The Deadlock Principle as a Ground for the Just and Equitable Winding Up of a Solvent Company : Thunder Cats Investments 92 ( Pty ) Ltd v Nkonjane Economic Prospecting Investment ( Pty ) Ltd 2014 5 SA 1 ( SCA )

The question addressed by the Supreme Court of Appeal in Thunder Cats Investment 92 (Pty) Ltd v Nkonjane Economic Prospecting & Investments (Pty) Ltd 2014 5 SA 1 (SCA) (hereafter the "Thunder Cats") provides much-needed guidance on the deadlock principle as well as the breadth and scope of the "just and equitable ground for winding up in terms of s 81(1)(d)(iii) of the Companies Act 71 of 2008. The facts, the issues and the contextual authority of Thunder Cats also bring to fore the lacuna in the just and equitable winding up provisions of the current Companies Act which lacuna has so far received no judicial or academic consideration. This Note contends the fact that the just and equitable winding up provisions do not countenance any deviation from the statutory prescriptions once the factual grounds for just and equitable winding up have been established is not in consonance with the spirit, purport and objects of Companies Act, and, in particular those of Chapter Six of the Act which have introduced the innovative business rescue scheme into South African corporate law landscape. The facts, the issues and the contextual authority of Thunder Cats will be reviewed at length in the ensuing discussion.


Introduction
Until fairly recently, the winding up provisions in sections 79 to 81 of the Companies Act 71 of 2008 1 in respect of solvent companies had attracted relatively little attention from the courts. However, with the burgeoning business rescue jurisprudence in the South African corporate law landscape, 2 the provisions pertaining to winding up on the just and equitable ground are increasingly being tested before the courts. 3 An order for the winding up of a solvent company is a drastic and draconian remedy. 4 It has been aptly described as a "bludgeon". 5 For the purposes of the thesis advanced in this paper, it is especially significant that the judicial discretion Section 81 of the 2008 Act provides that a court may order the winding up of a solvent company where the company has resolved by a special resolution that it be wound up by the court (s (a)(i)); or has applied to have its voluntary winding-up continued by the court (s (a)(ii)). The court may further order the winding up of a solvent company where the practitioner appointed during business rescue proceedings applies for liquidation in terms of s 141(2)(a) on the ground that there is no reasonable prospect of the company being rescued (s 81(1)(b)). Ss 82 and 83 deal with the deregistration of companies. For serious scholarly engagement: Matlala Deregistration and Dissolution of Companies. to grant equitable relief is not unbounded. It must be exercised judicially, on a principled basis, and in recognition of the courts' disinclination to interfere lightly in the internal affairs of a company. Consequently, the applicant bears a formidable onus of establishing that a winding up order is warranted on the ground that such an order would be just and equitable.
The question addressed by the Supreme Court of Appeal in Thunder Cats Investments 92 (Pty) Ltd v Nkonjane Economic Prospecting & Investments (Pty) Ltd 6 provides much-needed guidance on the deadlock principle as well as the breadth and scope of the "just and equitable" ground for winding up. The factual matrix in Thunder Cats may be stated briefly. 7 The appellants sought to appeal a winding up order granted in terms of section 81(1)(d) (iii) due to shareholders' impasse in Thunder Cats, the first respondent company whose main asset was an 11% shareholding in Ntsimbintle Mining (Pty) Ltd worth R132 million. The parties challenging the winding up order were Thunder Cats and Turquoise Moon Trading 8 (Pty) Ltd. In support of the winding up order were the second and third respondents, who were the successful applicants in the court below, namely Bosasa Operations (Pty) Ltd and Bosasa Youth Development Centres (Pty) Ltd, each holding 25% of the issued shares in Nkonjane. The warring parties were equipollent at management and shareholder level. In other words, the appellants' nominees and the respondents' nominees each had 50% of the vote at both board and management level. The shareholders appointed directors who vote in blocks in proportion to their shareholding. The rights of the shareholders to dispose of their shares were limited so that a shareholder could not sell its shares without the approval of other shareholders. The facts, the issues and the contextual authority of Thunder Cats will be reviewed at length in the ensuing discussion.

