1. SECTION 228(1) AND MORTGAGE BONDS
2. IS THE PASSING OF A MORTAGE BOND A DISPOSAL?
- Section 228(1) of the Companies Act 1973, after its substitution in terms of section 21 of Act 24 of 2006, now provides as follows:
228 Disposal of undertaking or greater part of assets of company
(1) Notwithstanding anything contained in it's memorandum or articles, the directors of a company shall not have the power, save by a 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.
- Prior to its said substitution section 228(1) of the Companies Act 1973 read as follows:
(1) Notwithstanding anything contained in its memorandum or articles, the directors of a company shall not have the power, save with the approval of a general meeting of the company, to dispose of -
(a) the whole or substantially the whole of the undertaking of the company; or
(b) the whole or the greater part of the assets of the company.
- The conveyancer who has to register a mortgage bond over a property which constitutes "the whole or the greater part of the assets" of a company needs to decide whether both a resolution by the directors and a special resolution by the shareholders are required.
- It is, from the wording of section 228 (1) clear that, had (prior to its substitution as aforesaid) the approval of the general meeting of the company been required for the valid registration of the said mortgage bond a special resolution by shareholders will now be required. The approval of the general meeting of a company would have been required for the valid registration of a mortgage bond only if the passing of that mortgage bond would have been regarded a 'disposal' as contemplated in Section 228(1). The only question that thus needs to be answered is whether the passing of a mortgage bond over property constitutes a 'disposal' of that property. It would appear that in terms of current case law and opinions by legal writers (as more fully discussed in paragraph 2 of this memorandum) the registration of a mortgage bond did not constitute a 'disposal' as contemplated in Section 228(1) prior to its amendment and, I submit, neither would it do so now.
3. SECTION 228(2)
- Henochsberg, The Companies Act has the following to say in this regard:
It is submitted that, in the context, the word "dispose" has its ordinary meaning of "to part with" or "to get rid of" (as to the ordinary meaning of the word, see Cullinan Properties Ltd v Transvaal Board for the Development of Peri-Urban Areas 1978 (1) SA 282 (T) at 285-286) and accordingly the only disposal to which it is intended to refer is one which would have the effect of permanently depriving the company of its right to ownership of the assets involved.
Thus, the grant of a right of first refusal to purchase is not within the section (Lindner v National Bakery (Pty) Ltd 1961 (1) SA 372 (O)). Neither is a pledge nor a cession in security (Alexander NO v Standard Merchant Bank Ltd 1978 (4) SA 730 (W)), notwithstanding, it is submitted, the divestitive effect of such a cession having regard to the residual interest which the company retains in relation to the right ceded. It is submitted that passing a mortgage bond is not within the section (cf Advance Seed Co (Edms) Bpk v Marrok Plase (Edms) Bpk 1974 (4) SA 127 (C) at 132.....
- There is no substantial difference between section 70 dec (2) of Act 46 of 1926 and Section 228(1) (as it read prior to its substitution). In Advance Seed Co (Edms) Bpk v Marrok Plase (Edms) B Bpk 1974 (4) SA 127 (NC), where the court had to decide whether, as there had been no approval of the general meeting of the company, the passing of a mortgage bond had been in contravention of section 70 dec (2) of Act 46 of 1926, the following was said regarding whether the passing of a mortgage bond constituted a disposal: "Mnr. Kumleben se betoog op hierdie aspek van die saak was tweeledig. Hy het eerstens aangevoer dat die beswaring deur verband nie ingesluit is by die begrip "om te vervreem" ("to dispose of") nie. Hy het veral gesteun op Henochsberg, The Companies Act, 2de uit., bl. 183 en Cilliers en Benade, supra te bl. 250, wat dieselfde mening huldig. Hy het daarna 'n baie volledige betoog gelewer wat hoofsaaklik dieselfde strekking het as die van Henochsberg. Ek meen dat daar veel te sê is vir hierdie standpunt, maar vir die redes wat hierna volg is dit nie nodig om daaroor uitsluitsel te gee nie."
- The pledge or cession in securitatem debiti of shares, I submit, is more of a 'disposal' than the passing of a mortgage bond over property and if such a pledge or cession is not a disposal neither would the passing of a mortgage bond be one. In Alexander and Another NNO v Standard Merchant Bank Ltd 1978 (4) SA 730 (W) the court said the following regarding whether a pledge or cession in securitatem debiti of shares constituted a 'disposal' for the purposes of section 228(1):
But, even if I am wrong in law or fact and even if there is no distinction between the so-called "pledge" of the shares and a cession, although being a cession in securitatem debiti, has the effect of divesting the cedent of all his rights for the time being, such a cession is not, in my view, a disposal in terms of the section. The dominium of the right remaining in the cedent may be nebulous but there is nothing nebulous in the reversionary right. The authorities are clear that, during the currency of the cession, the cedent loses his right of action against the debtor, but as between himself and the cessionary there is a clear obligation on the cessionary to cede the right back to the cedent once the debt has been paid. During the currency of the cession there is therefore no disposal in terms of the section because the cessionary cannot freely dispose of the property but is under an obligation to cede the rights back to the cedent upon payment of the debt. It may be that, if the debtors should abandon their original intention of paying the debt or of enforcing a recession by deliberately refraining from paying the debt causing the right of the cessionary to become absolute, there would then be a disposal in terms of the section, but there cannot be a disposal while the reversionary right lasts.
