Consumer Information

Author : Maryna Botha – STBB
9 December 2016

FFC IN NAME OF COMPANY, NOT CC:  NO COMMISSION
BRODSKY TRADING 224 CC V CRONIMET CHROME MINING SA (PTY_ AND OTHERS (39/2016) [2016] ZASCA 175 (25 NOVEMBER 2016)

An estate agent’s Fidelity Fund Certificate (FFC) is a prerequisite for the agent to operate and earn commission. The law requires further that where the agent is a company or close corporation (CC), a FFC is required for both the company or CC and the directors or members. This matter dealt with a commission claim by an agency that converted from a company to a close corporation and, at the time the sale transaction was concluded, a FFC existed for the company and director although the agency was by then a close corporation. Could the commission claim succeed on the basis that there was at least ‘substantial compliance’ with the FFC requirement?

SUMMARY OF JUDGMENT

FACTS
Brodsky Trading 224 CC (BT) alleged that it had received a mandate from Cronimet Chrome Mining SA (Pty), Cronimet Chrome SA (Pty) Ltd and Cronimet Chrome Properties (Pty) Ltd (together referred to as ‘Cronimet’) to find a purchaser for a property on which the sellers conducted a mining operation. The sale included the immovable property, mining licences and shares that two of the selling companies held in the third. BT alleged that it had fulfilled its mandate when an agreement was concluded between Cronimet and the purchaser and it therefore claimed commission on the transaction. A dispute arose, the main issues being:

1. Cronimet’s argument that as BT was not in possession of a valid Fidelity Fund Certificate (FFC) as required in terms of the Estate Agency Affairs Act 112 of 1976 (the Act) when the mandate was concluded, it was prohibited from claiming commission.

In this regard the facts showed that Brodsky Trading 224 (Pty) Ltd had, in 2005, converted to a close corporation in terms of the Close Corporations Act and was thereafter known as Brodsky Trading 224 CC. In May 2007 a FFC was issued to Brodsky Trading 224 (Pty) Ltd, the non-existent company, but not to BT, the close corporation. A certificate was also issued to one Maree in his former capacity as a director of Brodsky Trading 224 (Pty) Ltd and, similarly, not in his capacity as a member of BT, the close corporation. BT never advised the Estate Agent’s Affairs Board of the conversion. It transpired further that at the time the mandate was (allegedly) granted (March 2007), there was no FFC in place for either the company or the close corporation. The FFCs, issued to the non-existent company and Maree as director in May 2007, were in place at the time the agreement between Cronimet and the purchaser was concluded and at which time, so BT argued, it earned its commission.

2. BT argued that it was in substantial compliance with the requirements of the Estate Agency Affairs Act. It also argued that even if it was found that it did not have a valid FFC, it was entitled at least to claim commission in respect of the sale of the shares (thus excluding the sale of the immovable property that formed part of the deal).

This raised the question whether the transaction as a whole constituted a sale of an enterprise as provided for in the definition of ‘estate agent’ in the Act. (The definition reads as follows: an estate agent “(a) means any person who for the acquisition of gain … holds himself out as a person who … (i) sells or purchases or publicly exhibits for sale immovable property or any business undertaking…”.) If the sale, made up of all three components (the shares, permits and immovable property), was the sale of a ‘business undertaking’, then a valid FFC was required before BT could claim any commission. BT would then not be able to claim as an alternative that it was entitled to claim commission in respect of the sale of the shares, separate from the sale of the immovable property. In this regard the purchaser testified that the shares were purchased in order to acquire the company that owned the mining permits. The permits were the core assets of the whole mining business. The Court a quo held that there was substantial compliance with the provisions of the Act with regards to the FFC and that what was sold was indeed a ‘business undertaking’. Therefore BT was not precluded from recovering commission. However, on the merits of the claim, it found that BT had failed to prove that it was granted a mandate and dismissed the action. BT appealed to the Supreme Court of Appeal against the finding that the sale constituted the sale of a ‘business undertaking’ and Cronimet appealed the finding that there was compliance with the Act.

HELD:

Validity of the FFCs in the circumstances

• In terms of section 34A of the Act, no estate agent is entitled to any remuneration for any work, unless at the time the work was performed a valid certificate had been issued to the estate agent concerned.

• It was clear that neither BT nor its director, Mr Maree, were in possession of a valid certificate when the mandate was (allegedly) granted to and accepted by it on 15 March 2007.

• The certificate that was issued in May 2007, at the time the introduction of the potential purchaser to the seller was made (and the commission earned, according to BT), was not issued to the close corporation, but to the non-existent company. No valid certificate was issued to Maree in his capacity as a member of the close corporation; it was issued to him in his capacity as a former director of the non-existent company. Clearly there was non-compliance with the provisions of the Act.

• It is so that the Close Corporations Act provides for the transfer of rights of a company to a close corporation in the event of such a conversion, but since there was no valid certificate in place at the time of the conversion, no rights or entitlements in respect thereof could go over to the close corporation on conversion.

• The issue was one of substance and not simply nomenclature, or a misdescription in the name of the certificate holder. The objectives of the Act were not fulfilled by the issue of invalid certificates by the board, as they play a central role in ensuring that estate agents comply with its provisions and to safeguard the public.

• The conclusion of the Court a quo that BT had substantially complied with the requirements of the Act was therefore wrong. As a result, BT, the close corporation, was not entitled to receive any remuneration in terms of the Act.

Was the sale of the shares separate from the sale of the immovable property?

• The meaning of a ‘business undertaking’ in the Act was described in previous case law to mean ‘the entire undertaking of a business and not any transaction which a businessman may enter into or any individual transaction in the course of the business.’

• The facts of the present matter showed that the transaction involved the sale of a business undertaking:

1. It was established that Cronimet’s income was earned from the sale of minerals (chrome); it had active bank accounts and auditors, and profits were made from the recovery of chrome; the main company was the owner of a chrome mine business and that was what was put up for sale. 2. The manner in which the business was sold was to sell the shares in the company. As such, the sale price included not only the price of the immovable property, but also included the business and permits. The agreement included a share deal which had the object of acquiring a business. 3. The issue is placed beyond doubt by several provisions in the sale agreement where it stated that the purchasers were interested in completing the proposed transaction ‘in order to jointly establish a new, independent chrome mining and refining beneficiation site’, and clause 2.2 provided that the sale of the shares included ‘the right to receive profits for the current and all future financial years of the company … and the right to receive any profits of the company which have not yet been distributed’.

• The Court a quo was therefore correct to conclude that the sale of the shares fell within the ambit of a ‘business undertaking’ as contemplated in the Act.

CONCLUSION:
In the result, BT was not entitled to any remuneration in terms of s 34A of the Act with regard to the performance of the mandate, allegedly granted to it to sell the shares, immovable property and permits.  

The Judgment can be viewed here: