THE SUPREME COURT OF APPEAL REPUBLIC OF SOUTH AFRICA

JUDGMENT

In the matter between

Case No: 270/09

RICHARD JAMES SMYTH
First Appellant
COCO HAVEN 1325 CC
Second Appellant

and

BERNARD DARREN MEW
Respondent

Neutral citation:
Smyth v Mew (270/09) [2010] ZASCA 56 (1 April
2010)

Coram:
NAVSA, CLOETE, VAN HEERDEN, BOSIELO JJA et
SERITI AJA

Heard:
22 FEBRUARY 2010

Delivered:
1 APRIL 2010

Summary:
Close Corporations Act 69 of 1984 – whether the judge in
the court below erred in granting a winding-up order instead
of an order in terms of s 36 of the Close Corporations Act
that the respondent cease to be a member of the 2nd
appellant and further that his membership be acquired by the
1st appellant.

ORDER

On appeal from: South Gauteng High Court (Johannesburg) (De Waal AJ
sitting as court of first instance):

The appeal is dismissed with costs.

JUDGMENT

BOSIELO JA (Navsa, Cloete, Van Heerden JJA and Seriti AJA concurring)

[1] Mr Bernard Darren Mew (Mew) applied to the South Gauteng High
Court on an urgent basis for a winding-up of the second appellant, Coco
Haven 1325 CC (Coco Haven) in terms of s 68(d) of the Close Corporations
Act 69 of 1984 (the Act). In addition to opposing the application for a winding-
up order, the first appellant, Richard James Smyth (Smyth) launched a
counter-application for (inter alia) an order in terms of s 36 of the Act
terminating Mew's membership of Coco Haven and an order that Mew's
membership's interest in Coco Haven be acquired by Smyth against payment
to Mew of R400 000 (alternatively an amount to be determined by the court).
The court below granted an order for the final liquidation of Coco Haven and
dismissed Smyth's counter-application. The appellants are appealing against
that judgment with the leave of this court. Since the judgment of the court
below, Smyth has passed away and has been substituted by the executors of
his estate.

[2] Coco Haven is a close corporation trading under the name and style of
The Corner House Pub (the pub) in Randburg, Johannesburg. Smyth and
Mew are the only members of Coco Haven. Mew became involved in Coco

Haven in September 2007 when he paid Smyth R200 000 for a 50%
member's interest.

[3] In terms of an association agreement concluded by Smyth and Mew on
5 September 2007, the management of the business was vested in Smyth
who was employed by Coco Haven in a full time capacity earning a salary of
R25 000 per month. Mew was a 'sleeping partner' and was to receive an
amount of R5 000 per month, 'profits permitting'.

[4] The association agreement provided further that all monthly accounting
records were to be made available to the members fortnightly or upon request
within a reasonable time. Furthermore, Smyth who was the managing
member could not, save with the authority of a resolution of the members,
incur any capital expenditure in excess of an amount of R5 000.

[5] Mew complained that since the inception of the business, Smyth
refused to allow him, as a member of Coco Haven, to inspect its accounting
records, source documents, bank statements, management accounts or
books of account. At the same time, Smyth was not paying Mew the R5 000
per month agreed upon. Smyth averred that this amount was accruing to
Mew's loan account. According to Mew, Smyth's explanation for non-payment
of this amount was that the business was not making a profit, but was merely
breaking even.

[6] In the course of all these developments, Mew discovered that Smyth
had, without his consent, bought a double cab Mazda Drifter 4x4 motor
vehicle for himself. It is common cause that the monthly payments for this
vehicle came from Coco Haven. These payments were not debited to Smyth's
loan account. According to Mew the registered owner of this vehicle is Ms M
du Plessis who is Smyth's fiancée. It is common cause that Smyth was busy
with extensive structural alterations to the premises, without Mew's prior
approval. This was in contravention of clause 3.6 of the association
agreement. According to Smyth the money expended on the alterations

between 1 March 2007 and 29 February 2008 amounted to R793 057.82,
although Coco Haven's draft financial statements for the year ending 29
February 2008 reflected the costs of these improvements to be R269 703.

