Brief Summary

Liquidation — Section 417 enquiry — Application to rescind order establishing enquiry during provisional liquidation — Applicant contended that no enquiry could be established while the company was still in provisional liquidation and that the jurisdictional requirement of the company being unable to pay its debts was not met — Court held that a section 417 enquiry can be established even during provisional liquidation, and the evidence presented supported the finding that the company was unable to pay its debts, thus upholding the validity of the enquiry and the extension of powers granted to the liquidators.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an opposed application arising from the liquidation of Imagina FX (Pty) Ltd (the company), a business described as a fund manager trading in foreign currencies using funds solicited from members of the public. The company was placed in provisional liquidation on 7 October 2020 and in final liquidation on 9 November 2020.

The applicant, Craig Massyn, was one of two directors of the company and was alleged to have been the guiding force behind the “Imagina FX Investments Scheme”. The first respondent, Advocate Almero Smuts de Villiers N.O., was the commissioner appointed to preside over an enquiry established under section 417 of the Companies Act 61 of 1973 and he abided the court’s decision. The second and third respondents, Christian Findlay Bester N.O. and Laila Essop N.O., were the provisional liquidators of the company and opposed the relief.

The application followed an ex parte order granted on 19 October 2020 by Salie AJ (in what the judgment refers to as the extension of powers application) which, among other things, established a section 417 enquiry, appointed the first respondent as commissioner, authorised him to subpoena persons (including the applicant), and extended the powers of the provisional liquidators by granting certain powers listed in section 386(4) of the 1973 Act. The section 417 enquiry had commenced but was adjourned pending the outcome of this application.

The applicant sought, as primary relief, the rescission of the 19 October 2020 order establishing the enquiry and extending the liquidators’ powers. In the alternative, he sought the removal of the commissioner and the setting aside of subpoenas issued for his examination at the enquiry, or the setting aside of the subpoenas alone. The matter also formed part of broader litigation connected to the liquidation, including an application by the applicant to set aside a subpoena (heard by Binns-Ward J) and an Anton Piller application brought by the liquidators (heard by Baartman J).

2. Material Facts

The company conducted a business presented as foreign exchange trading using monies solicited from the public, with investor funds estimated to exceed R1.5 billion and with approximately 1000 investors. The company was liquidated at the instance of three investors/creditors who had collectively invested more than R20 million and sought liquidation after concluding, following investigations, that the company’s activities were unlawful and fraudulent and that it could not meet withdrawal requests.

It was undisputed that the company did not oppose the liquidation proceedings and in fact consented to provisional liquidation. A communication from the company’s attorney the day before the urgent liquidation hearing indicated that the trading platform had suspended accounts and the company was “therefore unable to continue its business of Forex Trading at this stage”, and that the company consented to provisional liquidation. Although the company’s attorney asserted that the liquidation papers contained “factual incorrect allegations, wild assumptions and unwarranted conclusions”, no specific refutation was provided and there was no assertion that the company was able to pay its debts.

The liquidation founding affidavit relied on allegations of significant irregularities, including alleged contraventions of financial services legislation, the use of contracts with defunct or liquidated entities, and the use of a bank account belonging to another company for initial deposits. It also relied on regulatory developments, including the suspension of licences of entities described as key components of the investment scheme, and an FSCA press release indicating a “strong indication” that the majority of clients’ funds were unlikely to be recovered. The liquidation applicants also relied on the fact that a substantial withdrawal demand made on 15 September 2020 had not been met.

After provisional liquidation, the provisional liquidators brought the ex parte extension of powers application, seeking both the establishment of a section 417 enquiry and additional powers under section 386(5) read with portions of section 386(4). In motivating for extended powers, they relied on the nature of the business, allegations of unlawful operations and asset movements, and the need for urgent investigation and steps to locate, preserve, and potentially repatriate funds, including from offshore jurisdictions. It was common cause in this application that Salie AJ granted the order while the company was still in provisional liquidation.

The applicant’s complaint against the commissioner focused on the commissioner’s conduct in relation to subpoenas issued on 2 November 2020 and 1 December 2020, and on certain process-related matters. These included that the liquidators’ attorneys prepared and circulated the Rule 53 record “on his behalf”, that those attorneys had (erroneously) filed a notice of intention to oppose purporting to act for all respondents including the commissioner, and that the commissioner transmitted his reasons for refusing to set aside the subpoena via the liquidators’ attorneys. The commissioner explained that he had only requested administrative assistance, had always intended to abide the court’s decision, and had not mandated the liquidators’ attorneys to oppose the application on his behalf.

