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[2017] ZAWCHC 58
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Swart and Others v Fourie and Others (2488/2017) [2017] ZAWCHC 58 (22 May 2017)
Republic
of South Africa
IN THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case
number: 2488/2017
Before: The Hon. Mr Justice Binns-Ward
Hearing: 10 May 2017
Judgment:
22 May 2017
In
the matter between:
BRAAM
SWART
First
Applicant
AND
SIX
OTHERS
Second
to Seventh Applicants
and
MAGISTRATE
A
FOURIE
First
Respondent
AND
SEVEN
OTHERS
Second
to Eighth Respondent
JUDGMENT
BINNS-WARD
J:
[1]
The applicants in this matter were
subpoenaed, in terms of s 414 of the Companies Act 61 of 1973
(‘the Act’), to
appear for examination at a creditors’
meeting of Silver Falcon Trading 84 CC (in liquidation). They
were also required
by the subpoenas to produce various categories of
documentation.
[2]
The
meeting in question had been scheduled to take place on 13 February
2017, but the applicants applied for and obtained an
interdict
prohibiting their examination pending the determination of the
current application. Costs in the interim interdict
proceedings
were stood over for determination in the current proceedings.
[3]
The applicants seek two things in these
proceedings. Firstly, to have the subpoenas set aside. In
this regard they seek
the setting aside, not only of the subpoenas
served on themselves, but also those served on the fourth and fifth
respondents.
[1]
The fourth respondent was the corporation in liquidation’s
banker and is also the bank at which the first to fourth
applicants
hold other banking accounts. The fifth respondent is an
individual who purchased a restaurant business from another
close
corporation of which the first and second applicants hold the
controlling interest. Secondly, and, in a sense, more
fundamentally, the applicants seek to have any examination to which
they might nevertheless be subject in terms of s 415 of
the Act
stayed for so long as the liquidators of the corporation are
represented by the same legal representatives as those that
currently
also represent the petitioning creditor.
[2]
The first head of relief bears on an alleged failure by the
first respondent to have exercised his authority in the manner
required by the Act. The second head of relief is related to
how the applicants apprehend the examination process might be
used
for improper purposes. The first goes to what has already
happened, and the second to what it is feared could happen.
[4]
The first head of relief is sought on two
principal footings: that the presiding officer (a magistrate),
who has been joined
as the first respondent in the proceedings,
issued the subpoenas – which had been drafted by the
liquidators’ attorneys
– without proper cause and without
having applied his mind; and that they were in any event overbroad.
The second head of relief
[5]
It
is convenient to deal first with the second head of relief. The
application for that relief is founded on the contention
that, in
seeking to procure the examinations on the basis adumbrated in the
subpoenas, the liquidators acted pursuant to the dictates
of the
petitioning creditor and its attorneys, rather than upon an
independent and impartial assessment by themselves of the appropriate
means to discharge their statutory duties. It is alleged that
the liquidators have thereby made themselves a mere instrument
of the
petitioning creditor. The applicants aver that in the
circumstances they apprehend that, for so long as the liquidators
are
represented by the petitioning creditor’s attorneys, any
interrogation in terms of ss 414 and 415 will be misused
to
harass and oppress them in furtherance of the hostility and animosity
that Mr Lambertus van Zyl (the moving spirit behind Bella
Rosa
Investment Holdings (Pty) Ltd, the petitioning creditor) and his
representatives have allegedly shown towards the applicants
in the
course of the winding-up and related pending litigation. The
applicants also contend that while the liquidators use
the services
of the petitioning creditor’s attorneys any examinations that
take place under the statutory provisions are
likely to be used to
improperly further the petitioning creditor’s position in
respect of the other litigation.
[6]
The business of the corporation was a
restaurant. The restaurant was operated from premises leased
from Bella Rosa.
[7]
To contextualise the applicants’
allegations about the other litigation it should be recorded that the
compulsory winding
up of the corporation was ordered pursuant to an
application by Bella Rosa, in terms of s 344(f) of the Act, read
with the
relevant cross-referencing provisions of the
Close
Corporations Act 69 of 1984
. The application for the
liquidation of the corporation arose out of its failure to pay the
rent claimed in terms of the
lease. The rental fell to be
calculated with reference to the square meterage of the leased area
measured in terms of ‘the
SAPOA method’. The
corporation opposed Bella Rosa’s application for a provisional
winding-up order on the grounds
that it disputed the measurement of
the leased area and, consequently, also the extent of its alleged
liability in respect of rent.
The court found, however, that
the corporation had failed to show that Bella Rosa’s claim was
disputed bona fide and on reasonable
grounds, and placed it in
provisional liquidation. At some stage prior to the bringing of
the liquidation proceedings the
corporation had instituted an action
for a declaratory order that Bella Rosa had over-recovered rent from
it on the basis of a
misrepresentation of the extent of the leased
premises and for repayment of the amount so over-recovered.
Those proceedings,
which were not prosecuted with perceptible vigour,
were still pending when the winding-up intervened.
[8]
Furthermore, the members of the corporation
(the first to fourth applicants in the current application) had bound
themselves in
favour of Bella Rosa as sureties for, and co-principal
debtors with, the corporation in respect of the latter’s
liability
for rent under the lease. Also pending is an action
by Bella Rosa against the first to fourth applicants for payment of
the
amount of rental in which the corporation was alleged to be in
arrears. The action is being defended on the same grounds as
those on which the aforementioned action by the corporation for
declaratory relief was instituted.
[9]
It also bears mention, by way of
background, that Bella Rosa had, prior to the institution of the
winding-up proceedings, applied
for and obtained an order evicting
the corporation from the leased premises. It was alleged that
the corporation’s
right to occupy the premises had been ended
upon the cancellation of the lease by Bella Rosa because the rent had
not been paid.
The court (per Ndita J) also granted an
order perfecting the landlord’s tacit hypothec.
Notwithstanding its characterisation
of the institution of the
ejectment application as a repudiation of the lease, which it said it
had accepted, the corporation remained
in occupation of the premises
and applied for leave to appeal against the orders granted against
it.
[10]
The application for leave to appeal came up
for hearing more than nine months after the orders against the
corporation were made.
