SHELF COMPANY OR COMPANY TO BE FORMED DOES IT MATTER?

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1 SHELF COMPANY OR COMPANY TO BE FORMED DOES IT MATTER? Venalex (Pty) Limited v Vigraha Property CC and Others (5452/2014) [2015] ZAKZDHC 20 (10 March 2015) An intriguing judgment in which, amongst other things, the court investigated whether a seller s expectation of the purchaser is affected by the fact that the agreement intimated that the purchaser is a company to be formed, and a shelf company is then obtained to stand in the shoes of the purchaser. In addition, finding that the three purchasers here acted in their individual capacities, but also stipulated for the substitution of a company in their place if that could be achieved by a fixed date, it was of no consequence here, as a matter of law, whether or not the subsequently nominated purchaser company was formed at the time of conclusion of the contract. The Judgment can be viewed here. FACTS In January 2014, Vigraha Property CC (Vigraha) sold an immovable property to Messrs Betts, Morgan and Glasspool. They were the directors of a substantial construction company and their intention was to purchase a property where their development company s head office would be located, the construction entity leasing the premises from the company acquiring the property. Clause 3 of the original agreement was headed The Purchaser/s. Adjacent to this heading the words Pty/Ltd to be formed: Directors were inserted in writing. Beneath the heading were the full names of Betts, Morgan and Glasspool and their identity numbers, also inserted in writing. Clause 17 of the agreement was headed Capacity of Purchaser and provided that: if the purchaser signed the agreement in the capacity of a director for a company to be formed, then the purchaser shall be personally liable in terms of this Agreement should the Company not be formed within a period of thirty (30) days of the date of signature hereof or if the Company fails to ratify and adopt this Agreement within a period of seven days of date of registration or incorporation ; and 1 // 6 sub-clause 17.2 went on to provide that the purchasers bound themselves as sureties with the Company for the due fulfilment of all the obligations of the

2 Company in terms of this Agreement. After the agreement was signed, the three businessmen consulted their accountant who pointed out that the registration of a new company would take time, and advised that a better course would be to use a shelf company for this purpose. (A shelf company is one that has already been incorporated and available "off the shelf" as a juristic entity which had not yet at any stage entered into any business.) This advice was accepted and Venalex Pty Ltd was the shelf company that was acquired for this purpose. The three businessmen became its directors. The sale agreement provided that the date of occupation would be agreed to with the seller. The three businessmen wanted access to the property in advance of transfer and as Vigraha was amenable to this, an addendum was drafted to record the details of their agreement in this regard. In this addendum Venalex was noted as purchaser. Each party signed their own copy of the addendum. Vigraha, however made certain insertions in its version before signature, something the purchaser was unaware of. At the same time two other documents were also prepared, namely: (i) (ii) a Nomination and Acceptance, executed by Messrs Betts, Glasspool and Morgan, in terms of which they nominated Venalex as the purchaser of the property; and a resolution of Venalex which recorded its acceptance of its nomination and its decision to buy the property and to ratify the sale agreement. Subsequently however, apparently due to seller s remorse, Vigraha sought to escape the agreement and adopted the view that there was no binding agreement with Venalex because the three businessmen, when they signed the sale agreement, did not purport to represent Venalex (which was an existing company at the time), but intended the purchaser to be a company still to be formed (as provided for in section 21 of the Companies Act, 71 of 2008). Vigraha also argued that the signatories (the three businessmen) signed the agreement in their capacities as agents for a principal that was not yet in existence. Venalex thereupon approached the court for an order declaring the agreement valid and binding and argued that: 2 // 6 whilst it was correct that it was intended that a company would be formed, and that it would take on the mantle of purchaser, there was no reason to assume that the intention was to implement the provisions of section 21 of the Companies Act

3 (as Vigraha had done). Rather, on a proper construction of the provisions of the agreement, what was contemplated was a stipulatio alteri (provision for the benefit of a third party) which envisaged the rights and obligations of the purchaser being taken up either by a company already incorporated or by one not yet incorporated. HELD: Valid differentiation between (i) company to be formed and (ii) a shelf company already formed, in the context? The distinction between the two forms is a distinction without a difference, in the present circumstances. In the former case, immediately upon incorporation, the company will be an entity which has not previously participated in any business. Its nominal share capital aside, its balance sheet would be a clean slate. In the case of a shelf company, precisely the same condition would apply. If one ascribed to Vihagra an intention only to allow a clean company to take on the rights and obligations of purchaser under the agreement, then it makes no difference whether the company is newly incorporated or taken "off the shelf". The parties agreement did in any event not stipulate that the purchaser company had to have a clean slate and not have participated in any business in advance of payment of the purchase price. So there was no guarantee that the directors of either type of entity would leave the purchasing company in a perfect condition to undertake to meet the obligations under the sale agreement. The risk was the same in both instances. Clearly, on either party s understanding of the agreement, Vigraha factually got what it bargained for by way of the quality of the substituted purchaser and, had the parties at the time of contracting considered the question as to whether the company had to be incorporated after the agreement or whether a shelf company could be used, the answer would have been that either would do. Wording in the present clause In the agreement between the parties it was not recorded that the three businessmen acted as trustees for a company to be formed or for and on behalf of a company to be formed. The signatures of the three businessmen appear on the last page of the document. They signed above the printed word PURCHASER/S and their signatures were 3 // 6

