Zhau v ERF One Eight Five Three (CC/2007/0071) Klein Windhoek Property CC and Another (A 341/2014) [2017] NAHCMD 100 (27 March 2017);

Group

Full judgment

REPORTABLE

REPUBLIC OF NAMIBIA

HIGH COURT OF NAMIBIA MAIN DIVISION, WINDHOEK

JUDGMENT

Case No.: A 341/201

In the matter between:                                                                  

XIZHOU ZHAU                                                                                   APPLICANT

And

ERF ONE EIGHT FIVE THREE (CC/2007/0071)                                    FIRST RESPONDENT

KLEIN WINDHOEK PROPERTY CC

XIZHONG HOU                                                                                 SECOND RESPONDENT

Case No.: A 342/2014

 

XIZHOU ZHAO                                                                                  APPLICANT

And

REMAINDER OF ERF 114 KLEIN

WINDHOEK PROPERTY CC                                                             FIRST RESPONDENT

XIZHONG HOU                                                                                SECOND RESPONDENT

 

Neutral Citation:  Zhau v Erf One Eight Five Three (CC/2007/0071) Klein Windhoek Property CC (A 341/2014); A 342/2014) [2017] NAHCMD 100 (28 February 2017)

 

Coram:                                  UEITELE J

Heard:                                   16 February 2016

Delivered:                             31 January 2017

Reasons released:                 27 March 2017

 

Flynote:         Close Corporation - Liquidation - On ground that winding-up just and equitable - Deadlock between members - Existence of deadlock not per se entitling winding-up order - Close Corporations Act, 1988 s 68(d).

Summary:     The applicant launched two separate applications (which applications have been consolidated) out of this court in terms of which he sought orders placing two close corporations under provisional liquidation in the hands of the Master of the High Court of Namibia, the applicant furthermore sought an order in terms of which a rule nisi is issued calling upon the close corporations and any other person who has interest in the matters to show cause (if any) to this Court on a date and time to be determined by the Registrar of this Court, why the two close corporations should not be placed under final liquidation.

The applicant predicates his application on the grounds that: (a) an irresolvable dispute has developed between him and the second respondent which has resulted in a lack of trust inter parties, thereby making the management of the close corporations impossible; and (b) that the two close corporations are unable to pay their debts. The second respondent opposes the applications.

Held that the circumstances under which a close corporation will be deemed to be unable to pay its debts, are set out in s 69 of the close corporations Act 26 of 1988 and that the applicant has not, in his founding affidavit, set out any of the necessary facts, as contemplated in s 69, to demonstrate or prove that the two close corporations are unable to pay their debts.

Held further that there is no doubt that there is a deadlock between the applicant and the second respondent, but the mere existence of a deadlock does not per se entitle an applicant to a winding-up order under the just and equitable provision.

Held further that what requires to be emphasised is that the Court is concerned with what is just and equitable not with whether there is a deadlock or not. The existence of a deadlock is one example of what might be regarded in a proper case as just and equitable but a Court must always have regard to all the circumstances of the case.

Held further that it will not be just and equitable to order the liquidation of the two close corporations whilst litigation to resolve what the parties agreed to when they agreed to terminate their relationship is still pending.


ORDER


1.         The applications for the winding up of the first respondents are stayed pending the final determination of the proceedings instituted under case number I 247/2015 in the matter of Xizhong Hou v Xizhou Zhao and Others.

2.         The costs will stand over pending the finalisation of these proceedings.


JUDGMENT


UEITELE, J

Introduction

[1]        This is a consolidated application for a provisional order of liquidation of two close corporations (namely Erf One Eight Five Three (CC 2007/0071) and Remainder of Erf 114 Klein Windhoek (CC 2007/00066)), incorporated as such in terms of the Close Corporation Act, 19881 (the close corporations are the first respondents in both matters).

[2]        The applicant is a certain Mr Xizhou Zhao (a Chinese citizen) who is member of the two close corporations holding a 50% member’s interest in each of those close corporations. The second respondent is a certain Mr Xizhong Hou (also a Chinese citizen), who is also a member of the two close corporations holding the other 50% member’s interest in each of the two close corporations.

[3]        In his answering affidavit Mr Hou makes the allegation that he does not read, speak or understand the English language. He, however, confirms that the answering affidavit has been translated to him from the English language to the Chinese language by a certain Ms Liz Ji and he furthermore confirms that he unreservedly trusts Ms Ji’s translation.