The statutory framework
The pertinent statutory provisions of section 81(1)(d)(i)-(iii) provide that a court may order a solvent company to be wound up if the company, one or more directors or one or more shareholders have applied to the court for an order to wind up the company on the grounds that- (bb) the company's business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock; (ii) The shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms expired; or (iii) it is otherwise just and equitable for the company to be wound up … . 8 The "just and equitable" phrase is found in a number of related pieces of legislation 9 as well as in the remedial provisions of the 1996 Constitution. 10 If not quite ubiquitous, then the phrase is at least exceedingly welltravelled. 11 The words "just and equitable" are intended to be elastic in their application to allow the courts to intervene to relieve against an injustice or inequity. 12 A court retains a broad discretion to make a winding-up order under section 81(1)(c) and (d) or any other order it considers appropriate. In its application, the just and equitable ground does not admit of a strict categorical approach. As Ponnan JA observed in Apco Africa v Apco Worldwide Inc, 13 "there is no necessary limit to the words 'just and 8 The precursor to s 81(1)(d)(i)-(iii) of the 2008 Act, s 344(h) of the Companies Act 61 of 1973, provided that a company may be wound up by the court when it is "just and equitable" to do so. 9 Section 4(7) of the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998 provides that the court will grant an eviction order only if it is of the opinion that it is "just and equitable to do so" after considering all the relevant circumstances, including the rights and needs of children, the elderly, disabled Section 8(1) of the Human Rights Act, 1998 (UK) provides that where the court finds that an act of a public authority is unlawful, it "may grant such relief or remedy, or make such order, within its powers as it considers just and appropriate". In the same breadth, see s 25 of the New Zealand Bill of Rights Act, 1990; s 5 of the Hong Kong Human Rights Act, 1991 both of which share similar wording to s 24(1) of the Canadian Charter of Rights and Freedoms, 1982. These provisions use the terms "appropriate and just" or "just and appropriate" to qualify the wide discretionary powers the courts may exercise in considering the remedies to vindicate these statutorily and constitutionally guaranteed rights. See further Okpaluba 2006 SAPR/PL.  equitable"'. A court must be careful not to construe the authorities as setting out a series of restrictive principles which would confine the phrase "just and equitable" to rigid categories. 14 Each case depends to a large extent on its own facts. The judicial inquiry must extend beyond an examination of the legal rights of the shareholder to include a broader spectrum of equitable rights. 15 The decisive question therefore is: When is it "just and equitable" for the court to order that a company be wound up on the "just and equitable" ground? The answer to this question emerges from certain principles distilled from the cases which have considered the just and equitable ground since Ebrahimi v Westbourne Galleries Ltd. 16 The ground is usually applied in four situations: (1) where there has been a disappearance of substratum; (2) where there exists justifiable lack of confidence among members; (3) where, in practical terms, the relationship resembles that of a partnership and lacks the protection of a more formal corporate structure; and (4) where the parties are deadlocked. The partnership analogy and deadlock are commonly relied upon to justify judicial intervention. This is because the deadlock and partnership analogy are broad in scope and, at the same time, they are the easiest categories to satisfy in terms of proof. Thunder Cats is emblematic of the deadlock principle envisaged several decades ago in Re Yenidje Tobacco Co Ltd 17 for scenarios where in substance a partnership exists in the guise of company. The analogy to this could be found in the familiar questions which English and other Commonwealth courts have grappled with for decades. Ebrahimi v Westbourne Galleries Ltd 1972 2 All ER 492 (HL). 17 In Re Yenidje Tobacco Co 1916 2 Ch 426 it was submitted that the deadlock principle is "founded on the analogy of partnership and is strictly confined to those small domestic companies in which, because of some arrangement, express, tacit or implied, there exists between the members in regard to the company's affairs a particular personal relationship of confidence and trust similar to that existing between partners in regard to the partnership business".

Deadlock
In Palmieri v AC Paving Co Ltd 18 Levine J (as she then was) provided a succinct statement of the types of situations in which it will be just and equitable to order a winding up on the grounds of deadlock: 19 Some of the circumstances ... that will lead to a finding that it is just and equitable to wind up the company because of deadlock are: there are no other effective and appropriate remedies; there is an equal split or nearly equal split of shares and control; there is a serious and persistent disagreement as to some important questions respecting the management or functioning of the corporation; there is a resulting deadlock; and the deadlock paralyzes and seriously interferes with the normal operations of the corporation.
