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The art of law - can minority shareholders wind up a solvent company against the wishes of the majority?

When can aggrieved minority shareholders secure the winding up of a solvent company under the Companies Act 2008?

The winding up of solvent companies is provided for in the new Companies Act 71 of 2008. The winding up of insolvent companies remains regulated by the old Companies Act 61 of 1973.

The shareholders of a solvent company may decide, for any number of reasons, that despite its solvency the company should be wound up. If sufficient shareholders favour this course of action to be able to secure the passing of a special resolution at a shareholders' meeting, then this process can take its course without controversy.

A contested application for the winding up of a solvent company

Where, however, the aggrieved shareholders cannot muster sufficient votes to pass a special resolution that the company be wound up, a further avenue is open to them, namely an application to court in terms of section 81(1)(e) of the Companies Act 2008.

Section 81(1)(e) of the Act provides that a court may order a solvent company to be wound up if -

"a shareholder has applied, with leave of the court, for an order to wind up the company on the grounds that -
(i) the directors, prescribed officers or other persons in control of the company are acting in a manner that is fraudulent or otherwise illegal; or
(ii) the company's assets are being misapplied or wasted".

The company itself and its directors and other shareholders may of course oppose such an application.

The first reported judgment on section 81(1)(e)

The first reported judicial decision on the interpretation and application of section 81(1)(e) is Pinfold v Edge to Edge Global Investments Ltd [2013] ZAKZDHC 52 in which judgment was handed down by the KwaZulu-Natal High Court on 27 September 2013.

Fraudulent or otherwise illegal conduct

The first ground for winding up contemplated in section 81(1)(e) is that fraudulent or otherwise illegal conduct has been engaged in by the directors or other controllers of the company.

In Pinfold v Edge to Edge the court observed (at para [5]) that the term fraud has a well-established meaning, connoting a misrepresentation with an intent to defraud which is actually or potentially prejudicial to another person.

In this particular case, the fraudulent conduct that the applicant shareholders were able to demonstrate to the satisfaction of the court included factual misrepresentations made in a Private Placement Memorandum whose purpose was to persuade investors to invest in the company, and misrepresentations regarding assets allegedly owned by the company.

The expression illegal in s 81(1)(e) is a much broader term. The illegalities on the part of the directors, alleged by the applicant shareholders in this case, included the undisputed failure for two years to issue financial statements as required by the Companies Act, and the court regarded this in a serious light.

In the result, it was held that there was no genuine dispute of fact, and that the version put forward by the directors in question was "untenable".

The court therefore granted the order requested by the applicants - namely, an order that the company be wound up.

Misapplication or wasting of company assets

The more contentious ground for winding up, envisaged in section 81(1)(e) is that the company's assets are being wasted or misapplied. Although allegations in this regard were made in the Pinfold v Edge to Edge case, the court did not rely on these grounds in ordering that the company be wound up.

The difficulty with this ground is that it is wide enough to include non-fraudulent mismanagement of the company and its resources.

Traditionally, and for good reason, the courts have declined to become involved in such issues, which are the proper province of the board of directors, where directors, fundamentally, have to act in good faith and are not legally accountable for mere errors of judgement.

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