[4]        On the 9th day of December 2014 the applicant launched two separate applications (which applications have, as I indicated above, been consolidated) out of this court in terms of which he sought orders placing the two close corporations under provisional liquidation in the hands of the Master of the High Court of Namibia, the applicant furthermore sought an order in terms of which a rule nisi is issued calling upon the close corporations and any other person who has interest in the matters to show cause (if any) to this Court on a date and time to be determined by the Registrar of this Court, why the two close corporations should not be placed under final liquidation.

[5]        The applicant predicates his application on the grounds that: (a) an irresolvable dispute has developed between him and the second respondent which has resulted in a lack of trust inter parties, thereby making the management of the close corporations impossible; and (b) that the two close corporations are unable to pay their debts. The second respondent opposes the applications. With this brief introduction I briefly turn to the background facts (as I have discerned them from the affidavits filed in this matter) which have given rise to this application.

Background

[6]        Towards the end of the year 2010 or at the beginning of the year 2011 the applicant and the second respondent (I will, in this judgment, when required refer to the applicant and the second respondent as the parties) were introduced to each other by a shared friend. After that introduction the applicant and the second respondent concluded an oral agreement in terms of which they agreed that they will jointly invest in Namibia by constructing a pharmaceutical plant in Namibia. The oral agreement was later (during September 2012) reduced to writing. A copy of the agreement drafted in the Chinese language and translated to the English language was annexed as Annexure “ZS2” to the applicant’s founding/supporting affidavit.

[7]        The terms of the oral agreement were, amongst other things, that, the applicant would invest an amount of 10 000 000 Chinese Yuan (RMB) and the second respondent would invest an amount 20 000 000 Chinese Yuan (RMB): Pursuant to the oral agreement the applicant transferred an amount of 600 000 Yuan (RMB) into the second respondent’s account in Beijing, China, for the costs of preliminary investigations into possibilities of investing in Namibia and the costs of the preparation work before the actual investment.

[8]        During the year 2011 (it is not clear from the affidavits before me, as to exactly when) the parties agreed that their investment in Namibia must be channelled through a private company. In pursuance of that agreement the second respondent incorporated a private company called Right Path Investment (Pty) Ltd. The second respondent was initially the sole shareholder of that company.

[9]        During September 2011 the applicant and the second respondent agreed to, though, Right Path Investment (Pty) Ltd, purchase two immovable properties in Windhoek. The immovable properties were at that stage owned by the two close corporations (namely Erf One Eight Five Three (CC 2007/0071) and Remainder of Erf 114 Klein Windhoek (CC 2007/00066)). The parties received legal advice to the effect that a juristic person such as a private company could not hold member’s interest in a close corporation. After receiving that advice the parties decided to register the member’s interest in their names.

[10]      There is a dispute as to who paid the purchase price of the immovable properties. The applicant alleges that he transferred an amount of USD 2 227 505 and 2 235 168-54 RMB to Right Path Investments (Pty) Ltd in accordance with the investment agreement (i.e. Annexure “ZS2”). The second respondent on the other hand alleges that the purchase price for the immovable properties was paid for by Right Path Investment (Pty).

[11]      During October 2011 the parties agreed that the properties needed to be renovated. The parties accordingly furthermore agreed that the applicant, because of his expertise in construction, would relocate six of his employees from China to Namibia to embark on the renovations of the two immovable properties. In accordance with the oral agreement the renovation work was executed and it took approximately five months to complete.

[12]      The applicant alleges that he singularly paid the salaries of the six employees who renovated the immovable properties and also paid the costs of all the materials (used in the renovations of the properties) purchased in China. The second respondent admits that the applicant paid the salaries of the workers and covered the costs of the materials but alleges that, that was part of the applicant’s investment in accordance with the joint venture agreement.

[13]      During February 2012 the parties agreed to enter into a partnership with a close corporation known as Omusati Construction CC for the purposes of constructing a Sports Complex in Eenhana. The parties were also involved in the field of construction (as partners or joint ventures) with other close corporations such as Omatungo CC, Tonateni Hibei Construction CC and Oluzizi CC. During August 2012 the applicant appointed a certain Hongzhong Jiang (I will in this judgment refer to him as Jiang) as his representative or partner to look after his business interests and investments in Namibia.