The shareholder feud and impasse in Thunder Cats is not too dissimilar to the corporate stalemate in Apco Africa and Kinzie v Dell Holdings. 20 In Thunder Cats shareholders were hopelessly at loggerheads. The shareholder relationship was strained from the moment the respondents gave notice of their intention to extricate themselves from Nkonjane. They could not do so because the provision in the shareholder agreement dealing with the disposal of shares required that all other shareholders consent thereto in writing. The appellants were unwilling to consent to the respondents selling their shares or to meet to discuss a reasonable basis for their leaving the company. The appellants considered disinvestment before Ntsimbintle began mining and disposing of its minerals as likely to diminish the full value of their long-term investment. The strain on the parties' relationship intensified as time went on.
The obstructive conduct of both sides did little to help the situation. Mediation efforts floundered due to the confrontational attitude of the warring shareholders. The internal wrangling, mutual disillusionment and distrust, and the consequent breakdown of the relationship between the shareholders paralysed the company. The shareholder agreement could not provide a resolution to the stalemate as there was no deadlock breaking method such as the Texas Auction clause. 21  A Texas Auction is conducted as follows: The unanimous consent of directors appointed by shareholders or where appropriate, the unanimous consent of shareholders in general meeting of the Company, shall be required for a resolution to be of any force or effect if the resolution provides for: the company to change the nature of or discontinue its business; the company to dispose of or otherwise deal in or with the whole or any part of its assets or undertaking except in the ordinary course of business. board meetings as a ground for winding up the company. If there was a reasonable hope of tiding over the period of deep conflict and of Nkonjane emerging from its malaise to carry on at a profit, there may well have been insufficient reason for a court to wind up the company on the just and equitable provision. However, the evidence showed a justifiable breakdown of mutual trust and confidence between the shareholders regarding the conduct and management of the company's affairs. In particular, the state of animosity precluded all reasonable hope of cooperation in the attainment of the company's financial goals.
The facts and issues for determination by the Supreme Court of Appeal in Apco Africa v Apco Worldwide Incorporated 22 appropriately capture the problem of deadlock. The somewhat simple question confronting Ponnan JA was whether the first appellant, Apco Africa (Pty) Ltd ("the Company"), ought to be wound up on the ground that this course was just and equitable within the meaning of section 344(h) of the old Companies Act 61 of 1973, or more accurately, whether such an order was properly granted by the court below. Briefly, the company was set up as a joint venture partnership between the second appellant, Arcay Communications Holdings (Pty) Ltd ("Arcay") and the respondent, Apco Worldwide Inc. The appellant and respondent held interest in the company in the same proportion. Apco was to refer clients' work required to be performed on the African continent to the company. The residual profit generated by the company was to be shared on an equal footing while the directors seconded by Arcay were to manage the affairs of the company.
The parties disagreed from the outset on important corporate decisions and Arcay's response to matters relating to performance and accountability. There were complaints from disgruntled clients concerning the services rendered by the company. Another bone of contention was the fact that Arcay had been appropriating for itself 90% of the revenue generated by the company. A director seconded by Apco to help salvage matters was met with hostility by the local directors of the company. As result of animosity and altercation with the company's local directors, she had to operate from another office until the dispute between the shareholders could be resolved. The flurry of court applications involving shareholders underscored the failure of the business relationship. Several attempts by the respondent to convene a shareholders' meeting in order to discuss its exit proved futile. As a result, the company lost its ability to function and the board became unable to take decisions. It is submitted that the state of affairs prevailing in 22 Apco Africa v Apco Worldwide Inc 2008 5 SA 615 (SCA). the company would compel any court to exercise its discretion to wind up the company on the just and equitable basis.
