A succinct discussion of selected topical, legal matters
I take great pleasure in submitting the August 2014 edition of Talking Point to you.
This issue contains a variety of topics, including matters every company director must know, issues with suretyships, employment equity, and how judges think.
Mark Twain, the pen name for the American author Samuel Clemens (1835 – 1910), is one of the best sources of quotes in the English language. He did not spare lawyers (or anyone else):
“A clear conscience is the sure sign of a bad memory.”
“Get your facts first, and then you can distort them as much as you please.”
“Always acknowledge a fault. This will throw those in authority off their guard and give you an opportunity to commit more.”
“Lawyers are like other people – fools on the average; but it is easier for an ass to succeed in that trade than any other.”
“Laws control the lesser man… Right conduct controls the greater one.”
“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”
For the first time in this issue, we introduce This month in law, in which we’ll recall important South African and international legal events.
As always, I would greatly appreciate your feedback on Talking Point. Please email me at email@example.com.
In this issue:
The rate is now lower, but it may take some time to become effective (we explain how it works).
The law under the new Companies Act clarified.
Creditors should use guarantees (we explain why).
It became operational on 1 August 2014 (we mention but a few changes).
How to decide between two mutually destructive versions, in and out of court.
The United States Declaration of Independence
The Prescribed Rate of Interest Act
by Jerome Veldsman
If a debt bears interest, and the applicable interest rate is not specifically governed (under a contract, law, or otherwise), the rate prescribed under this Act applies. As of 1 October 1993, the prescribed rate was 15,5% per year. As of 1 August 2014, the rate is 9% per year.
However, the interest calculation under this Act is counter-intuitive. Interest under this Act is simple interest (not compound interest). In respect of each debt that bears interest under this Act, the applicable interest rate is the prescribed rate applicable when the debt arises, regardless of changes, from time to time, to the prescribed rate.
So, the new 9% per year prescribed rate will only apply to relevant debts that arise on or after 1 August 2014.
Directors Refusing to Consent to a Transfer of Shares
by Matt van Eden and Nox Malumbete
In Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd and Others, a judgment of the High Court, Cape Town on 19 June 2014, a shareholder who wished to purchase more shares from another shareholder challenged the directors’ refusal to consent to implementation of the transaction.
A private company must in its Memorandum restrict the transferability of the company’s shares, one way, or another. The Court regarded the standard restriction of the board of a company being entitled to refuse consent for a shareholder to transfer his shares as acceptable.
The Court considered whether in the modern era it is acceptable for the board not to be obliged to give reasons for its decision. There is a constitutional principle of just administrative action that a decision-maker exercising public power under legislation must give reasons. However, the Court held that such principle does not apply to the administration of private companies:
“The administration of corporations would become unwieldy if directors were bound on request to provide reasons for their decisions. … To do so might jeopardise the company’s business relations with third parties. The directors might be reluctant publicly to state reservations they have concerning the character of the proposed transferee. The giving of reasons might require the company to disclose matters of strategy.”
The Court further held that the board’s discretion must be exercised in what the directors in good faith consider to be the best interests of the company, and not for an improper or collateral purpose. The Court found that:
“… the actual purpose for which GHS’ board exercised the power to refuse the proposed transfer fell within one of the intended purposes of the empowering provision, namely to enable the board to prevent a person from acquiring an increased shareholding in the company where the obtaining of the increased shareholding was regarded as being contrary to the best interests of the company.”
If a board refuses consent for a shareholder to transfer his shares for an improper or collateral purpose, he may under the Companies Act apply to Court for relief against such oppressive or unfairly prejudicial conduct. However, in this case, the Court found that the board had cogent reasons for not consenting to the transfer.
Suretyships Can Be Less Than Sure
by Jerome Veldsman
It is settled practice for a creditor to insist on the owner of a company (or other borrower) standing surety for the company’s debt, essentially to “put your money where your mouth is.”
However, many a suretyship is struck down, one way or another. The law of suretyship is ancient and overly complicated. This is underscored by suretyships, in the category of security agreements, holding the number one spot for the volume of reported court decisions.
We advise clients rather to require guarantees as security. A guarantee is a separate and independent undertaking by the guarantor to pay, and can survive a defect in the underlying principal debt.
Tuning Fork (Pty) Ltd T/A Balanced Audio v Greeff, a judgment of the High Court, Cape Town on 28 May 2014, identified a new deficiency in suretyships as security.
The facts were not unusual. The debtor company ran into financial difficulties, and went into business rescue in terms of the Companies Act. In due course, a business rescue plan was adopted and implemented. Several creditors took a “haircut”; and accepted less money than due under the principal debts, in full and final settlement. One creditor then went after the surety, and claimed for the shortfall.
A general principle of the law of suretyship is that, if the principal debt is compromised or discharged, the surety is concomitantly released under the suretyship. The position is different if the “suretyship” provides otherwise, but then the “suretyship” is actually in part a guarantee, despite being called a “suretyship”
Such general principle also applies to a compromise or discharge pursuant to a statute, unless, the statute provides otherwise. The Court held that: “if a business rescue plan provides for the discharge of the principal debt by way of a release of the principal debtor, and the claim against the surety is not preserved by such stipulations in the [business rescue] plan as may be legally permissible, the surety is discharged.” So, the creditor lost out.
We mention that in a 2013 judgment the High Court, Pretoria found to the contrary, and held that a “haircut” under a business rescue does not concomitantly release sureties. This judgment is commercially more sensible. Once again, the difficulty arises from inadequate drafting in the Companies Act. However, the moral of the story is rather to use the ‘modern technology’ version, a guarantee.
