1 October 2009

Court's interpretation of "disposal" is hunky-dory

Does section 228 of the Companies Act 61 of 1973 impose a requirement on a company to procure the consent of its shareholders by special resolution when mortgaging its main asset?

In The Standard Bank of South Africa Ltd v Hunkydory Investments 188 (Pty) Ltd and others, case no 15427/08, Acting Judge Owen Rodgers had to decide whether the registration of a mortgage bond over a company's main assets constituted an act whereby the company "disposes of" the whole or the greater part of its assets within the meaning of section 228(1) of the Companies Act.

In short, Standard Bank sought summary judgment against the defendant on the strength of four mortgage bonds. In a last-gasp attempt to escape liability under these four mortgage bonds, the defendant argued that the mortgage bonds were not binding on it because the passing of the bonds constituted disposals as contemplated in section 228 of the Companies Act and because shareholder resolutions as required by that section were not procured.

Section 228(1) states that -

"[n]otwithstanding anything contained in its memorandum and articles, the directors of a company shall not have the power, save by special resolution of its members, to dispose of -

(a) the whole or the greater part of the undertaking of the company; or
(b) the whole or the greater part of the assets of the company." (emphasis added)

The term "dispose" or "disposal" is not defined in the Companies Act.

The Court considered numerous arguments in rejecting the defendant's contention that the mortgaging of an asset constitutes a disposal for the purposes of section 228.

The Court stated that in all instances where a company borrows money, the company's assets are exposed to risk of attachment and disposal by judicial sale.

The transaction, which exposes the company's assets to the risk of forced sale is therefore the borrowing of money, and not the mortgage per se. Further, a bond would not (and could not) set out the terms of the potential future disposal of the property. In a forced sale it is the sheriff who sells the property, not the mortgagor.

Acting Judge Owen Rodgers' interpretation of section 228 would seem to be valid. The crux of the matter must be that the transaction that exposes the company's assets to the risk of forced sale is the borrowing of money, and not the mortgage per se. The borrowing of money is typically a function of the directors who should be free to do so, subject to any limitations imposed by the company's articles of association.

While the Hunkydory case deals only with the registration of mortgage bonds over a company's assets, there is no reason not to extend the ratio of the case to other transactions where money is borrowed or the lender acquires security, such as cessions and pledges in securitatem debiti.

When the new Companies Act 71 of 2008 comes into effect, section 112 (section 228's successor) will regulate a company's disposal of all or the greater part of its assets or undertaking. It is interesting to note that section 112 also refers to a "disposal" of a company's assets, and the term "disposal" is also not defined in the new act. It is therefore likely that the reasoning in Hunkydory would also apply to the provisions of section 112.

Werner Mennen,
Associate, Corporate and Commercial


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