Brief Summary

Companies — Enquiry into affairs of company — Challenge to ex parte order authorising enquiry — Applicants, former directors of Retro Reflective (Pty) Ltd, sought to set aside order based on alleged non-disclosure of material facts and oppressive terms of the order — Court held that applicants lacked locus standi to challenge the order as they were not parties to the original proceedings and had no right to be joined — Application dismissed.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter comprised two related applications heard together in the Eastern Cape Division, Gqeberha. Both applications arose from prior liquidation-related litigation concerning an enquiry into the affairs of Retro Reflective (Pty) Ltd (“the company”) convened under sections 417 and 418 of the Companies Act 61 of 1973.

In case no. 1214/2021, the applicants (Messrs Du Preez and Swanepoel, former directors of the company) sought the re-enrolment of an earlier ex parte application (case no. 3000/2020) and an order declaring the section 417/418 enquiry authorisation order granted on 8 December 2020 to be unlawful and void ab initio, and to have it set aside. Although the challenge was initially framed on two broad bases (alleged non-disclosure and overbroad powers conferred on the commissioner), following an interlocutory ruling by Goosen J refusing access to the underlying papers, the applicants persisted only with the challenge directed at the terms of the order itself.

In case no. 1303/2021, the applicants (Mr and Mrs Pretorius, together with Mr Du Preez and Mr Swanepoel, but expressly not the same Du Preez and Swanepoel as in 1214/2021) had initially sought urgent relief to stay subpoenas and postpone the same enquiry insofar as it related to them. By the time the application was pursued, however, the enquiry had already been postponed due to their non-attendance, rendering the substantive relief moot. The only issue remaining for determination in that application was therefore costs.

The general subject-matter of the dispute concerned the extent to which persons subpoenaed (or prospective examinees) under a liquidation enquiry authorised under sections 417 and 418 may challenge the authorising order itself, as distinct from challenging a subpoena or other steps taken in the conduct of the enquiry, and the consequent costs consequences of launching ill-suited proceedings.

2. Material Facts

The undisputed background facts accepted by the court were that the applicants in case no. 1214/2021 were the founding directors of the company. They resigned at the end of June 2018 when the company was sold to Phumla Cynthia Mkhontwana. At the time of the sale, the company was indebted to Hantle Infra Planning (Pty) Ltd (“Hantle”), and that indebtedness was secured by personal suretyships signed by those applicants.

The company was placed into voluntary liquidation in November 2018, and the second and third respondents were appointed as the joint liquidators. During July 2020, Hantle brought an Anton Piller application under case no. 1354/2020 against various parties including the company and the persons who are applicants in the present applications; that Anton Piller order, initially obtained ex parte, was later challenged and set aside on 10 December 2020.

Running in parallel, on 8 December 2020 Hantle obtained an ex parte order under case no. 3000/2020 authorising an enquiry in terms of sections 417 and 418. The fourth respondent was appointed as the commissioner, and her powers were circumscribed by the terms of the court order.

In executing her functions, the commissioner issued subpoenas duces tecum to the relevant individuals, requiring attendance at the enquiry scheduled for 17–19 May 2021. After service of the subpoenas, the applicants in case no. 1214/2021 requested a postponement because they intended to seek to set aside the ex parte authorisation order. When that undertaking was not forthcoming, they launched their application in two parts, seeking interim relief in part A (including a stay and access to papers) and final relief in part B (re-enrolment and setting aside of the authorisation order).

On 14 May 2021, Makaula J granted an order staying the subpoenas and postponing the enquiry only in respect of the applicants in case no. 1214/2021, pending determination of the relief sought in part B.

The applicants in case no. 1303/2021 then sought a similar postponement for themselves, contending they would otherwise be subjected to interrogation under an ex parte order which might later be set aside. That request was refused. They appeared at the enquiry on 17 May 2021 and applied for a postponement; the commissioner refused it in a ruling circulated at 16h50 that day. They then refused to attend for examination on 18 May 2021 and, at approximately 16h00, launched the application under case no. 1303/2021 seeking a stay and postponement pending the outcome of part B in case no. 1214/2021.

A further undisputed fact central to the costs issue was that, at the time case no. 1303/2021 was launched, the commissioner had already postponed the enquiry due to non-attendance, with the result that the substantive relief sought became moot, a circumstance the applicants only learned from the answering papers.

As to procedural history material to the issues later decided, Goosen J dismissed the applicants’ request for access to the papers filed in support of the ex parte authorisation order (part A relief) on 14 April 2022, and leave to appeal was refused on 16 May 2022. Consequently, the later challenge in case no. 1214/2021 proceeded only on the question whether the applicants could attack the authorisation order on the basis of its terms, and whether they had the standing to do so.

