LWELA Case Law

Airport Cold Storage v Ebrahim

Highlights the judiciary’s willingness to disregard the separate legal

personality of a corporation when it is misused to defraud creditors,
ensuring that individuals who misuse the corporate form are held
personally responsible for the entity’s obligations

Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd

The court allowed piercing the corporate veil when directors were found
to have used the corporate structure for fraudulent purposes. The court
emphasized that the corporate personality should not serve as a shield
for dishonest conduct.

Dodo vs Kruegersdrop Municipal council

The property vested in the company and could not be regarded as a
vesting in any or all of the shareholders of the company.

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

Is a pivotal South African case that clarified the concept of “financial

assistance” within the context of company law, particularly concerning a
company’s provision of financial support for the acquisition of its own
shares.

Case Summary:

• Parties Involved: Lipschitz NO (the appellant) and UDC Bank Ltd (the
respondent).
• Background: The case addressed whether certain transactions
constituted financial assistance under the Companies Act, which would
be prohibited if intended to facilitate the purchase of the company’s own
shares.
Court’s Findings:

• Two-Phase Assessment: The court established a two-step approach to

determine if financial assistance was provided:

1. Identification of Financial Assistance: Ascertain whether the company

provided any form of financial assistance, directly or indirectly.

2. Purpose of Assistance: Determine if this assistance was given for the

purpose of, or in connection with, the acquisition of shares in the
company.
• Clarification of Financial Assistance: The court held that financial
assistance encompasses any assistance of a financial nature, given
directly or indirectly, for the purpose of or in connection with the
purchase of shares. This includes not only direct financial contributions
but also indirect support that facilitates share acquisitions.

Legal Significance:

•The ruling expanded the definition of financial assistance beyond mere

impoverishment (i.e., depleting company assets) to include any financial
support related to share acquisitions, regardless of whether company
assets were directly reduced.

• This case reinforced the prohibition against companies providing

financial assistance for the purchase of their own shares, aiming to
prevent potential abuses and protect creditors’ interests.

Implications:
• Companies must exercise caution when engaging in transactions that
could be construed as financial assistance for share acquisitions,
ensuring compliance with legal standards to avoid invalidation of such
transactions.
• The case serves as a foundational reference for interpreting financial
assistance provisions in company law, influencing subsequent legal
interpretations and corporate practices.
In essence, Lipschitz NO v UDC Bank Ltd clarified that any financial
support provided by a company to facilitate the purchase of its own
shares falls within the ambit of financial assistance, which is subject to
legal restrictions to maintain corporate integrity and protect stakeholders.

Gradwell (Pty) Ltd v Rostra Printers Ltd

Is a significant South African case that addressed the issue of financial
assistance provided by a company for the acquisition of its own shares.
The court’s decision in this case has become a foundational reference in
understanding the legal boundaries of such financial transactions.

Case Summary:

• Parties Involved: Gradwell (Pty) Ltd (the appellant) and Rostra Printers
Ltd (the respondent).

• Gradwell (Pty) Ltd entered into an agreement with Rostra Printers Ltd,
which involved the provision of financial assistance for the acquisition of
shares in the company. The transaction was structured to include the
settlement of existing debts and the arrangement of a new mortgage
bond.

Legal Issue:
The central legal question was whether the financial assistance provided
by Gradwell (Pty) Ltd to facilitate the purchase of its own shares
contravened Section 86bis(2) of Act 46 of 1926, which prohibits
companies from providing financial assistance for the acquisition of their
own shares.

Court’s Findings
• Impoverishment Test: The court applied the “impoverishment test” to
determine whether the transaction resulted in the company being
deprived of its assets. It concluded that the transaction did not constitute
financial assistance as defined by the statute. The arrangement was
primarily aimed at restructuring existing debts and did not involve the
company providing funds to facilitate the purchase of its own shares.
• Purpose of the Transaction: The court emphasized that the true
purpose of the transaction was to reorganize the company’s financial
obligations, rather than to provide assistance for share acquisition.
Therefore, it did not fall within the prohibited category of financial
assistance.

