Gihwala and Others v Grancy Property Ltd and Others (20760/14) [2016] ZASCA 35; [2016] 2 All SA 649 (SCA); 2017 (2) SA 337 (SCA) (24 March 2016)

Key Facts

Transaction Type

Issues

• Who were the parties to the agreement concluded on 3 February 2005 and what were its material terms?
• Was Grancy entitled to orders against Mr Gihwala and Mr Manala in terms of s 424 of the 1973 Act or s 77(3) of the 2008 Act?
• Did Grancy have financial claims arising out of the breach of the agreement?
• Is s 162 of the 2008 Act unconstitutional and, if not, was Fourie J correct to make orders of delinquency in relation to Mr Gihwala and Mr Manala?
• Were those claims precluded by the rule in Foss v Harbottle?
• The disposal of the cross-appeal
• Was Grancy entitled to an order for access to the books and accounting records of SMI and for the rendering of an account in relation to its investment?
• Was that agreement breached and, if so, in what respects?

Holdings

• The High Court order for a detailed accounting was amended to require only existing books and records, rejecting the broader accounting demands as vague and overlapping with prior judgments.
• The constitutional challenge to section 162(5) of the Companies Act was rejected as the provision is rational and not retrospective, with no irrational infringement on rights such as dignity, trade, or access to courts.
• The costs of the appeal and cross-appeal were allocated, with the cross-appeal costs to be paid by the appellants and the Trust, while the constitutional challenge costs were each party's own responsibility.
• The appeal succeeds in part, with paragraphs 1(b) and (e) of the High Court order set aside, and the amount in paragraph 1(c) reduced to R41 763.20. The cross-appeal succeeds by inserting paragraph 1(g) for R465 000 plus interest and declaring the Dines Gihwala Family Trust jointly liable with the defendants for specified monetary claims.
• The court declared the first and second defendants (Mr. Gihwala and Mr. Manala) delinquent directors under section 162(5)(c) of the Companies Act 2008, citing gross abuse of their directorship and personal enrichment at the expense of the company.

Remedies

• Paragraph 1(g) is inserted into the High Court order for R465 000 plus interest at 15.5% from 3 March 2009 to payment date.
• The Dines Gihwala Family Trust is declared jointly and severally liable with the First and Second Defendants for specified monetary claims.
• The First and Second Appellants and the Dines Gihwala Family Trust are liable for the cross-appeal costs, including two counsel's fees.
• The First Plaintiff is liable for costs of the 2014 amendment application, including opposing costs by the Second Defendant.
• Paragraph 2 of the High Court order is varied to require the First, Second, and Third Defendants to make available books of account and financial records for the Third Defendant's business.
• The amended paragraph 3 of the High Court order must be complied with within 30 days of the judgment, with no suspension pending further appeals.
• Paragraphs 1(b) and (e) of the first paragraph 1, and paragraphs 3 and 5 of the order in the High Court are set aside.
• The amount in paragraph 1(c) is reduced to R41 763.20.
• The First and Second Defendants are declared delinquent directors under section 162(5)(c) of the Companies Act 2008.
• No costs are ordered in respect of the constitutional challenge to section 162(5) of the Companies Act 2008.

Contract Value

Legal Principles

• The court held that the directors and the Trust owed Grancy a duty of good faith and fair dealing, treating the investment agreement as creating a fiduciary relationship. This duty was breached when they misappropriated funds and failed to account properly.
• The constitutionality of section 162(5)(c) of the Companies Act 2008 was challenged, but the court upheld its validity as a rational and proportionate response to director misconduct, rejecting claims of unconstitutionality.
• The court emphasized the principle of joint and several liability, holding Mr Gihwala, Mr Manala, and the Trust collectively responsible for damages caused by their breaches of the investment agreement.
• The rule in Foss v Harbottle was analyzed to determine if Grancy's monetary claims were precluded. The court found the claims were not precluded as they arose from breaches of the investment agreement, not solely from harm to the company.
• Unauthorized loans to directors (s 226 of the 1973 Act) were deemed void ab initio, and the court rejected attempts to justify such loans as part of the investment agreement.