The delay was as a result of the
indisposition due to ill health of the judge who had made the
orders. Leave to appeal against
the eviction order was refused
on the grounds that the proposed appeal enjoyed no prospects of
success in the face of the corporation’s
acceptance of what it
considered to have been Bella Rosa’s repudiation of the lease.
Leave to appeal was granted, however,
against the order perfecting
the hypothec; see
Bella Rosa Investment
Holdings v
Silver
Falcon Trading 84 CC
[2016] ZAWCHC 91
(28 July 2016). The leave so granted was subject to a condition
requiring the corporation to furnish Bella Rosa with security
in the
sum of R125 000. The prosecution of the appeal is also a
pending matter. And the position concerning the
amount of
R125 000 that was paid by the corporation’s attorneys to
Bella Rosa’s attorneys by way of security in
lieu of the
hypothec appears to be contentious in the winding-up.
[11]
Bella Rosa is, or was, represented in all
of the aforementioned proceedings, and continues to be represented in
the winding-up process,
by the same set of legal representatives.
The corporation and its members have also been represented in all the
matters by
the same firm of attorneys, of which a certain Mr Jacques
Theron is the proprietary practitioner. Bella Rosa’s
legal
representatives are the same persons as those engaged by the
liquidators in opposing the current application and for the purposes
of the intended interrogation.
[12]
The applicants have alleged that the
affidavits in some of the other litigation that I have described were
characterised by ‘
a remarkable
display of aggressive, vexatious drafting, motivated by what is a
clearly-held antipathy towards the members and Theron
held not only
by Van Zyl, but by those preparing the affidavits
’.
The applicants’ counsel listed 55 instances of the
allegedly ‘aggressive, vexatious drafting’
in their heads
of argument. It is unnecessary to recite them. Suffice it
to observe that whilst the inclusion of many
of them might be
regarded, from an objective perspective, as reflecting varying
degrees of oversensitivity, it would nevertheless
be fair to allow
that it is evident that Bella Rosa and its legal representatives
adopted a conspicuously robust and no holds barred
approach to the
litigation.
[13]
The applicants’ heads of argument
also identified 11 passages in the various sets of papers
delivered by Bella Rosa containing
explicit accusations of dishonest
and unprofessional conduct by Theron. It has not been necessary
to best of my knowledge
for any court to pronounce on these
allegations, and I am not called upon to do so in these proceedings,
but their very existence
does bear out the applicants’
contention that the proceedings have been marked by an exceptional
degree of animosity and
extraordinary ad hominem recriminations.
[14]
The applicants also drew attention to the
circumstances in which the ejectment order was executed after the
application for leave
to appeal against it had been refused.
The ejectment was carried out by the sheriff, acting on the
instructions of Bella
Rosa’s attorneys, on the very day that
the application was refused. It was effected while the
restaurant was serving
the evening meal to its customers. It
appears that it was attended by a heated confrontation at the scene
between the respective
attorneys of Bella Rosa and the corporation.
So confrontational was the event that the police were called upon to
assist
in the eviction. I am neither called upon, nor indeed in
a position, to determine the rights and wrongs concerning the
contentious
and contested events attending the eviction, but it must
also be allowed, I think, that the circumstances in which it was
effected
demonstrated notable animus by Van Zyl and/or Bella Rosa’s
attorneys against the members of the corporation.
[15]
Attorney Theron is the fifth applicant.
He was also subpoenaed to appear for examination; as was the external
accountant to
his firm, who is the sixth applicant. The seventh
applicant was a former chef at the restaurant. He was
subpoenaed
in error. The intention was to subpoena a person
with a similar name who had been the front of house manager.
[16]
Having described the factual backdrop it is
time now to look at the statutory context in which the impugned
subpoenas were issued.
[17]
Section 414 of the Act provides:
Duty of directors and officers
to attend meetings
(1) In any winding-up of a company
unable to pay its debts, every director and officer of the company
shall-
(a)
attend the first and second
meetings of creditors of the company, including any such meeting
which is adjourned, unless the Master
or the officer presiding or to
preside at any such meeting has, after consultation with the
liquidator, authorised him in writing
to absent himself from that
meeting;
(b) attend any subsequent meeting
or adjourned meeting of creditors of the company which the liquidator
has in writing required
him to attend.
(2)
The
Master or officer who is to preside or presides at any meeting of
creditors, may subpoena any person-
(a)
who is known or on
reasonable grounds believed to be or to have been in possession of
any property which belongs or belonged to
the company or to be
indebted to the company, or who in the opinion of the Master or such
other officer may be able to give material
information concerning the
company or its affairs, in respect of any time before or after the
commencement of the winding-up, to
appear at such meeting, including
any such meeting which has been adjourned, for the purpose of being
interrogated; or
(b)
who is known or on reasonable grounds believed to have in his
possession or custody or under his control any book or document
containing any such information as is referred to in paragraph (a),
to produce that book or document or an extract therefrom
at any such
meeting or adjourned meeting.
(3) Any director or officer of a
company who fails to comply with any provision of this section, shall
be guilty of an offence.
[18]
As mentioned, the first to fourth
applicants are the erstwhile members of the corporation. They
are thus obliged in any event
to attend the meeting if required by
the liquidator in writing to do so, and to submit to interrogation,
if so required, ‘concerning
all matters relating to the company
or its business or affairs in respect of any time, either before or
after the commencement
of the winding-up, and concerning any property
belonging to the co[rporation]’; see s 414(1). The
subpoenas that
have been served on them, however, also require them
(in terms of s 414(2)) to produce an extensive range of
documentation,
and thereby impose upon them additional obligations
going beyond those provided in terms of s 414(1) of the Act.
[19]
The members of the corporation do not
suggest that they may not be legitimately examined in terms of the
provisions; their challenge
is founded on their apprehension that the
examination on the basis of the issued subpoenas and in circumstances
in which the liquidators
have engaged Bella Rosa’s legal
representatives for the purpose would be unfair, vexatious and
oppressive. In the context
of the liquidators allegedly having
been unable thus far to obtain from the members a coherent set of
accounting records in respect
of the corporation of the nature
required in terms of
s 56
of the
Close Corporations Act, the
liquidators unarguably have a basis to pursue an examination.
Such an examination might also be justified to explore any
difference
between the state of affairs of the corporation found by the
liquidators upon assuming office and that described by
the members in
the answering papers in the winding-up proceedings. I refer to
these matters in passing, not to suggest by
mentioning them that they
are the only matters that the liquidators could consider worthy of
investigation.
