Brief Summary

Liquidation — Meeting of creditors — Validity of resolutions — Second meeting of creditors held without proper notification to members — Liquidators' authority to sell company property questioned — Resolution passed at invalid meeting deemed ineffective — Transfer of immovable properties to third party set aside. The court considered the validity of the second meeting of creditors held on 6 October 2010, where resolutions were passed authorizing the sale of company property. The meeting was challenged on the grounds of improper notification, as it was convened solely as a creditors' meeting without including members, leading to questions about the liquidators' authority to sell the properties. The court held that the resolutions passed at the invalid meeting were ineffective, thereby nullifying the transfer of the immovable properties to the third party.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter was an application in the KwaZulu-Natal High Court, Durban, arising from the liquidation of Ciconia Properties (Pty) Ltd (“the company”) and, in particular, the liquidators’ authority to sell the company’s immovable properties and their entitlement to retain a substantial deposit paid under a cancelled sale agreement. The application initially included urgent interdictory relief to prevent transfer of the properties to a third-party purchaser, together with declaratory and setting-aside relief directed at the liquidation process and subsequent sale.

The first applicant, Mr Raymond Leisher, acted together with Moneybox Investments 173 (Pty) Ltd and RowanTree 17 (Pty) Ltd (the second and third applicants), which later sought leave to intervene as concurrent creditors. The principal respondents were the liquidators, cited as Enver Mohamed Motala N.O., John Douglas Michau N.O., and Preetha Dabideen N.O. (the first to third respondents). The fourth respondent, Cast Arena Trade and Invest 121 (Pty) Ltd (“Cast Arena”), was the purchaser to whom the properties were eventually transferred. The Master of the High Court, Durban was also cited.

The procedural history included the company’s provisional winding-up on 1 February 2010 and final winding-up on 23 March 2010, followed by a second meeting of creditors on 6 October 2010 where resolutions were passed authorising the sale of assets. An auction of five immovable properties took place on 24 March 2011, but was not finalised; Mr Leisher then concluded a private treaty purchase on 7 April 2011, paid a deposit, failed to raise the balance, and the agreement was cancelled. The liquidators later sold the properties by private treaty to Cast Arena. An urgent hearing before K Pillay J on 29 September 2011 resulted in a consent order regulating interim arrangements, including conditions under which transfer to Cast Arena could proceed. Subsequent interlocutory steps included condonation applications, an attempted further interdict, and an intervention application by the corporate applicants.

The dispute therefore concerned (a) the validity and effect of liquidation meeting resolutions underpinning the liquidators’ power to sell, (b) an alleged misrepresentation said to have induced the consent order, and (c) the appropriate disposition of the deposit following cancellation of the first sale agreement.

2. Material Facts

It was common cause that the company was wound up by the High Court and that the first to third respondents were appointed as liquidators. It was also common cause that at the second meeting held on 6 October 2010 a resolution was passed authorising the liquidators to dispose of the company’s immovable property by public auction, public tender, or private contract on terms determined by them.

The liquidators attempted to sell five immovable properties at an auction on 24 March 2011, but that sale was not finalised. Thereafter, on 7 April 2011, Mr Leisher concluded a private treaty to purchase the properties for R72 000 000 and paid a deposit of R10 800 000. Mr Leisher could not raise the balance of the purchase price; the liquidators cancelled the agreement and later sold the properties to Cast Arena for R70 050 000 by private treaty. The liquidators deducted certain expenses from the deposit and retained the balance in the amount of R10 711 976,04, asserting that they were entitled to do so in terms of a clause permitting retention of the deposit as “rouwkoop”.

After demand for repayment of the deposit on 16 September 2011, Mr Leisher launched motion proceedings seeking repayment and interdictory relief to prevent transfer to Cast Arena pending further challenges. On 29 September 2011, the matter served urgently before K Pillay J and a consent order was granted. The order contemplated that transfer to Cast Arena would be interdicted only temporarily and would proceed unless Mr Leisher met certain conditions by 28 October 2011, including making a higher written offer and obtaining Cast Arena’s written consent to cancellation of its sale agreement with the liquidators, supported by acceptable guarantees.

