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Court case: Sale by the executor of an interest in a close corporation

Read the below recent court case in the matter of Livanos v Oates, regarding a sale by the executor of an interest in a close corporation.

Livanos NO & others v Oates & others
[2012] JOL 28595 (GSJ)

Reported in: Judgments Online, a LexisNexis Electronic Law Report Series
Case No: 16115 / 11
Judgment Date(s): 14 / 03 / 2012
Hearing Date(s): 01 / 03 / 2012
Marked as: Unmarked
Country: South Africa
Jurisdiction: High Court
Division: South Gauteng, Johannesburg
Judge: Wepener J
Bench: WL Wepener J
Parties: Mark Demetrios Livanos NO (1At), Bernadette Livanos NO (2At), Mark Demetrios Livanos (3At), Bernadette Livanos (4At); Leslie Oates (1R), Architectural Hardware CC (2R), The Master of the High Court (3R), The Registrar of Companies & Close Corporations (4R)
Appearance: Adv A Subel SC, B Gilbert, Allan Levin & Associates (At); Adv A Gautschi SC, P Strathern, Yammin Hammond Attorneys (R)
Categories: Application – Civil – Substantive – Private
Function: Confirms Legal Principle
Relevant Legislation: Section 35, Close Corporations Act 69 of 1984

Key Words

Close corporations – Sale of membership interest – Validity

Mini Summary

As executors of a deceased estate, the applicants sought an order declaring that the estate of the deceased had validly sold the estate’s 50% membership interest in the second respondent to the third applicant in terms of a sale agreement.

Held that section 35 of the Close Corporations Act 69 of 1984 regulates the disposal by an executor of an interest of a deceased member in a close corporation. Section 35(a) provides that an executor is first to seek a transfer of a deceased member’s interest to the legatee or heir and that such transfer can only be effected if the remaining members of the corporation consent to the transfer. Consent of the remaining member not having been obtained, the executors were entitled to proceed to sell the deceased member’s interest in terms of section 35(b) of the Act. The remaining member in this case had the opportunity to acquire the member’s interest when he first received the letter but he failed to do so within the time period prescribed. Section 35 does not oblige the executor to sell the member’s interest to the corporation or the remaining members. The intention of the legislature is clearly that in the event of section 35(a) not being applicable, that the executors can dispose of the member’s interest in one of the three manners provided for in section 35(b).

Finding the sale to have been valid, the Court granted the relief sought.

Page 2 of [2012] JOL 28595 (GSJ)

WEPENER J

[1]  The applicants, the executors of an estate, seek an order declaring that the estate of the deceased has validly sold the deceased estate’s 50% membership interest in the second respondent to the third applicant in terms of a sale agreement and additional relief. The first respondent filed a counter-application for a declaration that the agreement of sale is unenforceable and for its setting aside. The first respondent also seeks to review the decision of the third respondent’s consent to the sale.

[2]  The first and second (sic: third) applicant (Mark), is the son of the deceased. The second and fourth applicant (Bernadette), is the wife of the deceased. They brought the application both in their personal capacities and as the duly appointed executors of the estate of the deceased. The first respondent, Oates, has a 50% member’s interest in a close corporation in which the deceased held the other 50%. The second respondent is the close corporation (“the corporation”), which owns a business and the third respondent is the Master of the High Court, whilst the fourth respondent is the Registrar of Companies and Close Corporations.

Page 3 of [2012] JOL 28595 (GSJ)

[3]  The facts are largely common cause, but where there are conflicts I will approach it on the basis that Mark bears the onus in respect of the application brought by him and Oates bears the onus in respect of a counter-application, subject to the normal rules governing disputes of fact in motion proceedings (see Luster Products Inc v Magic Style Sales CC 1997 (3) SA 13 (A) [also reported at [1997] 1 All SA 327 (A) – Ed] at 21H). The normal rules are that the applicant will be entitled to final relief on the undisputed facts together with the facts contained in the respondent’s affidavit and the respondent will, in its counter-application, be subject to the same rules regarding the counter-application (Plascon-Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A)).