[20]
Section 415 of the Act provides insofar as
currently relevant:
Examination of directors and
others at meetings
(1) The Master or officer
presiding at any meeting of creditors of a company which is being
wound-up and is unable to pay its debts,
may call and administer an
oath to or accept an affirmation from any director of the company or
any other person present at the
meeting who was or might have been
subpoenaed in terms of section 414 (2)
(a)
, and the
Master or such officer and any liquidator of the company and any
creditor thereof who has proved a claim against the company,
or the
agent of such liquidator or creditor, may interrogate the director or
person so called and sworn concerning all matters
relating to the
company or its business or affairs in respect of any time, either
before or after the commencement of the winding-up,
and concerning
any property belonging to the company: Provided that the Master or
such officer shall disallow any question which
is irrelevant or would
in his opinion prolong the interrogation unnecessarily.
(2) In connection with the
production of any book or document in compliance with a subpoena
issued under section 414 (2)
(b)
or the
interrogation of a person under subsection (1) of this section, the
law relating to privilege as applicable to a witness
subpoenaed to
produce a book or document or give evidence in a magistrate's court
shall apply: Provided that a banker at whose
bank the company
concerned keeps or at any time kept an account, shall be obliged, if
subpoenaed to do so under section 414 (2)
(b)
, to
produce-
(a)
any cheque in his
possession which was drawn by the company within one year before the
commencement of the winding-up; or
(b)
if
any cheque so drawn is not available, any record of the payment, the
date of payment and the amount of the cheque which may be
available
to him, or a copy of such record, and shall, if called upon to do so,
give any other information available to him in
connection with any
such cheque or the account of the company.
(3)
No person interrogated under
subsection (1) shall be entitled at such interrogation to refuse to
answer any question upon the ground
that the answer would tend to
incriminate him or her and shall, if he or she does so refuse on that
ground, be obliged to so answer
at the instance of the Master or
officer presiding at such meeting: Provided that the Master or
officer presiding at such meeting
may only oblige the person in
question to so answer after the Master or officer presiding at such
meeting has consulted with the
Director of Public Prosecutions who
has jurisdiction.
(4)
The Master or officer
presiding at any meeting aforesaid shall record or cause to be
recorded in the manner provided by the rules
of court for the
recording of evidence in a civil case before a magistrate's court the
statement of any person giving evidence
under this section: Provided
that if a person who may be required to give evidence under this
section, has made to the liquidator
or his agent a statement which
has been reduced to writing, or has delivered a statement in writing
to the liquidator or his agent,
that statement may be read by or read
over to that person when he is called as a witness under this section
and, if then adhered
to by him, shall be deemed to be evidence given
under this section.
(5) ...
(6) Any person called upon to give
evidence under this section may be represented at his interrogation
by an attorney with or without
counsel.
(7) …
[21]
The
statutory provisions are intended to assist liquidators and creditors
in effectively achieving the objects of a compulsory winding-up
of a
corporation that is unable to pay its debts – the
identification and realisation of the corporation’s assets for
the redemption of its liabilities in accordance with the rules of
insolvency, and the reporting by the liquidator of the cause(s)
of
its failure and any delinquencies on the part of its management that
might have played a part. The effective achievement
of those
objects is obviously in the interests of the creditors and also in
the public interest.
[3]
Provision for enquiries of this nature has a long pedigree and it is
mirrored in the statutory regimes of other countries
to whose law
comparative reference is commonly made in our company law.
[4]
It will be noted from the text quoted in the preceding
paragraph that s 415 contains a number of inbuilt protections
for examinees.
[22]
Speaking of enquiries in terms of ss 417
and 418 of the Act, Ackermann J observed in
Bernstein
and Others v Bester NO and Others
[1996] ZACC 2
;
1996
(2) SA 751
(CC),
1996 (4) BCLR 449
, at para. 16 (e)-(k), that –
(e)
It is
only by conducting such enquiries that liquidators can:
(i) determine what the assets and
who the creditors and contributories of the company are;
(ii) properly investigate doubtful
claims against outsiders before pursuing them, as well as claims
against the company before pursuing
them.
(f)
It is
permissible for the interrogation to be directed exclusively at the
general credibility of an examinee, where the testing
of such
person's veracity is necessary in order to decide whether to embark
on a trial to obtain what is due to the company being
wound up.
(g)
Not
infrequently the very persons who are responsible for the
mismanagement of and depredations on the company are the only persons
who have knowledge of the workings of the company prior to
liquidation (such as directors, other officers and certain outsiders
working in collaboration with the former) and are, for this very
reason, reluctant to assist the liquidator voluntarily. In these
circumstances it is in the interest of creditors and the public
generally to compel such persons to assist.
(h)
The
interrogation is essential to enable the liquidator, who most
frequently comes into the company with no previous and finds that
the
company's records are missing or defective, to get sufficient
information to reconstitute the state of knowledge that the company
should possess; such information is not limited to documents because
it is almost inevitable that there will be transactions which
are
difficult to discover or understand from the written materials of the
company alone.
(i) The liquidator must, in such
circumstances, be enabled to put the affairs of the company in order
and to carry out the liquidation
in all its varying aspects.
(j)
The
interrogation may be necessary in order to enable the liquidator, who
thinks that he may be under a duty to recover something
from an
officer or employee of a company, or even from an outsider concerned
with the company's affairs, to discover as swiftly,
easily and
inexpensively as possible the facts surrounding any such possible
claim.
(k)
There is
a responsibility on those who use companies to raise money from the
public and to conduct business on the basis of limited
liability to
account to shareholders and creditors for the failure of the
business, if the company goes insolvent. Giving evidence
at a s 417
enquiry is part of this responsibility. This responsibility is not
limited to officers of the company, in the strict
sense, but extends
also to the auditors of the company.
Those observations hold equally true in respect of enquiries under
ss 414-415.
[23]
The Constitutional Court’s judgments
in
Bernstein
,
especially that of Ackermann J, afford a comprehensive and
learned consideration of the nature and purpose of insolvency
enquiries under the Act. The Court was seized of a challenge to
the constitutionality of ss 417 and 418. The challenge
was
advanced on the grounds that the intrusive and potentially draconian
effect of the provisions on persons required to submit
to
interrogation under them were incompatible with various fundamental
rights enshrined in the Bill of Rights
[5]
to a degree that was unjustifiable in a free and democratic society.
