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A draconian statutory remedy to resolve a dispute betweent the members of a close corporation

Close corporations - statutory expropriation of a member's interest1

Typically, people begin a business venture in an atmosphere of great optimism and goodwill. It is human nature that people do not, at this initial stage of the venture, pause to think about how they will extricate themselves from difficulty if things go wrong in the future.

If they were to apply their minds to this vital question, they might then include in their initial agreement some provisions as to how disagreements and breakdowns in the relationship are to be resolved for example, that the majority can buy out the minority's interest at a fair value.

Where parties fail to agree amongst themselves as to the process by which a dispute between them is to be resolved, they have no choice but to fall back on the law and accept whatever outcome the law imposes on them.

Where the parties have entered into a partnership to pursue their venture, the solution to a fundamental disagreement or dispute between the parties is usually clear-cut, namely, a dissolution (that is to say, a termination) of the partnership, so that each of the partners can then go their separate ways.

Greater complexity where the dispute involves parties associated in a close corporation

Where the parties are utilising a close corporation as the vehicle for their venture, the Close Corporations Act 69 of 1984 provides a number of remedies where the members of the corporation cannot themselves agree on how to resolve a difference of opinion that has arisen between them. But in this context, a new factor has entered the equation, namely that the close corporation is a legal person in its own right that will continue to exist even if some of its members give up or are forced to surrender their membership.

It needs to be borne in mind that, although no new close corporations can be registered after the Companies Act 2008 came into force on 1 May 2011, close corporations that existed at that date of which there are hundreds of thousands continue to exist until they are wound up or converted to a company.

Consequently, close corporations and their attendant opportunities and problems will remain an issue in the business community for many years to come.

Statutory expropriation of a member's interest in a close corporation

One of the most draconian remedies provided for in the Close Corporations Act for disputes between members is that contained in section 36 which empowers the court, on the application of a member of a corporation, to order that a particular person is to cease to be a member of the close corporation. The Act provides that such an order can be made where

  • a member of the close corporation is permanently incapable, because of unsound mind or any other reason, of performing his part in the carrying on of the business of the corporation;
  • a member has been guilty of such conduct as is likely to have a prejudicial effect on the carrying on of the business and that it is not reasonably practicable for the other member or members to carry on the business of the corporation with him or her;
  • circumstances have arisen which render it just and equitable that such member should cease to be a member of the corporation.

Where a court makes such an order, it can simultaneously make an order that the interest of the misbehaving member in the corporation is to be acquired by the corporation itself or by the other members at a specified value. In effect, therefore, the member of the close corporation is bought out, either by the corporation itself or by the other members.

The reason this remedy is particularly draconian is that where a person has a member's interest in a close corporation, this is a form of private property and the law usually respects and upholds property rights. As Holmes JA said in Oakland Nominees (Pty) Ltd v Gelria Mining & Investment Co (Pty) Ltd 1976 (1) SA 441 (A) at 452A:

'Our law jealously protects the right of ownership and the correlative right of the owner in regard to his property .'

And, indeed, the Constitution itself provides that no one may be deprived of property except in terms of law of general application and no law may permit arbitrary deprivation of property.

The Close Corporations Act (and the Companies Act) are of course law of general application and may therefore provide for members and shareholders to be deprived of the property they hold in the form of member's interests and shares so long as such deprivation is not arbitrary and has a rational basis.

In effect, section 36 of the Close Corporations Act empowers the court to order that the member's interest of a particular person be expropriated against the latter's will. On the other hand, the section clearly contemplates that proper compensation will be given to that person for the loss of his member's interest.

A discretionary remedy, and the applicant bears the onus of proof

The Supreme Court of Appeal recently made clear in Smyth v Mew 2010 (6) SA 537 (SCA) that the court has a discretion to make an order in this respect, and a member of a close corporation cannot demand, as of right, that another person be stripped of his member's interest in terms of section 36 of the Act.

There have indeed been a few reported judgments in which the court has made an order under section 36 that a particular member of a close corporation was to give up his membership; see for example, Griffiths v Climatic Air Conditioning and Refrigeration CC [2011] ZAECPEHC 35.

However, in the most recent decision involving section 36 that has come before our courts, namely, Daniels v Stander 2012 (2) SA 586 (WCC) the Western Cape High Court refused, for two reasons, to order that the person in question should cease to be a member of the close corporation in question. The first reason was that the aggrieved member of the close corporation who was seeking the order had failed to prove the facts that would bring section 36 into play; secondly, that the aggrieved member had failed to provide the court with evidence as to the value of the member's interest in question and the court was therefore, in any event. unable to make such an order.



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