14 to the plaintiff in his capacity aforesaid.'

The excipients requested the plaintiff to furnish further particulars. I shall set out some of the particulars requested and the replies thereto:

Request: 'Had plaintiff demanded and/or sued first defendant for the said sum of R112 219,14 apart from the present action and made any demand in connection therewith?'

Reply: 'Not apart from bringing the present action and making demand in connection therewith.

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Request: 'Does plaintiff aver that he has demanded and/or attempted to recover the said sum of R112 219,14 from first defendant under the agreement? '

Reply: 'No, but the first defendant informed the plaintiff that he is financially unable to pay any amount in discharge of his debit A loan account.'

Request: 'Does plaintiff rely for his allegation of loss suffered by him on the basis that plaintiff is not able to recover the loss from first defendant in an action based on the agreement but that plaintiff has other legal remedies available to him not based on B the agreement?'

Reply: 'The company has suffered loss in the said sum since any claim for the said sum based on the agreement is unenforceable.'

The basic question at issue in this exception is whether the transactions which I have set out in a summarised form offended against the provisions of sec. 86 bis (2) of the Companies Act, C 46 of 1926 (the Act then applicable). The relevant portion of the section provided as follows:

'No company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security, or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company to which it is a subsidiary...'

At the material time a contravention of this section was a D crime on the part of any director or officer of the company who was a party to the contravention, punishable by a fine not exceeding R1 000.

The second and third defendants excepted to the particulars of claim on the ground that they...