10 February 2021 by , and Corporate & Commercial Alert

Pride, prejudice and section 163 of the Companies Act

Whether a company’s affairs are managed across the boardroom table, or across the family dining room table, relations among shareholders and directors can (and do) easily go sour. For this reason, the Companies Act 71 of 2008 provides certain mechanisms through which parties may find relief in instances where things go wrong. One such mechanism is section 163 which allows a shareholder or a director of a company, as the case may be, to approach the courts and ask for relief if any act or omission by the company or a related person has an oppressive or unfairly prejudicial result, or unfairly disregards the interests of such shareholder or director. This section sets out a list of remedies which a court may consider granting in instances where such conduct was sufficiently proven, including a restraint order against the conduct complained of, an order directing an issue or exchange of shares, an order to pay compensation, or an order placing the company in liquidation or business rescue.

Gent and another v Du Plessis

In Gent and another v Du Plessis the applicant (Gent) and the respondent (Du Plessis) were the only shareholders in Bonnox Proprietary Limited and had been the only shareholders since 2012, until which time Gent was also the only director of the company. After Gent’s resignation in 2012, Du Plessis was appointed as the sole director until he was subsequently removed and dismissed in 2013 due to his gross misconduct and mismanagement of the company.

Du Plessis refused to take his dismissal lying down and brought an application in the Gauteng Division of the High Court seeking, among other things, a liquidation order and alternatively, an order that Gent’s conduct towards him, which included allegedly excluding him from decision making in the company and removing him as director of the company, was oppressive and unfairly prejudicial in that it undermined his rights as a minority shareholder of the company. 

The High Court found that neither Du Plessis’ loss of confidence in the management of the company, which was allegedly due to the fact that Gent excluded him from such management and refused to provide him with certain financial information, nor his resentment at having been removed as a director had established the requirements for section 163 relief to be granted. On appeal before a full bench of the High Court, the court a quo’s finding that Du Plessis failed to satisfy the requirements of section 163 was upheld. Nevertheless, the full bench went on to grant relief in terms of the section, justifying its approach by holding itself “duty-bound to design or craft a mechanism which would result in a clean break between the parties”. It thus ordered that Du Plessis buy Gent’s shares in the company so Gent could exit as a shareholder.

On appeal, the Supreme Court of Appeal had to assess the validity of the decision by the full bench of the High Court to grant relief in terms of section 163, in spite of the conclusion by the full bench that Du Plessis had failed to show that the requirements of section 163(1) of the Companies Act were met. The SCA agreed with the decisions of both the courts that Du Plessis had failed to show how Gent’s conduct towards him had been oppressive and unfairly prejudicial, holding that (i) Du Plessis was validly removed as a director and fairly dismissed after having been found guilty of misconduct and his dismissal did not constitute conduct which fell within the ambit of section 163(1); and (ii) the mere exercise of majority shareholding voting rights does not amount to oppression. Further, the SCA held that the full bench of the High Court had misdirected itself in making an order that Gent sell her majority shareholding to Du Plessis and ought to have dismissed the appeal from the outset. The order of the full bench was set aside and replaced with an order that the appeal be dismissed with costs.

Lessons learnt

It can be very difficult, in particular in closely held companies where the same persons often occupy the dual positions of both directors and shareholders, if these persons are at an impasse with no hope of independently resolving their dispute. This case is, however, a testament to the principle that irrespective of however much our courts would like to impose their own sense of justice by crafting remedies to rectify a situation and resolve a deadlock, they are still required to act within the bounds set out in our legislation. The Companies Act limits relief in terms of section 163(2) to situations where the requirements of section 163(1) have been met, and in the absence thereof, our courts are not free to independently grant such relief.

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