Johnson v Johnson and Others

• Jurisdiction: South Africa
• Judge: Goldstone J
• Judgment Date: 03 November 1982
• Citation: 1983 (2) SA 324 (W)
• Court: Witwatersrand Local Division

Goldstone J:

No appearance for the third to fifth defendants. This action H was instituted against five defendants. The third and fifth defendants abide the judgment of the Court. The fourth defendant originally opposed the relief claimed by the plaintiff. However, at the commencement of the trial on Monday of this week, the fourth defendant withdrew its opposition and no order for costs is sought against that defendant. The trial then proceeded against the first and second defendants.

Goldstone J

The plaintiff and the first defendant are brothers. For convenience I shall refer to the plaintiff as Richard, and to the first defendant as Harold. I shall refer to the second defendant as "the company".

The plaintiff, after leading evidence, has closed his case and A argument was addressed to me on an application made on behalf of the first and second defendants for an order absolving them from the instance. The test to be applied at this stage of the proceedings is whether there is evidence upon which a reasonable man might hold that the defendants are liable. In B applying that test I shall assume, as I am obliged to do for the aforegoing purpose, that the plaintiff's evidence and that of his witnesses is true and correct.

At about the end of 1975 Richard and Harold commenced a business association. In consequence of that association the company was incorporated and Richard and Harold became the sole shareholders. For reasons which are not now relevant, in 1978 C Harold held 51 of the 100 issued shares in the company and Richard held the remaining 49 shares. That was the position when Richard left South Africa in September 1978 to sail his yacht in the Caribbean. Whilst he was away, and during 1979, Richard received a report to the effect that all was not well D with the company. In consequence of that report he returned to South Africa. What ensued was an unpleasant dispute between the two brothers. Again, the details of that dispute and the discussions in relation thereto are not relevant and I shall not refer to the details thereof.

However, one of the matters which was discussed was whether Richard should continue to retain an interest in the company. E On 11 January 1980 Harold proposed a scheme to Richard in terms of which the latter would indeed not only retain his interest in the company, but in addition he would receive a payment via the company of an amount of R155 000 which, so he was told, would not be subject to income tax in his hands. F Richard was not so concerned with the financial benefit, but he was happy that the dispute with his brother appeared to be settled amicably.

The scheme was the following:

(a)

Richard's 49 shares would be converted into "A" cumulative redeemable preference shares having the G same par value, ie R2 each. Those shares would be entitled to a preferent dividend at the rate of 10,5% per annum, which rate would be variable, being 1% above the prime rate of Barclay's National Bank Ltd.

(b)

Barclay's National Merchant Bank Ltd (to which I shall refer as "the bank") would be allotted and issued with 49, 10,5% "B" cumulative redeemable preferent shares H of R2 each, having a price equal to the par value plus R6 325,53 per share, payable against issue thereof.

(c)

The bank would apply for and be allotted the "B" cumulative redeemable preferent shares for the aforementioned consideration which, in the aggregate, amounted to R310 000.

(d)

The company would use the proceeds of that issue to redeem Richard's "A" cumulative redeemable preferent shares for the sum of R310 000.

Goldstone J

(e)

Harold would transfer to Richard 49% of his, Harold's, 51% interest in the company and so restore the status quo ante. Such transfer was to be effected simultaneously with the aforementioned transactions.

(f)

A Harold and Richard would share the tax-free amount of R310 000 equally, ie the amount which Richard would receive from the company for the redemption of his shares.

Harold explained to Richard that the scheme had been negotiated with the bank, which was not to be informed of the simultaneous transfer of shares to Richard from Harold as the bank was not B aware of it, and knowledge of it by the bank might prejudice the whole scheme.

It appears from the evidence that Harold, in the meantime, had informed officials of the bank that Richard wished to sever his interest with the company. The cumulative redeemable preferent share scheme had been put up by the bank as a most advantageous C method of achieving that result. One of the advantages was the non-taxable receipt by Richard of the proceeds of the redemption of his shares; another advantage was the income tax-free accrual of dividends by the bank and, hence, the low coupon rate attached to the shares.

Without going into the details which emerged during the D evidence, Richard sought the advice of his accountant in Cape Town, one Margolis. Margolis at first did not understand the scheme, and after a number of enquiries made by him it would appear, from his evidence, he did resolve his uncertainties in relation thereto. Margolis informed Richard, however, of his misgivings concerning the non-disclosure of the whole scheme to E the bank.

In due course, on 31 January 1980, Harold sent to Richard, who was then in Cape Town, a proxy form authorising Harold to pass the resolutions necessary to give effect to that part of the scheme which he had discussed with the bank. Harold had previously requested Richard to arrange for the drafting of an F agreement relating to that part of the scheme which was to be withheld from the bank. Instructions for the drafting of such an agreement for the simultaneous transfer of 49% of Harold's 51% to Richard was given by Margolis to a Cape Town attorney.

Notwithstanding Margolis' aforementioned misgivings, Richard signed a proxy on 31 January 1980 and returned it to Harold. On G the next day Richard changed his mind. He telephoned Harold and revoked, not only the proxy, but also a general power of attorney which he had given to Harold some years earlier. Harold agreed to comply with that revocation. Richard confirmed the request for the return of the proxy and the power of H attorney in a telex which he sent to Harold on 1 February 1980. That was the state of affairs when Richard returned to the Caribbean by air on 13 February 1980. By then Harold had already called a general meeting of the company which was held on 3 February 1980. Harold used the proxy which had been revoked by Richard and purported to pass all of the resolutions to give effect to the cumulative redeemable preferent share scheme. Harold opened an account in Richard's name at Nedbank, and the sum of R300 000

Goldstone J

was eventually paid into that account. That amount was alleged to be the net proceeds of the redemption of Richard's 49 shares in the company.

On 5 February 1980 the minutes of the general meeting were A lodged with the third defendant, ie the Registrar of Companies. Special resolutions were registered by him in terms of s 200 (1) of the Companies Act 61 of 1973 (to which I shall refer as "the Act"). Pursuant to the resolutions:

(a)

the company's articles of association were duly amended;

(b)

B Richard's 49 shares were converted into the "A" cumulative preferent shares; and

(c)

the bank was issued and allotted the 49 "B" cumulative preferent shares.

I need hardly add that on Richard's evidence all of the aforegoing steps were executed fraudulently at the behest of C Harold and without the knowledge of Richard.

When Richard returned from his further travels, he caused an action to be instituted against the present five defendants. He claimed the following relief:

"(a)

An order declaring to be invalid and setting aside -

(i)

D the conversion of the 49 ordinary shares in second defendant held by plaintiff into 49 "A" redeemable preferent shares of the nominal value of R2 each;

(ii)

the amendment of the articles of association of the second defendant set forth in the minutes.

(b)

E An order directing third defendant to cancel the registration of the special resolutions passed at the general meeting of shareholders of second defendant held on 3 February 1980.

(c)

An order declaring to be invalid and setting aside the allotment and issue on 5 March 1980 of 49 ordinary shares in second defendant to first defendant.

(d)

F An order declaring that -

(i)

the total issued ordinary share capital of second defendant consists of 100 shares of R2 each;

(ii)

plaintiff is the holder of 49 ordinary shares of R2 each in...