The challengers were the partners and certain employees
of an
accounting firm that had been the auditors of the liquidated
company. It had become apparent that, notwithstanding
the
willing and extensive co-operation that the firm had given to the
liquidators in the aftermath of the company’s failure,
the
liquidators intended to use the enquiry in part to investigate the
viability of holding the auditors liable in negligence and
pursuing
them for damages. The rights that the challengers alleged were
infringed by the provisions were (a) the right
to freedom and
security of the person, (b) the right to personal privacy, in
particular
not to be
subject to seizure of private possessions or the violation of private
communications
, (c) the right to
procedurally fair administrative action, and (d) the right
against self-incrimination.
[6]
The challengers also argued that ‘[i]nsofar as the mechanism
permits the liquidator and the creditors of the company
in
liquidation to gain an unfair advantage over their adversaries in
civil litigation that they would not have enjoyed but for
the
liquidation of the company, it violates (i) an implied
constitutional right to fairness in civil litigation, and (ii)
the
guarantee of equality.
[7]
[24]
Save to the extent that the challenge had
already been vindicated in the court’s earlier judgment in
Ferreira
supra,
[8]
the provisions were held otherwise not to be incompatible with the
Interim Constitution. It is not necessary to go into the
detail
of the court’s reasons for dismissing the challenges.
[9]
It is enough for present purposes to note that the decision was made
in the context of a sensitive consideration of the adversely
intrusive and taxing effects that the provisions potentially can have
on examinees. The context makes especially significant
the
Constitutional Court’s acknowledgment in several passages in
Bernstein
that, subject to effective controls against their abusive use, the
far-reaching effects of the provisions are justified in the
public
interest and accordingly have to be borne with stoicism by those upon
whom they are properly brought to bear.
[25]
A proportionate approach is indicated, the
more obvious and important the need for investigation in the peculiar
circumstances,
the more rigorously the provisions can fairly and
legitimately be applied.
[10]
The potential scope for such an enquiry ‘is extremely
wide’.
[11]
The Constitutional Court in
Bester
was keenly conscious, however, of the susceptibility of the
provisions to be used oppressively and vexatiously for inappropriate
or ulterior purposes. The Court, moreover, confirmed the power
and duty of the High Court to intervene in appropriate cases
to
prevent the abusive application of the examination procedures; the
judgment of this court (per Thring J) in
James
v Magistrate, Wynberg, and Others
1995
(1) SA 1
(C) was cited as an example of this type of judicial
supervision.
[12]
It has been observed in this connection that ‘[t]he more
difficult issue lies in determining what constitutes an abuse’.
[13]
Plainly, the determination will depend on the peculiar circumstances
of the given case. It is unlikely to be an abuse
if it is
apparent that the examination is being used for the purposes
contemplated by the statutory provisions.
[14]
[26]
In
Bernstein
,
the Constitutional Court refrained from prescribing how the protocols
for judicial supervision should operate. That was
matter that
it was considered appropriate to leave to the then Supreme Court
(which comprised what are now the High Court and the
Supreme Court of
Appeal) to develop. It is clear from the appeal court
jurisprudence to which I shall come presently that
the
‘quasi-judicial’ role of the Master, presiding officer,
or commissioner, as the case might be, is regarded as the
examinee’s
primary protection against the abusive, vexatious or oppressive use
of the interrogation procedures. It
is when that resource of
primary protection against abuse fails or when it is shown that it
would probably prove to be inadequate
that it is appropriate for the
court to intervene.
[27]
Mr
Woodland
SC, who (together with Mr
Brink
)
appeared for the applicants, submitted that the present case was
closely comparable to that in
James
supra, which they argued this court
should follow; so it is appropriate to dwell on it.
[28]
James
concerned
an application by the sole member of a close corporation in
liquidation to stay his interrogation at a meeting convened
by the
liquidator in terms of s 386(1)(d) of the Act. The
interrogation was to be funded by the corporation’s
sole proved
creditor, which had been the insurer of a large consignment of books
that had been destroyed in a fire at the corporation’s
premises.
[29]
Prior to its liquidation, which had been at
the instance of the insurer, the corporation had instituted action
against the insurer
to enforce payment of its insurance claim.
In its plea in the action the insurer had alleged that the fire had
been caused
intentionally by the applicant, or by someone acting on
his instructions. The insurer prayed for the dismissal of the
action
with costs on the scale as between attorney and own client.
The action had been dismissed after the corporation had failed
to
comply with an order requiring it to provide security for the
insurer’s costs in the action. The costs of the action
were stood over for later determination. It was common ground
that the insurer had incurred attorney and own client costs
in a very
substantial amount.
[15]
Prescription not having run, it was still open to the corporation or
its liquidator to pursue the insurance claim in fresh
proceedings if
so advised.
[30]
After assuming office, the liquidator
received notice from the defendant-insurer that he had been
substituted, in terms of rule
15(2), as plaintiff in the action, in
which it will be recalled the only undetermined issue was that of
costs. The liquidator
thereupon promptly gave notice to the
insurer of his willingness to consent to an order in favour of the
defendant-insurer in respect
of the reserved costs; and, moreover, on
the most punitive scale on which they had been sought. He did
so without any consultation
with the member, or the attorneys who had
represented the corporation in the action against the insurer.
Furthermore, the
liquidator was availing of the services of the
attorneys who had represented the insurer in the action and in the
winding proceedings.
[31]
An argument by the liquidator’s
counsel in
James
that the statutory role of the presiding officer – in that case
also a magistrate – was sufficient safeguard against
any
possible infringement of the examinee’s right not to have the
examination process used to harass or oppress him did not
find favour
with the court. It allowed that he had been entitled to the
interdictory relief because he had a reasonable perception,
on the
grounds of the background features that I have outlined, that the
liquidator was biased against him. The court considered
that
the existence of such bias, whether real or only reasonably
perceived, was fundamentally inconsistent with a principle that
liquidators should be seen to act independently in the interests of
both the members and the creditors of the corporation in liquidation.
