It is a common occurrence that disputes arise in different spheres in people’s relations with one another. Some disputes are more capable of expedient resolution than others. What happens when such a dispute occurs at a shareholder level of a company, when the relationship between shareholders has irretrievably broken down and renders the management of a company dysfunctional?
These are some of the pertinent questions which were wisely addressed by the court in Thunder Cats Investment 92 (Pty) Ltd v Nkonjane Economic Prospecting & Investments (Pty) Ltd 2014 5 SA 1 (SCA). In this case, the Supreme Court of Appeal was seized with an appeal to set aside an order made by Vermeulen AJ in the South Gauteng High Court to wind up Nkonjane Economic Prospecting and Investments (Pty) Ltd on the basis of just and equitable circumstances in terms of Section 81(d)(iii) of the Companies Act 71 of 2008.
The High Court found that the irretrievable breakdown in the relationship between the parties was much more than the inability to meet or pass resolutions and that such inability resulted in a deadlock at the shareholder level. The High Court opined that in the absence of any other remedy, the liquidation was the most viable route under the circumstances.
It is noteworthy that such a liquidation is an extraordinary one and ought to be exercised judiciously and with caution by the court so as not to be seen as descending lightly on relationships established by valid and binding agreements, such as and for purposes of this discourse, shareholder agreements. Pacta sunt servanda is after all a well-established common law principle asserted by the Constitutional Court in Barkhuizen v Napier 2007 (S) SA 323 (CC) that: –
“public policy as informed by the Constitution requires in general that parties should comply with contractual obligations that have been freely and voluntarily undertaken”
In Mozart Ice Cream Franchises (Pty) Ltd v Davidoff and Another 2009 (3) SA (CC), the court maintained that in the absence of this principle, the law of contract would be subject to gross uncertainty, judicial whim and an absence of integrity between contracting parties.
Notwithstanding the sanctity of a shareholder’s agreement, as it were, the difficulty arises when the management of the company is deadlocked and such an impasse has been incapable of resolution in voting power and any other means as may be provided in the shareholder agreement.
In this instance, Section 81(1)(d)(iii) of the Act provides for the winding-up of a solvent company based on it being just and equitable. The SCA maintained that the examples of deadlock in terms of Section 81(1)(d)(i) and (ii) are not in any way exhaustive and do not limit Section 81(1)(d)(iii). The use of the word “otherwise” in Section 81 the SCA said, is operative in that it widens the scope of the Section insofar as what is meant by “just and equitable”. In effect, it extends the grounds of winding-up to include other cases of deadlock.
The SCA referred to Ebrahimi v Westbourne Galleries Ltd & Others 1973 AC 360 (HL) wherein the court stated that the just and equitable principle does not entitle one party to disregard the obligations he assumes by entering a company, nor does the court dispense him from it. It does, as equity always does, enables the court to subject the exercise of legal rights to equitable considerations; considerations that are of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
The SCA noted that whilst a person who applies for winding-up on the just and equitable ground must come to court with “clean hands”, the lack of clean hands is not an absolute bar. In this regard, where the application for the company’s liquidation is based on the failure of the relationship between the parties, the court ought to assess the contributions to the breakdown and determine whether it is just and equitable to liquidate a solvent company.