Pursuant to that order, Mr Leisher made an offer on 5 October 2011 which the liquidators rejected on 7 October 2011. No further offer meeting the deadline was made; Cast Arena demanded transfer on 2 November 2011, and transfer was registered on 12 December 2011.

On the question of notice for the second meeting, the factual record showed publication in the Government Gazette on 17 September 2010, publication in newspapers including Beeld and the Natal Witness, and registered-mail notices to known creditors. A registered letter was sent to Mr Richard Bate (a shareholder and director) referencing attendance in terms of section 414(1)(a) of the Companies Act 1973. The applicants contended that the notices and process reflected a meeting of creditors only, not a meeting of members, and that members were not properly notified as required by the regulations.

On the evidence, there were only two members: Mr Bate and Moneybox Investments 173 (Pty) Ltd. The court accepted evidence that Bate attended the second meeting and signed the minutes, and that he confirmed on oath that he adopted the reports and resolutions in his capacity as a member. The court also accepted that Mr Leisher was, on his own version, the alter ego of Moneybox and that he received notification of the meeting, and further considered his claimed status as a director as relevant to his duty to attend.

The alleged misrepresentation relied upon by Mr Leisher concerned an asserted assurance that Cast Arena would consent to cancellation of its sale agreement. The court considered the affidavits and correspondence after the consent order and found the asserted inducement was not supported on the papers.

3. Legal Issues

The court identified the issues for decision as including whether the second meeting of creditors and its resolutions were invalid due to (a) improper notice to relevant parties and/or (b) the meeting being one of creditors only rather than a meeting of both creditors and members, given the requirements of section 386(3) of the Companies Act 1973.

Contingently, if invalidity were established, the court identified additional questions relating to whether the court would be precluded from setting aside transfer to Cast Arena and whether the K Pillay J consent order constituted sufficient authority for transfer. However, these contingent issues became unnecessary once the court found the meeting and resolutions valid.

A further issue was whether Mr Leisher was misled by representations made during the process culminating in the consent order, and whether any such misrepresentation was sufficient to justify setting aside the agreement embodied in that order and consequentially to set aside the sale and transfer to Cast Arena. This issue involved an assessment of fact on affidavit (whether the representation was made and induced the agreement) and the legal consequences if such an inducement were established.

Finally, the court had to determine the appropriate disposition of the deposit retained by the liquidators after cancellation of the first sale agreement, including whether it was justifiable for the liquidators to withhold the full amount and whether immediate partial repayment should be ordered pending determination of damages.

Overall, the dispute largely concerned the application of legal requirements to the established facts (notice and character of meeting; authority of liquidators; admissibility and sufficiency of material supporting misrepresentation), together with a discretionary or evaluative judgment regarding interim relief and the handling of the deposit.

4. Court’s Reasoning

Validity of the second meeting and the liquidators’ authority

The court approached the challenge to the second meeting through the statutory framework governing liquidators’ powers. It referred to section 386(3) of the Companies Act 1973, which requires, in a court winding-up, that the liquidator act “with authority granted by meetings of creditors and members or contributories” (unless acting on Master’s directions under section 387), and to section 386(4), which includes the power to sell movable and immovable property by auction, tender, or private contract.

Because it was common cause that the Master had issued no directions authorising the sale, the court treated the existence of proper meeting authority as central. It then examined section 412 (procedures for convening meetings of creditors and members), together with the insolvency-law method of convening creditors’ meetings (including section 40(3)(b) of the Insolvency Act 1936) and the regulations prescribing how members’ meetings must be summoned (including regulation 8(2) read with regulation 7(1) of the Regulations for Winding-up and Judicial Management of Companies: Forms and Fees).

In assessing whether the second meeting was properly convened and whether it functioned as both a creditors’ and members’ meeting, the court treated the question as one of fact to be deduced from the evidence. The applicants relied on the form and content of various notices, some of which referred to a “meeting of creditors” and did not explicitly characterise the meeting as a members’ meeting. The applicants also invoked authority emphasising the need for proper compliance where section 386(3) requires authority of both constituencies.

