[Question] Dispute within CC

[k99]

I own 25% of a CC with two other fmily members owning 75%. I am a silent partner but the accounting officer and rely on accounting records prepared by the other members who manage the business. I recently discovered that the other members had been putting personal expenses through the business (a medium sized franchise restaurant) in the amount of some R 750 000 to R 900 000 per year, and were deducting these for VAT purposes, when they did pay VAT. This also created a large loss and the business was looking insolvent but they kept paying these expenses. As this had resulted in a material misstatement of the financial statements, I redid the financial statemnts for the past five years, transferring their personal expenditure to a loan account. The result is I have a credit loan (lent to the cc) of R 750 000 and they have a debit loan (owing to the cc) of R 3 million. I know they have been trading recklessly and trading under insolvent circumstances and have committed tax evasion (company tax, VAT and personal tax). Is there any way I can take over their membership interests because of the imbalance in contribution (R 750k I have put in as opposed to R 3 million they have taken out). I do know that I can probably approach the High Court because of unfairly prejudicial conduct and unjust enrichment on their part and because of their rckless trading but this is expensive. I am looking for another way to take over the business because with proper management it can make money. any assistance will be appreciated.

[AndyD]

Welcome to the forum K99.

....the other members had been putting personal expenses through the business ... in the amount of some R 750 000 to R 900 000 per year.......

......The result is I have a credit loan (lent to the cc) of R 750 000 and they have a debit loan (owing to the cc) of R 3 million.

Wow, this is the classic family versus business issue. I'm not qualified to give you advice but I do have a question.

Assuming the other two members put in R750 000 as well as yourself then this means they've been defrauding the business for about 2.5 years. How did it go on for so long unnoticed especially as you say it was trading 'under insolvent circumstances'?

[Justloadit]

I have been is a situation where the partners had stolen stock. The way it was resolved is that we created a civil case against them, and they settled out of court, because had it gone to court, it would have then led on to a criminal case of fraud, and possibly jail.

This process did take two years though.
i suggest you find a good advocate, as the amount we are talking here requires supreme court hearings, and normal lawyers hire an advocate to represent you anyway. Be ready to spend some money, but its the only way.
You may require an urgent application to remove them from the business while you take over the business and continue running it till it is settled.

[CLIVE-TRIANGLE]

@k99
Those are very serious allegations and there are various reasons why you should tread carefully.
1)If you have evidence of these allegations, our law actually compels you to make it known.
2)Assuming the tax issues you mention are accurate, then without proactive intervention SARS will almost certainly apply a 200% penalty
3)In cc's there is no such thing as a silent partner. You could well find yourself in the same boat as the other members. Even if there is an association agreement, it cannot affect the rights of 3rd parties to recourse.
4)As regards obtaining a court order to remove remove the other members; if you have evidence of what you allege, an application for a court order in terms of section 36 of the Act can do this. There should be no problem showing urgency.
5)If you look at (1) to (4), it should be obvious that you need to consult an attorney versed in company and cc law as a matter of urgency, else you might well be dragged in with them.

For information and reference, here is S36:
1) On application by any member of a corporation a Court may on any of the following grounds order that any member shall cease to be a member of the corporation:
a) Subject to the provisions of the association agreement (if any), that the member is permanently incapable, because of unsound mind or any other reason, of performing his part in the carrying on of the business of the corporation;
b) that the member has been guilty of such conduct as taking into account the nature of the corporation's business, is likely to have a prejudicial effect on the carrying on of the business;
c) that the member so conducts himself in matters relating to the corporation's business that it is not reasonably practicable for the other member or members to carry on the business of the corporation with him; or
d) that circumstances have arisen which render it just and equitable that such member should cease to be a member of the corporation:
Provided that such application to a Court on any ground mentioned in paragraph (a) or (d) may also be made by a member in respect of whom the order shall apply.
2) A Court granting an order in terms of subsection (1) may make such further orders as it deems fit in regard to--
a) the acquisition of the member's interest concerned by the corporation or by members other than the member concerned; or
b) the amounts (if any) to be paid in respect of the member's interest concerned or the claims against the corporation of that member, the manner and times of such payments and the persons to whom they shall be made; or
c) any other matter regarding the cessation of membership which the Court deems fit.

[Dave A]

k99, you're going to have to ignore the fact that it's family in getting the ball rolling towards resolving this. And I agree with the comments above - hand it over to a lawyer.

It's always a little uglier when there is a family connection in these things, but it might help to remember that these family members were defrauding and predjudicing you, not just the business, SARS etc.

Start with the lawyers and be merciful if you can once the right result (from your point of view) is assured.

[k99]

k99, you're going to have to ignore the fact that it's family in getting the ball rolling towards resolving this. And I agree with the comments above - hand it over to a lawyer.

It's always a little uglier when there is a family connection in these things, but it might help to remember that these family members were defrauding and predjudicing you, not just the business, SARS etc.

Start with the lawyers and be merciful if you can once the right result (from your point of view) is assured.

Thanks. I have already come to terms that there will be no more family after all this. The difficulty is they have lovely kids who will be damaged but I guess they are not my problem. This is where the real difficulty lies though. Thanks again for the response.

[k99]

@k99
Those are very serious allegations and there are various reasons why you should tread carefully.
1)If you have evidence of these allegations, our law actually compels you to make it known.
2)Assuming the tax issues you mention are accurate, then without proactive intervention SARS will almost certainly apply a 200% penalty
3)In cc's there is no such thing as a silent partner. You could well find yourself in the same boat as the other members. Even if there is an association agreement, it cannot affect the rights of 3rd parties to recourse.
4)As regards obtaining a court order to remove remove the other members; if you have evidence of what you allege, an application for a court order in terms of section 36 of the Act can do this. There should be no problem showing urgency.
5)If you look at (1) to (4), it should be obvious that you need to consult an attorney versed in company and cc law as a matter of urgency, else you might well be dragged in with them.