Legal Significance:
• Clarification of Financial Assistance: This case clarified that not all
financial transactions involving a company’s funds are considered
financial assistance for share acquisitions. The intent and structure of
the transaction are crucial in determining its legality.

• Impoverishment Test: The introduction of the “impoverishment test”

provided a practical tool for courts to assess whether a transaction
resulted in the company losing assets, thereby offering clarity in
distinguishing permissible financial arrangements from those that are
prohibited.
Conclusion:

Gradwell (Pty) Ltd v Rostra Printers Ltd serves as a critical case in South
African company law, offering guidance on the complexities surrounding
financial assistance for share acquisitions. It underscores the importance
of examining the substance and purpose of financial transactions to
ensure compliance with legal provisions and to prevent potential abuses
of corporate funds.
Johnson v Liquidator of M Bulkin Co Ltd

Is a significant South African case that delved into the complexities of

company liquidation and the rights of creditors. The dispute arose when
Johnson, a creditor of M Bulkin Co Ltd, sought to challenge certain
transactions conducted by the company prior to its liquidation.

Case Summary:

• Parties Involved: Johnson (the appellant) and the Liquidator of M

Bulkin Co Ltd (the respondent).
• Background: Johnson, a creditor, alleged that M Bulkin Co Ltd had
engaged in transactions that unfairly prejudiced creditors’ interests
before entering liquidation.
Legal Issue:

The central issue was whether the transactions in question were

conducted in good faith and in compliance with legal obligations, or if
they amounted to fraudulent preferences disadvantaging creditors.
Court’s Findings:

• Transactions Scrutinized: The court examined the nature and timing of

the disputed transactions, considering factors such as the company’s
solvency and the intent behind the transactions.
• Creditor Protection: Emphasizing the need to protect creditors’ rights,
the court assessed whether the transactions were detrimental to the
creditors’ collective interests.
• Outcome: Based on the findings, the court ruled on the legitimacy of
the transactions, aiming to ensure equitable treatment of all creditors in
the liquidation process.

Legal Significance:
• Fraudulent Preferences: The case reinforced the principle that
transactions favoring certain creditors over others shortly before
liquidation could be deemed fraudulent preferences and thus voidable.
• Creditor Remedies: It highlighted the avenues available to creditors to
challenge transactions that unfairly prejudice their claims during
liquidation proceedings.

Conclusion:

Johnson v Liquidator of M Bulkin Co Ltd serves as a pertinent reminder

of the legal safeguards in place to protect creditors during company
liquidation. It underscores the judiciary’s role in scrutinizing pre-
liquidation transactions to prevent fraudulent activities and ensure fair
treatment of all creditors involved.

Fidelity Bank Ltd v Three Women (Pty) Ltd

South African case that addresses the issue of financial assistance

provided by a company for the acquisition of its own shares, as
governed by Section 38 of the Companies Act 61 of 1973.
Case Overview:

• Parties Involved: Fidelity Bank Ltd (the plaintiff) and Three Women
(Pty) Ltd (the defendant).

• Legal Issue: Whether the transaction in question constituted unlawful

financial assistance under Section 38 of the Companies Act, which
prohibited companies from providing financial assistance for the
purchase of their own shares.
Court’s Findings:
• Purpose of the Transaction: The court examined the intent behind the
transaction and determined that it did not serve any legitimate
commercial interest for the company. This led to the conclusion that the
primary purpose was to facilitate the purchase of shares, thereby
constituting financial assistance.

• Impoverishment Test: The court noted that the “impoverishment test”—

assessing whether the company was financially disadvantaged by the
transaction—was not the sole determinant. Even in the absence of direct
financial loss, a transaction could still be deemed financial assistance if
its primary purpose was to aid in the acquisition of the company’s own
shares.
Legal Significance:

This case underscores that when evaluating potential financial

assistance, courts will scrutinize the underlying purpose of the
transaction. Even if a company does not suffer direct financial harm,
transactions intended to facilitate the purchase of its own shares can
violate statutory prohibitions.