[4]  The factual disputes in the main application are few. The parties are ad idem regarding the issue that falls to be determined. The disputes of fact relate to the relationship between Mark and Oates and their respective conduct towards each other, all of which have no bearing on the interpretation of the parties’ rights pursuant to section 35 as read with section 34(2) of the Close Corporations Act 69 of 1984 (“the Close Corporations Act”). The applicant sets out the issues out as follows:

“13.

The second applicant and me as the executors in the deceased estate have sold the deceased’s 50% interest in the corporation to me personally in terms of section 35(b)(iii) as read with section 34(2) of the Close Corporations Act. Notwithstanding that this sale has become effective and is to be implemented in terms of section 34(2)(c) of the Close Corporations Act, the first respondent has refused to co-operate in giving effect to the sale including the signing of an amended founding statement in order to enable lodgement of the amended founding statement with the fourth respondent, reflecting the transfer of the deceased’s 50% interest to me and reflecting me as a 50% member in the corporation.

Page 4 of [2012] JOL 28595 (GSJ)

14.

The first respondent contends that he as the remaining member of the corporation is entitled to purchase the deceased’s 50% interest in the corporation at a fair market value, that he is prepared to do so and that accordingly he is not obliged to consent to or co-operate in giving effect to the sale by the deceased estate of the deceased’s 50% interest to me.

15.

The central issue in this application is the interpretation of section 35 as read with section 34(2) of the Close Corporations Act. The applicants contend that upon a proper interpretation of these sections, the sale by the deceased estate of the deceased’s 50% interest in the corporation to me is effective and that the first respondent must co-operate in giving effect thereto.

16.

The first respondent contends that upon a proper interpretation of section 35 read with section 34(2) of the Close Corporations Act he is entitled to purchase the deceased’s 50% interest at a fair market value (which, the first respondent contends has been valued by his professional valuer in the sum of R10,7 million) and accordingly need not accede to the sale by the deceased estate to me of the deceased’s 50% interest.”

The response by Oates is:

“This is a fair summary of the respective positions taken up by the parties. The issue is indeed the interpretation of section 35 read with section 34(2) of this Act. In addition however the validity of the Master’s consent is in issue in the counter-application.”

[5]  Although there was an earlier agreement of sale of the 50% member’s interest by the executors to Mark, it was later substituted with an amended agreement and nothing turns on that issue and I am not called upon to decide anything in relation thereto.

Page 5 of [2012] JOL 28595 (GSJ)

[6]  Sections 34 and 35 of the Close Corporations Act read as follows:

34.

Disposal of interest of insolvent member.– (1) Notwithstanding any provision to the contrary in any association agreement or other agreement between members, a trustee of the insolvent estate of a member of a corporation may, in the discharge of his or her duties, sell that member’s interest –

(a)

to the corporation, if there are one or more members other than the insolvent member;

(b)

to the members of the corporation other than the insolvent member, in proportion to their member’s interests or as they may otherwise agree upon; or

(c)

subject to the provisions of subsection (2), to any other person who qualifies for membership of a corporation in terms of section 29.

(2)

If the corporation concerned has one or more members other than the insolvent, the following provisions shall apply to a sale in terms of subsection (1)(c) of the insolvent member’s interest:

(a)

The trustee shall deliver to the corporation a written statement giving particulars of the name and address of the proposed purchaser, the purchase price and the time and manner of payment thereof;

(b)

for a period of 28 days after the receipt by the corporation of the written statement the corporation or the members, in such proportions as they may agree upon, shall have the right, exercisable by written notice to the trustee, to be substituted as purchasers of the whole, and not a part only, of the insolvent member’s interest at the price and on the terms set out in the trustee’s written statement; and

(c)

if the insolvent member’s interest is not purchased in terms of paragraph (b), the sale referred to in the trustee’s written statement shall become effective and be implemented.

35.