Precedent Name

• Grancy Property v Seena Marena
• Grancy Properties Ltd v Manala and Others

Key Disputed Contract Clauses

• The agreement required shareholder consent for significant investments or changes to SMI's strategy. This was ignored when directors unilaterally approved investments in Redefine units and other ventures without consulting Grancy.
• The agreement stipulated that SMI would be used solely as a corporate vehicle for the Spearhead BEE transaction, with investments restricted to Spearhead units. This was breached when SMI made unauthorized investments in Scarlet Ibis and other ventures without shareholder consent.
• The agreement imposed a duty of good faith on directors and the Trust, requiring them to act transparently and account for stewardship. This was violated through misappropriation of funds, false accounting, and refusal to provide proper records.
• The agreement granted Grancy a right to inspect SMI's books and records. This was repeatedly denied, leading to disputes over accountability and transparency in financial management.
• The agreement required prompt distribution of net income to shareholders after servicing loans and administrative expenses. This was violated when directors delayed dividend payments and retained funds for personal enrichment.
• A tacit term in the agreement mandated equal treatment of all investors in allocating benefits. This was breached when directors enriched themselves at Grancy's expense through unauthorized fees and dividend distributions.
• The agreement and Companies Act 1973 (s 226) prohibited unauthorized loans to directors. This was violated when SMI lent R2 million to Manala, which was deemed unlawful and void ab initio.

Cited Statute

• Companies Act 71 of 2008
• Constitution of the Republic of South Africa, 1996
• Companies Act 61 of 1973

Judge Name

• Leach
• Seriti
• Lewis
• Tsoka
• Wallis

Passage Text

• [137] ... All of those constituted breaches of fiduciary duty on their part as directors of SMI, which was a party to the investment agreement and bound by it. The directors of SMI owed a fiduciary duty to SMI to ensure that it complied with its obligations under that agreement. They consistently breached that duty.
• [58] The material terms of the agreement concluded between the parties on 3 February 2005 were the following: (a) Mr Gihwala (through the vehicle of the Trust), Mr Manala and Grancy would participate in the Spearhead BEE transaction and thereby invest indirectly in Spearhead linked units. (b) The investment would be undertaken using SMI as a corporate vehicle with each participant (Grancy, the Trust and Mr Manala) holding one-third of the shares in SMI. (c) The parties would make their investment contributions by way of subscription for shares in and the making of loans to SMI on the basis set out in Mr Gihwala's email of 21 February 2005, which included the making of loans to Mr Manala to enable him to lend his share of the amount required by SMI.
• [149] ... a delinquency order can only be made in consequence of serious misconduct on the part of a director. It is that conduct that results in delinquency. ... The court investigates the conduct and if it is established by evidence the striking off or suspension or delinquency order is the necessary consequence.

Damages / Relief Type

• Compensatory Damages: R213,789.57 with interest at 15.5% from 19 August 2009 to payment date (paragraph 1(d))
• Declaratory Relief: First and Second Defendants declared delinquent directors under s 162(5)(c) of the 2008 Act (paragraph 4)
• Compensatory Damages: R465,000 with interest at 15.5% from 3 March 2009 to payment date (paragraph 1(g))
• Other Relief: Cross-appeal costs paid by appellants and Trust (paragraph 7)
• Compensatory Damages: R620,000.00 with interest at 15.5% from 15 June 2009 to payment date (paragraph 1(c))
• Compensatory Damages: R326,740.00 with interest at 15.5% from 19 August 2009 to payment date (paragraph 1(e))
• Compensatory Damages: R41,763.20 with interest at 15.5% from 28 February 2009 to payment date (paragraph 1(b))
• Compensatory Damages: R2,051,833.34 with interest at 15.5% from 20 March 2007 to payment date (paragraph 1(a))
• Compensatory Damages: R165,660.60 with interest at 15.5% from 6 January 2010 to payment date (paragraph 1(f))
• Other Relief: First Plaintiff liable for costs of 2014 amendment application (paragraph 6)