The court considered the factual matrix revealed by the notices, minutes, and affidavits. It noted that the Gazette notice contained a preamble referring to meetings of “creditors, members or contributories” and that the meeting minutes were headed in a manner consistent with a combined meeting and reflected adoption of resolutions on behalf of “creditors, contributories and members”. The court attached particular importance to the evidence relating to the company’s members. Mr Bate, a shareholder and director, attended and signed the minutes, and the liquidators’ evidence was that he acted in his capacity as a member; this was confirmed by Bate on oath. The court further held that Bate’s confirmatory affidavit could in any event be regarded as ratifying the liquidators’ action, relying on the ratification principle illustrated by the authority it cited.

As to Moneybox, the court reasoned that Mr Leisher was, on his own version, its alter ego, and it was common cause that he had notice of the second meeting. The court also considered that, insofar as Mr Leisher claimed to have been a director, his statutory duty to attend the meeting reduced the force of arguments premised on lack of notice to him personally as a member representative. The court viewed it as “artificial” in the circumstances to maintain that the meeting was not effectively a combined meeting of creditors and members, given that the only other member (Bate) attended and the remaining member’s controlling mind (Leisher) knew of the meeting and ought to have attended.

On this basis, the court found that the relevant parties had been properly notified and that the second meeting constituted a meeting of both creditors and members for purposes of section 386(3). It therefore found that the resolutions passed at that meeting gave the liquidators the power to sell the immovable properties.

Having reached that conclusion, the court held it unnecessary to determine the contingent issues regarding the setting aside of transfer to Cast Arena on the assumption of invalidity, or whether the K Pillay J order constituted authority for transfer.

Alleged misrepresentation inducing the consent order and sale to Cast Arena

The court then turned to the claim that Mr Leisher had been induced into the consent order by a misrepresentation, namely that Cast Arena would consent to cancellation of its sale agreement if a higher offer emerged. Mr Leisher contended that, had he known Cast Arena would not consent, he would not have agreed to the consent order, and he sought a referral to oral evidence on the alleged fraud.

In evaluating this claim, the court focused on what was supported by the affidavits and the contemporaneous correspondence. It considered that whatever the parties’ intentions might have been in agreeing to the relevant clause in the consent order, evidence of intention and prior negotiations was inadmissible, referencing the authority it cited on that point. It then assessed whether the papers established any factual basis that a false representation had been made to Mr Leisher, by whom, and that it induced the agreement.

The court found that the assertion of misrepresentation was not supported by the correspondence. It regarded as improbable a claim that Cast Arena had already decided to consent to cancellation while simultaneously insisting on a clause requiring Mr Leisher to obtain its written consent, and a further clause preserving Cast Arena’s right to proceed to transfer after the deadline. The court also considered correspondence in which Mr Leisher’s attorneys offered Cast Arena money to procure consent to cancellation, which the court treated as inconsistent with a belief that consent had already been secured.

The court further dealt with the suggestion that counsel for the liquidators might have represented in court that Cast Arena consented to cancellation. It accepted evidence advanced on behalf of Cast Arena (in related proceedings) that counsel for Mr Leisher had withdrawn that allegation at the urgent hearing, and it took into account that Mr Leisher did not address that allegation in reply. On this footing, the court concluded there was no basis on the affidavits for a referral to oral evidence and declined to make such an order.

The court therefore found no proper basis to set aside the sale of the immovable properties to Cast Arena.

The deposit and interim repayment pending damages determination

Although the applicants failed on the principal relief relating to the validity of the meeting and the setting aside of the Cast Arena sale, the court separately addressed the retention of the deposit paid by Mr Leisher under the cancelled R72 million agreement.

The liquidators contended that the deposit dispute should be resolved by action to quantify damages. However, the court noted a concession that any damages would “be nowhere near” the retained amount of approximately R10.7 million, and it considered that the liquidators could have calculated their loss given their stance that the later sale to Cast Arena should stand. The court considered it unjust that a large amount could be withheld without proper justification.

