Case No. 288/98
In the matter between:
JONATHAN DAVID PETERS NO
First Appellant
EDWIN MARCUS LETTY NO
Second Appellant
LEONARD CAREL VAN VUGHT NO
Third Appellant
in their capacity as the trustees of the Jonty Peters
family trust
JONATHAN DAVID PETERS NO
Fourth Appellant
DERRICK STUART PLANTING NO
Fifth Appellant
MICHAEL STEPHEN EDY
Sixth Appellant
in their capacity as the trustees of the Derrick
Planting Family Trust
and
THERESA SCHOEMAN
First Respondent
CATHERINA SUSARA ABRAHAM
Second Respondent
MüLLER LOUW
Third Respondent
MARIETHA MAGDA LUTTIG
Fourth Respondent
Coram:
HEFER ADCJ, GROSSKOPF, MARAIS, SCHUTZ JJA and MPATI AJA
Heard:
11 SEPTEMBER 2000
Delivered:
10 NOVEMBER 2000
Company law - Contravention of s 38 of Act 61 of 1973 - Scheme for avoiding of - court to have
regard to true nature of agreement and disregard parties' description thereof
JUDGMENT

MPATI AJA/
MPATI AJA:
[1] The main question in this appeal is whether a written deed of
sale concluded in 1997 is hit by s 38 of the Companies Act 61 of 1973 (“the
Act”) which prohibits the rendering by a company of any financial
assistance for the purpose of or in connection with a purchase of its shares.
The appellants acted as trustees for two family trusts, which were the
sellers.  Roux J, sitting in the Transvaal Provincial Division, concluded that
the parties had failed to avoid the operation of the section, indeed that their
attempts to do so amounted to mere camouflage.  Consequently he refused
the appellants’ claim for an order that the respondents comply with their
obligations as buyers, particularly to pay the final instalment of the price.
Subsequently Roux J granted leave to appeal to this court.
S 38(1) provides:

“(1)
No company shall give, whether directly or indirectly, and
whether by means of a loan, guarantee, the provision of
security or otherwise, any financial assistance for the purpose
of or in connection with a purchase or subscription made or
to be made by any person of or for any shares of the
company, or where the company is a subsidiary company, of
its holding company.”
[2] The company (Carpe Diem Properties (Pty) Ltd) owned
immovable property in Mpumalanga.  Had the immovable property of the
company been mortgaged to provide financial assistance to enable the
respondents to pay the price or any part of it for the shares in the company,
there would have been a clear contravention of s 38.  The conversion of the
company into a close corporation by the trusts, followed by the giving of
financial assistance by the close corporation in order to enable the
respondents to pay for the members' interest so created, would not have
offended against s 38.  By contrast with the Companies Act, s 40 of the
Close Corporations Act 69 of 1984 (“the Close Corporations Act”) allows

a close corporation to give financial assistance for the purpose of the
acquisition of a member’s interest.  But here there was another impediment.
Section 27 of the Close Corporations Act requires every member of a
company which is to be converted to a close corporation to be a member
of the corporation, while s 29(1) provides that only natural persons may be
members of a corporation. The members of the company were the trusts
which each owned 50% of the shares. They were not qualified to become
members of the close corporation.  The parties were quite frank about their
problems and their proposed solution, as the preamble to the deed of sale
contained the following:
“2.1
The Purchasers are prohibited by law from purchasing the
shares in the Company;
2.2
The Sellers may not convert the Company to a Close
Corporation and hold a members interest therein as they are
not natural persons;
2.3
To facilitate this transaction the Sellers have agreed to transfer
the shares to the Purchasers on the terms set out hereunder

and thereafter to convert the Company to the Close
Corporation;
2.4
After conversion of the Company to the Close Corporation
the mortgage bond will be registered and the purchase price
for the members' interest paid to the Sellers.”
[3] The manner in which the parties gave effect to the purpose just
stated was the following: The purchase price of R1 000 000 was payable by
means of an initial deposit of R100 000, a further deposit of R450 000
within 10 days of signature (clause 6.2), and by the utilisation of a bank loan
of R450 000 to repay the sellers’ loans totalling R250 000, and to pay the
sellers R200 000 in settlement of the buyers’ remaining indebtedness on the
price.  Clause 3.1 provided that after the first R450 000 had been paid “the
sellers will transfer the shares [in the company] and cede the  claims to the
purchasers in consideration for the purchase price” (emphasis supplied).
In terms of clause 3.3 the share certificates and written cessions of the
claims would be held in trust by the attorneys Deneys Reitz on behalf of the