3. Legal Issues

The primary legal issue in case no. 1214/2021 was whether the applicants, as former directors and subpoenaed/prospective examinees, had the requisite locus standi to seek an order re-enrolling an ex parte application and setting aside the section 417/418 enquiry authorisation order in its entirety, including a declaration that it was void ab initio.

A related issue was the scope of permissible challenges open to a subpoenaed examinee in this context, including whether such a person may challenge the authorising order itself, or whether their remedies are confined to resisting or setting aside a subpoena (for example on grounds of oppression or hardship), or opposing the authorisation only if the proceedings come to their attention before the order is granted.

Ancillary legal issues concerned whether the procedural mechanisms relied upon by the applicants could apply to their position, specifically the applicability of Uniform Rule 6(12)(c) (reconsideration of urgent orders granted in absence) and Uniform Rule 6(4)(b) (leave to oppose an ex parte application by an interested person who becomes aware of it before it is heard).

In case no. 1303/2021, the legal issue was confined to costs, including whether the costs should follow the outcome in case no. 1214/2021 and whether the application was properly conceived given that the enquiry was already postponed and the commissioner had already issued a ruling refusing postponement which had not been set aside.

These issues involved a combination of legal questions (standing; applicability of procedural rules; scope and purpose of sections 417 and 418) and the application of those legal principles to the procedural posture and established facts, together with a discretionary/value component in relation to costs (including the reasonableness of employing two counsel).

4. Court’s Reasoning

In approaching locus standi and the nature of sections 417 and 418, the court placed reliance on the Supreme Court of Appeal’s recent discussion in Smith N O and Others v Master of the High Court, Free State Division, Bloemfontein and Another [2023] ZASCA 21 (8 March 2023), which in turn endorsed Constitutional Court authority emphasising the public utility and enabling purpose of liquidation enquiries. The judgment treated the enquiry as a mechanism intended primarily to assist liquidators to determine the company’s assets and liabilities, recover assets, and discharge duties in a manner serving creditors and the public interest.

The court accepted as correct that a prospective examinee generally has no right to prior notice of an application to authorise an enquiry under sections 417 and 418, and therefore does not enjoy the full protection usually associated with audi alteram partem at the authorisation stage. In that regard, the court relied on Friedland and Others v The Master and Others 1992 (2) SA 370 (WLD), which was cited for the proposition that the right to be heard is limited in this context and ordinarily arises only if the prospective examinee learns of the application before the power is exercised.

From that premise, the court reasoned that where a potential witness becomes aware of an intended authorisation application in advance, such a person may have standing to oppose it, but the grounds to resist are narrow, extending to issues such as jurisdiction, hardship or oppression, or unusual or exceptional circumstances justifying the court’s intervention. The judgment further endorsed the proposition (with reference to authority including Botha v Strydom and Others 1992 (2) SA 155 (N)) that once a witness is subpoenaed, the appropriate challenge typically lies against the subpoena itself, including on the basis that compulsion to attend and be examined may cause undue hardship or oppression.

Applying those principles, the court found that the applicants in case no. 1214/2021 were not parties to the ex parte authorisation proceedings and had no right to be joined at the time the order was sought. They were, at best, persons who might possess information relevant to the winding-up. In that posture, the court was not satisfied that they had established the necessary standing to pursue relief directed at setting aside the authorisation order ut totum, including a declaration of invalidity ab initio.

The court also addressed and rejected the applicants’ reliance on Power N.O. v Bieber and Others 1995 (1) SA 497 (WLD) as a basis for their entitlement to set aside the authorisation order. It held that Power was decided on different facts (involving abuse of process by a liquidator) and did not stand for the proposition that a subpoenaed witness has standing to set aside an enquiry authorisation order in its entirety. To the extent that Power contained obiter remarks about an aggrieved examinee opposing an examination, the court regarded those remarks as qualified and directed to opposition in relation to that witness, rather than a challenge to the proceedings as a whole.

On the procedural rules invoked, the court drew a clear distinction between the applicants’ position and the situation contemplated by Uniform Rule 6(12)(c). That rule allows reconsideration of an urgent order granted in a party’s absence to a person against whom the urgent order was granted. The court held that this did not fit the present circumstances because the applicants were neither parties to the ex parte authorisation proceedings nor persons against whom that order had been granted in the manner contemplated by Rule 6(12)(c). The court likewise held that Uniform Rule 6(4)(b) did not avail the applicants because it is directed at a person who becomes aware of an ex parte application before it is heard and seeks leave to oppose at the same hearing. On the facts, the authorisation had already been granted, and the rule was therefore inapplicable.

Given the finding on standing, the court considered it unnecessary to engage with the substance of the challenge to the commissioner’s powers under the authorisation order.