I have therefore come to the conclusion that, even if the shares in dispute constituted the whole or the greater part of the assets of UTL, the pledge of these shares to the respondent in securitatem debiti is not a disposal in terms of the section.
- I think that the following example shows that the passing of a mortgage bond cannot be a 'disposal' as contemplated in section 228(1):
- Company A has, as its only asset, a property on which a building requiring renovation has been built. A borrows the money required in order to effect the renovations from a bank and, as security for the repayment of the loan, pass a mortgage bond over the property in favour of the bank.
- Company B has, as its only asset a property exactly similar to the one owned by A on which a building also requiring renovation has been built. B borrows the money required in order to effect the renovations from a bank by way of an unsecured loan.
- Both A and B default when the time for repayment arrives. In both instances the relevant bank institutes action against the borrower which leads to the property owned by the relevant borrower to be sold in execution.
- It is clear that the actual reason for the eventual sale of the property was not the passing of the mortgage bond but the defaulting under the loan agreements.
- It would, I submit, be absurd to interpret Section 228(1) to mean that anything done which could lead to the eventual loss of the whole or the greater part of the assets of the company is a 'disposal' for which a special resolution is required. Such an interpretation would mean that even the incurring of debt in an insignificant amount would be a 'disposal' if it leads to the eventual sale in execution of "the whole or the greater part of the assets of the company."
- The passing of a mortgage bond is, for the reasons set out above, not a 'disposal' for the purposes of Section 228 of the Companies Act, 1973 and no special resolution is required for the validity thereof.
4. SPECIAL RESOLUTION
- Where there is an actual disposal of the the whole or the greater part of the assets of the company (for instance where a company having only one asset being an immovable property sells that property) the passing of a special resolution becomes imperative and the other provisions of Section 228, especially 228(2), need to be taken cognisance of.
- Section 228(2) provides as follows:
(2) If in relation to the consolidated financial statements of a holding company, a disposal by any of its subsidiaries would constitute a disposal by the holding company in terms of subsection (1) (a) or (b), such disposal requires a special resolution of the shareholders of the holding company.
- Conveyancers need to note the requirements for a valid 'special resolution' as contained in sections 199 to 203 of the companies Act. In particular it should be noted that registration of the special resolution at the offices of the Registrar of Companies is required and that the resolution only becomes effective on registration.
- Under the "old" section 228(1) one could, by applying the principle of unanimous assent, get away without actually convening a general meeting of the company.
- In Southern Witwatersrand Exploration Co Ltd v Bisichi Mining Plc and Others 1998 (4) SA 767 (W) the said principle of unanimous assent was discussed and applied as follows:
This contention derived from what has come to be known as the principle of unanimous assent. In Blackman's formulation in Joubert (ed) The Law of South Africa (first reissue, 1996) vol 4 part 2 at para 40, even though generally company decisions are arrived at by means of formal resolutions taken at properly constituted meetings of the company, 'the courts have recognised that the unanimous assent of all the members, when fully aware of what is being done, is an alternative method of passing valid company resolutions - despite the fact that the procedures by the articles have not been observed'. The principle has been accepted and developed by the Appellate Division (now the Supreme Court of Appeal) (Gohlke & Schneider and Another v Westies Minerale (Edms) Bpk and Another 1970 (2) SA 685 (A) at 692D--694E; Quadrangle Investments (Pty) Ltd v Witind Holdings Ltd 1975 (1) SA 572 (A) at 581C--582B; Alpha Bank Bpk en Andere v Registrateur van Banke en Andere 1996 (1) SA 330 (A) at 348G--I), as well as in an increasing variety of first instance decisions.
- The principle of unanimous assent would, however, not apply where a special resolution (as now is the case) is required. In Quadrangle Investments (Pty) Ltd v Witind Holdings Ltd 1975 (1) SA 572 (A) the court held that in requiring a special resolution the Legislature also bore the wider interest of the general public in mind in prescribing those formalities. A purported alteration by the unanimous assent of the shareholders, which can occur informally, even by conduct, would therefore not serve those purposes. A special resolution must therefore be regarded as being essential. (See on this aspect, too, the well-reasoned and useful article, "The Principle of Unanimous Assent," by Professor Beuthin, in 91 (1974) S.A.L.J. at pp. 11-15).