In characterising the impartiality and independence required of
liquidators, the court placed considerable stock on the Australian
jurisprudence to which the member’s counsel had directed
attention - in particular the judgment in
Re
Allebart Pty Ltd (in liq)
[1971] 1
NSWLR 24
, upon which the applicants’ counsel in the current
matter also placed reliance.
[16]
[32]
Our courts have confirmed the importance of
independence and impartiality by liquidators in the discharge of
their duties in other
judgments; see, for example,
Standard
Bank of South Africa v The Master of the High Court and Others
2010 (4) SA 405
(SCA), at para. 1. The principle is that
liquidators should not, because their fiduciary relationship to the
corporation
in liquidation, the body of creditors as a whole and the
body of members or contributors, ever be in a position in which their
personal interests do, or could, put them in conflict with their
fiduciary duties. But the notion that actual or perceived
bias
by a liquidator against a member was sufficient ground to disqualify
him or her from interrogating the member was trenchantly
rejected by
the appeal court in
Receiver of Revenue,
Port Elizabeth v Jeeva and Others; Klerck and Others NNO v Jeeva and
Others
[1996] ZASCA 5
;
1996 (2) SA 573
(A).
[33]
In
Jeeva
,
it was held by the late Appellate Division (per Harms JA) that ‘…
the fact that a liquidator has fiduciary
duties towards, say, creditors does not mean that he can always be
evenhanded. He is obliged,
should the occasion arise, to dispute a
creditor's claim or to impeach a transaction between a creditor and
the company. I do not
accept as a general proposition that in such
circumstances the relevant creditor can object to an examination or
litigation on
the ground of the liquidator's perceived bias.
’
[17]
(It is, of course, equally, if not more, conceivable that a
liquidator might have cause to take up an adversarial position
against a shareholder or director in a compulsory liquidation.)
Further in the judgment it was stated:
It appears to me that the true nature of the s 418
inquiry was misconceived by both Courts. The Commissioner, against
whom no complaint
has been laid, is the person who conducts the
inquiry. It is he who has to act in a quasi-judicial capacity. He has
the main duty
to examine the witnesses. He has to regulate and
control the interrogation. Should he fail in his duty to apply the
procedural
fairness appropriate to this forum, an aggrieved party may
approach the Court for suitable relief (
Schulte v Van der Berg and
Others NNO
1991 (3) SA 717
(C)).
Contrary to what Thring J held, the position of the
liquidator is quite different. He, in this context, acts in neither
an administrative
nor quasi-judicial capacity. He is not in a
position of authority vis-à-vis the witness. He does not
determine or affect
any of his rights. He simply represents the
company in liquidation at the inquiry. He is, or may be, an adversary
of the witness.
As adversary he can have no higher duty towards his
opponent than any other litigant has. The authorities relied upon by
Thring
J (at 14I) deal with the position of a presiding officer and
not with someone in the position of a liquidator.
As noted, a creditor is also entitled to interrogate any
witness at the inquiry. The creditor may be biased or unbiased. He
may
join forces with another creditor. Acrimony between creditor and
witness may exist. The witness will nevertheless have to answer
all
relevant questions. I fail to see why, in similar circumstances, the
liquidator may not proceed with the examination because
of a similar
acrimony or bias. The liquidator has to comply with the lawful
instructions of the body of creditors. The fact that
there is one
creditor only does not affect his duty.
Although the court was treating of an enquiry in terms of s 418,
the position also holds true in respect of enquiries in terms
of
s 415.
[34]
The incidence of the responsibility to
prevent the abusive use of the examination procedures under the Act
being upon the commissioner,
Master or presiding officer, as the case
might be,
not
on the liquidator, was reiterated in the judgment of Supreme Court of
Appeal in
Roering
supra (per Wallis JA). In
Roering
,
the appeal court confirmed that in a case, such as the present in
respect of the first head of relief claimed by the applicants,
where
it is alleged that the issuance of the summons or subpoena was
improper, it is the decision of the presiding officer to issue
it
that is the appropriate target to be challenged,
not
the motives of the liquidators in procuring it.
[18]
The court also held that where it is alleged that the examination
will be used for an improper or impermissible purpose ‘the
primary issue is whether the commissioner [in this case the presiding
officer] would permit that’.
[19]
In the current matter, there has been no suggestion that the
presiding officer would not - especially if called upon by the
examinee or his or her legal representative - exercise his powers to
prevent any abuse by the liquidators or Bella Rosa.
In
this connection it was pointed out in
Roering
[20]
that ‘[o]
f course, instances may
arise where liquidators interrogating a witness at an enquiry may
overstep the permissible bounds of the
enquiry and abuse their
statutory rights. But an aggrieved person, who is entitled to
be legally represented, is entitled
to complain, and it is then for
the commissioner to prevent any abuse. If the witness is dissatisfied
with the commissioner's approach,
that may be the subject of a
review, but one cannot start from the perspective that the
commissioner will not discharge their duties
properly and prevent
abuse from occurring
’. This
was no doubt what counsel for the liquidators, Mr
Ferreira
,
had in mind when he submitted that the application in respect of the
second head of relief
[21]
was ‘premature’.
[35]
The applicants’ counsel suggested
that the extent to which the judgment in
James
had been disapproved by the appeal court was confined only to the
question of whether a liquidator was disqualified from examining
a
member under the provisions when it was reasonably perceived that he
was biased against the witness. I do not agree.
The
judgment does indeed remain authoritative in respect of the principle
that the courts will intervene, when appropriate, to
prevent an abuse
of the provisions. But insofar as the issues in the current
matter are concerned, the decisions in
Jeeva
and
Roering
clearly held, expressly or by necessary implication, that the
judgment of this court in
James
had proceeded on a fundamentally misconceived conception of the role
of a liquidator in the statutory enquiry proceedings under
ss 415
and 418 of the Act. The appeal court judgments in these two
cases have made it clear that the applicants should
first seek
protection, if it is needed, against an abusive examination from the
presiding officer
[36]
The applicants’ counsel’s
reliance on
Allebart
supra - which, as mentioned, was notably influential in Thring J’s
reasoning in
James
– calls to mind the frequently voiced caveats about the dangers
of the undiscriminating application of foreign jurisprudence.