Conclusion:

Fidelity Bank Ltd v Three Women (Pty) Ltd serves as a critical reminder
for companies to ensure that their transactions have legitimate
commercial purposes and do not inadvertently contravene legal
restrictions on financial assistance for share acquisitions.

Barry v Clearwater Estates NPC and Others (187/2016) [2017]

ZASCA 11
The Supreme Court of Appeal addressed the validity of a company’s
Memorandum of Incorporation (MOI) imposing a 48-hour notice
requirement for the appointment of proxies. The court held that such a
provision was inconsistent with Section 58(1) of the Companies Act 71
of 2008, which allows a shareholder to appoint a proxy “at any time.”
Consequently, the court declared the 48-hour notice requirement in the
MOI null and void.

Key Points from the Judgment:

• Shareholder Rights: Section 58(1) of the Companies Act grants
shareholders the right to appoint a proxy at any time to participate in,
speak, and vote at shareholders’ meetings.

• MOI Restrictions: The MOI of Clearwater Estates NPC required proxies

to be appointed at least 48 hours before a meeting. The court found this
requirement to be in direct conflict with the unalterable provisions of
Section 58(1).
• Timing of Proxy Appointment: The court emphasized that the phrase
“at any time” in Section 58(1) means that a shareholder can appoint a
proxy without any time restrictions imposed by the company’s MOI.

Implications of the Judgment:

This ruling underscores the supremacy of the Companies Act over a
company’s MOI regarding shareholder rights. Companies cannot impose
additional restrictions on proxy appointments beyond what is stipulated
in the Act. Shareholders retain the flexibility to appoint proxies at any
time, ensuring their rights are not unduly limited by internal company
documents.

Butler and Others v Van Zyl and Others (554/13) [2014] ZASCA 81, the
Supreme Court of Appeal of South Africa addressed the rights of
majority shareholders to requisition a shareholders’ meeting aimed at
removing a director.

Background:

The appellants, co-executors of a deceased estate, held 78% of the

shares in Nuco Chrome Bophuthatswana (Pty) Ltd (“Nuco”). They
sought to remove Gerrit Marthinus Van Zyl, the managing director and a
12% shareholder, alleging that his actions had jeopardized the
company’s sole assets. To initiate this removal, they issued a written
demand on November 1, 2012, for a shareholders’ meeting, proposing
resolutions for Van Zyl’s removal and the appointment of a new director.

Legal Proceedings:

Van Zyl contested the validity of the demand, arguing that the board was
not properly constituted to convene the meeting. He filed an urgent court
application to declare the notice invalid and to interdict the holding of the
shareholders’ meeting. The South Gauteng High Court ruled in favor of
Van Zyl, setting aside the notices and interdicting the meeting.

Supreme Court of Appeal Decision:

On appeal, the Supreme Court of Appeal overturned the High Court’s
decision. The court emphasized that Section 61(3) of the Companies Act
71 of 2008 mandates the board to convene a shareholders’ meeting
upon a valid demand from shareholders holding at least 10% of the
voting rights. The court found that the appellants had complied with the
statutory requirements, and thus, the board was obligated to convene
the meeting. The court concluded that the High Court erred in setting
aside the notices and interdicting the meeting.
Significance:

This case underscores the statutory rights of majority shareholders to

call for a shareholders’ meeting to address significant company matters,
such as the removal of a director. It clarifies that when shareholders
meet the criteria set out in Section 61(3) of the Companies Act, the
board is compelled to convene the requested meeting. The ruling
reinforces the principle that directors cannot unduly obstruct
shareholders from exercising their rights to influence company
governance.

CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others

The court examined the circumstances under which a shareholder can
invoke Section 61(12) of the Companies Act 71 of 2008 to compel a
company’s board to convene a shareholders’ meeting. Section 61(12)
allows a shareholder to request court intervention when the board fails to
call a meeting as demanded under Section 61(3).
Case Background:

CDH Invest NV (CDH), holding a majority stake in Petrotank South

Africa (Pty) Ltd, sought a court order under Section 61(12) directing the
board to convene a shareholders’ meeting. The proposed agenda
included resolutions to remove a director, appoint a substitute, and
consider a pro rata rights offer of additional shares. The High Court
dismissed the application, leading to an appeal.