The Employment Equity Amendment Act
by Amien Hoosain
The Amendment Act, 2014 became operational on 1 August 2014. We mention but a few changes.
The Amendment Act introduces the concept of “equal pay for equal work” as a new ground of unfair discrimination. If two employees (of the same employer) perform the same or substantially the same work or work of equal value, they may not have different terms of employment (salary, and the like) on the basis of one of the listed grounds of unfair discrimination (including race, gender, marital status, sexual orientation, religion, belief, political opinion, or language) or on any other arbitrary ground. This amendment brings the Employment Equity Act in line with corresponding section in the Labour Relations Act. As the listed grounds are virtually all encompassing, the inclusion of any other arbitrary ground may be of little consequence.
Assume: Six employees perform the relevant same work. Alice is a black, gay, and married female; and Ben is a white, heterosexual, and unmarried male. Of the six employees, Alice is the only black person; and Ben is by far the most able, productive, and qualified, by a margin of 35%.
Facts 1: Alice is head-hunted by a competitor, and informs the employer that she will stay if she receives a 25% raise.
Will it be justifiable for the employer to pay only Alice the additional 25%? The answer may be in the affirmative. An affirmative action measure consistent with the purpose of the Employment Equity Act is not unfair discrimination. In terms of the Code of Good Practice on the Integration of Employment Equity into Human Resource Policies and Practices, favourable terms and conditions of employment for employees can serve as an affirmative action measure, including to retain individuals from designated groups, but should be used with caution as a justified affirmative action measure.
Facts 2: Ben is head-hunted by a competitor, and informs the employer that he will stay if he receives a 25% raise.
Will it be justifiable for the employer to pay only Ben an additional 25%? The answer may be in the affirmative. In terms of the Employment Equity Regulations, 2014, a difference in remuneration between employees performing work that is of equal value is permitted if the difference is not unfair discrimination, is fair and rational, and is based on listed factors including the individuals’ ability, qualifications, and competence above the minimum acceptable levels required for the performance of the job.
Employers may be in for some tough calls, and a pragmatic approach may serve better than a too legalistic approach.
In addition to the existing requirements for testing and assessment of employees, such tests and assessments must now be certified by the Health Professions Council in order to be valid. This provision could be problematic if the Council does not act promptly.
The Amendment Act triples the maximum penalties imposed by the Employment Equity Act across the board. As an example, a first time offender employer who fails to put an employment equity plan in place, or fails to comply with a recommendation made subsequent to a review of its employment equity plan, will be exposed to a penalty of the greater of R1 500 000 and 2% of annual turnover.
The Prescribed Rate of Interest Act
by Jerome Veldsman
Presiding officers, such as arbitrators, magistrates, and judges, are often called upon to adjudicate in matters where the competing parties have competing versions of the facts. The following is the technique generally employed by courts in resolving factual disputes of this nature; and the technique has merit in life in general.
The leading case is Stellenbosch Farmers’ Winery Group Ltd and Another v Martell ET CIE and Others 2003 (1) SA 11 (SCA). The Stellenbosch Farmers’ theory was applied by the High Court, Johannesburg, in Makate v Vodacom (Pty) Limited (1 July 2014) (the “Please Call Me” dispute) in the evaluation and rejection of the evidence of Mr Alan Knott-Craig.
To come to a conclusion on the disputed issues, an adjudicator must make findings on –
• the credibility of each witnesses;
• the reliability of each witnesses; and
• the probabilities.
The adjudicator’s impression about the credibility of a particular witness will depend on a variety of subsidiary factors (not necessarily in order of importance) such as –
• the witness’s candour and demeanour in the witness-box;
• his bias, latent and blatant;
• internal contradictions in his evidence, meaning he gives more than one version of the same event in evidence;
• external contradictions, such as between his evidence and –
– established facts;
– his own statements or deeds outside of the courtroom; and
– what was stated in court documents on his behalf, or was put to other witnesses on his behalf;
• the probability or improbability of particular aspects of his version; and
• the caliber and cogency of his performance compared to that of other witnesses testifying about the same event.
The adjudicator’s impression about the reliability of a particular witness will depend on some of the subsidiary factors considered as to his credibility, as well as –
• the opportunities he had to experience or observe the event in question; and
• the independence, integrity, and quality of his recall of the event.
As to the probabilities, the adjudicator must conduct an analysis and evaluation of the probability or improbability of each witness’s version on each of the disputed issues.
In the light of his assessment of all of the foregoing, the adjudicator will then, as a final step, determine whether the party burdened with the onus of proof has succeeded in discharging it.
In a particularly hard case, the adjudicator may make credibility findings in favour of one party, and probabilities findings in favour of the other party. The more convincing the credibility finding, the lesser weight is given to the probability finding, and the other way around. However, when all factors are equipoised, the probabilities prevail.
The American War of Independence commenced in 1775. On (or just after) 2 August 1776, the last required signatory of the (then) Continental Congress signed the official version of the United States Declaration of Independence.
The Declaration, drafted primarily by Thomas Jefferson, a lawyer, unilaterally announced that the (then) thirteen American colonies were now independent states, and no longer part of the British Empire. It contained the formal explanation for why the Congress had voted (on 2 July) to declare independence, including the famous:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty, and the pursuit of happiness.”
News of the Declaration reached London on 10 August. However the War raged on until ended in 1783 by the Treaty of Paris, in which Great Britain recognised American independence and established borders for the new nation.
The USA celebrates Independence Day on 4 July. That is the date on which the Congress approved the wording of the Declaration.