[14]      After his appointment as the applicant’s representative Mr Jiang reduced the oral agreement that was concluded between the applicant and the second respondent to writing and signed it on behalf of the applicant while the second respondent personally signed the “Joint Investment Agreement”. I have indicated above that the second respondent was initially the sole shareholder of Right Path Investment (Pty) Ltd. During February 2013 Jiang requested the second respondent to transfer the equivalent of the 37% shareholding in Right Path Investment (Pty) Ltd to the applicant. During March 2013 the second respondent transferred the equivalent of the 37% shareholding in Right Path Investment (Pty) Ltd to the applicant. Shortly after, that is during April 2013, the transfer of the shares to the applicant, Mr Jiang indicated to the second respondent that the relationship between the parties be terminated.

[15]      According to the applicant the reasons why he opted to terminate the relationship between him and the second respondent are allegations that:

(a)       The second respondent became careless and irresponsible regarding their business venture in Namibia and the fact that the second respondent was allegedly not properly attending to the business venture in Namibia.

(b)       As regards the investment in the pharmaceutical plant the applicant felt that the second respondent did not intend to seriously proceed with the project, because since applicant’s coming to Namibia in 2013 there was no progress with respect to that project.

(c)        The second respondent has an irrevocable dispute with the employees, with six of the employees, including the Chief Executive Officer, Manager, Accounting Officer and the local pharmacists resigning from the company.

[16]      The second respondent agreed to the termination of the relationship between him and the applicant. The second respondent, however, denies that he neglected or was careless with the investment ventures or that he had had irreconcilable differences with the company’s employees. The second respondent alleges that they agreed to the termination of the relationship with the applicant on the following basis:

(a)       That the applicant had to return the equivalent of the 37% shareholding in Right Path Investment (Pty) Ltd to the second respondent.

(b)       That the second respondent would pay an amount of N$3 million to each of the construction close corporations of the applicant, namely Omatungo CC, Omusati CC and Oluzizi CC (the applicant on the other hand alleges that they agreed that the second respondent agreed to pay an amount of N$ 5.3 million).

(c)        That the second respondent would transfer his shares and interest in all construction corporations and activities to the representative of the applicant (Mr Jiang).

(d)       Mr Jiang would return the following vehicles (a Volkswagen Transporter, a Ford Ranger Pick Up, and a Land Rover Discovery) to the second respondent.

(e)       The applicant would transfer his member’s interest in the two close corporations to the second respondent and that the applicant would not have to repay to the second respondent any funds advanced by the second respondent in terms of the investment agreement.

(f)        That the agreement would be in full and final settlement of all the claims the parties had against each other.

[17]      The parties partially complied with the settlement agreement, in that the applicant transferred the equivalent of the 37% shareholding in Right Path Investment (Pty) Ltd to the second respondent, the second respondent paid an amount of N$3 million to the applicant, the second respondent transferred his shares and interest in all construction corporations and activities to the applicant.

[18]      The parties are now accusing each other of breaching the settlement agreement.  The applicant accuses the second respondent of failing or refusing to pay to him the amount of N$ 5.3 million, while the second respondent accuses the applicant of breaching the settlement agreement in that the applicant allegedly failed or refuses to transfer the member’s interest in the two close corporations and the motor vehicles to the second respondent. The applicant furthermore accuses the second respondent of failing or refusing to sign the termination/settlement agreement.  The applicant accordingly states that he has resolved to apply for the liquidation of the close corporations in order to protect his rights.

The basis on which the applicant seeks the order

[19]      The applicant’s application is grounded on the allegations that an irresolvable dispute has developed between him and the second respondent. The applicant attributes the development of the ‘irresolvable dispute’ to the alleged unreasonable and vexatious actions of the second respondent. The applicant furthermore alleges that the second respondent stubbornly and uncompromisingly refuses to co-operate with him.

[20]      As a direct consequence of the alleged hostile actions of second respondent, the alleged stubborn and uncompromising refusal of the second respondent to co-operate with the applicant, the applicant contents that the trust relationship between the parties has broken down making it impossible for the parties to, together, manage the close corporations. The applicant thus premises his application for the provisional winding up of the two close corporations on the basis that it is just and equitable to wind up the close corporations.

[21]      Because the applicant's case for the winding-up of the two close corporations is based upon the allegation that a 'deadlock exists' between the two members of those close corporations and that it would be just and equitable to wind up the close corporations I will proceed to consider the legal principles governing the winding up of a close corporation by an order of Court.