sellers.  Clause 3.4 provided for the pledging of the shares and claims with
the sellers as security for the buyers’ compliance with their obligations.  The
pledge was to be effected simultaneously with the transfer.  In terms of
clause 4 the sellers would take the necessary steps to convert the company
into a corporation once the deposit of R450 000 (clause 6.2) had been paid
and the transfer of the shares and cession of the claims had been effected.
The buyers were to co-operate in the effecting of the conversion.  Once all
of this had been done, clause 5 would come into operation.  It reads:
“The sellers sell to the purchasers who purchase the members'
interest and the claims in equal shares . . .”  (emphasis supplied).
[4] Some time after the transaction the buyers refused to proceed
with it, contending that s 38 had been contravened so that the sale was void
ab initio.
[5] As I have stated, Roux J considered the form in which the

parties' agreement was cast as amounting to camouflage.  I do not agree if
by that the learned judge meant that the parties had deliberately camouflaged
their real agreement.  It was not alleged in the affidavits that the transaction
reflected in the written agreement was a simulated one in that sense.  There
are two classes of "simulated" transaction known to our law.  The first is
one in which the parties have set out to conceal the real agreement by
dressing it up in the guise of another.  The second is one in which the
parties have mistakenly characterised their real agreement as something
which, when juristically analysed, it is not.  In the first, the simulation is
deliberate; in the second, it is unwitting.  In both instances a court will have
regard to the true nature of the agreement and disregard the description
given to it by the parties.  As I have said, there is no suggestion in the
affidavits that the transaction was simulated in the first sense.  What was
argued, was that to the extent that the written agreement purported to

characterise the transaction as a sale of members' interest, and to exclude
a purchase of shares in the company, it was not an accurate reflection of the
real agreement between the parties.  In other words, it was argued that it was
a simulation in the second sense.  Whether the agreement was camouflage
in that sense has to be considered.  The judge a quo characterised the
agreement as "a deliberate attempt to avoid the prohibition contained in s 38
...".  No doubt it was, but that does not mean that there was a
contravention, because as Miller JA said, in dealing with the predecessor of
s 38 in Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) at 806F:
"No doubt the matter was so arranged with the very object of
ensuring that s 86 bis (2) was not contravened, but it is trite law that
that would not be improper, provided only that the agreement was
genuine and not disguised in order to conceal the true agreement."
[6] The essential contention of the buyers is that a purchase of the
shares was inherent in the transaction.  The court a quo accepted this

argument and said:
"Whatever one chooses to call it the Respondents <purchased' the
shares in Carpe Diem from the Applicants.  The Respondents had to
acquire ownership or control of the rights attaching to the shares to
convert Carpe Diem to a Close Corporation.  This was a vital step in
the scheme of things, as the Applicants could not be members of a
Close Corporation."
That conclusion appears to me to be correct for the following reasons.
[7]          In this Court Mr Cilliers, for the respondents, conceded during
argument  that the trusts would have been entitled to transfer the shares in
the company to a third party for the sole purpose of converting the
company to a close corporation and thereafter transferring the members’
interest so created to the respondents, in return for which the trusts would
be paid the sum of R1 000 000 to be raised by mortgaging the immovable
property owned by the close corporation.   Mr Cilliers conceded further that
in such circumstances the respondents would have had no case.  However,

the parties did not do that.  They avoided the interposition of a third party
by agreeing to transfer the shares directly to the appellants to give them
locus standi to effect the conversion themselves and so become members
of the close corporation.  It is quite clear that what the purchasers wished
to acquire ultimately was the members’ interest in a close corporation into
which the company had been converted.    That is why Clause 5 of the deed
of sale provides for the sale of the members’ interest by the sellers (trusts).
Paradoxically, in my view, that is where the difficulty in the way of
concluding that the shares were not sold, arises.  The trusts are incapable
in law of creating or acquiring members’ interest in a close corporation and
therefore can have no members’ interest to sell.  The agreement requires the
purchasers to create themselves the very thing which the sellers purported
to sell in terms of Clause 5.
[8]          One is therefore driven to the conclusion that, on a proper

