The courts will disregard a simulated transaction
Legal ingenuity or a simulated transaction?
The law draws a distinction between, on the one hand, legitimately utilising legal means in order to achieve a particular result and, on the other hand engaging in a simulated (that is to say, a pretended) transaction in which a person seeks to achieve an end by disguising a transaction as something that it is not.
The difficulty of applying this distinction appears from the recent judgment of the Eastern Cape High Court in van Wyk v Ekosto 1042 CC  ZAECGHC 7.
The sale of a member's interest in a close corporation
The facts in this case were that Owles, the sole member of a close corporation, had sold his member's interest in the corporation to van Wyk for some R4.5 million. In terms of the agreement, ownership of the member's interest was to pass on the full payment of the price. The agreement was subject to a suspensive condition that the purchaser succeed in obtaining loan finance from a commercial bank in the sum of R4 million within 90 days of the sale; in other words, the agreement would become operative only if such a loan were obtained and, if it were not the sale would fall away. The agreement provided that, if such a loan had not been secured within the envisaged 90 days, the member's interest was to be sold by way of public auction.
In the event, van Wyk was unable to secure the R4 million loan, and the suspensive condition was therefore not fulfilled. Owles and van Wyk attempted to find another buyer for the member's interest. When that proved impossible, a public auction of the member's interest was held – as provided for in the agreement – and (to the chagrin of van Wyk) Owles was the successful bidder for the member's interest.
van Wyk was aggrieved at this turn of events because he claimed to have spent some R800 000 on improvements for which he had received no compensation and he claimed that he was entitled to retain possession of the property owned by the close corporation until he had been paid such compensation. He therefore applied to the High Court to set aside the purchase by Owles.
The High Court ruled that the sale was void on the basis that, in terms of the agreement, Owles had still been the owner of the member's interest at the time he purported to purchase it. As a matter of law, a person cannot validly purchase property that he already owns.
A second auction sale therefore had to be held as required by the agreement.
Owles formed a trust to bid at the auction
In the interim, Owles formed a trust of which he was a capital beneficiary and a potential income beneficiary. At the second auction sale, the trust successfully bid for the member's interest.
Still aggrieved, van Wyk then applied to court for an order declaring that the sale of the member's interest to the trust had been a simulated transaction, designed to avoid the effect of the court order that had declared Owles' prior purchase of the member's interest to be void.
van Wyk alleged that in reality, Owles had once again purchased his own member's interest and that the trust was a mere front.
The nature of a simulated agreement
It was not disputed that the courts will not give effect to a simulated transaction. The locus classicus in this regard is the judgment of Innes CJ in Zandberg v Van Zyl 1910 AD 302 where he said that –
“Now, as a general rule, the parties to a contract express themselves in language calculated without subterfuge or concealment to embody the agreement at which they have arrived. They intend the contract to be exactly what it purports; and the shape which it assumes is what they meant it should have. Not infrequently, however (either to secure some advantage which otherwise the law would not give, or to escape some disability which otherwise the law would impose), the parties to a transaction endeavour to conceal its real character. They call it by a name, or give it a shape, intended not to express but to disguise its true nature. And when a Court is asked to decide any rights under such an agreement, it can only do so by giving effect to what the transaction really is; not what in form it purports to be. But the words of the rule indicate its limitations. The Court must be satisfied that there is a real intention, definitely ascertainable, which differs from the simulated intention. For if he parties in fact mean that a contract shall have effect in accordance with its tenor, the circumstances that the same object might have been attained in another way will not necessarily make the arrangement other than it purports to be.”
This is a dictum that has been affirmed many times in our courts.
The question in the case at hand was whether the sale of the member's interest in the close corporation to a trust of which Owles was a beneficiary was a simulated transaction in that the true purchaser was yet again Owles (as in the first sale that had been declared void by the court) and that the trust was a mere front.
van Wyk bore the onus of proving that the purchase by the trust was a disguised transaction
In order to establish that the transaction was indeed simulated, van Wyk bore the onus of proving, as set out in Innes CJ's dictum, quoted above, that there was a definitely ascertainable real intention on the part of Owles and the trust which differed from the allegedly simulated intention – in other words, that the ostensible purchase of the member's interest by the trust disguised the true transaction, namely that the real purchaser was Owles.
The court rejected van Wyk's contention in this regard pointing out that –
"A public auction is what it says: it is open to the public to bid for whatever is being sold. The auctioneer conducts the sale. As was submitted on behalf of the respondent, [van Wyk] himself could have bid for the member’s interest. Another person could have bid a higher price than that bid by the Trust, in which case the member’s interest would have been sold to someone other than the Trust. In these circumstances there was no guarantee that the Trust’s bid would be successful. There was no suggestion by the appellant that the public auction was improperly conducted or that there was any collusion between Owles and the auctioneer."
The court pointed out that the trust in question had been duly registered with the Master of the High Court. The trust was thus a separate legal entity and the trustees were able to enter into contracts, such as the one alleged to be simulated.
The court rejected the contention that, on the facts, Owles had yet again effectively purchased his own member's interest in the close corporation, and described this proposition as "nothing more than speculation". The court said that the evidence fell far short of establishing that the sale agreement between Owles and the trust did not record their respective true intentions.
The court therefore ruled, in effect, that the sale to the Trust had been valid and that van Wyk's right to remain in occupation of the property and to conduct the business of the close corporation had come to an end when the Trust purchased his members interest in the close corporation that owned the business.