Disposal of interest of deceased member.– Subject to any other arrangement in an association agreement, an executor of the estate of a member of a corporation who is deceased shall, in the performance of his or her duties –

Page 6 of [2012] JOL 28595 (GSJ)

(a)

cause the deceased member’s interest in the corporation to be transferred to a person who qualifies for membership of a corporation in terms of section 29 and is entitled thereto as legatee or heir or under a redistribution agreement, if the remaining member or members of the corporation (if any) consent to the transfer of the member’s interest to such person; or

(b)

if any consent referred to in paragraph (a) is not given within 28 days after it was requested by the executor, sell the deceased member’s interest –

(i)

to the corporation, if there is any other member or members than the deceased member;

(ii)

to any other remaining member or members of the corporation in proportion to the interests of those members in the corporation or as they may otherwise agree upon; or

(iii)

to any other person who qualifies for membership of a corporation in terms of section 29, in which case the provisions of subsection (2) of section 34 shall mutatis mutandis apply in respect of any such sale.”

[7]  It is common cause that there existed no association agreement between Oates and the deceased that regulated the relationship between them. The result is that the executors were free to apply the provisions of section 35 unfettered by provisions of an association agreement. Section 35 of the Close Corporations Act regulates the disposal by an executor of an interest of a deceased member in a close corporation. Section 35(a) provides that an executor is first to seek a transfer of a deceased member’s interest to the legatee or heir and that such transfer can only be effected if the remaining members of the corporation consent to the transfer. It is common cause that Bernadette is the sole heir of the deceased’s 50% member’s interest and that the executors requested Oates, as the remaining member, to consent to the transfer of the deceased member’s interest to Bernadette as the heir. It is further common

Page 7 of [2012] JOL 28595 (GSJ)

cause that Oates declined to consent to the transfer of the member’s interest to Bernadette as heir.

[8]  Oates, having not given the requisite consent within 28 days in terms of section 35(a), the executors were entitled to proceed to sell the deceased member’s interest in terms of section 35(b) of the Close Corporations Act.

[9]  The executors sold the member’s interest to Mark for the sum of R16 million (as per a substituted agreement). On 18 June 2009 Oates, as remaining member of the close corporation, was requested by the executors to consent to the transfer of the deceased’s 50% member’s interest in the close corporation to Mark. The executors, on behalf of the estate, addressed a letter to the close corporation enclosing a copy of the sale agreement of the member’s interest from the deceased estate to Mark. The request was made in terms of section 35 as read with section 34(2) of the Close Corporations Act. Oates did not consent to the transfer within 28 days as provided for in section 34(2) of the Close Corporations Act. Pursuant to section 35(b)(iii) this would be a proposed sale as envisaged in that subsection. A failure to transfer deceased member’s interest pursuant to section 35(a) results in the executor’s obligation to act pursuant to section 35(b). Section 35 uses the word “shall” and it was argued that the provisions of section 35(b) are consequently mandatory. It can only be mandatory if one reads the subsections of section 35(b) disjunctively, ie as “or” and not only as “or” between subsections (ii) and (iii) because an executor can never be compelled, in the absence of obtaining a transfer pursuant to section 35(a), to sell such interest to the corporation or any of its members, as provided for in section

Page 8 of [2012] JOL 28595 (GSJ)

35(b)(i) as none of them may wish to purchase it:

“Moreover, the executors simply may not be able to sell the interest: construing the language literally, this would mean that the Legislature intends that he is to be in breach of the Act. This cannot have been intended. It is accordingly submitted that, notwithstanding the use of the word ‘shall’ and the grammatical effect of the usage in the section as a whole, s 35 should be construed on the basis that the provisions of para (a) are mandatory but those of para (b) are permissive” (see Meskin Henochsberg on The Close Corporations Act Com-80).

Indeed, conceptually, the executors cannot unilaterally impose a sale on anyone in any of the categories contained in section 35(b). There is no provision in the Close Corporations Act as to a basis upon which an executor would be obliged to sell the member’s interest to the corporation or the remaining members in terms of subsections (i) or (ii).

[10]  The section does not oblige the executor to sell the member’s interest to the corporation or the remaining members. The intention of the Legislature is clearly that in the event of section 35(a) not being applicable, that the executors can dispose of the member’s interest in one of the three manners provided for in section 35(b).

[11]  Oates had the opportunity to acquire the member’s interest when he first received the letter but he failed to do so within the time period prescribed.