3. Legal Issues

The central questions were questions of law and the application of law to fact, with certain evaluative components concerning discretion and reasonableness.

The first set of issues concerned whether the order establishing the section 417 enquiry should be rescinded on the basis that the liquidators had allegedly failed to establish a jurisdictional requirement for such an enquiry, namely that the company was a company “unable to pay its debts” in a winding up, and whether an enquiry could lawfully be established while the company was in provisional rather than final liquidation.

The second set of issues concerned whether the extended powers granted to the provisional liquidators under section 386(5) had been properly justified as necessary for winding up the company’s affairs, and whether any portion of the order should be rescinded on that basis.

The third set of issues concerned the alternative relief: whether the commissioner should be removed because his conduct created a reasonable perception of bias, and whether subpoenas issued under the enquiry should be set aside.

4. Court’s Reasoning

Establishment of a section 417 enquiry during provisional liquidation

The court analysed the wording of section 417(1), together with the statutory definition of a “winding up order” and the continuing applicability of the 1973 Act provisions to insolvent company windings-up by virtue of provisions in the Companies Act 71 of 2008. It reasoned that, where an appropriate case is made out, there was good reason to interpret section 417(1) as permitting the establishment of an enquiry even during provisional liquidation, particularly because opposition to final liquidation could generate protracted litigation and undermine the purpose of a section 417 enquiry, which is to obtain information expeditiously to enable liquidators to perform their functions in the interests of creditors and shareholders.

The jurisdictional requirement: inability to pay debts

The court accepted that an enquiry could only be established in the winding up of a company unable to pay its debts, and it therefore examined whether that requirement had been established on the papers that served before the liquidation court and before Salie AJ. The court considered the content of the liquidation founding affidavit, including allegations of regulatory intervention, frozen trading activities, delays in payments, failure to honour withdrawal requests, and the FSCA statement indicating a strong likelihood that the majority of investor funds were unrecoverable. It also considered that the company did not oppose liquidation and had consented to provisional liquidation, without asserting solvency.

On that basis, the court held that the irresistible inference from the unanswered allegations and circumstances was that the company was unable to pay its debts. It further reasoned that Salie AJ could scarcely have doubted that inability to pay debts was the basis for liquidation and was aware that this was a prerequisite for an enquiry under section 417.

In addressing an argument that the liquidators had not “proved” inability to pay debts at the time of invoking section 417, the court relied on authority discussing when the “unable to pay its debts” requirement is assessed. Referring to Taylor and Stein NNO v Koekemoer (in relation to section 415) and Hudson v The Master and Others, the court treated the relevant time for assessing inability to pay debts as the time when the section is invoked. It reasoned that, at the time the liquidators sought establishment of the enquiry, there was nothing suggesting the company’s position had changed or that the liquidation applicants had been mistaken as to solvency.

The court also dealt with the incidence of the onus in a rescission-type challenge. Applying Hudson v The Master and Others, it held that a person seeking relief from a court order bears the burden of satisfying the court that they are entitled to it. Since it was essential to the applicant’s challenge that the company was able to pay its debts when section 417 was invoked, the applicant needed at least to allege (and ultimately establish) solvency at the material time. The applicant had not done so; there had never been any assertion by the company prior to liquidation that it could pay its debts, and no such allegation was made by the applicant in these proceedings. The court regarded it as incongruous for an affected party, in post-liquidation proceedings, to seek to set aside an enquiry established on the basis of inability to pay debts without asserting that the company was, in fact, able to pay its debts.

For these reasons, the court rejected the rescission challenge to the establishment of the enquiry.

The extension of the liquidators’ powers under section 386(5)

The court approached the extension of powers under section 386(5) on the basis that the liquidators must demonstrate that the powers sought are necessary, not merely useful or convenient, for winding up the company’s affairs and distributing its assets. It referred to Moodliar NO and Others v Hendricks NO and Others, which emphasised that the necessity of powers must be evaluated in the factual matrix, bearing in mind the provisional liquidator’s primary duty to preserve the company’s property and status quo pending final appointment, but also recognising that circumstances may dictate a more active role. In that regard, the court also relied on Ex parte: Klopper NO: in re Sogervim SA (Pty) Ltd, which explains that, depending on circumstances, urgent and proactive steps may be required and provisional liquidators should not be unduly restricted where circumstances truly dictate otherwise.