In relation to costs in case no. 1214/2021, the court applied the ordinary approach that costs follow the result, finding no reason to depart from it. It nevertheless held that the employment of two counsel was not warranted.

Turning to case no. 1303/2021, the court rejected the submission that costs should follow the result in case no. 1214/2021 in a manner beneficial to those applicants, noting that the outcome in 1214/2021 was adverse to the challenge. Independently, the court found that the relief sought in 1303/2021 was ill-conceived because, at the time it was launched, the commissioner had already ruled on the postponement request, and that ruling remained effective with legal consequences unless and until set aside. With reliance on Oudekraal Estates (Pty) Ltd v City of Cape Town and Others 2004 (6) SA 622 (SCA), the court treated the commissioner’s ruling as existing in fact and producing legal consequences that could not be ignored. The appropriate remedy, had the applicants wished to challenge that ruling, was review and setting aside, which they had not pursued.

Accordingly, the court held there was no basis to depart from the ordinary costs approach in case no. 1303/2021, and reiterated that two counsel were not justified.

5. Outcome and Relief

In case no. 1214/2021, the court dismissed the relief sought in part B of the notice of motion and ordered the applicants to pay costs, without allowing costs on the scale of two counsel.

In case no. 1303/2021, the court ordered the applicants to pay the costs of the application jointly and severally, the one paying the other to be absolved, again not endorsing the need for costs of two counsel.

Cases Cited

Smith N O and Others v Master of the High Court, Free State Division, Bloemfontein and Another (1221/2021) [2023] ZASCA 21 (8 March 2023).

Ferreira v Levin NO and Others; Vryenhoek v Powell NO and Others (as referenced in the judgment through Smith).

Bernstein and Others v Bester and Others NNO (as referenced in the judgment through Smith).

Friedland and Others v The Master and Others 1992 (2) SA 370 (WLD).

Ex Parte Liquidators Ismail Suliman & Co. (Pty.) Ltd 1941 WLD 33.

Botha v Strydom and Others 1992 (2) SA 155 (N).

Power N.O. v Bieber and Others 1995 (1) SA 497 (WLD).

Oudekraal Estates (Pty) Ltd v City of Cape Town and Others 2004 (6) SA 622 (SCA).

Legislation Cited

Companies Act 61 of 1973, sections 417 and 418.

Rules of Court Cited

Uniform Rules of Court, Rule 6(12)(c).

Uniform Rules of Court, Rule 6(4)(b).

Held

The court held that the applicants in case no. 1214/2021, as former directors and subpoenaed/prospective examinees, did not establish the necessary locus standi to seek to re-enrol and set aside the ex parte order authorising a sections 417 and 418 enquiry in its entirety, including a declaration that the order was void ab initio. The procedural rules relied upon for reconsideration or intervention were found to be inapplicable on the facts.

The court further held, in case no. 1303/2021, that the costs should be borne by the applicants because the substantive relief sought had become moot and, in any event, the application was ill-conceived given the existence of the commissioner’s postponement ruling, which remained effective unless set aside on review.

LEGAL PRINCIPLES

A section 417/418 liquidation enquiry is an enabling mechanism designed to assist liquidators in fulfilling their statutory duties, including identifying assets and liabilities and serving the interests of creditors and the public.

A prospective examinee generally has no right to prior notice of an application to authorise a section 417/418 enquiry; a right to be heard may arise only if the intended examinee becomes aware of the application before the authorisation is granted.

Where a prospective examinee does have an opportunity to oppose authorisation, the permissible grounds of opposition are narrow, including challenges based on jurisdiction, hardship or oppression, or unusual or exceptional circumstances.

A subpoenaed witness’s remedies typically lie in challenging the subpoena or the conduct of the enquiry as it affects that witness, rather than seeking to set aside the authorising order in its entirety.

Uniform Rule 6(12)(c) applies to reconsideration of urgent orders granted in a party’s absence where the order was granted against that person; it does not apply where the applicant is not a party against whom the order was granted in the relevant sense.

Uniform Rule 6(4)(b) is directed at intervention to oppose an ex parte application that comes to an interested party’s attention before it is heard; it does not provide a mechanism to undo an ex parte order once granted.

A decision or ruling (including within the context of an enquiry) exists in fact and carries legal consequences unless and until set aside by a competent process; the proper remedy to challenge such a ruling is to seek its review and setting aside, consistent with the principle articulated in Oudekraal Estates (Pty) Ltd v City of Cape Town and Others 2004 (6) SA 622 (SCA).

Du Preez and Another v Hantle Infra Planning (Pty) Ltd and Others (1214/2021;1303/2021) [2023] ZAECQBHC 22 (4 April 2023)