Peters and Others NNO v Schoeman and Others

• Jurisdiction: South Africa

Peters and Others NNO v Schoeman and Others
2001 (1) SA 872 (SCA)

2001 (1) SA p872

Citation	2001 (1) SA 872 (SCA)
Case No	288/98
Court	Supreme Court of Appeal
Judge	Hefer ADCJ, F H Grosskopf JA, Marais JA, Schutz JA and Mpati AJA
Heard	September 11, 2000
Judgment	November 10, 2000
Counsel	M A Kriegler for the appellants; P G Cilliers for the respondents

Flynote : Sleutelwoorde F

Company — Shares and shareholders — Granting of financial assistance for purchase of its own shares in contravention of s 38(1) of Companies Act 61 of 1973 — What amounts to — Two family trusts each owning 50% of shares in company — Deed of sale concluded with respondents in terms of which trusts agreeing to transfer shares to respondents who were thereafter to convert company into close G corporation — After such conversion, mortgage bond to be registered over immovable property owned by close corporation and purchase price of members' interest to be paid to trusts — Scheme designed to bypass provisions of s 38(1) of Act by utilisation of s 40 of Close Corporations Act 69 of 1984 while not contravening ss 27 and 29(1) of H that Act — Respondents refusing to proceed with scheme alleging that it nevertheless contravened provisions of s 38(1) of Act — Ultimate object to enable respondents to become owners of members' interest in close corporation which acquired company's assets — Financial assistance only given once company ceased to exist and its assets becoming that of close corporation — While company in existence financial position remaining untouched by arrangement as it made no I loan, its assets were unencumbered and position of creditors not prejudiced — Provision of financial assistance by close corporation not prohibited by Companies Act or Close Corporations Act — Present deed of sale not falling within mischief s 38 aimed at — Respondents ordered to comply with their obligations. J

2001 (1) SA p873

Headnote : Kopnota

Two family trusts each owned 50% of the shares in a company. The A provisions of s 38 of the Companies Act 61 of 1973 (the Act) prohibited the rendering by a company of any financial assistance for the purpose of or in connection with the purchase of its shares. The conversion of the company into a close corporation by the trusts followed by the giving of financial assistance by the close corporation for the purchase of the members' interest so created would, however, not have offended against the provision of the Act as s 40 of the B Close Corporations Act 69 of 1984 (the CC Act) allowed such assistance to be given. However, s 27 of the CC Act required every member of a company converted into a close corporation to be a member of the corporation while s 29(1) provided that only natural persons may be members of a close corporation. The trusts were therefore not qualified to become members of the close corporation. To bypass this problem the C appellants, acting as trustees for the two family trusts which were the sellers, had facilitated the conclusion of a deed of sale with the respondents. In terms of the deed of sale, the sellers agreed to transfer the shares to the purchasers who would thereafter convert the company into a close corporation. After such conversion, a mortgage bond would be registered over the immovable property owned by the close D corporation and the purchase price for the members' interest paid to the sellers. The respondents had subsequently refused to proceed with the scheme, contending that the provisions of s 38 of the Act had been contravened so that the sale was void ab initio.

The Court a quo had found that the parties had failed to avoid the operation of s 38 of the Act and that their attempts to do E so had amounted to a mere camouflage. It had therefore refused to order the respondents to comply with their obligations as purchasers, particularly to pay the final instalment of the purchase price. In an appeal,

Held, that on a proper construction of the deed of sale in its totality, what was in reality being sold were shares in the company. But the sale of the shares was only one facet of a multi-faceted transaction, the ultimate object of which was to enable F the respondents to become the owners of the members' interest in the close corporation which would acquire the company's assets. In terms of the deed of sale, after payment by the respondents of a deposit, the shares would be transferred to them. Thereafter the company would be converted into a close corporation with the respondents as its members in equal shares. Financial assistance was to be given to enable the balance of the purchase price to be paid G and the conversion would facilitate the giving of such assistance as the company would then have ceased to exist and its assets would have become those of the close corporation. While the company was in existence, its financial position would remain untouched by the arrangement: it would make no loan, its assets would not be encumbered H and the position of its creditors would not be prejudiced in any way. (Paragraph [8] at 880I/J - 881C/D.)

