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The art of law - the disposal by the executor of a deceased member's interest in a close corporation

The disposal of a deceased member's interest in a close corporation

The decision in Livanos NO v Oates 2013 (5) SA 165 (GSJ) is the first High Court decision on the interpretation of the provisions of the Close Corporations Act 69 of 1984 that govern the process for disposing of the interest of a deceased member of a close corporation where this is not provided for in an association agreement.

In this case, the deceased held a 50% members' interest in a close corporation and his one son, Oates, held the remaining 50%.

The sole heir to the deceased's estate was his widow, Bernadette, who wished to acquire the deceased's member's interest. She and the deceased's other son, Mark, wrote to Oates requesting him to approve a transfer of the deceased's interest to Bernadette, as heir, but Oates declined.

The executors then proposed to sell the deceased's member's interest to Mark for R16 million, and sent Oates a letter, requesting his approval to such a sale, but the latter declined to give his approval and also declined to co-operate with the transfer of the member's interest to Mark.

Mark and Bernadette applied to court for an order declaring the sale to Mark to be valid, and Oates counter-applied for the sale to be rescinded.

The surviving member claimed that he was entitled to purchase the interest at a fair value

Oates's position was that, as the remaining member of the close corporation, he was entitled to purchase the deceased's member's interest at a fair value and was not obliged to consent to the proposed sale to Mark. For his part, Mark contended that Oates had failed to exercise his statutory pre-emptive right and was now obliged, in terms of the Close Corporations Act, to give effect to the executor's sale to himself.

The dispute thus centred on the interpretation of the provisions of the Close Corporations Act, namely section 35, read with certain provisions of section 34, that regulate the disposal, by an executor, of the interest of a deceased member where - as in this case - this is not provided for in an association agreement.

An executor must first seek transfer of the deceased's member's interest to the heir or legatee

The court pointed out (at para [7] of the judgment) that section 35(a) of the Close Corporations Act requires an executor first to seek the transfer of the interest of the deceased member's interest to the heir or legatee, but that such a transfer can be effected only if the remaining members of the corporation consent to it.

In this particular case, the surviving member of the corporation, Oates, had declined to consent, within the 28 day period envisaged in section 35(a), to a transfer of the deceased's member's interest to the heir, Bernadette. The court said that the executors were then entitled to propose a sale of the deceased member's interest in the manner provided for in section 35(b), and had proposed such a sale to Mark for R16 million.

The executors then (as required by section 35 read with section 34(2)) requested Oates, as the remaining member of the corporation to consent to the proposed sale of the deceased member's interest to Mark, but Oates failed to consent to the transfer within the 28 days provided for in section 34(2).

This sequence of events, said the court (at para [12]), left the executors free to adopt one of the options set out in section 35(b), including, the option of selling the interest to any person who qualified for membership of the corporation - in this case, Mark.

The remaining member had failed to exercise his rights

The court pointed out at para [12]) that Oates, as the remaining member, had been entitled, in terms of section 34(2)(b), to exercise what was effectively a pre-emptive right within 28 days of receipt of the written statement by the corporation and to be substituted as the purchaser at the price and on the terms set out in the written statement, but that Oates had failed to do so within the prescribed time period, with the result that the proposed sale to Mark became effective.

In short, therefore, Oates (who did not wish Mark to be his co-member in the corporation) had the opportunity to acquire the deceased's member's interest to the exclusion of Mark, but he failed to exercise the options available to him in terms of sections 34 and 35 of the Close Corporations Act.

In the result, the court issued an order declaring that the deceased's 50% member's interest in the corporation had been validly sold to Mark.

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