The legal principles governing the winding up of a close corporation by an order of court

[22]      Section 68 of the Close Corporations Act, 1988 deals with the liquidation of close corporations by orders of the courts. That section reads as follows:

68       Liquidation by Court

A corporation may be wound up by a Court, if-

(a)        members having more than one half of the total number of votes of members, have so resolved at a meeting of members called for the purpose of considering the winding-up of the corporation, and have signed a written resolution that the corporation be wound up by a Court;

(b)        the corporation has not commenced its business within a year from its registration, or has suspended its business for a whole year;

(c)        the corporation is unable to pay its debts; or

(d)        it appears on application to the Court that it is just and equitable that the corporation be wound up.’

[23]      Section 68(d) provides that a close corporation may be wound up by a Court if it appears on application to the Court that it is ‘just and equitable’ that the corporation be wound up. In the matter of Moosa NO v Mavjee Bhawan (Pty) Ltd and Another2 Trollip J while interpreting the ‘just and equitable’ ground3 said:

‘The ground relied upon for a final winding-up order is that … it is 'just and equitable' that the company should be wound up. That paragraph ... postulates not facts but only a broad conclusion of law, justice and equity, as a ground for winding up … In its terms and effect, therefore, [it] confers upon the Court a very wide discretionary power, the only limitation originally being that it had to be exercised judicially with due regard to the justice and equity of the competing interests of all concerned…’

[24]      Various Courts have endeavoured to define what might be regarded as just and equitable grounds to wind up a company. This Court in the matter of Laicatti Trading Capital Inc and Others v Greencoal (Namibia)(Pty) Ltd And Another4 expressed the view that no fixed and immutable rule can be laid down as to the nature of the circumstances that would justify the conclusion that it is just and equitable to wind up a company. The Court, however, accepted the five principles that were set out in the matter of Rand Air (Pty) Ltd v Ray Bester Investments (Pty) Ltd5 to guide the Court in the exercise of its discretion. The five principles or guidelines identified by Coetzee J6 are:

‘The first is the disappearance of the company's substratum. Where the company was formed for a particular purpose for instance, and that purpose can no longer be achieved at all, its raison d'être, its substratum has gone and it may be fair and equitable to the incorporators under those circumstances to wind it up. There are a variety of circumstances which can possibly lead to the disappearance of a company's substratum.

Secondly, illegality of the objects of the company and fraud committed in connection therewith. If a company is promoted in order to perpetrate a serious fraud or deception on the persons who are invited to subscribe for its shares, it is the kind of case in which the persons who are defrauded in that fashion can take the promoters to Court and, provided the circumstances demand that, the company be wound up.

The third is that of deadlock which results in the management of companies' affairs, because the voting power at board and general meeting level is so divided between dissenting groups that there is no way of resolving the deadlock other than by making a winding up order. The kind of case which falls most frequently to be dealt with under this heading is the one where there are only two directors or only two shareholders, usually in a private company, who hold equal voting shares or rights and have irreconcilably fallen out.

Fourthly, grounds analogous to those for the dissolution of partnerships. Where the company is a private one and its share capital is held wholly or mainly by the directors and it is in substance a partnership in corporate form, the Court will order its winding up in the same kind of situation that it would order the dissolution of a partnership on the ground that it is just and equitable to do that.

Fifthly, there is oppression. Where the persons who control the company have been guilty of oppression towards the minority shareholders whether in their capacity as shareholders or in some other capacity, a winding up order in suitable cases may be made. ‘

[25]      These are the circumstances under which a company may be liquidated on the 'just and equitable' grounds in our law. As Parker AJ recognised this is not a final or complete list of circumstances; it is open to courts to identify other circumstances or devise other categories in future. With that statement of the legal principles I will now turn to the facts of this case.

Discussion of the relief sought by the applicant

[26]      In the present matter the applicant seeks an order provisionally liquidating the two close corporations. As I indicated above, the applicant’s basis is that there is first, a ‘deadlock’ between him and the second respondent in respect of the management of the close corporations. The second basis of his application is that the close corporations are unable to pay their debts.