[7] According to Mew, he met with Ms Nicolene Botes, who was a night
manager at Coco Haven. Botes made a number of disclosures to Mew which
were disturbing. Amongst others, she told Mew that Smyth conducted the
close corporation's business through a bank account at First National Bank in
the name of Smyth's daughter.  It is common cause that the bank account
was in the name of Nicola Ann Prinsloo, t/a The Corner House. Ms Prinsloo is
Smyth's daughter and she had signing powers on this bank account. It
transpired that the close corporation had no bank account of its own, with the
result that all the money which the close corporation was banking was
deposited into Prinsloo's account. No reference was made in the bank
statements relating to this account to the close corporation's registration
number and the statements indicate that the VAT registration number of the
account holder is 'not available'. In fact, it subsequently emerged that the
close corporation had failed to register for VAT, PAYE, UIF, SDL and WCA.

[8] From other disclosures which Botes made to Mew it is clear that Smyth
did not have a proper cash management system in place. All the cash takings
for the day were put in a bag at the end of each business day and thrown
through the window of the cottage on the premises occupied by Smyth and
Du Plessis. Both Smyth and Du Plessis had keys to the cottage and therefore
had access to the money. Significantly, Smyth confirmed this state of affairs.

[9] Smyth admitted that he was not banking all the takings from the
business but was retaining large amounts of cash, allegedly to pay the
operating costs of the close corporation. This is notwithstanding the fact that,
on Smyth's version, the business had a turnover in the region of R750 000 per
month. The time period report for 1 April 2008 to 23 September 2008 shows
that the business generated sales of R3 728 823.60.

[10] Mew made various unsuccessful attempts to gain access to Coco
Haven's financial records. He was forced to resort to court for an order to give
him access to these financial records. The application was vigorously
opposed by Smyth. The refusal by Smyth to allow Mew access to Coco
Haven's financial records increased the tension and acrimony between the
two. As a result both Smyth and Mew became embroiled in a number of
abrasive legal skirmishes.

[11] Before Mew became a member of Coco Haven, Smyth had signed a
written agreement of lease on behalf of Coco Haven with Mr and Mrs
Strachan (the Strachans) in respect of the premises where Coco Haven
conducted its business. The lease was to endure from 1 February 2006 to 31
January 2009. Smyth had the option to renew the lease on written notice of at
least eight months before the expiry of the lease, but failed do so timeously.

[12] Smyth had agreed in terms of the agreement of lease to pay the rent,
municipal charges including rates and taxes as well as charges levied in
respect of electricity and water consumed at the leased premises.

[13] During February 2008, Mew concluded a written agreement of sale
with the Strachans in respect of the premises where Coco Haven conducted
its business. Subsequent to the agreement of sale, Mew was unable to take
transfer of the property as it transpired that Smyth had not been paying rates
and taxes and charges for water and electricity. According to Mew the arrears
amounted to about R120 000. On being confronted, Smyth did not dispute
that he owed such charges. All that he disputed was the amount.

[14] Section 68(d) reads as follows:
'A corporation may be wound up by a Court, if –
. . . .
(d)
it appears on application to the Court that it is just and equitable that the
corporation be wound up.'

