Brief Summary

Companies — Liquidators — Remuneration — Application to set aside directive of Master regarding liquidators' fees — Liquidators contending that fees should be taxed at 10% under Item 1 of Tariff B of the Insolvency Act, while Master taxed at 3% under Item 2 — Court finding that the Master incorrectly applied the tariff as the proceeds from the sale agreement included both movable and immovable property — Directive set aside and order granted for taxation of fees at 10%.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an application brought in the Gauteng Division of the High Court, Pretoria, in terms of section 407(4)(a) of the Companies Act 61 of 1973 (the repealed “Old Companies Act”). The proceedings sought the judicial setting aside of a directive issued by the Master of the High Court, Pretoria regarding the taxation of liquidators’ remuneration.

The applicants were Johan Francois Engelbrecht N.O., Deon Marius Botha N.O., Allan David Pellow N.O., and Barend Petersen N.O., acting in their capacities as liquidators in the winding-up of Pamodzi Orkney (“Pamodzi”). The respondent was the Master of the High Court, Pretoria.

The procedural history was that the Master, after the applicants had lodged a liquidation and distribution account, issued correspondence indicating an intention to tax a portion of the remuneration at 3% rather than 10%, and then issued a formal directive dated 4 March 2016 to that effect. The applicants invoked the statutory review mechanism in section 407(4)(a) to challenge the directive. If successful, they further sought an order directing the Master to confirm the account on the basis that their fees should be taxed at 10%.

The general subject-matter of the dispute was the proper tariff category applicable to the liquidators’ remuneration under Tariff B (Tariff 8) of the Second Schedule to the Insolvency Act 24 of 1936, as incorporated into company winding-up remuneration through the relevant statutory and regulatory framework. The dispute turned on whether the proceeds reflected in the relevant account should be treated as proceeds of immovable property (3%) or as proceeds falling within movable property / collections / “other income” (10%), in circumstances where the underlying transaction involved a sale of a mining business as a going concern comprising a mixture of asset types and rights.

2. Material Facts

Pamodzi was provisionally wound up on 20 March 2009, and the applicants were appointed as liquidators in the winding-up. Before winding-up, Pamodzi operated a gold mine in Orkney with an approximate workforce of 6 000 employees. Shortly before the provisional liquidation, the mine was placed under care and maintenance, with the result (as described in the judgment) that the mine and associated mining assets were kept in a condition capable of operating.

It was common cause on the papers, and not disputed by the Master, that between March 2009 and August 2011 the liquidators sought a purchaser for the business. They ultimately concluded a sale agreement dated 1 August 2011 with China African Precious Metals (Pty) Ltd, for a purchase price of R150 000 000 (excluding VAT).

The assets sold were defined in the sale agreement as “sale assets”, comprising a wide range of items, including buildings, equipment and infrastructure, fixed assets, immovable property, intellectual property, mining rights, shafts, surface assets and permits, stock, ore stockpiles, geological and technical information, and certain prepaid expenses and deposits.

The applicants contended (and the judgment records their contention) that the immovable properties were of little value if not utilised for mining, were largely barren land, and were burdened by an environmental rehabilitation liability exceeding R100 000 000, which they said extinguished any positive inherent value. The purchaser agreed to assume responsibility for rehabilitation, which the applicants described as a mechanism to facilitate the sale as a going concern.

In the First Liquidation and Distribution Account lodged around October 2015, the total gross realisation was reflected as R222 356 112,17, split between a Free Residue Account and an Encumbered Asset Account No. 1. The Encumbered Asset Account No. 1 referred to income received in respect of the immovable properties as “PROCEEDS OF MINE” and “INTEREST RECEIVED ON PURCHASE PRICE”. Although the account’s description focused on immovable property, the court accepted, on the undisputed factual position, that the proceeds reflected emanated from the sale agreement and thus from a conglomerate of movable and immovable property as well as other rights and interests.

The applicants claimed remuneration reflected as “10% ON PROCEEDS-PROPERTY/ASSETS/INTEREST”. The Master rejected this, stating in a letter dated 14 December 2015 that the liquidators’ fee of 10% would be taxed at 3% in accordance with Tariff B of the Insolvency Act. The Master maintained that stance and issued the impugned directive on 4 March 2016, specifically taxing the applicants’ fees in Encumbered Asset Account No. 1 at 3% in terms of Item 2 of Tariff B.

3. Legal Issues

The court identified two main questions for determination.

The first issue was whether the Master applied the correct tariff item when directing that the applicants’ remuneration in the relevant account be taxed at 3% under Item 2 of Tariff B, which addresses (among other things) the gross proceeds of immovable property sold.

The second issue, arising only if the directive was incorrect, was whether the court should grant the further relief sought by the applicants by directing the Master to confirm the account on the basis that the remuneration should be taxed at 10% under Item 1 of Tariff B (which includes, among other categories, gross proceeds of movable property sold, certain collections, and amounts collected as rent, interest, or “other income”).

The dispute predominantly concerned the application of law to fact, namely the classification of the proceeds arising from a single composite transaction involving mixed assets and rights under the categories created by Tariff B, together with an evaluative component concerning the scope of the Master’s discretion to determine “reasonable remuneration” within the statutory framework.

4. Court’s Reasoning

Legislative and tariff framework applied

The court outlined that, under section 384 of the Old Companies Act, liquidators are entitled to reasonable remuneration to be taxed by the Master in accordance with the prescribed tariff. The court further traced the incorporation mechanism through regulation 24 of the regulations for winding-up and judicial management, read with annexure “CM104”, which in turn adopts the tariff applicable to trustees of insolvent estates under the Insolvency Act 24 of 1936, specifically Tariff 8 (Tariff B) in the Second Schedule.