The judgment of the British Columbia Supreme Court in the Canadian case of Dell Holdings 23 provides another illustration of a corporate deadlock justifying liquidation on equitable grounds in terms of section 324 of the Business Corporations Act of British Columbia. 24 As in Thunder Cats and Apco Africa, the two warring shareholder groups were, in fact, agreed that there was a deadlock in the management of the affairs of the company and that there was no suitable mechanism for resolving it. Dell Holdings owned and operated a shopping centre. Its income was derived entirely from the rents collected under the various lease agreements in place with retailers in the mall. An intractable dispute arose in connection with efforts which were being made by the shareholders to sell the shopping centre for redevelopment purposes. While the applicants in Dell Holdings were not opposed to a sale of the shopping centre to a third party, they disagreed with the insistence of the respondents that any new leases contain a demolition clause. 25 The respondents were of the view that in the absence of a demolition clause, developers would be disinclined to purchase the shopping centre due to the substantial pay-outs that would otherwise be required to terminate a tenant's lease. As a consequence of this disagreement, the parties were unable to present a common front to prospective purchasers. The difference of opinion led to conflict between the opposing shareholder groups during negotiations with a grocery chain seeking to lease a sizable space in the mall. The disagreement was found by Bruce J to be "paralyzing the proper management of Dell's business affairs". 26 Accordingly, relief was granted in the form of a shot-gun sale. 27

23
Kinzie v Dell Holdings 2010 BCSC 1360. 24 Section 324 of the Business Corporations Act, 2002 provides as follows: "324(1) On an application made in respect of the company by the company, a shareholder of the company, a beneficial owner of a share of the company, a director of the company or any other person, including a creditor of the company, whom the court considers to be an appropriate person to make the application, the court may order that the company be liquidated and dissolved if: (a) an event occurs on the occurrence of which the memorandum or the articles of the company provide that the company is to be liquidated and dissolved, or (b) the court otherwise considers it just and equitable to do so.
(3) If the court considers that an applicant for an order referred to in subsection (1) (b) is a person who is entitled to relief either by liquidating and dissolving the company or under section 227, the court may do one of the following: (a) make an order that the company be liquidated and dissolved; (b) make any order under section 227 ( As noted above, for a winding up order to be justified on the grounds of deadlock, there must be a serious and persistent disagreement on some important questions respecting the management or functioning of the company and a deadlock which has the effect of paralysing or seriously interfering with its normal operations. 28 This brings to focus the partnership analogy, that is, circumstances in which it may be appropriate to apply the kind of equitable considerations that govern the dissolution of partnerships to applications to wind up the business of a company.

The partnership analogy
Where the relationship between the parties resembles a partnership between more than arm's length shareholders such that it can be said that the entity is, in substance, a partnership in the guise of a private company, courts have been prepared in some circumstances to liquidate a corporation on the same grounds that would justify the winding up of a partnership. 29 In determining to apply the partnership analogy in the famous English case of Ebrahimi, 30 Lord Wilberforce made it clear in his judgment that it was a fact of "cardinal importance" to the determination of that case that, prior to its incorporation, the business had been carried on by the shareholders as a partnership, with each partner equally sharing the management and profits of the firm. The equitable intervention of the court on the "partnership analogy" ground requires the satisfaction of two conditions: firstly, the existence of an undertaking that is in substance a partnership in the guise of a private company, and secondly, a breakdown of the mutual trust and confidence upon which the original undertaking was founded. 31 Two Canadian decisions further illustrate this principle. Kurt v Pryde 32 concerned former spouses and equal shareholders in a trucking company. Kurt was in charge of administrative support while Pryde led the service operations of the company. Importantly, the parties agreed that they could not, following their divorce, continue to work closely together in the company. The applicant, Kurt, wished to realise on her interest in the to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order: (a) directing or prohibiting any act, … (h) directing any shareholder to purchase some or all of the shares of any other shareholder, … (o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security." Emphasis added. business, proceed on her separate way and pursue a career in real estate sales. She brought an application to wind up the affairs of the company. Although both parties recognized that a winding up order was not in their respective best interests, the judgment reflects an inability on their part to compromise in their respective positions. The Ontario Supreme Court declined to issue a winding up order but instead imposed a framework for the voluntary purchase by Pryde of Kurt's interest in the company.
In Paulson v Dogwood Holdings Ltd, 33 a case which has some features in common with the case at bar, the court found no evidence of a breakdown in trust and confidence between the shareholders to warrant winding up on deadlock grounds. The shares of Dogwood Holdings were held equally by Paulson and Dorothy Dawson. Paulson's application for a winding up order was motivated by a desire to liquidate his investment in the company and satisfy his creditors. As in Kurt v Pryde, 34 there was no question that Dogwood Holdings, which had been incorporated 27 years earlier, was a profitable endeavour. The Articles of the company provided that either shareholder had the right to sell his or her shares to a third party, subject to the other shareholder's right of first refusal. Paulson had made unsuccessful efforts to dispose of his shares to third parties. He offered Dorothy a shotgun buyout whereby he would sell his shares to her at a fixed price or buy hers at that price if she declined his offer. She refused to do either. Paulson also sought Dorothy's concurrence in the sale of the company's assets to an interested third party purchaser. But she would not agree to the sale. Paulson's application for a winding up order rested on a contention that the affairs of the company were in deadlock or, alternatively, that it was justifiable on the partnership analogy ground.