Applying these principles, the court examined the specific powers requested and the case made for them. It emphasised that the liquidators had not sought the entirety of section 386(4) powers, but selected certain powers and grounded their request in the alleged unlawfulness and complexity of the company’s operations, the transnational and digital nature of the trading activity, the size of the investor pool, and the stated need for urgent investigation, preservation of information, and prevention of dissipation.

The court held that the liquidators made out a strong case for the power to institute or defend legal proceedings (section 386(4)(a)), and that, once that was accepted, the related powers to obtain legal advice and engage attorneys and counsel were also justified as necessary. The court further accepted the necessity of the power to engage professional services such as forensic investigators and accountants, given the online and offshore dimensions of the business and the difficulty of tracing and preserving assets that may exist only in cyberspace or be moved quickly across jurisdictions.

However, the court held that two of the extended powers were not justified on the liquidators’ founding case. First, it found no proper basis had been laid for the power to agree to any reasonable offer of composition by a debtor, because the liquidators did not identify such debtors or explain why this power was necessary in a business model that did not readily suggest such debts. Second, it held that no basis had been made out for the power to sell movable property of the company because no such property was identified and the liquidators did not explain why sale would be necessary as opposed to realisation or repatriation. The submission that investor “investments” constituted movable property was rejected as the investments would be incorporeal property, not movable property in the ordinary sense.

The parties were in agreement that, if the court found that certain extended powers had been granted without a sufficient case being made in an ex parte setting, the court could rescind that portion using its inherent jurisdiction under section 173 of the Constitution to regulate its own process in the interests of justice. The court considered this an appropriate case to “trim” the order accordingly.

Removal of the commissioner and setting aside of subpoenas

Turning to the alternative relief, the court applied the principles governing a commissioner’s impartiality drawn from Absa Bank v Hoberman and Others NNO. It treated the relevant test as whether there was, objectively assessed on reasonable grounds, a perception of bias, and emphasised that reasonableness is central to the enquiry.

The applicant relied on various features of the commissioner’s conduct, including that the Rule 53 record was prepared and filed by the liquidators’ attorneys on his behalf, that the commissioner was (at least initially) represented by those attorneys, that the commissioner allegedly failed to exercise his powers judicially when issuing subpoenas, that the commissioner’s written reasons included statements that certain points had been abandoned, and that the commissioner’s reasons were circulated and later included in the record via the liquidators’ attorneys. The applicant also relied on the fact that the subpoenas bore the signature of the liquidators’ attorneys.

The court accepted the commissioner’s explanation that the liquidators’ attorneys had performed administrative tasks at his request to avoid incurring legal costs because he was abiding the court’s decision, and that their filing of a notice of intention to oppose on his behalf had been an error that was corrected once identified. The court also treated the omission of the commissioner’s written reasons from the initial Rule 53 record as an oversight rather than something sinister, noting that the reasons had been transmitted to the applicant’s attorneys shortly after they were prepared.

On the handling of the subpoenas, the court reviewed the background, including the commissioner’s authorisation in the Salie AJ order to subpoena the applicant, the liquidators’ request for subpoenas supported by material, the applicant’s earlier challenges, and the commissioner’s written reasons for refusing to set aside the subpoena. The court held that even if the commissioner may have erred on aspects of law or fact, that would not in itself demonstrate bias. It considered the commissioner’s conclusion regarding “abandonment” of certain points to be substantially correct in the context described, and it found no factual basis for any suspicion that the commissioner relied on unauthorised documents obtained via the Anton Piller process.

The court further considered the issuance of a second subpoena and held that, given the limited lifespan of the first subpoena (which called the applicant for specific dates) and the need to secure attendance on later dates, issuing a replacement subpoena was lawful and did not evidence partiality or rubber-stamping.

As to the liquidators’ attorneys signing the subpoenas, the court regarded the complaint as technical and unsubstantial, noting that the subpoena contained provisions concerning expenses and contact details, and that the Uniform Rules’ civil subpoena form contemplates signature by both the registrar and the attorney for the party at whose instance the witness is subpoenaed. The court found that none of the relied-upon factors, individually or cumulatively, could reasonably ground a perception of bias, particularly when contrasted with the markedly more serious conduct that led to removal of a commissioner in Hoberman.

Accordingly, the court refused the relief removing the commissioner and refused to set aside the subpoenas on the basis advanced.