[12]  The executors were therefore free to employ the options contained in section 35(b) and, in particular, the option contained in section 35(b)(iii). Having entered

Page 9 of [2012] JOL 28595 (GSJ)

into a sale with a person who qualifies, ie Mark, the executors also had to comply with the provisions of section 34(2). At this stage the corporation or the remaining member is entitled, in terms of section 34(2)(b), to exercise what is effectively a pre-emptive right within 28 days of receipt of the applicable written statement to be substituted as purchaser for the member’s interest at the price and on the terms set out in the written statement and that if they fail to do so, then the sale to Mark will become effective and be implemented. However, Oates recorded that he wished to purchase the member’s interest at an agreed price failing which a mechanism should be agreed to determine the value of the member’s interest. Mr Gautschi, appearing for Oates, argued that an objective market value must be determined. For this proposition Mr Gautschi referred to section 36 of the Close Corporations Act, which requires a court to determine a value of a member’s interest in the case of a dispute between members.

[13]  Section 36 has no application to a sale of the member’s interest from a deceased’s estate and if the Legislature wished a fair value to be placed on the price on the member’s interest pursuant to sections 34 and 35 of the Close Corporations Act, it could so have stated in these sections. The maxim inclusio unius, est exclusio alterius is applicable and the provisions referred to in section 36 have no application to sections 34 and 35. In my view, sections 34(2) and 35 are clear and there is no warrant to read in to it the requirement of fair value as argued by Mr Gautschi. The power conferred upon a court in terms of section 36(2) is limited to where the court makes an order in terms of section 36 of the Close Corporations Act and provided the grounds for such relief are present. There

Page 10 of [2012] JOL 28595 (GSJ)

is no reason to transpose that power into section 35, the latter which is clear in its content and meaning. The price which Oates or the corporation had to match in order to be substituted as purchasers was that which was contained in the written statement referred to in section 34. Oates failed to exercise his pre-emptive right in terms of section 35(b)(iii) as read with section 34(2) of the Close Corporations Act to match the offer, and the sale to Mark became effective. It cannot be doubted that a person, like Mark, may wish to purchase his father’s member’s interest for reasons of his own, and as he says, even at a premium. It was common cause that, if the interpretation contended for by the applicants is upheld, there was compliance with the sections.

[14]  Having come to this conclusion, the values obtained by the respondent in order to justify what he regards as a fair value for the member’s interest, take the matter no further.

[15]  Oates, for a number of reasons set forth in his affidavit, does not wish Mark to be his co-member in the corporation. This he could have prevented but he failed to exercise the options available to him pursuant to the provisions of sections 34 and 35 of the Close Corporations Act.

[16]  Pursuant to section 49 of the Administration of Estates Act 66 of 1965, the Master of the High Court is required to sanction a sale of any property in an estate to an executor of that estate. The reason seems obvious: The Master is to ensure that the executors do not act to the detriment of the estate in order to enrich themselves. It is the executor’s duty to obtain the best price for

Page 11 of [2012] JOL 28595 (GSJ)

the estate. The Master did so give her consent. The counter-application is aimed at setting aside the decision of the Master’s consent to the sale. The argument is that the Master had to also take into account the interests of third parties, such as Oates, in deciding whether to consent to the sale. If it could be said that this argument is correct (which I do not accept as correct), Mark offered R16 million and Oates wanted to offer an amount in excess of R5 million less. The interests of the estate are paramount and it is the Master’s duty to see that its interests are best served. The Master is to guard against any potential conflict between the estate and the executor (see Meyerowitz Administration of Estates and Estates Duty (2007 ed) at 13-11). Where a sale is concluded with the knowledge and consent of the heir, as in the case in this matter, there should be no obstacle to the sale (Meyerowitz at 13-11 and Ex parte van Niekerk 1918 CPD 108). Oates’s interests are not of such a nature that they should form part of the facts to be considered by the Master as those interests are removed from the interests of the estate. Indeed, Oates’s offer would be prejudicial to the estate. The lesser offer by Oates will not serve the interests of the estate and it would, in my view, be contrary to the interests of the deceased estate if an executor is to be compelled to dispose of the deceased’s member’s interest at a price lower than the price offered by Mark. There is consequently no basis to review the decision of the Master.