It is in this regard that the judgement of the court of first instance in Thunder Cats is instructive for applying the partnership analogy to the shareholder relationship that had been clearly marred by difficulty and disagreement. 35 According to the High court, the application of the just and equitable ground does not require a finding that the company was in fact a partnership or "quasi-partnership", but rather requires a finding that it has some of the attributes that also describe a partnership. In importing the partnership analogy to Nkonjane, Vermeulen J took into consideration the fact that the company comprised of only four members, each having the right to appoint a director. Each of the shareholders had the right to participate in the 33 management of the company. Furthermore, there was no body of shareholders separate from the board. In the view of Vermeulen J, no deep analysis was required but rather the bare facts spoke for themselves. Not surprisingly, the court concluded that the disagreement between the shareholders affected the operation of the company so as to impair the attainment of its economic ends. In those circumstances it seemed just and equitable to dissolve the company pursuant to the relevant legislative provision. 36

Clean hands
There can be no dispute that the contribution of the contending parties to the breakdown of the relationship is a weighty factor. Thus the question arises: to what extent is the degree of the moral turpitude attributable to the applicant for winding up material to the enquiry whether it is just and equitable to liquidate the company? This leads squarely to the argument pressed by the appellants in Thunder Cats in their challenge against the granting of the winding up order. It was contended that as the respondents were the causa causans of the management paralysis, they could not insist upon the company being wound up.
It is a cardinal principle that in the interpretation of the "just and equitable" ground, general rules regarding equitable remedies apply such that a person seeking relief must come to court with "clean hands". 37 It is a principle that Lord Mildew expressed equally well, if less decorously: "A dirty dog will get no dinner from the courts". 38 244-45 (1933) articulated unclean hands as follows: "Whenever a party who, as actor, seeks to set the judicial machinery in motion and obtain some remedy, has violated conscience, or good faith, or other equitable principle, in his prior conduct, then the door of the court will be shut against him in mimine; the court will refuse to interfere on his behalf, to acknowledge his right, or to award him any remedy". Similarly, in determining whether it is just and equitable to liquidate a company, the court will take into account the fact that the applicant's hands are not completely clean, and this is so when the reason for the breakdown of the parties' relationship is the result of his or her own misconduct. It follows that a party who is responsible for the collapse of the relationship is precluded from seeking the liquidation of a company. 41 Trite and obviously necessary as this equity principle may be, it must not be thought of as being of universal application. If the rigid application of the clean hands principle would work manifest unfairness on one of the parties, a departure would be justified on the grounds that "public policy should properly take into account the doing of simple justice between man and man". 42 Where all the parties lack clean hands, the policy behind the clean hands doctrine is not applicable. The Australian case of Ruut v Head, 43 where the warring partners were at fault, affirms the principled view that the lack of cleans hands is not decisive of the question whether it was just and equitable to grant a winding up order, but Santow J added that "it must be an important factor in the exercise of the court's discretion along with other factors, such as whether the partnership is truly deadlocked". 44 It should be remembered that at stake here is the best interests of the company. Where a company is effectively deadlocked and paralysed, the granting of an order for dissolution coupled with the appointment of a liquidator may be the only viable option for bringing an end to the paralysis and securing the company's best interests. 45 In the case at bar, the Supreme Court of Appeal could not find fault with the reasoning of Vermuelen AJ that both parties were culpable for the inevitable breakdown of the relationship. In other words, the court a quo had thought that "an equal apportionment of blameworthiness might be somewhat charitable to the appellants but not an outright injustice to the respondents". 46  shareholders after the launching of the liquidation application underscored the point that both parties were to blame for the irrevocable breakdown of their relationship. In a sense, the most appropriate qualifier to the paralysis that haunted the company was winding up. Malan JA on behalf of a unanimous SCA, held: 47 The shareholder agreement and the equal holding of shares and voting power on the board require the shareholders to co-operate. Without such cooperation the company cannot function. It was not possible to meet and approve the financial statements for the year ending February 2010. In these circumstances their relationship has broken down irretrievably and the court below correctly found that it was just and equitable that the company be wound up.

Conclusion
The judgment of the Supreme Court of Appeal in Thundercats is welcomed for three obvious reasons. First, it has provided a much-needed clarification on the breadth and scope of the "just and equitable ground" in terms of