Smyth v Mew

Richard James Smyth and Bernard Darren Mew were the only two members of Coco Haven 1325 CC, which traded as The Corner House Pub in Randburg, Johannesburg. In September 2007, Mew paid Smyth R200,000 for a 50% member's interest. Under their association agreement, Smyth was the managing member earning R25,000 per month, while Mew was a 'sleeping partner' entitled to R5,000 per month 'profits permitting'. The relationship deteriorated when Smyth refused to provide accounting records to Mew, made unauthorized capital expenditures including purchasing a vehicle for himself, conducted business through a bank account in his daughter's name rather than in the close corporation's name, failed to register for VAT and other tax obligations, did not pay municipal charges as required under the lease agreement, and retained large amounts of cash without proper accounting. The relationship broke down irretrievably, leading to litigation.

• Whether a winding-up order should be granted in terms of section 68(d) of the Close Corporations Act 69 of 1984 on the basis that it is just and equitable
• Whether alternatively an order should be granted in terms of section 36 of the Close Corporations Act for the cessation of Mew's membership and acquisition of his interest by Smyth
• What evidence is required to satisfy the court's discretion under section 36(2) of the Close Corporations Act regarding the disposition of a member's interest
• Whether the parties' association agreement bound the court to accept a particular valuation method for determining a member's interest

The appeal was dismissed with costs. The winding-up order granted by the South Gauteng High Court was upheld, and Smyth's counter-application for an order terminating Mew's membership and requiring Mew to sell his interest to Smyth remained dismissed.

The binding legal principle is that an applicant seeking an order under section 36 of the Close Corporations Act for the cessation of another member's membership and acquisition of that member's interest must adduce sufficient evidence to enable the court to exercise its discretion under section 36(2) regarding the disposition of the member's interest and the terms and conditions thereof. The court retains discretion both as to whether to grant the cessation order and as to the financial adjustments to be made. A valuation that is based exclusively on information from one party without consulting the affected member, and which the court finds unreliable, is insufficient to discharge this evidential burden. Where such evidence is not adduced, a winding-up order under section 68(d) may be just and equitable even if continuing the business might otherwise be preferable.

The court noted, without deciding definitively, that Smyth appeared to have established conduct falling within section 36(1)(b), (c) and (d) - namely conduct prejudicial to the business, conduct making it impracticable to carry on business together, and circumstances rendering it just and equitable for Mew to cease being a member. The court also observed that Smyth had engaged in serious financial mismanagement, including incurring unauthorized personal expenses paid by the close corporation, making unauthorized payments, conducting business through an account in his daughter's name, failing to register for tax obligations, and not maintaining proper cash management systems. The court accepted that the business employed 42 people who would lose employment if liquidated, and that Smyth had built up the business, but found these considerations insufficient to overcome the lack of proper valuation evidence.

This case clarifies the requirements for granting relief under section 36 of the Close Corporations Act 69 of 1984 as an alternative to winding up. It establishes that: (1) the applicant seeking to acquire a departing member's interest bears the onus of placing sufficient evidence before the court to enable it to exercise its discretion under section 36(2); (2) a valuation conducted without input from the affected member and based solely on information from one party is insufficient; (3) association agreements do not necessarily bind the court's discretion under section 36; and (4) where insufficient evidence is presented to support a section 36 order, a winding-up order under section 68(d) may be the appropriate remedy despite the parties' preference for continuation of the business. The case serves as an important reminder that courts will not allow section 36 to be used where proper financial disclosure and reliable valuations are not provided.