[15] Section 36 of the Act reads as follows:

'(1)
On application by any member of a corporation a Court may on any of the
following grounds order that any member shall cease to be a member of the
corporation:
(a)
Subject to the provisions of the association agreement (if any), that the
member is permanently incapable, because of unsound mind or any other
reason, of performing his or her part in the carrying on of the business of the
corporation;
(b)
that the member has been guilty of such conduct as taking into account the
nature of the corporation's business, is likely to have a prejudicial effect on
the carrying on of the business;
(c)
that the member so conducts himself or herself in matters relating to the
corporation's business that it is not reasonably practicable for the other
member or members to carry on the business of the corporation with him or
her; or
(d)
that circumstances have arisen which render it just and equitable that such
member should cease to be a member of the corporation:
Provided that such application to a Court on any ground mentioned in paragraph (a)
or (d) may also be made by a member in respect of whom the order shall apply.
(2)
A Court granting an order in terms of subsection (1) may make such further
orders as it deems fit in regard to –
(a)
the acquisition of the member's interest concerned by the corporation or by
members other than the member concerned; or
(b)
the amounts (if any) to be paid in respect of the member's interest concerned
or the claims against the corporation of that member, the manner and times of
such payments and the persons to whom they shall be made; or
(c)
any other matter regarding the cessation of membership which the Court
deems fit.

[16] It was common cause that Mew and Smyth had serious irreconcilable
differences and the relationship between them had broken down irretrievably.
Mew alleged that it was important that a liquidator be appointed so that (inter
alia) a thorough investigation of Coco Haven's financial affairs could be
conducted to determine its financial position.

[17] Smyth agreed that the relationship between them had broken down
irretrievably, although he attributed this to Mew. He accused Mew of conduct

which was likely to have a prejudicial effect on the carrying on of their
business. He avered that by purchasing the property on which the business is
being conducted for himself, Mew acted in breach of his fiduciary duty to Coco
Haven. Smyth avered further that the apparent unwillingness on the part of
Mew to renew the lease in favour of Coco Haven was prejudicial to the
continuation of their business. He accused Mew of acting mala fide. Smyth
was unequivocal that, given the prevailing circumstances, there was no
possibility that he and Mew could continue to work together in future or to
remain co-members in the close corporation.

[18] Smyth stated that it would be just and equitable if the court were to
make an order that Mew cease to be a member of Coco Haven and that he be
allowed to take over his membership at R400 000 or any other amount which
the court might find to be reasonable. This assertion is based amongst others
on the fact that he had single-handedly built the business from a struggling
small business to a lucrative one; that the business employed 42 people who
would lose their jobs if Coco Haven were to be liquidated and lastly, that it
was better to keep a thriving business than to have it liquidated.

[19] Smyth relied on a valuation done by Coco Haven's accounting officer
and auditor, Mr Haasbroek (Haasbroek), in an amount of R400 000 which he
stated should be paid to Mew in return for the latter's member's interest. It is
common cause that in determining the value of the member's interest
Haasbroek did not consult Mew. His valuation was based exclusively on the
information supplied to him by Smyth and Ms Woolmer, Coco Haven's
bookkeeper. Smyth asserted that the valuation was acceptable as it was done
in terms of clause 8 of the association agreement, signed by both parties.

[20] Having analysed the evidence the learned judge found that there was
indeed a complete breakdown of the working relationship between Smyth and
Mew. Relying on a dictum by Nepgen J from De Franca v Exhaust Pro CC
(De Franca intervening) 1997 (3) SA 878 (SE) at 891E, the learned judge
found that indeed 'the breakdown in their relationship is so complete that any
confidence and trust they may have had in each other no longer exists'.

[21] Concerning the issue whether to grant the winding-up order in terms of
s 68(d) of the Act or the compulsory buy-out of Mew by Smyth in terms of
s 36 the learned judge, relying on Kanakia v Ritzshelf 1004 CC t/a Passage to
India & another 2003 (2) SA 39 (D) at 48E-F, found that Smyth had to adduce
evidence that the relief which he sought should be granted. However, having
accepted, without deciding, that Smyth had discharged the onus for the
purposes of establishing conduct falling within the purview of s 36(1)(b), (c)
and (d), the learned judge found that Smyth had not adduced sufficient
evidence to enable him to exercise  his discretion in Smyth's favour in terms
of s 36(2) of the Act. The learned judge was not content with the fact that
Smyth relied solely on the valuation made by Haasbroek. He found
Haasbroek's valuation not to be reliable as it was based entirely on the
information submitted to him by Smyth and Coco Haven's bookkeeper, Ms
Woolmer.

