Neugarten and Others v Standard Bank of South Africa Ltd

• Jurisdiction: South Africa

Neugarten and Others v Standard Bank of South Africa Ltd
1989 (1) SA 797 (A)

1989 (1) SA p797

Citation	1989 (1) SA 797 (A)
Court	Appellate Division
Judge	Corbett JA, van Heerden JA, Smalberger JA, Kumleben JA, Nicholas AJA
Heard	August 25, 1988
Judgment	November 11, 1988

Flynote : Sleutelwoorde I

Company — Contracts by — Company providing security for another company controlled by one or more of its directors — Prohibition in s 226(1) of the Companies Act 61 of 1973 against company providing security for another company controlled by one or more of its J directors not applicable where security given with consent of

1989 (1) SA p798

A members of company in terms of s 226(2) — Consent required before or at time loan made or security provided — If consent not given at that stage, loan or security invalid.

Headnote : Kopnota

V Co, the members of which were H Neugarten, M Hirschowitz Family Investments (Pty) Ltd (MHFI), Sacks, Rosmarin and Eagle and B the directors, H Neugarten, Hirschowitz and Eagle, executed a guarantee for the repayment of all sums of money which N Co, the members of which were Neugarten, MHFI, Sacks and Rosmarin and the directors H Neugarten and Hirschowitz, might thereafter owe to the Standard Bank. The signatories to the guarantee were H Neugarten and Hirschowitz. Attached to the guarantee were two documents, the first of which purported to be a consent in terms of s 226(2)(a) of the Companies Act 61 of 1973 for V Co to sign a guarantee in favour of Standard Bank guaranteeing C the obligations of N Co. The document was signed by Neugarten, Sacks, Rosmarin and Hirschowitz, though not by Eagle or specifically MHFI. The two companies subsequently went into liquidation and the Bank brought an application in the Witwatersrand Local Division against Neugarten, Sacks and Rosmarin claiming payment of an amount allegedly owed by N Co, payment of which had been guaranteed by V Co for whose D indebtedness respondents were liable under the guarantee signed by them. Respondents challenged the validity of the guarantee on the grounds that its provision was contrary to s 226 of the Companies Act inasmuch as Eagle had not consented, as provided for in s 226(2) of the Act, to the provision of security by V Co to the applicant for the debts of N Co. Judgment was granted against the respondents and they appealed, the only issue being the validity of the V Co guarantee.

Held (per Kumleben JA, Corbett JA and Van Heerden JA concurring), E that, when consent was required in terms of ss 226(1), the lack thereof before or at the time the loan was made or the security provided was fatal to the validity of the transaction and because Eagle had not consented at that stage the guarantee was invalid and the appeal should be upheld.

Held (per Nicholas AJA, Smalberger JA concurring), that, with reference to transactions such as those referred to in s 226(1), subsequent ratification was the equivalent of prior consent.

F Held, further, that the onus of proving ratification was on the person alleging it and on an examination of the evidence, the Judge a quo had erred in finding that all the members of V Co had consented as provided for in s 226(2) and the appeal should therefore be upheld.

The decision in the Witwatersrand Local Division in Standard Bank of SA Ltd v Neugarten and Others 1988 (1) SA 652 reversed. G

Case Information

Appeal from a decision in the Witwatersrand Local Division (Goldblatt AJ), reported at 1988 (1) SA 652. The facts appear from the judgment of Nicholas AJA.

I W Schwartzman SC (with him N Lazarus ) for the appellants referred H to the following authorities: Pottie v Kotze 1954 (3) SA 719 (A) at 726H - 727A; Knocker v Standard Bank of SA Ltd 1933 AD 128; Gilbey v Rush [1906] 1 Ch 11 at 22 - 3; Henochsberg On the Companies Act; Glen Comeragh (Pty) Ltd v Colibri (Pty) Ltd and Another 1979 (3) SA 210 (T) at 215A - C; Hoffmann and Zeffertt South African Law of Evidence 3rd ed at 438 - 40; Katzen v Mguno 1954 (1) SA 277 (T); Western Province Wine I Depot Ltd v Bellingan 1966 (1) SA 349 (T); Christie The Law of Contract in South Africa at 186 - 7; Standard Bank of SA Ltd v Neugarten and Others 1987 (3) SA 695 (W).

R H Zulman SC (with him P Blieden ) for the respondents referred to the following authorities: Standard Bank of SA Ltd v Neugarten and J Others 1987 (3) SA 695 (W); Association of Amusement and Novelty Machine

1989 (1) SA p799

Operators and Another v Minister of Justice and Another 1980 (2) SA 636 (A) at 660 - 1; Mellvill and Another NNO v The Master and Others 1984 (3) SA 387 (C) at 394; Novick and Another v Comair Holdings Ltd and Others 1979 (2) SA 116 (W) at 128 - 9; Silver Garbus & Co (Pty) Ltd v Teichert 1954 (2) SA 98 (N); Standard Bank of SA Ltd v Neugarten and Others 1988 (1) SA 652 (W); Mathole v Mothle 1951 (1) SA 256 (T); Glen Comeragh (Pty) Ltd v Colibri (Pty) Ltd and Another 1979 (3) SA 210 (T); B Burger v Central South African Railways 1903 TS 571 at 578. A

Cur adv vult.