[22]
The role of the ‘official liquidator’ in
Allebart
arose for consideration in the context of a contemplated private
examination in terms of s 249 of the long since redundant
New
South Wales Companies Act 71 of 1961.
[23]
Winding-up proceedings under the NSW Act were conducted by or under
the auspices of the Supreme Court of New South Wales
under its
equitable jurisdiction. An ‘official liquidator’
was a functionary appointed in terms of s 11
of the Act, not as
in South Africa on an ad hoc basis for the winding-up of a particular
company, but as one of a standing panel
of appointees chosen by the
Minister from the ranks of ‘registered liquidators’ ‘
for
the purpose of conducting proceedings in winding up companies and
assisting the Court therein
’.
It was in that context that, unlike in South Africa, where it is
generally accepted that a liquidator is not properly
classified as an
‘officer of the court’,
[24]
that the ‘official liquidator’ was considered to be an
officer of the court. His duties entailed, to some extent,
carrying out the court’s functions. The extent to which
this appears to have reflected an official liquidator’s
position as a manifestation of the court itself is to be gathered by
the reference in
Allebart
to what seems to have been a well-established convention in New South
Wales that the liquidator’s reasons for seeking a private
examination in terms of s 249 of the NSW Act were regarded as
‘confidential’, in the sense of being kept private
between the liquidator and the court.
[25]
[37]
According to the tenor of its provisions,
enquiries under s 249 of the NSW Companies Act were initiated by
the court, not by
the liquidator.
[26]
In motivating for the conduct of such an enquiry the liquidator
therefore acted in a sense as an agent of the court charged
with the
conduct of the enquiry. It seems that the close association of
the official liquidator with the identity of the
court itself formed
the basis of a requirement that he be seen to be impartial and above
the fray.
[27]
As the decisions in
Jeeva
and
Roering
confirm, the local environment is materially distinguishable.
[38]
Even in
Allebart
,
the engagement by the official liquidator of the same attorneys as
those who acted for the petitioning creditor was, of itself,
regarded
as ‘innocuous and, indeed, commonplace’.
[28]
I have had occasion twice recently to consider the propriety in the
local context of liquidators using the services of the
petitioning
creditor’s attorneys; see
Ex p.
Steenkamp and others NNO
(WCC case
no. 19265/13), reported on SAFLII sub nom.
Steenkamp
N.O and others v Liquidators of Monoceros Trading 111 CC
(19265/13)
[2014] ZAWCHC 82
(10 January 2014), and
Trustees
for the Time Being of the Bermack Trust (IT 1730/1996) and Another v
Patel NO and Another
[2014] ZAWCHC 105
,
at paras. 72-81.
[39]
The determinative question is usually
whether such engagement would result in the attorneys having a
conflict of interest; but,
depending on the circumstances, there may
be wider considerations. I summed up what I perceive to be the
position in this
regard at para. 73 in
Bermack
Trust
. After referring to the
judgment in
Steenkamp
,
I said -
…
In that judgment I held that
there was nothing inherently untoward about such an engagement.
I noted that whether a conflict
of interest presents in any matter is
dependent on the facts. If, on an analysis of the facts, the
interests of the petitioning
creditor and those of the liquidator
correspond with each other, there will ordinarily be no conflict of
interest. On the
contrary, there will often be much to be said
in favour of the employment of the petitioning creditor’s
attorneys because
they may be steeped in the complexities of the
issues with which the liquidator will have to engage, and it would be
unduly costly
and time consuming in such circumstances to appoint
other attorneys with no prior involvement to qualify themselves
afresh. The
fact that the liquidator may, as in the current matter,
adopt a position adverse to the position of one or more of the other
creditors
does not, without more, derogate from the conclusion just
stated. It is in the nature of a liquidator’s responsibilities
to interrogate creditors’ claims and in that context he may
have to adopt an adversarial position; cf.
Receiver
of Revenue, Port Elizabeth v Jeeva And Others; Klerck And Others NNO
v Jeeva and Others
[1996] ZASCA 5
;
1996 (2) SA 573
(A). The position would obviously be
different if the attorney had also previously acted for the creditor
against whom an adverse
position was adopted and, in that connection,
had been made privy to any relevant confidential information of that
creditor. There
is also a duty on legal practitioners to be ever
astute to the possibility of a conflict of interest not identified at
the outset
of their engagement subsequently presenting itself, in
which case, of course, they are bound to withdraw. In a context like
the
present, liquidators too are bound to exercise their independence
in giving and overseeing the carrying out of instructions to
attorneys who act also for one or more of the creditors in the
winding-up. It may be necessary or prudent in a given case
that
separate attorneys be employed to deal with certain questions that
may arise in the liquidation. In that manner conflict
situations may be managed and grounds for perceptions of partiality
avoided.
(The reference to partiality in the context of
Bermack Trust
concerned allegations in that case that one of the liquidators was
seen as having aligned himself with the interests of one creditor
-
whose attorneys were also employed by the liquidators - against those
of another creditor whose interests were in conflict with
those of
the first creditor. In that case the other creditor had applied
to the Master in terms of s 379(1) of the Act
for the removal of
the liquidators.)
[40]
In the current matter it seems to me that
the liquidators’ position in respect of whether or not to
pursue the pending action
by the corporation against Bella Rosa is
not something on which they should be dependent upon advice from
their current attorneys.
The merits of that case seem to depend
on an objectively determinable question; the physical extent of the
let premises determined
according to the SAPOA method. That is
a matter of measurement, which is not something one would expect that
they would engage
attorneys or counsel to determine. Bella
Rosa’s claim against the sureties seems to turn on exactly the
same point.
I therefore do not see that it is a matter that is
likely to give rise to a conflict of interest situation at an enquiry
in terms
of s 415 of the Companies Act. But, if the
unexpected happens, the liquidators and the legal representatives
will have
to deal with the situation. Their failure to do so
appropriately would expose the liquidators to proceedings to remove
them
from office and the legal representatives to a finding of
professional misconduct.
[41]
In the current case the applicants have not
attempted to show any conflict of interest that would disqualify the
petitioning creditor’s
attorneys from accepting instructions
from the liquidators. They do not suggest that the liquidators
should be barred from
using the services of the same legal
representatives as Bella Rosa. Their complaint is confined to
the allegation that the
engagement by the liquidators of those legal
representatives has and will probably continue to cause an abuse of
the interrogation
process.
