Mirchandani v Unica Iron & Steel (Pty) Ltd and Unica Iron & Steel (Pty) Ltd v Mirchandani

Mr Mirchandani was appointed as technical director of Unica Iron & Steel (Pty) Ltd in terms of a written Profit Share Agreement dated 21 May 2007 (backdated to 4 December 2006). His role was to source, commission and run Unica's plant (Unica 1) in Babelegi, Hammanskraal. His association with Unica 1 was mutually terminated on 30 September 2010. After termination, Mr Mirchandani reported Unica to the Gauteng Department of Rural Development (GDRD) for operating Unica 1 without complying with the National Environmental Management Act 107 of 1998 (NEMA). As a result, Unica was criminally charged and entered into a Plea and Sentence Agreement in terms of section 105A of the Criminal Procedure Act 51 of 1977, resulting in a R5 million penalty (half suspended) plus R3 million for environmental rehabilitation. Unica instituted a damages claim against Mr Mirchandani alleging breach of the profit agreement and breach of fiduciary duties in failing to ensure compliance with NEMA. Mr Mirchandani instituted an accounting action claiming that his loan account was incorrectly debited with bond repayments and utility charges (water, electricity and taxes) which, in terms of two lease agreements concluded between the parties, should have been for Unica's account. Two lease agreements had been concluded for a property at 30 Blesbuck Avenue, Eldo Manor, Centurion, which was purchased for Mr Mirchandani to occupy pending transfer into his name. The parties had agreed Mr Mirchandani would pay rent but utilities and taxes would be for the lessor's (Unica's) account.

• Whether compliance with NEMA was an express, tacit or implied term of the Profit Share Agreement
• Whether Mr Mirchandani breached his fiduciary duties to Unica under common law
• Whether Mr Mirchandani breached his duties under section 218(2) read with section 76(2)(a) of the Companies Act 71 of 2008
• Whether the claim under section 218 of the Companies Act was properly pleaded
• Whether the lease agreements were valid and binding or were a sham concluded solely for FICA compliance purposes
• Whether Mr Mirchandani's loan account was correctly debited with bond repayments and utility charges
• Whether the agreement regarding 5% wastages was validly concluded at the meeting of 15 April 2010

Case no: 802/2020 (Unica's appeal): The appeal was upheld with costs including costs of senior counsel. The judgment of the high court was set aside and replaced with an order dismissing Unica's claim 1 (damages claim) with costs, but ordering the defendant (Mr Mirchandani) to pay the wasted costs of adjournment of 31 July 2017 and the costs of the application to set aside the subpoena duces tecum of the plaintiff's auditor. Case no: 813/2020 (Mr Mirchandani's appeal): The appeal was dismissed with costs including costs of senior counsel, meaning Mr Mirchandani's accounting claims succeeded as per the high court judgment.

The binding principles established are: (1) Compliance with legislation (such as NEMA) is not a tacit or implied term of an agreement unless the parties were aware of the legislation and contemplated compliance when concluding the agreement. (2) Breach of fiduciary duty requires disloyalty or infidelity, not mere incompetence; a director who loyally pursues the company's interests (even if breaching other laws) does not breach fiduciary duties to the company. (3) Claims under section 218 of the Companies Act 71 of 2008 must be specifically pleaded, identifying which contraventions of the Act are alleged and the losses flowing therefrom, with sufficient particularity to enable the defendant to plead to the allegations and raise available defences under section 77. (4) When directors collectively make decisions for a company, even unlawful decisions, responsibility cannot subsequently be attributed solely to one director in the absence of evidence that director acted contrary to the board's decision or for his own benefit. (5) Contractual interpretation follows the principles in Endumeni - courts interpret agreements based on what the parties agreed, not what would be reasonable, and obvious errors in describing property can be corrected through sensible interpretation of the agreement as a whole.

The court made several non-binding observations: (1) The court noted that in 2006 when the parties concluded the profit agreement, section 24G of NEMA (relating to rectification and condonation for late compliance) was applicable, having been introduced by amendment in 2004, and that Unica's strategy of non-compliance with a view to later rectification under section 24G was therefore available and was in fact utilized by Unica. (2) The court observed that the reference by the Supreme Court of Appeal in an earlier 2016 judgment (Unica Iron and Steel v Mirchandani 2016 (2) SA 307 (SCA)) to the 15 April 2010 meeting and the statement that the 5% wastage issue was not resolved was obiter dicta in that earlier judgment, as the real issue in that case was whether a document constituted a valid agreement, and therefore did not constitute res judicata in the present case. (3) The court commented that if Mr Ul Haq did not agree to the 5% wastage cap, it was irrelevant because the other two co-directors (who were in the majority) agreed, making it binding on the company. (4) The court observed there could be a myriad of reasons why parties agree to particular rental amounts in successive lease periods, and it is not for courts to second-guess such commercial decisions. (5) The court noted that Unica's argument about the lease agreements being a sham based on different rental amounts in different years was "nothing but disingenuous" and untenable.

This case is significant for several reasons: (1) It clarifies the requirements for establishing breach of fiduciary duty in the company law context, emphasizing that breach requires disloyalty or infidelity, not mere incompetence, and that a director who pursues the company's interests (even if incompetently) does not breach fiduciary duties. (2) It establishes that claims based on section 218 of the Companies Act 71 of 2008 must be properly pleaded with sufficient particularity to enable the defendant to know the case to be met, including specification of which contraventions are alleged and the losses flowing therefrom. (3) It illustrates that when directors collectively make decisions (even unlawful ones), responsibility cannot be unilaterally shifted to one director after the fact, particularly where the decision was made for the company's benefit. (4) It demonstrates the application of the Endumeni principle of contractual interpretation to determine the true meaning of ambiguous or erroneous terms in lease agreements. (5) It addresses the interplay between company law duties and environmental law compliance, holding that environmental breaches deliberately decided upon by a board of directors cannot be attributed solely to one director as a breach of fiduciary duty. (6) It emphasizes the importance of pleadings in commercial litigation, particularly when relying on statutory remedies under the Companies Act.