Postea (November 11). C

Judgment

Nicholas AJA:

The dramatis personae in this appeal are: the Standard Bank of South Africa Ltd; two companies now in liquidation - Neugarten Fashions (Pty) Ltd ('Neugarten') and Paul Vivaldi Fashions (Pty) Ltd ('Vivaldi'); and five individuals - Messrs H Neugarten, M Hirschowitz, M Sacks, J Rosmarin and S Eagle. (When I refer to Mr D Neugarten I shall call him 'H Neugarten' so as to distinguish him from the company which is abbreviated to 'Neugarten'.)

Neugarten carried on the business of importers and wholesale distributors of ladies' clothing and knitwear. At the date of its liquidation, the 200 issued shares which had been issued were held by E H Neugarten (100 shares), Michael Hirschowitz Family Investments (Pty) Ltd ('MHFI') (50 shares), Sacks (25 shares), and Rosmarin (25 shares). The directors were H Neugarten and Hirschowitz. Its business and affairs were managed by H Neugarten, Hirschowitz and Sacks, who were the company's principal executive officers. H Neugarten was in charge of buying, marketing and sales; Hirschowitz was in charge of F general administration; and Sacks' responsibilities were those of financial director. No important decision was taken in regard to the affairs of Neugarten without prior discussion by H Neugarten, Hirschowitz and Sacks.

Vivaldi was incorporated on 5 May 1982. Its business was the G importation and wholesale distribution of men's clothing and knitwear. At the date of liquidation, the 100 shares which had been issued were held by H Neugarten (40 shares), MHFI (20 shares), Rosmarin (10 shares), Sacks (10 shares) and Eagle (20 shares). The business and affairs of Vivaldi were managed in the same way as those of Neugarten. Although Eagle was also a director he was essentially a salaried employee, whose H function it was to buy and sell merchandise. Neugarten and Vivaldi shared the same premises, and had the same personnel, the same shippers and bankers and the same bookkeeper and auditors. Their businesses were similar in character: the main difference was that Neugarten dealt in ladies', and Vivaldi in men's, clothing.

On 2 July 1982, Hirschowitz, H Neugarten, Sacks, Rosmarin and I Eagle executed a guarantee for the repayment of all sums of money which the Vivaldi company might thereafter owe to the Standard Bank. This was in connection with an application for overdraft facilities by Vivaldi to the bank. Vivaldi did not in the result make use of the overdraft facilities which were granted: its finances were provided by J Neugarten. By September 1982 it had become plain to the Standard Bank that Neugarten

1989 (1) SA p800

Nicholas AJA

A was financing Vivaldi, and that Neugarten was becoming increasingly indebted to the bank in consequence. The bank accordingly informed Hirschowitz that, unless Vivaldi provided a guarantee for Neugarten's indebtedness to the bank, Neugarten's credit facilities would be curtailed. As a result Vivaldi executed a guarantee ('the Vivaldi guarantee'), which was signed on its behalf by H Neugarten B and Hirschowitz, for the repayment of all sums of money which Neugarten might thereafter owe to the bank. Attached to the guarantee were two documents. One was in the following terms:

'Consent in terms of s 226 (2)(a) of the Companies Act, 1973.

Paul Vivaldi Fashions (Pty) Ltd Registration No 82004475/07

C We, being all members of the Company, hereby consent to the Company signing a guarantee for an unlimited amount in favour of the Standard Bank of South African Ltd, Kine Centre branch, guaranteeing the obligations of Neugarten Fashions (Pty) Ltd in respect of such banking facilities as the Bank may in its sole discretion deem fit (either by way of the continuation of any existing facilities and/or provision of new or further facilities).

D We further consent to the Company providing the Bank with such securities in support of the aforesaid guarantee as the directors may from time to time in their discretion deem fit.

Thus done and signed at Johannesburg on the 28th day of September 1982.

Signed:.....................'

E The signatories to this document were H Neugarten, Sacks, Rosmarin and Hirschowitz. It was not signed by Eagle, or specifically by MHFI.

On 10 March 1986, by which date Neugarten and Vivaldi had both been placed in liquidation, the Standard Bank brought an application in the Witwatersrand Local Division against H Neugarten, Sacks and Rosmarin as first, second and third respondents respectively. It claimed payment F of R2 755 242,31 and other relief, alleging that this was an amount owing by Neugarten; that payment had been guaranteed by Vivaldi; and that the respondents were liable for Vivaldi's indebtedness to the bank under the guarantee signed inter alios by them. As proof of the alleged indebtedness the bank relied on...