For information and reference, here is S36:
1) On application by any member of a corporation a Court may on any of the following grounds order that any member shall cease to be a member of the corporation:
a) Subject to the provisions of the association agreement (if any), that the member is permanently incapable, because of unsound mind or any other reason, of performing his part in the carrying on of the business of the corporation;
b) that the member has been guilty of such conduct as taking into account the nature of the corporation's business, is likely to have a prejudicial effect on the carrying on of the business;
c) that the member so conducts himself in matters relating to the corporation's business that it is not reasonably practicable for the other member or members to carry on the business of the corporation with him; or
d) that circumstances have arisen which render it just and equitable that such member should cease to be a member of the corporation:
Provided that such application to a Court on any ground mentioned in paragraph (a) or (d) may also be made by a member in respect of whom the order shall apply.
2) A Court granting an order in terms of subsection (1) may make such further orders as it deems fit in regard to--
a) the acquisition of the member's interest concerned by the corporation or by members other than the member concerned; or
b) the amounts (if any) to be paid in respect of the member's interest concerned or the claims against the corporation of that member, the manner and times of such payments and the persons to whom they shall be made; or
c) any other matter regarding the cessation of membership which the Court deems fit.

Thanks for the assistance. I also believe I have a case under Section 49 (Unfairly prejudicial conduct) which states “Any member of a corporation who alleges that any particular act or omission of the corporation or of one or more other members is unfairly prejudicial, unjust or inequitable to him, or to some members including him, or that the affairs of the corporation are being conducted in a manner unfairly prejudicial, unjust or inequitable to him, or to some members including him, may make an application to a Court for an order under this section.”

Of course the big problem with court applications is that you need large sums of cash (I understand R 20000 to R 30000 for an application for an urgent interdict).

As regards my own liability I hope to use the following sections of the CC Act for protections:

42 (4) Fiduciary position of members
Except as regards his duty referred to in subsection (2) (a) (i), any particular conduct of a member shall not constitute a breach of a duty arising from his fiduciary relationship to the corporation, if such conduct was preceded or followed by the written approval of all the members where such members were or are cognisant of all the material facts.
43. (2) Liability of members for negligence
Liability referred to in subsection (1) shall not be incurred if the relevant conduct was preceded or followed by the written approval of all the members where such members were or are cognisant of all the material facts.

The big problem is the SARS issue, but as I have not benefited financially at all from any of the illegal activities, I do not think I can be personally charged with any crime or be required to pay SARS any of the outstanding tax. And if SARs does decide to impose a large penalty or double or triple tax, this would be against the CC. And in this case the CC would have to be liquidated, and the other two members would be required to repay, to the CC, all they have taken out of the CC over the past two years. As I have taken nothing out, and have in fact put in, all that will happen is that I will lose what I have put in, which while regrettable is well worth getting out of this mess.

Once again thanks for taking the time to respond. It is much appreciated.

[k99]

I have been is a situation where the partners had stolen stock. The way it was resolved is that we created a civil case against them, and they settled out of court, because had it gone to court, it would have then led on to a criminal case of fraud, and possibly jail.

This process did take two years though.
i suggest you find a good advocate, as the amount we are talking here requires supreme court hearings, and normal lawyers hire an advocate to represent you anyway. Be ready to spend some money, but its the only way.
You may require an urgent application to remove them from the business while you take over the business and continue running it till it is settled.

Thanks for the response. I agree that in the end it will have to be the High Court, which is expensive. Maybe it is better just to follow this route and get it over with. Thanks again

[k99]

Welcome to the forum K99.



Wow, this is the classic family versus business issue. I'm not qualified to give you advice but I do have a question.

Assuming the other two members put in R750 000 as well as yourself then this means they've been defrauding the business for about 2.5 years. How did it go on for so long unnoticed especially as you say it was trading 'under insolvent circumstances'?

Thanks. The other two members put in R Nil but have taken out R 3 million over and above what would be considered an above market salary of R 20k per month. I did notice the cc was struggling, which they assured me was becasue of the marginal nature of the business. They were the "experts" so I did not question them. To keep the company solvent, The assets were revalued and some costs were transferred to their loan account. It was only on a fuller investigation that I discovered that they had been helping themselves to R 700k to R 800 k per annum, by processing all their personal expenses through the business, and claiming the same for VAT and tax purposes. Once you remove these the business is profitable.

As to why I did not notice. I guess trust (misplaced and misguided in hindsight) and a lack of time to pay any attention. and of course stupidity. thanks again for the response.

[Justloadit]

I think the beeeg problem here is trust, we tend to be extremely open when family is involved. I have just been through one for about a million, and my brother has been through one for about the similar amount. Trusted family too openly.

[k99]

I think the beeeg problem here is trust, we tend to be extremely open when family is involved. I have just been through one for about a million, and my brother has been through one for about the similar amount. Trusted family too openly.

This is so true. Maybe there should be a law to outlaw involving family in business to protect idiots like me against themselves

[Mike C]

Hi K99 - don't think that it is restricted to family (although that ALWAYS makes it more complicated). I know a wise old man who has been in business for many years, and the advice he gave me was that if I was ever to take on a business partner I must do it with as much (if not more) care as getting married, as the association can get very complicated at times. Good luck. I do not envy you having to do what you have to do.