Court’s Considerations:

The court emphasized that seeking judicial intervention under Section

61(12) is not an automatic entitlement. The applicant must demonstrate
a genuine need for the court’s involvement, as courts typically refrain
from interfering in a company’s internal affairs without substantial
justification. In this case, the court questioned why CDH sought judicial
intervention when it already had the power, through its majority
representation on the board, to convene the meeting without court
assistance.

Conclusion:

The ruling underscores the principle that court intervention in corporate

governance matters requires clear evidence of necessity. Shareholders
must first exhaust internal mechanisms before seeking judicial
assistance to convene meetings. This ensures that the company’s
internal processes are respected and that court resources are utilized
appropriately.

Kukama v Lobelo

The applicant launched an application to declare Mr. L. a delinquent

director in terms of section 162 and for the removal as director. The
court did declare Mr. L. to be a delinquent director including the
following.
 1. He allowed money for company A to be placed in the bank account
for company B.
2. He had failed to refund SARS, a fraudulent claim.
3. He had failed to alert co-directors and co-shareholders of the
fraudulent transaction.

The court therefore concluded that Mr. L's conduct fell short of the
standard expected of a director of company A to such an extent that it
amounted to wilful misconduct, breach of trust, and gross abuse of his
position as a director in order for delinquency was made.

Foss v Harbottle.

In that case, two minority shareholders alleged that the property of the
company had been misapplied and wasted by the directors and that
various mortgages were given improperly over the company’s property.
The minority shareholders acting as the plaintiffs in this case asked that
the guilty parties (the directors of the company) be held accountable to
the company and that a receiver be appointed.

The court dismissed the claim and held that when a company is
wronged by its directors, it is only the company that has standing to sue
not shareholders of the company. In effect, the court established the
proper plaintiff rule, which states that a wrong done to the company may
be vindicated by the company alone. The company itself must be the
plaintiff, and not shareholders of that company.

TWK Agriculture Ltd v NCT Forestry Co- operative Ltd,

The court examined the nature of the derivative action and held that, as
a general rule, where a wrong is alleged to have been committed against
a company, it is the company that must seek redress. This is the proper
plaintiff rule referred to above.

This proper plaintiff rule is subject to the exception that a shareholder

will be allowed to enforce the company’s rights where those who control
the company, wrongfully or in breach of duty, benefit themselves and, by
use of their control, ensure that no action is brought by the company to
obtain redress. This exception is generally described as the ‘fraud on the
minority’ exception. The court held that the terminology used is
somewhat misleading, as it is clear from the authorities that ‘fraud’ is not
used in the technical sense, but in the sense of any misuse or abuse of
power by those who control the company

Derivative action should not abuse court process:Mouritzen v

Greystones Enterprises (Pty) Ltd

One of the directors of a company submitted that the expenses charged

to the company by another director for the use of his personal credit card
had escalated out of all proportion to what might be regarded as
reasonable expenditure for a director and had reached a point where
they were having an impact on the financial results of the company, a
situation that was prejudicial to the company and to the company’s
shareholders. The alleged wrongdoer disputed any suggestion that he
was cheating the company and alleged that he had been paying
legitimate company expenses using the credit card.

The court held that it is important that there must be a demonstration of

good conscience and sincere belief on the existence of reasonable
prospects of success in the proposed litigation and, therefore, there
must be an absence of ulterior motive on the part of an applicant who
brings an action in terms of s 165. The court held that if a court was not
satisfied that an applicant actually holds the requisite belief, that fact
alone would be sufficient to lead to the conclusion that the application
must be made for a collateral purpose, as to be an abuse of process. An
applicant may, however, believe that the company has a good cause of
action with a reasonable prospect of success but nevertheless be intent
on bringing the derivative action, not to prosecute it to a conclusion, but
to use it as a means for obtaining some advantage for which the action
is not designed or for some collateral advantage beyond what the law
offers. If that is shown, the application and the derivative suit itself would
be an abuse of the court’s process.