[17]  Mr Gautschi argued that because the Master stated:

“Since there was no objection lodged with the Master by the first respondent, I therefore consented to the sale”,

Page 12 of [2012] JOL 28595 (GSJ)

it was a concession that the rights of Oates had to be considered. I do not agree. That statement by the Master must be seen in the light of paragraph 1 of the report which states:

“The first respondent’s notice of counter-application, with annexures, were received by me on 24 May 2011 and same corresponds with my records insofar as it relates thereto.”

Clearly, the Master reacted to the documents served upon her after she had taken the decision and she only became aware of the counter-application when the documents were so served. The statement is factually correct and it is not, in my view, a concession that she should have had regard to the interests of Oates when considering the interests of the estate when approving the sale in terms of section 49 of the Administration of Estates Act.

[18]  Mr Gautschi argued that the sale to Mark was not bona fide. The onus of successfully questioning the bona fides of the sale is on the first respondent (see Meyerowitz at 13-11 and the cases there cited). If this test is stated too high, it is still the applicant’s version (together with the admitted facts) that must be considered. The argument was based on speculative averments by Oates in his affidavit, all of which were denied by Mark. The speculation and argument are effectively countered by a number of facts. Firstly, in so far as the facts are disputed, reliance is to be placed on the applicants’ version. Thus the disputes as to the value of the member’s interest must be determined on Mark’s version as he is the respondent in the counter-application. That version shows that the price offered by him is justified. Secondly, the sale to Mark was an open and transparent process and the sole heir approved of it. Thirdly, payment of the R16 million will be

Page 13 of [2012] JOL 28595 (GSJ)

reflected in the liquidation and distribution account. Fourthly, estate duty will have to be paid on the full purchase price. Fifthly, the Master will have control over the sale and speculation to the contrary is premature. The speculation regarding Mark’s ability to pay can also not affect the sale. The ability to pay comes into play at the time when payment must be made.

[19]  In the circumstances, the attack on the sale to Mark as not being bona fide, fails and the Master’s decision consequently does not fall to be reviewed and set aside on the basis suggested by Oates.

[20]  If I am wrong in this view, section 49 of the Administration of Estates Act allows for the Master or the court to consent to a sale from an estate to an executor thereof. Mr Gautschi argued that I should refer the matter back to the Master in the event of my reviewing the Master’s decision. I do not agree. In so far as there may be a technical defect regarding the time periods allowed by the Master and in the event of her decision being reviewable for that reason, it is clear that all of the facts are before me and there is nothing that is contained in the affidavits of Oates to indicate that he did not place his case fully before the court or that there may be additional information to be placed before the Master who would then be in a better position to exercise a discretion.

[21]  In so far as it may be necessary, I consent to and confirm the sale of the 50% member’s interest of the deceased to Mark.

Page 14 of [2012] JOL 28595 (GSJ)

[22]  I consequently grant the following order:

1.

Declaring that the deceased estate of Dimitrios Constantin Livanos (“the deceased”) with Master’s reference number 3251/09, as represented by the first and second applicants, has validly sold the deceased estate’s 50% member’s interest in the second respondent to the third applicant in terms of the sale agreement annexed as “MDL22” to the founding affidavit (“the sale”).

2.

Directing the first and second respondents to take such steps as are necessary to give effect to the implementation of the sale with effect from 26 February 2011, including the signature of the amended founding statement annexed hereto as “NOM1” and lodging in the prescribed form an amended founding statement, with the fourth respondent in terms of section 15(1) of the Close Corporations Act 69 of 1984, failing which, authorising the Sheriff or Deputy Sheriff to take such steps as are necessary to give effect to the implementation of the sale, including the signature of the amended founding statement and any further documents.

3.

Directing the fourth respondent to register the amended founding statement upon payment of the prescribed fee and

Page 15 of [2012] JOL 28595 (GSJ)

upon lodging of the amended founding statement in the prescribed form.

4.

Directing the first respondent to pay the costs of the application, including the costs of two counsel.

5.

The counter-application is dismissed with costs, including the costs of two counsel.

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