Held, further, that it was the close corporation which was providing financial assistance and not the company; and this was not prohibited by the Act or the CC Act. (Paragraph [8] at 881D/E - E.)

Held, further, that the object of s 38 of the Act was to I protect the creditors of a company who had the right to look to its paid-up capital as the fund out of which their debts were to be discharged. The purpose of the section was to avoid the employment and depletion of that fund or exposing it to possible risk in consequence of transactions concluded for the purpose of or in connection with the purchase of the company's shares. The present deed of sale was, however, not within the mischief at which the section was aimed. J

2001 (1) SA p874

(Paragraph [9] at 881E - F/G.) Appeal upheld and respondents A ordered to comply with their obligations under the agreement of sale.

The decision in the Transvaal Provincial Division in Peters and Others NNO v Schoeman and Others reversed.

Cases Considered

Annotations:

Reported cases B

Kragga Kamma Estates CC and Another v Flanagan 1995 (2) SA 367 (A): dictum at 375C - D applied

Lewis v Oneanate (Pty) Ltd and Another 1992 (4) SA 811 (A): dictum at 818D compared and dictum at 818B - C applied

Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A): considered

Putco Ltd v TV & Radio Guarantee Co (Pty) Ltd C and Other Related Cases 1985 (4) SA 809 (A): dictum at 830E applied

Segal v Mazzur 1920 CPD 634: dictum at 644 - 5 applied.

Statutes Considered

Statutes

The Close Corporations Act 69 of 1984, ss 27, 29(1) and 40: see Juta's Statutes of South Africa 1999 vol 2 at 1-288 - 1-289 and 1-291

The Companies Act 61 of 1973, s 38(1): see D Juta's Statutes of South Africa 1999 vol 2 at 1-137.

Case Information

Appeal from a decision in the Transvaal Provincial Division (Roux J). The facts appear from the judgment of Mpati AJA.

M A Kriegler for the appellants: The respondents seek E to escape their obligations under the agreement on the basis of the contention that the agreement contravenes the provisions of s 38 of the Companies Act 61 of 1973 and that it is therefore void ab initio. The respondents also contended a quo, and it was held by that Court, that the agreement did not reflect the true F intention of the parties, that it was in fact designed to conceal their true intention which was to effect a transaction (in fraudem legis) in contravention of s 38. The fundamental enquiry in deciding whether s 38(1) is contravened is into the effect of the particular transaction in all the facets of its implementation. Meskin Henochsberg on the Companies Act vol 1 at 74; Lipshitz G NO v UDC Bank Ltd 1979 (1) SA 789 (A) at 798 - 801; Gradwell (Pty) Ltd v Rostra Printers Ltd 1959 (4) SA 419 (A) at 424 - 6. Since the contravention requires conduct amounting to the giving of financial assistance, it follows that no contravention can occur unless and until the agreement, evaluated in all its parts, is implemented or in fact transacted. Lindner v Vogtmannsberger 1965 (4) SA 108 (O); Joubert (ed) The Law of South Africa 1st re-issue H vol 4 (part 1) para 123 opposite note 6. The mere fact that financial assistance facilitates a purchase of a company's shares does not mean that it was given 'for the purpose of or in connection with' the purchase. Lipshitz (ibid at 806). The onus of proving that a particular agreement contravenes the prohibition is on the respondents who in the present instance makes that assertion. Meskin (ibid at 76); I Zentland Holdings (Pty) Ltd v Saambou Nasionale Bouvereniging 1979 (4) SA 574 (C) at 578 - 9. Where, as in the present instance, an agreement is executory at the time when the Court's evaluation of the agreement is made, the onus of proving a contravention ought not to be found to have been discharged if the further implementation of the agreement may take place without a J

2001 (1) SA p875

contravention of the prohibition. Meskin (ibid at A 76); Evrard v Ross 1977 (2) SA 311 (D) at 323; Brady v Brady [1989] AC 755 (HL) at 784 - 5, per Lord Oliver. The agreement envisages that the parties will transact or implement its...