Winding up when it’s over
17/06/2008

A company formed by partners may be wound up under the “just and equitable” provision, where circumstances which would justify dissolution of a partnership exist.

This is what the Supreme Court of Appeal held in the matter of Apco Africa v Apco Worldwide in a judgement delivered on 29 May 2008 under case number 372/2007.

In August 1998, two strategic partners, Apco Worldwide Inc, a company incorporated in accordance with the laws of the State of Delaware in the USA, and Arcay Communications Holdings, a South African company, concluded a memorandum of understanding. Their intention was to:

1. Draft and implement a joint business plan to offer and expand public affairs services in South Africa and to target new business opportunities for both parties;
2. Seek to refer business to one another;
3. Seek opportunities to jointly market their services.

In May 2000 the two parties decided to formalise their working arrangement by concluding a shareholders’ agreement, thereby incorporating a company called Apco Africa. The object of the company was to conduct business as a provider of public affairs and strategic communications and related services.

The two parties each held 50% of the shares in the issued share capital of Apco Africa. Almost all the work performed by the company was as a result of referrals to it by Apco and its other international entities.

In November 2005 Thomasine Kamerling, a director of Apco, was seconded to the company. This secondment apparently provoked resentment in the two directors of the company, Robyn de Villiers and Frikkie Botha. Over time the relationship between Kamerling, on the one hand, and De Villiers and Botha, on the other, became acrimonious and there were numerous altercations between them which led to Kamerling moving to another office in Sandton. There, she continued to serve the clients of the company for whom she was responsible.

In court papers, Apco, which applied for the winding up of the company, contended that there had been a serious and irretrievable breakdown in the relationship between the parties, in consequence of:

1. the conflict between Kamerling and Arcay’s representatives, De Villiers and Botha;
2. the poor service provided by Arcay to the company’s clients;
3. the lack of focus and interest in the business of the company by De Villiers and Botha, which prejudiced the shareholders; and
4. the fact that Apco was referring business to the company, but was receiving virtually no benefit from the partnership due to the fact that Arcay had been appropriating all the revenue of the company for itself.

Furthermore, Apco contended that the shareholders of the company had reached deadlock and that the company was no longer able to function. The deadlock had resulted in the disappearance of the substratum of the company.

On the other hand, Arcay alleged and/or contended that:

1. Apco’s application to wind up the company was frivolous, vexatious, an abuse, mala fide and part of a ploy to wipe out Apco’s competition in an underhanded and dishonest fashion.
2. There had been a pre-determined, secret scheme to hijack and take over the company and that Kamerling, through her fraudulent conduct, had created a springboard to set up a business in direct competition with the company.
3. In light of Apco’s breach of the shareholders’ agreement, it had a claim for specific performance against Apco which it would in due course seek to assert, hence the corporate form of the company had to be preserved.

The court analysed Section 334(h) of the Companies Act, 1973 and the relevant cases and reiterated what has previously been held by the courts, namely, that:

1. Subsection 334(h) is not confined to cases in which there are grounds similar to those mentioned in the other parts of the section.
2. No general rule can be laid down as to the nature of the circumstances that have to be borne in mind in considering whether a case comes within the phrase “just and equitable”.
3. There is no necessary limit to the generality of the words “just and equitable”. Section 344(h) affords a court a wide judicial discretion in the exercise whereof, however, certain other sections of the Act must be taken into account.

The court then held that:

1. The just and equitable provision is not to be limited to cases where the substratum or subculture of the company has disappeared or where there has been a complete deadlock.
2. Where there is in substance a partnership, in the form of a private company, circumstances which would justify the dissolution of the partnership would also justify the winding up of the company under the just and equitable provision. In this regard, the court will be guided by two distinct principles, namely:
   • It may be just and equitable for a company to be wound up where there is a justifiable lack of confidence in the conduct and management of the company’s affairs grounded on the conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s affairs.
   • The deadlock principle, which is founded on the analogy of partnership and is strictly confined to those small domestic companies in which, because of some arrangement, express, tacit or implied, there exists between the members in regard to the company’s affairs a particular personal relationship of confidence and trust similar to that existing between partners in regard to the partnership business. If, by conduct which is either wrongful or not as contemplated by the arrangement, one or more of the members destroys that relationship, the other member(s) is entitled to claim that it is just and equitable that the company should be wound up.

On the facts, the court held that:

1. Arcay’s proposition that there was a carefully planned strategy, in which Kamerling played a pivotal role, to destroy the company found no support in the evidence and was, in truth, unsustainable.
2. Arcay’s contention that the corporate form of the company should be preserved in light of the fact that Arcay had a claim for specific performance against Apco which it would in due course seek to assert was held to be illusory. This was because the relief envisaged by Arcay would have been something in the nature of an order compelling Apco to continue referring its client to it, thus recommending Arcay to its clients, in terms of the shareholders’ agreement, which Apco could not do as it had lost all faith in Arcay. In any event, the court held, Arcay would not have lacked a remedy entirely as, if it were to prove the breach complained of, it would have a claim for damages against Apco.
3. The facts as presented to the court placed it in a position where it was inclined to conclude that there was a state of deadlock but it was not necessary to go that far. Suffice to say that, on the analogy of partnership law, the company was in a state which could not have been contemplated by the parties when it was formed, hence ought to be terminated as soon as possible. It was, after all, contrary to the good faith and essence of the agreement between the parties that the state of things encountered in this matter should be allowed to continue, the court said.
Michael Gwala Partner and commercial attorney
Adams & Adams

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