[42]
It should be clear from the jurisprudence
that has been canvassed so far that the applicants have misconceived
their remedy.
They have not taken up the issue of any abuse of
the process with the presiding officer. They have also not
shown that the
presiding officer would not appropriately acquit
himself of his responsibilities should they do so. The relief
that has been
sought has also not been framed as it should have been
had the suggestion been that anything about the liquidators’
conduct
disqualified them from continuing in office as such.
[29]
The application for the second head of relief, whether in terms of
paragraph 3 of the notice of motion, or paragraph
2 of the draft
order handed up by the applicants counsel during argument, will
therefore be dismissed.
The first head of relief
[43]
It is not necessary to devote extensive
discussion to the first head of relief. There is no doubt in my
view that the subpoenas
are overbroad. The extent of their
over-breadth and the first respondent’s failure to offer an
explanation for it have
persuaded me that the applicants have
succeeded in showing on a balance of probabilities that the first
respondent did not apply
his mind, at least sufficiently, to whether
they should have been issued in that form.
[44]
There is nothing in the statutory framework
that prescribes the manner in which the issuance of such subpoenas is
to be procured.
The established practice is that the presiding
officer issues subpoenas if, upon the facts available, they ought
prima facie to
be issued; see
Cooper and
Others NNO v SA Mutual Life Assurance Society and Others
[2000] ZASCA 153
;
2001 (1) SA 967
(SCA), at 974-5. The presiding officer is
required to apply his or her mind in order to determine whether the
threshold of
information necessary to justify issuing the subpoenas
has been crossed. As observed in
Henochsberg
,
[30]
‘[i]n practice, the presiding officer ordinarily issues the
subpoena on the liquidator’s written request’.
I
think there is sound reason for the practice. Apart from any
other consideration, a written record promotes transparency
and
accountability. There was no written request in the current
matter. The evidence is that the subpoenas were issued
by the
presiding officer upon the oral request of a member of the firm of
attorneys representing the liquidators and Bella Rosa.
[45]
The attorney concerned averred that he
approached the presiding officer with an oral request to issue the
subpoenas. He testified
that Bella Rosa’s claim form,
attached to which was ‘a summary of facts and the background to
Bella Rosa’s claim’
had been in the file before the first
respondent. He said that he ‘properly explained the
background and reasons for
the issuing of the various subpoenas’.
He stated that he had ‘
inter alia
explained to [the first respondent] …(i) the reason why Silver
Falcon was wound up; (ii) that Silver Falcon seemingly has
no assets
of real value; (iii) that after inspection of Silver Falcon’s
bank statements, it seemed that its income had
not been retained, and
had most likely been distributed to members, but that no record of
such distribution had been found to date;
(iv) Silver Falcon had
no real or proper accounting records [and] (v) that it may be
that Silver Falcon and its members
had contravened the
Close
Corporations Act&rsquo
;. These superficially recounted factors
could, as acknowledged earlier in this judgment, have afforded the
first respondent
sufficient reason to issue at least some of the
subpoenas. But they do not explain why the subpoenas should
have been formulated
in the manner that they were.
[46]
They do not, for example, explain why the
members should have been required to produce ‘all
documentation, correspondence
and information including but not
limited to bank statements, management accounts and financial
statements, applications for credit
facilities and/or applications
for overdraft facilities, asset financing, applications for mortgage
bonds, salary receipt documentation,
loan payment account, payment
receipt documentation, invoices received from attorneys and advocates
and any other documents of
whatsoever nature, relating to the income,
expenditure, asset and liabilities of’ not only the corporation
in liquidation,
but also of 12 other businesses or corporate
entities. They also do not explain why the fifth applicant
should be required
to produce ‘all accounts, invoices,
advocates’ invoices’ rendered to such other businesses or
entities.
The subpoena served on the corporation’s bank
requires it, amongst other things, to produce bank statements for ten
identified
banking accounts, of which only one was operated by the
corporation. There is nothing to indicate that the first
respondent
was, or could have been satisfied that production of this
information, which on the face of it is extremely wide, was
potentially
of relevance in the enquiry.
[47]
The first respondent did not make an
affidavit. He wrote a letter, which was clearly for the purpose
of being introduced as
a form of report to this court. The
applicants’ counsel sought to make something of the absence of
an affidavit by
the first respondent. Their position in that
respect was misconceived. It is not ordinarily expected of
someone in
the position of the presiding officer to make an affidavit
in proceedings of this nature. The convention is that he or she
puts in a report for the assistance of the court. As it was,
the presiding officer’s letter, insofar as it was material,
did
no more than confirm the content of the liquidators’ attorneys’
affidavit that I have just related.
[48]
The liquidators’ counsel submitted
that in the event that it should be found, as it has been, that the
subpoenas were overbroad,
this court should trim them down instead of
setting them aside. That course does not commend itself to me.
Apart from
the fact that fresh subpoenas will in any event be
required because the currency of the summonses that were served has
expired
by reason of the passage of time, it seems to me, more
importantly, that the first respondent’s decision to issue them
was
legally invalid and that they are consequently void. It
would be inappropriate in the circumstances for this court to in
effect validate them, even if only partially. If the
liquidators wish to procure the lawful issue of fresh subpoenas, they
must go about it in the proper manner upon a properly motivated
written request to the first respondent, who must apply his mind
conscientiously to the request before acceding to it, whether in part
or in full. The application for the first head of relief
will
therefore be granted.
Costs
[49]
Both sides have been substantially
successful in these proceedings. The applicants have succeeded
in having the subpoenas
set aside. And the liquidators have
successfully resisted the application to stay any examination of the
first to sixth applicants
for so long as they are represented by the
legal representatives who currently also act for Bella Rosa. It
would be difficult
to treat the separate heads of relief discretely
for taxation purposes. In the circumstances it seems to me that
justice
would be done were each party to bear its own costs.
However, the setting aside of the subpoenas entitles the applicants
to the costs of the application for interim interdictory relief.
In my judgment the application for interim relief was not
of the
character that would justify burdening the losing party with the
costs of two counsel.
[50]
The following order is made:
1.