The court reasoned that the later sale price of R70 050 000, compared to the original price of R72 000 000, suggested an “arguable” loss of R1 950 000. It then treated immediate partial repayment as appropriate on an interim basis pending determination or agreement on damages, and adopted what it described as a generous approach to the liquidators. It ordered R8 000 000 to be repaid forthwith to Mr Leisher, with the balance to remain in trust pending further litigation to determine the liquidators’ damages.

Costs

In relation to costs, the court took into account that, save for the deposit issue, the applicants were unsuccessful, but also that the liquidators would not have returned any portion of the deposit without litigation. The court adopted an approach it considered fair in the circumstances: each side (the applicants and the liquidators) would bear its own costs, including wasted costs from an adjournment occasioned by Swain J’s recusal, while Cast Arena—having successfully resisted the principal relief affecting it—was awarded its costs against the first applicant.

5. Outcome and Relief

The court ordered that, pending a decision or agreement regarding the liquidators’ damages arising from breach of the first sale agreement, the liquidators must repay R8 000 000 to Mr Leisher as partial repayment of the deposit paid under the cancelled agreement of 7 April 2011. The remainder of the application was dismissed, which included the attempts to invalidate the second meeting resolutions and to set aside or prevent transfer to Cast Arena.

The court ordered that the applicants and the first to third respondents (the liquidators) should each pay their own costs of the application, including wasted costs arising from the adjournment following the recusal of Swain J. The court further ordered that the first applicant pay the fourth respondent’s costs.

Cases Cited

Griffin and Others v The Master and Another (Commins and Another Intervening) 2006 (1) SA 187 (SCA).

De Wet NO v Uys NO en Andere 1998 (4) SA 694 (T).

S v Di Stefano 1977 (1) SA 770 (CPD).

Van Aardt v Galway [2012] JOL 28349 (SCA).

Legislation Cited

Companies Act 61 of 1973, sections 386(3), 386(4), 387, 412, and 414(1)(a).

Insolvency Act 24 of 1936, section 40(3)(b).

Conventional Penalties Act 15 of 1962.

Rules of Court Cited

Regulations for Winding-up and Judicial Management of Companies: Forms and Fees, regulations 7(1) and 8(2).

Held

The court held, on the facts, that the second meeting held on 6 October 2010 was properly notified and functioned as a meeting of both creditors and members, with the consequence that the resolutions passed at that meeting validly conferred authority on the liquidators under section 386(3) read with section 386(4) of the Companies Act 1973 to sell the company’s immovable properties.

The court held that the applicants failed to establish a factual basis on the papers for an alleged misrepresentation that would justify setting aside the consent order or the subsequent sale and transfer of the properties to Cast Arena, and it declined to refer that issue to oral evidence.

The court held that, notwithstanding the applicants’ lack of success on the principal challenges, it was unjustified for the liquidators to retain the entire deposit, and it ordered immediate partial repayment of R8 000 000, with the balance to remain in trust pending determination or agreement of the liquidators’ damages.

LEGAL PRINCIPLES

A liquidator’s power in a court winding-up to sell a company’s property under section 386(4) of the Companies Act 1973 depends, absent Master’s directions, on authority granted by meetings of creditors and members or contributories as required by section 386(3). Whether the necessary authority exists may turn on a factual evaluation of how the relevant meeting was convened, who attended, and in what capacities resolutions were adopted.

Where a company has a limited class of members and the evidence demonstrates that a member attended and adopted resolutions in that capacity, and where another member’s controlling mind had notice and was obliged (as director) to attend, a court may treat it as untenable, on the particular facts, to characterise the meeting as one of creditors only.

Evidence directed at proving a different intention from that recorded in a court order (including reliance on prior negotiations to alter the meaning or effect of the recorded terms) is not admissible for that purpose, and an asserted inducement by misrepresentation must be supported by the evidence placed before the court on affidavit if it is to justify rescission-like relief or a referral to oral evidence.

In relation to deposits and asserted contractual forfeiture (including “rouwkoop”), the court may make an evaluative determination, on the available facts and concessions, that retention of a substantial deposit without substantiated quantification of damages is unjust, and may order partial repayment pending later determination of damages in further proceedings.

Leisher and Others v Motala N.O and Others (10769/11) [2012] ZAKZDHC 15 (1 January 2012)