In the court’s view:

[F]actual proof of any pre-existing personal animosity between the

parties, such as in the present instance, does not per se serve as
conclusive proof that any person referred to in section 165(2) of the Act
is not acting in good faith in serving a demand under that subsection, or
instituting an application under section 165(5). However, personal
animosity between the opposed parties is an important factor which the
Court will always take into account together with other relevant
evidentiary material presented before the Court in a given situation, in
determining whether or not an applicant has, on a balance of
probabilities, satisfied the ‘good faith’ requirement.

The court commented that indeed there is no requirement in law that the
directors of a company need to be friends or even to be on talking terms.
What is of utmost fundamental importance, amongst others, is the
fiduciary duty that they individually owe to the company of which they
are the directors. This aspect of a director’s responsibility vis-à-vis his or
her company is equally relevantly important in relation to this application,
in that such fiduciary duty entails, on the part of every director, the same
duty as required of an applicant under s 165(5)(b),namely, to ‘act in
good faith’ and ‘in the best interests of the company’. The court referred
to Da Silva v CH hemicals,37 which stated that ‘[i]t is a well-established
rule of company law that directors have a fiduciary duty to exercise their
powers in good faith and in the best interests of the company’.

The court found it important that the director in this case that had alleged
wrongdoing by the other director had himself offered to have his own
credit card account examined:

... on this basis, the applicant is demonstrating that he has nothing to

hide. Generally, such conduct would be consistent to a person who is
acting in good faith. Accordingly, I find that the applicant has succeeded
to demonstrate on a preponderance of probabilities that he is acting in
good faith.

The court confirmed that the Act requires the court to be satisfied that
granting leave to commence the proposed proceedings ‘is in the best
interests of the company’. In most, but not all, instances this requirement
will overlap with the requirement of good faith. An instance where a
person does not act in good faith but is driven by an ulterior motive, such
as a personal vendetta, will generally not be in the best interests of the
company.
In this case, the director that had alleged wrongdoing was given leave, in
terms of s 165(5), to institute action in the name of the company against
the alleged wrongdoer, and the latter was ordered to render a full
account of his expenditure on his credit card for a period of three years
prior to the date of the order.

Dissatisfied shareholder under s 252 of the 1973 Act In Robson v

Wax Works (Pty) Ltd,48

The applicant held 30 per cent of the issued share capital of a company.
The agreement in terms of which the applicant acquired his shareholding
in the company did not, however, provide for his appointment as a
director of the company. The applicant was, in fact, effectively a so-
called ‘sleeping partner’.

At the time that the applicant acquired his interest in the company, he
lived in Gauteng, but he then moved to Cape Town, where the business
of the company was carried out, and he developed a more direct interest
in the business of the company.

In his application for winding-up in terms of s 344(h) of the Companies

Act, 1973 (on the grounds that it was just and equitable to do so), the
applicant alleged that he had been effectively excluded from the
decision-making process by the other shareholders. He also alleged that
no proper shareholders’ meetings had taken place, and he alleged a
lack of probity on the part of the other shareholders in the management
of the company.

The court held that as a dissatisfied minority shareholder, the applicant

was not entitled, without more, to achieve his escape from an unhappy
investment in the company by winding up the company. The court had
no difficulty in appreciating the frustration and dissatisfaction that the
applicant experienced as a shareholder. The court held, however, that
many cases had emphasised that justice and equity required
consideration not only of the position of the applicant for winding up, but
also the need to take into account the situation and interests of all the
other affected, legally interested parties.
The court found that the other shareholders recognised that the
applicant should be able to withdraw from the company, but they argued
that winding up the company on just and equitable grounds was not the
appropriate means of achieving the objective. The other shareholders
wished to continue with the company’s business. The court held that the
provisions of s 252(1) of the Companies Act, 1973 plainly afford an
alternative remedy to winding up a company, and was suitable in the
present case.