[27]      The second basis of the application can be disposed of easily. In terms of paragraph (c) of s 68 of the Close Corporations Act, 1988 (which I have quoted above) a close corporation may be wound up by a Court if it is unable to pay its debts. The circumstances under which a close corporation will be deemed to be unable to pay its debts, are set out in s 69 which provides as follows:

‘69       Circumstances under which corporation deemed unable to pay debts

(1)        For the purposes of section 68(c) a corporation shall be deemed to be unable to pay its debts, if-

(a)        a creditor, by cession or otherwise, to whom the corporation is indebted in a sum of not less than two hundred rand then due has served on the corporation, by delivering it at its registered office, a demand requiring the corporation to pay the sum so due, and the corporation has for twenty-one days thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or

(b)        any process issued on a judgement, decree or order of any court in favour of a creditor of the corporation is returned by a sheriff, or a messenger of a magistrate's court, with an endorsement that he has not found sufficient disposable property to satisfy the judgement, decree or order, or that any disposable property found did not upon sale satisfy such process; or

(c)        it is proved to the satisfaction of the Court that the corporation is unable to pay its debts.

(2)        In determining for the purposes of subsection (1) whether a corporation is unable to pay its debts, the Court shall also take into account the contingent and prospective liabilities of the corporation.’

[28]      The applicant has not, in his founding affidavit, made any allegation that he is a creditor of the two close corporations and that he, in his capacity as creditor of the close corporations, has made demands to the two close corporations for them to repay the amounts owed to him. He has also not made any allegations that a process or judgement in favour of a creditor of the two close corporation was returned by a sheriff, or a messenger of a magistrate's court, with an endorsement that he has not found sufficient disposable property of the close corporations to satisfy the process or judgement.

[29]      The applicant, in his founding affidavit, simply states that the close corporations are unable to pay their debts. This is wholly inadequate, the applicant must set out the facts from which the conclusion can be drawn that the two close corporations are unable to pay their debts. The applicant has not set out any of the necessary facts and his application on this ground must fail and it fails.

[30]      I now turn to the second ground namely the ‘deadlock’ ground. What I could gather from the affidavits filed of record is that the applicant and the second respondents are not on speaking terms since 2014, in the words of the applicant the second respondent is hostile towards him and his partner (Mr Jiang). I therefore have no doubt that there is a deadlock between the applicant and the second respondent. I furthermore have no doubt that the deadlock has led to the breakdown of the friendly co-operation in running the two close corporations’ affairs and the trust relationship which needs to exist between members of a close corporation.

[31]      Mr Brandt on behalf of the applicant submitted that, because there is a deadlock, this Court needs to wind up the two close corporations. In the South African case of Emphy and Another v Pacer Properties (Pty) Ltd7 Leon J stated that:

'I am satisfied that the mere existence of a deadlock does not per se entitle an applicant to a winding-up order under the just and equitable provision. What requires to be emphasised is that the Court is concerned with what is just and equitable not with whether there is a deadlock or not. The existence of a deadlock is one example of what might be regarded in a proper case as just and equitable but a Court must always have regard to all the circumstances of the case.'

[32]      I endorse the view of Leon J and accept those views as a correct statement of the state of our law. It is common cause that during the year 2014 the applicant and the second respondent agreed to terminate their relationship. The only dispute that exists as regards the agreement to terminate the relationship, relates to the exact terms of that agreement. It is also common cause that the second respondent has commenced litigation (under case number I 247/2015 in the matter of Xizhong Hou v Xizhou Zhao and Others) to enforce what he alleges were the terms of the agreement to terminate their relationship.

[33]      I am therefore of the view that it will not be just and equitable to order the liquidation of the two close corporations whilst litigation to resolve what the parties agreed to when they agreed to terminate their relationship is still pending.  I agree with Mr Barnard for the second respondent that the proper course is to have the dispute as to what the parties agreed resolved by means of an action and that this application must await the resolution of the dispute with respect to what precisely the parties agreed to when they agreed to terminate their relationship.

[34]      For these reasons I make the following orders:

1.         The applications for the winding up of the first respondents are stayed pending the final determination of the proceedings instituted under case number I 247/2015 in the matter of Xizhong Hou v Xizhou Zhao and Others.

2.         The costs will stand over pending the finalisation of these proceedings.

---------------------------------

SFI Ueitele

Judge

APPEARANCES:

APPLICANT                                      C BRANDT

                                                        Of Chris Brandt Attorneys, Windhoek

SECOND RESPONDENT                   P C I BARNARD  

                                                       Instructed by P D Theron & Associates, Windhoek

_____________________________                                                                            

1Act 26 of 1988.

21967 (3) SA 131 (T) at 136G – H.

3Act No. 28 of 2004.

42016 (2) NR 363 (HC).

51985 (2) SA 345 (W).

6Ibid at 350.

71979 (3) SA 363 (D) at 369 A.

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