By Auren Freitas dos Santos
On 18 December 2023, the Gauteng Division of the High Court in Pretoria delivered an important ruling concerning the fairness of amendments to governing documents within home owners associations incorporated as non-profit companies, particularly when such amendments unfairly benefit certain members.
The case involved a home owners association situated on the banks of the Hartbeespoort Dam and centred on a dispute over amendments made to its Memorandum of Incorporation (MOI), which exempted a developer from paying certain levies.
Background of the facts:
At a special general meeting the HOA adopted a special resolution. One of the major consequences of the adoption of the special resolution was the amendment of the MOI, so as to provide that the developer does not have any obligation to pay levies for a period, calculated from the date of the incorporation of the HOA in 2004, until the expiry of 3 years, calculated from the date on which the special resolution was adopted.
Prior to the adoption of the special resolution the developer, as a member of the HOA, was obliged to pay levies to the HOA in terms of the provisions of the MOI as it read at that stage. However, when the applicants discovered that the developer had traditionally not contributed to the payment of levies to the HOA, they instructed their attorney to address a letter to the HOA in terms of Section 165(3) of the Companies Act, demanding that the HOA bring an application inter alia, for the procuring of a declaratory order to declare the developer liable for the payment of levies.
This triggered settlement discussions and according to the applicants the discussions ended on the expectation that a settlement offer, on behalf of the developer, would be forthcoming. However, instead of receiving a settlement offer, the applicants received a letter advising that the developers intend to convene a special general meeting in order to amend the MOI to the effect that the developer be exonerated from paying all levies which had been due historically, as well as future levies until the expiration of a period of 3 years.
The applicants were understandably unhappy with the stance adopted by the developers, especially in light of the fact that in terms of the MOI the developer reserved for itself additional voting power, enjoying a total of 203 votes, opposed to the 54 votes of the rest of the members of the HOA. In other words, the applicants argued that the developer knew that it would be able to approve the special resolution regardless of the views of the other members.
The developers rejected this argument and the proposed amendments were ultimately accepted at the special general meeting, absolving the developer from paying any levies from the date on which the HOA was established until 29 February 2024. The adoption of the special resolution had the effect that the developer was absolved from paying a total sum of levies amounting to approximately R25 million.
It was the applicants’ case, that the aforementioned situation is not only unjust and unfair, but also detrimental for the healthy growth and good governance of the HOA. In this regard the applicants alleged that the developers were abusing their powers as the majority shareholders in the HOA for their own financial benefit, which ultimately resulted in the detriment of the interests of the rest of the members.
As could be anticipated, the adoption of the special resolution created division amongst the members. It is precisely this discontent which prompted the applicants to invoke the statutory provisions contained in Section 163 of the Companies Act No. 71 of 2008.
Section 163 of the Companies Act
Section 163 of the Companies Act provides a legal mechanism for addressing grievances when the affairs of a company are being conducted in a manner that is oppressive, unfairly prejudicial, or unfairly disregards the interests of any shareholder or group of shareholders. This section essentially empowers a court to intervene in situations where actions taken by a company, or its directors, are seen to harm the rights or interests of shareholders in a way that is unjust or inequitable.
Under Section 163, an aggrieved shareholder can apply to the court for relief if they believe that certain acts or omissions by the company, or the conduct of its affairs, are detrimental to their interests. The court, upon finding merit in the application, has wide discretion to order any remedy it sees fit to rectify the situation. This can include, but is not limited to, amending or setting aside decisions made by the company, requiring the company to take specific actions, or even altering the company’s governance structure to prevent future injustices.
The provision is designed to protect minority shareholders from the potential abuse of power by majority shareholders or directors, ensuring that the company’s affairs are conducted in a fair and equitable manner for all stakeholders.
In this case the applicant sought the following relief:
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- That the Special Resolution adopted by the members of the HOA to amend its MOI be declared an act by the Company which has had a result that is oppressive and unfairly prejudicial to, and that unfairly disregards the interests of the applicants in terms of the provisions of Section 163(1)(a) of the Companies Act.
- An order in terms of section 163(2)(d) of the Act to regulate the Company’s affairs by directing the Company to amend its MOI by removing the offending clauses.
- An order in terms of section 163(2)(h) of the Act setting aside any agreement reached between the developer and the HOA which had the effect of absolving the developer from liability to pay levies to the HAO as envisaged in the offending clauses of the MOI.
- In addition the Applicants asked for ancillary relief which will not be dealt with in this article.
The Court’s Decision and Rationale
The Court held that Section 163 of the Companies Act, is aimed at giving the Court a very wide power to give any order it thinks fit, in order to curtail, restrict or limit “acts or omissions by a company that are unfairly prejudicial, unjust or inequitable”. In this context the court held that the phrase “the affairs of the company are being conducted” is wide enough to cover conduct by anyone who is taking part in the conduct of the affairs of the company, whether de facto or de jure, and would include the conduct of the developer in the general meeting and its nominated directors on the board, insofar as that conduct relates to the affairs of the HOA. Resolutions of the board of directors are decisions of the company and the consequences of them are consequences brought about by the conduct of the company.
The court held further that the test for the application of provisions such as Section 163 of the Companies Act is essentially one of fairness. The predecessors of Section 163, such as Section 252 and its earlier statutory equivalent targeted “oppressive conduct”, which meant conduct which was burdensome, harsh and wrongful. In modern times the requirement is less onerous. What is now required is fair play or fair dealing. A member will usually be entitled to relief where a dominant group of shareholders use their greater voting power unfairly, disabling others from enjoying fair participation in the affairs of the company. The court held that this is precisely what transpired in this case.
The Court also recognised that there is a unique relationship, in the context of company law, in a HOA. In assessing whether the affairs of the company have been conducted in an unfair manner, it must be recognised that the relationship between an HOA and its members is sui generes, in other words unique. The members are not typical shareholders who have invested money in the company. The company is an association incorporated not for gain. Its main objective is the promotion of communal or collective interests. The relationship of the members with each other is akin to that of members of a voluntary association established in pursuit of a social or cultural objective.
The court held that section 163 is clear and provides a Court with very wide and almost unrestricted powers to give appropriate relief. In terms of Section 163 an aggrieved minority shareholder can now apply to Court to request an order from a whole list of other orders.
The Court noted however that it remains vigilant that an amendment of a MOI in terms of Section 163(2)(d) of the Companies Act, should only be ordered as a last resort. The court held that the facts presented in this case however supported such relief as there was clearly an abuse of power with the result of it being unfair.
Consequently, the Court granted the applicant the relief sought by the applicants. The developer and the HOA were ordered to pay the applicants’ costs, including the costs consequent upon the employment of Senior Counsel.
This case signals to HOAs and developers alike that fairness, transparency, and adherence to the principles of good governance are paramount. HOAs must ensure that any changes to their governing documents do not unjustly benefit specific individuals or groups at the expense of the broader membership. Additionally, this judgment should encourage members of HOAs to scrutinise proposed amendments more closely and to challenge those they perceive as unfair or prejudicial.
Specialist Community Scheme Attorney (LLB, LLM), Auren Freitas dos Santos, is a Director of The Advisory, a boutique consultancy specialising exclusively in community schemes law. If you encounter similar issues in your HOA, feel free to reach out to him at info@theadvisory.co.za for expert advice and assistance.