construction of the deed of sale in its totality, what was in reality being sold
were the shares in the company and the sellers’ claims.  But the sale of the
shares was only one facet of a multi-faceted transaction the ultimate object
of which was to enable the respondents to become the owners of members’
interest in a close corporation which would acquire the company’s assets
and the question still remains: does the transaction offend against the
provisions of s 38(1) of the Act?  In terms of the deed of sale, after
payment by the respondents of the deposit of R550 000, the shares will be
transferred and the claims ceded to them.  Thereafter the company will be
converted to a close corporation with the respondents as its members in
equal shares.  It is true that financial assistance is to be given to enable the
balance of R450 000 to be paid and that the conversion will facilitate the
giving of that assistance.  But it is to be given only after the conversion, ie
after the company has ceased to exist and its assets have become those of

the close corporation.  While the company is in existence, its financial
position will remain untouched by the arrangement.  It will make no loan and
its assets will not be encumbered.  The position of its creditors will not be
prejudiced in any way.  Compare Lewis v Oneanate Pty Ltd and Another
1992(4) SA 811 (A) at 818 D.  It is true that one of the assets which it now
owns and which will in due course become that of the close corporation will
be encumbered to enable the purchasers to pay the balance of the purchase
price of the shares but that will happen only after the company has ceased
to exist, and it will be the close corporation which is providing financial
assistance and not the company.  That is not prohibited by the Act or the
Close Corporations Act.
[9]         In Lewis v Oneanate, supra, it was said that the object of s 38(1)
of the Act is to protect the creditors of a company “who have a right to
look to its paid-up capital as the fund out of which their debts are to be

discharged”.  The purpose is to avoid the employment and depletion of that
fund or exposing it to possible risk in consequence of transactions
concluded for the purpose of or in connection with the purchase of its
shares (at 818 B-C).  In my view, the present deed of sale is simply not
within the mischief at which s 38(1) is aimed.
[10] Mr Cilliers had a second string to his bow.  He submitted that
the appellants had cancelled the agreement.  They had exercised an election
to cancel on three occasions, so it was argued: first by letter dated 18 April
1997, secondly  by  telephone during May 1997 and thirdly by letter dated
6 May 1997.  In the first letter, written by the appellants’ attorneys to the
respondents’ attorney, the appellants threatened to cancel the sale if the
signed agreement was not received by them by close of business on 21
April 1997.  From the contents of the letter of 6 May 1997 it appears that
the respondents’ attorney had replied to the first letter and advised, inter

alia, that the agreement was with “the fourth party” for signature by him or
her.  In the last paragraph of the letter of 6 May 1997 the following is said:
“. . . our client instructs us that if the fourth party has not signed the
agreement and we are not paid the second deposit by close of
business on 8 May 1997, we will be instructed to cancel the land sale
agreement.”
[11] As to the alleged cancellation by telephone, the fourth
respondent merely states in the answering affidavit that the applicants,
through their legal representative, confirmed the “cancellation” (contained
in the first letter) to the respondents’ attorney during May 1997.
[12] Whether or not an innocent party has made an election to
cancel  is a question of fact to be decided on the evidence.  See the passage
in Segal v Mazzur 1920 CPD 634 at 644-5, quoted in Christie in The Law
of Contract in South Africa 3ed at 598.
[13] After receiving the respondents’ response to the first letter, the

appellants’ attorneys wrote the second letter clearly indicating that no
election to cancel as threatened in the first letter had been exercised.  The
second letter certainly does not purport to cancel.  It merely states that the
appellants will give instructions to cancel if the “fourth party” has not signed
the agreement by close of business on 8 May 1997 and the second deposit
not paid.  No such instructions seem to have been given.  I am in any event
of the view that none of the letters referred to can be said to constitute a
clear and unequivocal notice of cancellation.  See Putco Ltd v TV and
Radio  Guarantee Co (Pty) Ltd and Other Related Cases 1985 (4) SA 809
(A) at 830 E; Kragga Kamma Estates CC and Another v Flanagan 1995
(2) SA 367 (A) at 375 C-D.
[14] The appeal must therefore succeed.  The following order is
made:
(1)
The appeal is upheld with costs.

(2)
The order of the trial court is set aside and the following is
substituted:
(a)
The respondents are ordered to pay to the applicants, within
20 days of date of this order, the sum of R450 000 pursuant
to clause 6.2 of the Memorandum of Sale dated 9 May 1997;
(b)
The respondents are ordered to comply with their further
obligations under the Memorandum of Sale dated 9 May 1997;
(c)
The respondents are ordered to pay the costs of the
application, jointly and severally, the one paying the other to be
absolved.
_________________
L MPATI
ACTING JUDGE OF APPEAL
AGREE:
HEFER ADCJ
GROSSKOPF JA

MARAIS JA
SCHUTZ JA