In 2006 the Twincare International (Pty) Ltd (“Twincare 1”) entered into an employment agreement with Deborah Nel (“Nel”), containing confidentiality and restraint of trade clauses. As an employee of Twincare, Nel was involved in the education of staff members of Twincare’s clients regarding the various beauty and skincare products that Twincare produces.
In 2013, Twincare merged with another company, and accordingly transferred its employees including Nel to the newly-merged entity (“Twincare 2”) and Twincare 1 was finally deregistered as an entity, however Nel did not sign the new employment agreement containing the new restraint. Nel continued to work for Twincare 2 and subsequently retired in February 2017.
In September 2017, Nel attended an expo for Professional Beauty, and was seen by employees of Twincare 2, allegedly promoting a beauty product. Consequently, Twincare 2 launched an urgent restraint of trade application in the Labour Court.
In launching the urgent application, Twincare 1 was used as the Applicant. Nel raised a point in limine, arguing that Twincare 1 had no locus standi to institute proceedings for two reasons: the first being that it is a deregistered entity, and as such has no legal status. Secondly, Nel was employed by Twincare 2 in accordance with the merger and transfer of going concern. Accordingly, Twincare 2 would be the appropriate entity to launch the proceedings.
Twincare 1’s response to the aforementioned point in limine was that the use of Twincare 1’s registration number in all the founding papers was a typographical error. Consequently, an Application to Amend/Substitution of Party was launched by Twincare 1, aiming to either amend the company registration number on all the documents, to correctly reflect Twincare 2, or alternatively substituting Twincare 2 for Twincare 1 in the proceedings.
Nel opposed the application to amend/substitute on the basis that it was brought by the same party who lacks locus standi in the main application, therefore Twincare 1 cannot bring such application, and further, Twincare 2 cannot bring same because it is not a party before the court. In addition, the amendment essentially sought to bring a new party into the proceedings, which a mere application was incompetent to do. To adequately rectify the error, Nel argued, Twincare 1 would have to withdraw the current application and re-institute it in the name of the correct entity (Twincare 2).
Before considering the merits of the matter, the Court was faced with the question as to whether Twincare 1 in fact had locus standi in the circumstances and attendant to that, whether Twincare 1 could bring the interlocutory application to amend/substitute.
If the two above questions were answered in the affirmative, the court would then be faced with the question as to whether the restraint of trade agreement in question was reasonable and therefore enforceable.
The court confirmed the principles as mentioned in Affordable Medicines Trust and Another v Minister of Health and Another 2006 (3) SA 247 (CC) , that a Court has a discretion to grant an amendment, however the discretion is to be exercised so as to afford the parties a proper ventilation of the dispute at hand.
Further and as held in Miller and Others v Nafcoc Investment Holdings Co. Ltd and Others 2010 (6) SA 390 (SCA), the Court confirmed that a company’s final deregistration extinguishes the existence of the juristic entity, terminating with the company, its legal status much like death does to a natural person. In addition to the above, the Court reasoned that the effect of the amendment sought by Twincare 1, if granted, would be to introduce a new applicant (Twincare 2) into the matter, which method is fatally flawed as a new party cannot be added or substituted under the guise of an amendment.
The Court dismissed the application on the basis that Twincare 1, by virtue of deregistration, had no locus standi to bring the application, and further, for Twincare 1 to substitute itself with Twincare 2 by way of amendment was incompetent.
In addition to dismissing the application based on the points in limine, the Court held that Twincare did not make a case for the enforcement of the restraint agreement on the merits in any event, because the terms thereof were unreasonable and therefore unenforceable.
This case illustrates important principles regarding the locus standi of juristic entities to institute proceedings and confirms the current legal position regarding the requirements for enforceability of a restraint of trade agreement. Quintessentially, a deregistered company has no locus standi, and a restraint of trade agreement will not be upheld by a Court if same is unreasonable in the circumstances.
Written by Kgomotso Morudu and supervised by Musa Mathebula, 10 September 2018