LIMITING OF CROSS EXAMINATION

DE SOUSA AND ANOTHER v TECHNOLOGY CORPORATE MANAGEMENT (PTY) LTD AND OTHERS 2017 (5) SA 577 (GJ)

 

Company — Oppressive conduct — What constitutes — ‘Unfair prejudice’ —Test — Objective — Whether conduct fair or unfair depending on context — Effect of conduct being real issue — Requirement of ‘prejudice’ meant that conduct had to have harmed member in commercial, not merely emotional, sense — Companies Act 61 of 1973, s 252(1) and (3).

Company — Oppressive conduct — What constitutes — Minority shareholders in company bringing action for relief from oppressive conduct on part of majority — Majority causing income to be diverted from company — Wrongfully using company funds to pay legal costs incurred by majority shareholders in resisting action — Causing company to enter into simulated retention agreements with employee, where true aim to fund shareholder’s purchase of shares — Annual financial statements undervaluing assets to suppress share value — Conduct amounting to misuse of company funds to financial prejudice of minority — Lack of probity in manner affairs conducted — Conduct unfairly prejudicial to minority — Action granted — Companies Act 61 of 1973, s 252(1) and (3).

Constitutional law — Human rights — Right to a fair trial — Whether violated where judicial officer limiting time for cross-examination of witnesses in civil trial — Right to cross-examine witnesses not absolute — May be limited to prevent unnecessary wasting of time and increase in costs — Whether limitation violating fair trial rights dependent on whether litigant suffering any prejudice — Presently, no prejudice suffered as only time allowed for cross-examination limited, not scope.

Costs — Special order — When to be awarded — Minority shareholders bringing action against majority for relief from oppressive conduct — Defendants prolonging trial through unwarranted interlocutory applications, long and irrelevant cross-examination, and groundless objections — Majority withholding dividends to which plaintiffs were entitled, to deprive them of their means to litigate — Majority wrongfully using company funds to pay defendant shareholders’ legal costs — Special costs order on attorney and client scale appropriate.

Evidence — Witnesses — Calling, examination and refutation — Cross-examination — Right to cross-examine witnesses not absolute — May rightfully be limited by judicial officer to prevent unnecessary wasting of time and increase in costs.

 

Technology Corporate Management (Pty) Ltd (TCM) was an information technology company, comprising the shareholders De Sousa, Diez, Cornelli, Da Silva and the Hassim Family Trust (controlled by Hassim), each of whom was also a director (Hassim on behalf of the Trust). From its inception TCM had been conducted as a domestic company in a manner akin to a partnership, primarily between its founding members, De Sousa and the current CEO Cornelli, who together controlled and managed the company. The present matter — in which the minority shareholders De Sousa and Diez launched an application in terms of s 252 of the Companies Act 61 of 1973 for relief from oppressive conduct — arose from a break-down in the relationship between the shareholders that followed the purchase of shares in TCM by the Hassim Family Trust. When it had become apparent that the Trust (or Hassim) could not afford the original price agreed to, Cornelli attempted to persuade the shareholders to agree to the amendment of the shareholders’ agreement to reflect a lower price; De Sousa and Diez resisted this as being against the interests of the company and shareholders. The plaintiffs alleged that the majority, under Cornelli’s direction, had subsequently excluded them from the management of the company, and Cornelli had undermined and humiliated them by various means. They cited instances of conduct on the part of Cornelli (or those acting under his supervision) — often aimed at indirectly securing funding for the Trust to afford the shares — that were harmful to TCM and its shareholders. The plaintiffs further claimed that, when attempts were made by the plaintiffs to dispose of their shares in TCM, Cornelli did not negotiate in good faith to arrive at a fair price. De Sousa was ultimately dismissed as an employee of TCM, while Diez was sent away to a post in the Namibian office.

The plaintiffs’ principal argument was that Cornelli (acting alone, alternatively supported by the other shareholders) had conducted himself in a manner that brought about a state of affairs that was, in the words of s 252(1), ‘unfairly prejudicial’ and inequitable to them. ‘Just and equitable’ relief in terms of s 252(3), they argued, would be for TCM to purchase their shares. In addition to Cornelli and the other shareholders, against whom the plaintiffs’ complaint was in substance directed, TCM was cited as a nominal defendant.

Relief in terms of s 252(3)

The principal question was whether the plaintiffs had satisfied the jurisdictional requirements for relief in terms of s 252(3). The court undertook a comprehensive survey of the law relevant to a s 252 application, and reiterated the following:

  • The conduct complained of had not only to be prejudicial, but also unfairly so (see [34]). Fairness was an elastic concept, and whether conduct was ‘fair’ or ‘unfair’ would depend on the context (see [36]). The test for unfair prejudice was an objective one (see [35]). The effect of the challenged conduct was the real issue, and depending on the circumstances of the case, the motive for the conduct might also be relevant (see [55]). The requirement of prejudice meant that the conduct had to be shown to have caused the member harm in a commercial and not in a merely emotional sense (see [53]).
  • The law recognised the following kinds of conduct as being unfairly prejudicial: where there was an unfair abuse of power and an impairment in the probity with which the company’s affairs were being conducted (see [39] – [41]); where a minority shareholder who had a right or legitimate expectation to participate in the management of the company was excluded from so doing by the majority without a reasonable offer or arrangement being made to enable the excluded shareholder to dispose of his shares (see [44] – [48]); where the financial interests of a shareholder were adversely affected as a result of unfair conduct on the part of those who controlled the company (see [43]).

Held

The affairs of TCM had been conducted by Cornelli, and the majority shareholders under his instruction, in a manner that was detrimental to the plaintiffs’ financial interests, as follows:

  • The business of TCM’s profitable Supplies Division had been operated as if it were a separate entity from TCM; with all its income and profits being diverted to another company, of which Hassim was a shareholder. This resulted in a loss to TCM of the business and profit derived by the Supplies Division and jeopardised shareholder value.
  • In circumstances in which the dispute was one between the shareholders, TCM unjustly paid for the legal costs incurred by the defendant shareholders in resisting the s 252 action, conferring a distinct financial advantage on the majority at the expense of the minority.
  • TCM undervalued its assets in its annual financial statements for 2008 – 2012 by understating its inventory. For the same period, and indicative of inefficient management, operating expenses rose dramatically, in the form of increases in staff costs, directors’ emoluments, management fees, the payment of bonuses and other operating expenses. The profits available to shareholders were decreased dramatically, which negatively impacted on the level of dividends payable to the plaintiffs, and shareholder value. (See [258], [260], [289] – [293] and [333] – [334].)
  • TCM concluded so-called retention agreements with Hassim. They were in fact simulated agreements whose true aim was to assist Hassim or the Trust to pay for the shares. They unduly favoured Hassim at the expense of TCM and the other shareholders. (See [329].)

The manner in which the Supplies Division was operated, the payment of the legal fees of the shareholders and the retention agreements all constituted a misapplication of TCM’s funds (see [204], [333] – [335]). This demonstrated a lack of probity or fair dealing in the way the affairs of TCM were operated. So too did the way in which the annual financial statements were prepared, in that the probabilities were that the assets were deliberately undervalued in order to suppress share values in the event that TCM was compelled to purchase the plaintiffs’ shares. (See [329], [333] – [335].)

The plaintiffs, who had a legitimate expectation to participate in the management of TCM owing to its quasi-partnership nature, had been denied by the majority the ability to do so, in circumstances in which they had not been afforded an opportunity to dispose of their shares at fair value. Cornelli refused to engage in good faith, and also prevented the plaintiffs’ access to financial information of TCM. The plaintiffs were unduly prejudiced, as they remained passive shareholders in the company which appeared to be mismanaged by the majority with whom they had fallen out. It could not reasonably be expected of the plaintiffs who had lost their employment to keep their assets locked in TCM. (See [128], [149], [154], [163] and [332].)

In the premises, the plaintiffs were entitled to relief in terms of s 252. The affairs of TCM had been, and continued to be, conducted by Cornelli in a manner that was unfairly prejudicial, unjust and/or inequitable to the plaintiffs as members of TCM. There was every reason to believe that the conduct complained of would continue and that the plaintiffs would be prejudiced by such conduct unless relief were given to them in terms of s 252(3). The only practicable order would be for TCM to purchase the plaintiffs’ shares at their value on the date of the order. A referee had to be appointed to determine a fair value. As per the law, no allowance or deduction could be made for the fact that the plaintiffs held a minority shareholding. Further, the valuation had to include the value of the TCM Supplies Division. (See [330], [337], [358], [359] and [361].)

Prolonged length of proceedings

A distinguishing feature of the present action was its prolonged duration, its being marked by an excessively long record, and, on the part of the defendants, lengthy cross-examination of witnesses, constant objections, and numerous unsuccessful interlocutory applications. In the light of the aforementioned the court imposed a timetable on the parties during the course of the trial, and, when it became clear that the defendants would not stick to it, it limited cross-examination by the defendants. Two questions arose: (a) whether the defendants’ fair trial rights had in any way been compromised by the court’s decision to limit cross-examination; and (b) whether, given the manner in which the trial was conducted, the defendants should be subject to a punitive costs order.

Held

As to (a), while the right to cross-examine a witness was a fundamental procedural right, it was not an absolute one, and could be limited where continued cross-examination would waste time and add unnecessarily to costs. Whether the limitation infringed a litigant’s fair trial rights depended on whether they had suffered prejudice as a result, given the circumstances of the case. In the present matter, the court was fully justified in imposing a time limit on the cross-examination, given the unduly protracted nature of the trial, the defendants’ repeated failure to abide by the timetable, and their insistence on cross-examining witnesses on points that were not dispositive of the case. At the same time, no prejudice was suffered by the defendants, given that only the time allowed for questioning was limited. (See [94] – [101] and [112].)

As to (b), the following conduct of the defendants demanded that costs be awarded against them on a punitive scale of attorney and client. They had litigated in an obstructive fashion, taking every opportunity to prolong proceedings through unwarranted interlocutory applications, long and irrelevant cross-examination, and groundless objections. The defendants had purposely withheld dividends owing and due to the plaintiffs, with the intent of depriving the plaintiffs of their means to litigate. They had refused to negotiate in good faith with the plaintiffs with the aim of permitting the plaintiffs to dispose of their shares at a fair value and without resort to litigation. They had made wrongful use of company funds to resist present proceedings where the dispute was in truth one between the shareholders. (See [338] – [353] and [355].)

Action granted as per order above. Costs to be paid by the defendant shareholders on the attorney and client scale.

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