The court emphasised that the interpretive difficulty arose because Tariff B does not expressly provide for a composite sale of a business as a going concern comprising interwoven movable assets, immovable assets, and statutory or contractual rights.

Setting aside the directive (incorrect reliance on Item 2 for the whole proceeds)

On the first issue, the court accepted the applicants’ submission that the sale assets were not limited to immovable property. It recorded that it was not apparent from the papers on what basis the Master treated the sale of all assets as falling within Item 2. During argument, counsel for the Master conceded that the sale did not fall wholly within Item 2.

On that basis, the court held that the directive applying Item 2 (3%) to the applicants’ remuneration in relation to the relevant encumbered account was incorrect, and the applicants were entitled to an order setting aside the directive under section 407(4)(a).

Refusal to direct taxation at 10% (Item 1) and remittal to the Master

The more difficult question was whether the court should itself direct that the Master tax the remuneration at 10%. The applicants argued that the proceeds should fall within Item 1, specifically within the term “other income”, and relied on the interpretive approach in Elliot Brother (East London) (Pty) Ltd v The Master and Another NO 1988 (4) SA 183 (E), where the court interpreted “other income” broadly within Item 1.

The court, however, distinguished the Elliot matter on its facts. It considered that the asset mix in the present matter included items that, on a prima facie basis, were closely connected to or “attached to” the immovable property in a mining operation (such as buildings, shafts, surface assets, and technical data), and in any event the sale assets clearly comprised both movable and immovable property. The court reasoned that, although the applicants contended the immovable property had little or no value absent ongoing mining operations, it remained that without the immovable property there would be no mining business to sell, and an immovable property capable of being mined would have materially more value than barren land.

The court treated the nature of the underlying transaction as not changing the legal character of the assets sold. It considered the approach reflected in Griffiths v Foley’s Trustee 1910–17 GWL 270, where a hotel sold as a going concern required an assessment of how much of the purchase price related to immovable property and how much to the movable contents for commission purposes. The applicants criticised such an approach as an artificial ex post facto dissection of an indivisible transaction. The court rejected that criticism on the facts, reasoning that the sale agreement here defined the sale assets, and that practical difficulty in valuation did not mean the assets could not fall into distinct tariff categories.

In the result, the court held that the applicants had not made out a case for an order directing taxation at 10% under Item 1. The court further declined to impose a detailed directive prescribing valuation time limits or similar mechanics, stating that it was not prepared to fetter the Master’s discretion. It underscored that the Master retains a discretion to determine reasonable remuneration in the prevailing circumstances, guided inter alia by the tariff.

Costs

On costs, the Master sought a costs order against the applicants, advancing various reasons. The court did not address each reason in detail, holding instead that the applicants were substantially successful (having succeeded in setting aside the directive), and therefore the Master should pay the costs, including the costs of two counsel.

5. Outcome and Relief

The court set aside the Master’s directive dated 4 March 2016 that the liquidators’ fee in Encumbered Asset Account No. 1 be taxed at 3% in accordance with Tariff B of the Insolvency Act.

The court referred the matter back to the Master to determine a reasonable remuneration, in terms of the applicable legislation, for the work performed by the applicants as liquidators in the winding-up of Pamodzi Orkney. The court refused the applicants’ further requested relief that the Master be directed to tax their fees at 10%.

The Master was ordered to pay the costs of the application, including the costs consequent upon the employment of two counsel.

Cases Cited

Elliot Brother (East London) (Pty) Ltd v The Master and Another NO 1988 (4) SA 183 (E).

Griffiths v Foley’s Trustee 1910–17 GWL 270.

Legislation Cited

Companies Act 61 of 1973, section 384.

Companies Act 61 of 1973, section 407(4)(a).

Insolvency Act 24 of 1936, Second Schedule, Tariff 8 (Tariff B).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Master’s directive taxing the liquidators’ remuneration at 3% under Item 2 of Tariff B on the basis that the proceeds were treated as proceeds of immovable property was incorrect in circumstances where the proceeds arose from a sale of a conglomerate of assets and rights, including movable and immovable property.

Although the directive was set aside, the liquidators were not entitled on the papers to an order compelling taxation at 10% under Item 1 of Tariff B. The matter was remitted to the Master to determine a reasonable remuneration under the applicable framework, without the court prescribing the detailed method or fettering the Master’s discretion.

LEGAL PRINCIPLES

A liquidator (or an aggrieved person) may approach the High Court under section 407(4)(a) of the Companies Act 61 of 1973 to have a directive of the Master regarding the taxation of remuneration set aside, and the court may confirm the account or make an order it considers fit within the scope of that statutory power.

Liquidators’ remuneration in company winding-up proceedings under the Old Companies Act is to be taxed as reasonable remuneration by the Master, guided by the tariff framework applicable through the regulations and incorporation of the Insolvency Act tariff for trustees.

Where a realisation arises from a single transaction involving a mixture of movable property, immovable property, and associated rights, it does not follow that the entirety of the proceeds must be taxed under the tariff item applicable to only one category (such as immovable property). An overbroad categorisation may constitute a misapplication of the tariff and justify setting aside the Master’s directive.

The fact that a business is sold as a going concern, and that valuation or apportionment may be practically difficult, does not in itself eliminate the need to recognise that different components of the merx may fall into distinct tariff categories, nor does it justify compelling the application of a single tariff rate without a proper basis.

In reviewing the Master’s taxation decision, the court may decline to substitute a specific tariff outcome (such as a fixed 10% rate) where the determination remains one involving the Master’s discretion to fix reasonable remuneration guided by the tariff, and may remit the matter for reconsideration rather than prescribing detailed mechanics that would fetter that discretion.

Engelbrecht NO and Others v Master of the High Court, Pretoria (55163/2016) [2017] ZAGPPHC 5 (18 January 2017)