Costs

The court considered that the applicant’s success was minimal, limited to rescission of two extended powers, while he failed in the main challenges directed at setting aside the enquiry, removing the commissioner, and setting aside subpoenas. Applying the general rule that costs follow the result, the court awarded costs against the applicant, including the costs of two counsel for the liquidators. It declined to award costs on an attorney-and-client scale.

5. Outcome and Relief

The court partially rescinded the earlier ex parte order by rescinding paragraphs 2.5 and 2.6 of Salie AJ’s order dated 19 October 2020 (case number 15082/2020), which corresponded to two extended powers the court found had not been shown to be necessary.

The application was otherwise dismissed. The applicant was ordered to pay the liquidators’ costs, including the costs of two counsel.

Cases Cited

Taylor and Stein NNO v Koekemoer 1982 (1) SA 374 (TPD)

Hudson v The Master and Others 2002 (1) SA 862 (TPD)

Moodliar NO and Others v Hendricks NO and Others 2011 (2) SA 199 (WCC)

Ex parte: Klopper NO: in re Sogervim SA (Pty) Ltd 1971 (3) SA 791 (TPD)

Renwick and Others v Transvaal Taxicab Co 1910 T.H. 27

Absa Bank Ltd v Hoberman and Others NNO 1998 (2) SA 781 (C)

Legislation Cited

Companies Act 61 of 1973, sections 344(f), 386(4), 386(5), 386(6), 415, 417, 418

Companies Act 71 of 2008, section 224 and item 9 of section 9 (as referenced in the judgment in relation to the continued application of Chapter 14 of the 1973 Act)

Constitution of the Republic of South Africa, 1996, section 173

Rules of Court Cited

Uniform Rules of Court, Rule 53

Uniform Rules of Court, Form 16

Held

The court held that a section 417 enquiry could, on a proper interpretation of the statutory scheme, be established while the company was in provisional liquidation, and that the factual material underlying the liquidation and extension of powers applications supported the conclusion that the company was unable to pay its debts when section 417 was invoked. It further held that, insofar as the applicant sought rescission based on the alleged absence of that jurisdictional fact, he was required at least to allege solvency at the material time, which he did not do.

The court held that extended powers under section 386(5) must be shown to be necessary for winding up, and that while most of the extended powers granted to the provisional liquidators were justified on the facts, two were not. It therefore rescinded only those portions of the earlier order granting (as the court identified) the powers to agree to offers of composition and to sell movable property.

The court held that the applicant failed to establish, on an objective and reasonable basis, any perception of bias warranting removal of the commissioner, and that the process complaints concerning the Rule 53 record, representation, circulation of reasons, and the form of subpoenas did not justify such relief, whether considered individually or cumulatively. The application was otherwise dismissed with costs, including the costs of two counsel.

LEGAL PRINCIPLES

A section 417 enquiry is directed at the expeditious gathering of information about the affairs of a company in liquidation for the benefit of liquidators, creditors, and shareholders, and the statutory definition and transitional regime may support the establishment of such an enquiry during provisional liquidation where appropriate.

For purposes of statutory provisions requiring that the company be “unable to pay its debts”, the relevant time for assessing that inability is when the statutory mechanism is invoked, and a party seeking to set aside an order made on the premise of such inability bears the burden, in rescission-type proceedings, of placing before the court the facts necessary to show entitlement to relief, including (where relied upon) that the company was in fact able to pay its debts at the relevant time.

An application to extend a provisional liquidator’s powers under section 386(5) requires a factual demonstration that the powers sought are necessary for winding up the company’s affairs and distributing its assets, rather than merely convenient. The necessity of powers is evaluated against the factual matrix and the nature of the liquidation, recognising that provisional liquidators may need proactive authority in urgent and complex cases.

Where an ex parte order has granted powers that were not properly justified, the High Court may, in an appropriate case, invoke its inherent jurisdiction under section 173 of the Constitution to regulate its process and rescind or trim the order in the interests of justice.

A commissioner appointed to conduct a section 417 enquiry must act with procedural fairness and impartiality. The test for disqualification is whether there is an objectively assessed, reasonable perception of bias, and not every procedural irregularity, error, or use of administrative assistance will establish such a perception.

Massyn v De Villiers N.O and Others (109/2021) [2021] ZAWCHC 106; [2021] 3 All SA 578 (WCC) (1 June 2021)