Jonathan David Peters NO and Others v Theresa Schoeman and Others

The appellants were trustees of two family trusts which owned all shares in Carpe Diem Properties (Pty) Ltd, a company owning immovable property in Mpumalanga. The trusts wished to sell their interest to the respondents (natural persons). However, direct sale of shares with mortgage security would contravene s 38 of the Companies Act 61 of 1973. The trusts could not convert the company to a close corporation themselves as s 29(1) of the Close Corporations Act 69 of 1984 allows only natural persons to be members. The parties structured a transaction whereby: (1) respondents would pay R550,000 deposit; (2) shares would be transferred to respondents; (3) respondents would convert the company to a close corporation; (4) the close corporation would provide financial assistance (mortgage bond of R450,000) to enable respondents to pay the balance of the purchase price. The respondents later refused to proceed, arguing the transaction contravened s 38 and was void ab initio. Roux J in the Transvaal Provincial Division agreed with the respondents and dismissed the appellants' claim for specific performance.

• Whether the transaction contravened s 38(1) of the Companies Act 61 of 1973, which prohibits a company from giving financial assistance for the purchase of its own shares
• Whether the agreement was a simulated transaction designed to disguise the true nature of the sale
• Whether the court should look at the form or substance of the transaction
• Whether financial assistance provided by a close corporation after conversion falls within the prohibition of s 38
• Whether the appellants had validly cancelled the agreement

The appeal was upheld with costs. The order of the trial court was set aside. The respondents were ordered to: (1) pay R450,000 to the applicants within 20 days pursuant to clause 6.2 of the sale agreement; (2) comply with their further obligations under the sale agreement dated 9 May 1997; and (3) pay the costs of the application jointly and severally.

Section 38(1) of the Companies Act 61 of 1973 is not contravened where financial assistance for the purchase of shares in a company is to be provided only after the company has been converted to a close corporation and has ceased to exist, even though the assets used to provide that assistance were originally assets of the company. The prohibition in s 38 is aimed at protecting creditors by preventing depletion or risk to a company's paid-up capital while the company exists. Where the company's financial position remains untouched while it exists and financial assistance is provided by the successor close corporation (which is permitted by s 40 of the Close Corporations Act 69 of 1984), the transaction does not fall within the mischief at which s 38 is aimed. Courts will examine the true nature and substance of transactions to determine whether they contravene s 38, looking beyond the parties' characterization to the juristic reality, but will uphold genuinely structured transactions that avoid the statutory prohibition without prejudicing creditors.

The court noted that the trusts would have been entitled to transfer shares to a third party solely for the purpose of converting the company to a close corporation, with that third party then transferring the members' interest to the ultimate purchasers, with payment facilitated by mortgaging the close corporation's property - this was conceded by counsel for the respondents. The court also provided guidance on what constitutes valid cancellation of a contract, emphasizing that whether an election to cancel has been made is a question of fact requiring clear and unequivocal notice. Letters threatening future cancellation upon non-compliance with conditions do not themselves constitute cancellation. The court also distinguished between two classes of simulated transactions: those where parties deliberately conceal the real agreement by dressing it up as another transaction, and those where parties mistakenly characterize their agreement as something which, when juristically analyzed, it is not. In both instances, courts will disregard the parties' description and have regard to the true nature of the agreement.

This case is significant in South African company law for its interpretation of s 38 of the Companies Act 61 of 1973. It establishes that courts will look at the substance and purpose of transactions, not merely their form, when determining whether s 38 has been contravened. Importantly, it clarifies that s 38's prohibition only applies while the company exists - financial assistance provided after conversion to a close corporation does not contravene the section. The case demonstrates that structured transactions designed to avoid s 38 are permissible provided they genuinely do not expose the company's assets or prejudice creditors while the company exists. The judgment also reinforces the principle that parties may legitimately structure their affairs to avoid statutory prohibitions, provided the arrangement is genuine and achieves its stated purpose without contravening the spirit of the legislation. It provides important guidance on the interaction between the Companies Act and the Close Corporations Act in conversion scenarios.