The
subpoenas issued by the first respondent in terms of s 414 of
the Companies Act 61 of 1973, attached to the first applicant’s
founding affidavit,
jurat
9 February 2017, requiring the applicants and the fourth to seventh
respondents to appear before the first respondent for the purpose
of
interrogation
concerning matters relating to Silver Falcon
Trading 84 CC (in liq.) or its business or affairs are hereby set
aside.
2.
Save as
provided in paragraph 1 of this order, the application is otherwise
dismissed.
3.
Save as
provided in terms of paragraph 4, the parties shall bear their
own costs in the application proceedings.
4.
The second and
third respondents shall pay the applicants’ costs of suit in
the interim interdict application that were reserved
for later
determination in terms of the judgment of this court dated
13 February 2017 (per Holderness AJ).
A.G. BINNS-WARD
Judge of the High Court
[1]
In a draft order handed in during
the applicants’ counsel’s argument the relief sought was
extended to include the
setting aside of the subpoenas served on the
sixth and seventh respondents.
[2]
The second head of relief was claimed in terms of
paragraph 3 of the notice of motion, Counsel for the
applicants indicated
at the commencement of their argument, however,
that they considered the relief framed there to have been too widely
stated.
In a draft order that they put in it was reformulated
as follows: ‘[that t]
he interrogation
in the insolvency of Silver Falcon not proceed for as long as the
liquidators are represented by the current
or, should they cease to
act for it, past attorneys and counsel of Bella Rosa Investment
Holdings (Pty) Ltd.
’.
[3]
For a more detailed statement of the
duties of liquidators and the objects of such enquiries or
interrogations see
Ferreira
v Levin NO and Others, Vryenhoek and Others v Powell NO and Others
1996 1 BCLR 1
(CC) at paras. 122-124 and
Bernstein
and Others v Bester NO and Others
[1996] ZACC 2
;
1996 (2) SA 751
(CC),
1996 (4) BCLR 449
, at paras. 15-16.
(There is no difference for relevant purposes between ss 414
and 415 and ss 417 and 418, respectively,
of the Act.)
[4]
See
Ferreira
supra, at paras.
115-120 and
Roering
NO and Another v Mahlangu and Others
2016 (5) SA 455
(SCA), at para 20 and note 5.
[5]
Under the Interim Constitution (Act
200 of 1993).
[6]
The allegedly infringing effect on
the right against self-incrimination had effectively already been
determined in
Ferreira
supra, which had been decided shortly before judgment in
Bernstein
was delivered.
[7]
See
Bernstein
para. 12.
[8]
Note 3
above.
[9]
The challenge that was sustained in
Ferreira
has
subsequently been addressed by remediating amendments to ss 415(3)
and 415(5) and 417(2)(b) and (c) of the Act.
[10]
See, for example,
Bernstein
at paras. 24-25. The judgment in
Bernstein
appears to call into question the assertion by Galgut AJA in
Pretorius v Marais
1981 (1) SA 1051
(A) that the fact that the information sought might
easily be obtained by alternative, less intrusive, means does not
affect
the legitimacy of a decision to require a witness by subpoena
to submit to an examination.
[11]
Roering
supra,
at para. 21, and
Pretorius
v Marais
supra, at
1063-1065A.
[12]
Bernstein
in
para. 35.
[13]
Roering
supra,
at para. 34.
[14]
Roering
supra,
at para. 37.
[15]
The insurer had procured evidence on
commission from expert witnesses in Europe for the purposes of the
trial of the action.
[16]
The applicants’ counsel
stressed the following passage from the judgment of Street J in
Allebart
,
at p.28F-G:
The present windings up must not
be permitted to become debased into a pursuit of the personal
conflicts between Mr Armstrong
[the
petitioning creditor]
and
Mr Barton
[the
sole member and director of the company in liquidation]
.
Nor must they be permitted to present the appearance of having
become debased in this way. The official liquidator
is an
officer of the Court, and it is his duty to ensure that he does not
permit the processes of these windings up to be diverted
or to
appear to be diverted into an exercise of the gratification of
personal animosities existing between the individuals concerned.
[17]
Jeeva
,
at 579F-G.
[18]
Roering
,
at para. 51.
[19]
Roering
,
at para. 53.
[20]
At para. 53.
[21]
The nature of, and basis for, the
second head of relief is described in paragraphs [2]
and [5]
above.
[22]
Cf. e.g.
Bernstein
supra, at para. 133 (per Kriegler J) and
Roering
supra, at para. 49, where Wallis JA cautioned that ‘
too
facile a reading of foreign legal material is to be eschewed,
because, when removed from their own environment, they may mislead
’.
[23]
The NSW Act was formally declared
‘redundant’ in terms of the Statute Law (Miscellaneous
Provisions) Act 2008 No 62.
I assume that the redundancy set
in upon the commencement of the Corporations Act, 2001 (Cth), which
operates in all the states
of Australia pursuant to
intergovernmental agreements.
[24]
See
Jeeva
supra, at 579C-E.
[25]
Allebar
t
at p. 30B-E.
[26]
Section 249(1)-(3) of the NSW Act
provided:
(1) The Court may summon before it any officer of
the company or person known or suspected to have in his possession
any property
of the company or supposed to be indebted to the
company, or any person whom the Court deems capable of giving
information concerning
the promotion, formation, trade, dealings,
affairs or property of the company.
(2) The Court may examine him on oath concerning the
matters mentioned in subsection (1) of this section either by word
of mouth
or on written interrogatories and may reduce his answers to
writing and require him to sign them, and any writing so signed may
be used in evidence in any legal proceedings against him.
(3) The Court may require him to produce any books
and papers in his custody or power relating to the company, but
where he claims
any lien on books or papers the production shall be
without prejudice to that lien, and the Court shall have
jurisdiction to
determine all questions relating to that lien.
(4) …
[27]
A public examination in terms of
s 250 of the NSW Act, by contrast, occurred only after the
liquidator had taken a position
and reported to the court that in
his opinion a fraud had been committed or material facts had been
concealed. In other
words, such an examination would take
place only after the liquidator had taken a position, prima facie at
least, adverse to
potential examinees.
[28]
Allebart
,
at p. 29D.
[29]
A matter, in my view, that should ordinarily first be
raised with the Master before an approach is made to the court.
[30]
Meskin,
Henochsberg
on the Companies Act
(LexisNexis, looseleaf service) vol. 1 [Issue 26], at p.873.