The court held that since it was apparent that the other shareholders
desired the company to continue and the interests of the dissatisfied
shareholder could be equitably, justly and effectively addressed under s
252, it seemed that it would be inappropriate to wind up the company
against the wishes of the members who wanted it to continue. The
majority shareholders in this case were willing to buy the applicant’s
shares at fair value as determined by an independent and appropriately
qualified third party, and the court was of the view that the applicant was
likely to recoup a greater sum in respect of a sale of his shares to one or
both of his fellow shareholders than he would have done upon a
liquidation of the company. The court was also of the view that there was
no reason why a court making an order in terms of s 252(3) could not, in
framing its order, give appropriate directions that the applicant’s
shareholding had to be valued on a basis or formula that would address
any potential or alleged prejudice.

The court therefore concluded that the majority shareholders had

sufficiently established that it was unreasonable of the applicant not to
have commenced proceedings in terms of s 252, and that appropriate
relief under that section would more justly and equitably address the
exigencies of the disintegration of the relationship between the
shareholders than would a winding-up order.

The court’s findings under the 1973 Act have been accommodated
under the 2008 Act.

Court has broad powers in terms of s 163:Kudumane Investment

Holding Ltd v Northern Cape Manganese Company (Pty) Ltd &
others
The applicant (company K) was the minority (49 per cent) shareholder,
and the second respondent (company N) was the majority (51 per cent)
shareholder in the first respondent (NCMC), which was a joint venture
company constituted for the purpose of exploiting certain prospecting
rights. Company K relied on s 163 to obtain relief from certain alleged
‘oppressive and prejudicial conduct’ of company N.

The relief was sought by reason of alleged acrimonious infighting within

company N, which resulted in pending High Court litigation between
disputed ‘shareholders’ and disputed ‘directors’ of company N. Company
K claimed that the infighting and litigation hampered the ability of NCMC
to conduct the affairs for which it was constituted, thereby prejudicing the
commercial rationale for its existence. Company K asserted that while
the litigation was unresolved, there remained continued uncertainty both
as to the shareholding of company N and also of the identity of company
N’s directors authorised to sit on the NCMC board. Accordingly, NCMC
had no assurance that the people who purported to represent company
N at any board meetings were in fact and in law authorised to do so.
NCMC therefore had no guarantee that any resolutions passed at any
meeting of the board of NCMC would be valid because they could
subsequently be challenged by the successful party in the pending
litigation. The prospecting right held by NCMC was ‘results driven’ in that
if NCMC did not comply with the terms of the right, the Minister was
empowered in terms of the Mineral and Petroleum

Resources Development Act to either cancel or suspend the right

granted to NCMC.

The court held that s 163(1) provides that a shareholder of a company

may apply to court for relief if any act or omission of a person related to
the company has had a result that is oppressive or unfairly prejudicial to
or unfairly disregards the interests of the applicant. The court held that
the conduct complained of must not be an act or omission which may or
will occur in the future. It must be ‘something which had already been
done or performed’ at the time of bringing the application. However it
stated that it could see no reason why there cannot be a continuing state
of affairs that constitutes the complaint: ‘after all an act may be repeated;
an omission may be enduring; the current state of affairs will certainly
have commenced in the past and may continue indefinitely.’
The court held that there was uncertainty as to the identity of the
directors of company N and there was doubt which directors were
authorised to sit on the NCMC board: ‘no meeting can be held or
resolution passed in the complete confidence that such meeting or
resolution will be secure from challenge. It is the lack of confidence and
uncertainty which is the result’.

The court held that the powers of a court to grant appropriate relief in
such circumstances are framed in the broadest of terms in s 163. A court
is empowered to make any order ‘it considers fit’. The court concluded
that the actions of company N in the litigation had a result that the affairs
of NCMC, and hence of company K were being oppressed and unfairly
prejudiced and unfairly disregarded. The relief that the court granted was
an order declaring who the directors of NCMC would be, and they would
validly hold office until the infighting within company N had been
resolved by the pending litigation.