4 unqualified. No representative capacity was indicated on that page. However, looking at clause 3 of their agreement, the following appears: 1) The printed document was designed to have the names of multiple purchasers inserted in sub-clauses. The names which appeared in those sub-clauses were those of the three businessmen. The words Pty/Ltd to be formed: Directors were inserted adjacent to the heading of clause 3. The introduction of the concept of a company to be formed was cryptic. 2) In terms of clause 17.1 the businessmen bound themselves to be personally liable if a company was not formed within 30 days of the date of signature of the agreement. The deposit of R1,000,000 had to be paid in February 2014, well before the lapse of the 30 day period. 3) As to the balance of the purchase price, if it did not become the subject of an approved mortgage bond by a certain date, it had to be paid to the conveyancers on a stipulated date, again in advance of the 30 day period referred to in clause 17. Clearly the three businessmen acted in their individual capacities, but stipulated for the substitution of a company in their place if that could be achieved by a fixed date. As a matter of law, the question as to whether the company was one which existed or did not exist at the time of conclusion of the contract, was therefore irrelevant. Did the contract itself render it relevant that only a company incorporated after the conclusion of the original agreement could take on the rights and obligations of purchaser under the agreement? The answer to that question turns on the meaning of the words Pty/Ltd to be formed: Directors appearing adjacent to the heading of clause 3 of the agreement. The word formed, used in this context, did not have a precise meaning. As shown before, there was in fact no difference between a company to be formed and a shelf company and, as noted earlier, if the parties applied their minds they would have said that either would do. That would have been business-like and sensible. The word formed, where it appeared adjacent to the heading of clause 3 of the agreement, did not indicate a specific and narrow meaning equivalent to the word incorporated. Vol 4 Part 1 of Lawsa (2ed) states that: 4 // 6 Generally, company means an association of persons formed for a common, usually commercial, purpose. The word came to connote a commercial association with a large, continuously altering membership, thereby reflecting something of the origins and

5 development of company law. But, outside of statutory definition, the word company has no precise legal content, and in particular it does not necessarily connote an entity that has been incorporated by the persons who are associated in the enterprise. Outside of the statutory definition, company is thus a concept that is in some respects wider and in other respects narrower than the scope of this title. It was further instructive too that even within the statutory context of the Companies Act, 1973, the word formed was not consistently regarded as conveying the same thing as the word incorporated. So even our statutory law precisely recognised that the formation of a company was not necessarily to be equated to its incorporation with limited liability under a statute and there seems to be no reason at all to ascribe to ordinary persons of business, making a manuscript insertion on a printed form, an intention to bind themselves to the technical meaning of the word incorporated as it is used in section 13 of the Companies Act, 2008, when they actually used the word formed. There is no reason why the acquisition of a shelf company could not legitimately be employed as a means to achieve the intended incorporated status of a company formed by and amongst the three businessmen who signed the original agreement. That does no offence to the word formed where it appears in clause 3 of the original agreement. Venalex s principal argument therefore succeeded. Validity of the addendum There was no merit in the contention that the addendum was of no force and effect. Clause 3 of the addendum recorded that occupational interest would not be payable for the limited form of occupation to be afforded to Venalex prior to transfer, that the purchaser would nevertheless pay for all utilities consumed on the property from the date of occupation, that the accounts would be furnished by the seller to the purchaser and would be paid on presentation. The handwritten insertion appeared in parenthesis after the printed version of the clause and read as follows: (Rates, electricity, water and general maintenance of the property.) 5 // 6 Electricity and water were part and parcel of utilities consumed on the property and in that respect the written insertion added nothing to the printed text of clause 3. It simply clarified the effect of clause 9 of the schedule to the original agreement, which was to the effect that the monthly rates would be paid by the purchaser if occupation was taken in advance of transfer.

6 The manuscript additions to clause 3 neither added nor subtracted anything to or from the rights and obligations which were already established. Immaterial alterations do not breach the rule that offer and acceptance must be identical. Substance is to be looked at, not form. What is required is consensus ad idem and that was present. Accordingly, also on this ground, the agreement could not be attacked. The court found in favour of Venalex. 3 // 3 6 // 6