[22] The learned judge found that Smyth had failed to adduce sufficient
evidence to prove that it would be just and equitable for the learned judge to
exercise his discretion in his favour and make an order in terms of s 36(1) that
Mew cease to be a member of Coco Haven and further, in terms of s 36(2),
that Smyth acquire his interest upon payment of a particular amount. In the
result, the learned judge dismissed the counter application and granted a final
winding-up order in terms of s 68(d) of the Act.

[23] Before us counsel for Smyth submitted that the court a quo had erred
in refusing to grant the counter application. It was submitted that, as the
parties had bound themselves in terms of clause 8 of the association
agreement to a particular method of calculating a member's interest, the
learned judge was wrong in refusing to accept the valuation by Coco Haven's
accounting officer and auditor, Haasbroek. Counsel argued that, even if
Haasbroek's valuation is found to be unreliable, the court was bound to accept
it as the parties had agreed to be bound by it. It was submitted further that, as
Mew had failed to attack the valuation on any of the recognised grounds,

namely fraud, collusion, capriciousness or manifest injustice, it was not open
to the court to reject it.

[24] In the main, counsel for Mew argued that the evidence showed clearly
that Smyth was guilty of serious financial mismanagement, in that (inter alia)
he incurred personal expenses amounting to R90 722,90 which were paid for
by Coco Haven and made unauthorised payments to his erstwhile partner for
his membership interest in the amount of R500 458,08 which was not
allocated to Smyth's loan account. Further, that he incurred huge expenses in
respect of improvements which were done to the premises without a
resolution as required by the association agreement. In conclusion, she
submitted that as Smyth had failed to adduce sufficient evidence to satisfy the
court that it was just and equitable to order a cessation of Mew's membership,
as opposed to a winding-up, the court below was correct in dismissing the
counter-application and ordering that Coco Haven be liquidated.

[25] It should be clear from the provisions of s 36(1) and (2), as quoted
above, that the court retains a discretion, firstly whether to grant an order for
the cessation of a member's interest in the corporation, and secondly as
regards the disposition of such member's interest and the terms and
conditions under which such disposition should occur.

[26
Counsel's reliance on clause 8 of the association agreement is
misplaced in that this clause simply does not provide for a valuation of the
business by Coco Haven's accounting officer and auditor in the event of a
compulsory buy-out in terms of s 36 of the Act. The court was accordingly not
bound by Haasbroek's valuation. The court had to be placed in a position
which would have enabled it to exercise its discretion and carry out its
functions in terms of s 36(2) and, in particular, to decide what financial
adjustments should be made: see De Franca at 894F-G; Geany v Portion 117
Kalkheuwel Properties CC & another 1988 (1) SA 622 (T) at 631H-632A;
Kanakia at 48E-F. Such discretion can only be exercised if there is sufficient
information before the court to enable it to 'make such further orders as it
deems fit' in regard to the matters referred to in s 36(2): De Franca at 896H;

Gearny at 631H-I. The member who makes the application in terms of s 36(1)
must place the necessary evidence before the court: see Gearney at 631 H
and Kanakia at 48E-F.

[28] I agree with the court below that Smyth failed to do so. Based on the
above, I have no doubt that the court below was correct in finding that, given
the circumstances of this case, a winding-up was not only just and equitable
as required by s 68)(d) of the Act but was inevitable.

[29] In the result I make the following order:

The appeal is dismissed with costs.
________________
L O BOSIELO
JUDGE OF APPEAL

APPEARANCES:

For appellant:
J F ROOS SC

Instructed by:

J J S Manton Attorneys, Johannesburg

Webbers, Bloemfontein

For respondent:
K Bailey SC

Instructed by:

Tanya Brenner Attorney, Northcliff

McIntyre & Van Der Post, Bloemfontein