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[2009] ZAGPJHC 3
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Kebble v Gainsford NO and Others (09/1668) [2009] ZAGPJHC 3; 2010 (1) SA 561 (GSJ) (23 March 2009)
Links to summary
IN THE SOUTH GAUTENG HIGH COURT)
CASE NO: 09/1668
In the matter between:
ROGER AINSLEY RALPH KEBBLE
Applicant
and
GAVIN CECIL GAINSFORD N.O.
First Respondent
MICHAEL MMATHOMO MASILO N.O.
Second Respondent
MELITA MEISEL N.O.
Third Respondent
ELIZABETH WILANDA PRINSLOO N.O.
Fourth Respondent
RENE BEKKER N.O.
Fifth Respondent
RANDGOLD AND EXPLORATION
COMPANY LIMITED
Sixth Respondent
JUDGMENT
I. INTRODUCTION
This is an application to set aside a Summons (“the Summons”),
calling upon the Applicant (“Kebble”)
to testify at an
enquiry convened in terms of Sections 417 and 418 of the Companies
Act 61 of 1973 (“the Companies Act”).
The enquiry
concerns a company in liquidation, BNC (Pty) Limited (“the
Company”).
The First to Fifth Respondents (“the Liquidators”) are
the liquidators of the Company.
The Fifth Respondent (“the Commissioner”) is the
Commissioner appointed to conduct the enquiry into the affairs of
the Company by the Master of the High Court pursuant to an Order
(“the Master’s Order”) signed by the Master
on 20
March 2006.
The Sixth Respondent (“Randgold”) is the only proven
creditor of the Company with a proved claim in an amount of
R169 500 000.
Kebble and his late son, Brett Kebble (“Brett”), were
the sole directors of the Company prior to its liquidation.
As a
result of the death of Brett, Kebble is the sole surviving director
of the Company.
Kebble maintains that he was a non-executive director of the
Company, and knows nothing of the manner in which the Company
conducted its affairs. The Liquidators dispute this.
The Company was placed in final liquidation on 11 April 2006
at the instance of Randgold.
After the Master’s Order was granted, Kebble entered into two
settlement agreements with Randgold, dated respectively 1 October
2006 (“the first settlement agreement”) and
28 February 2008 (“the second settlement agreement”)
(collectively “the settlement agreements”).
Pursuant to the settlement agreements, Kebble agreed to pay Randgold
an amount of R30 million in settlement of any claims
that
Randgold might have against him. He also agreed to pay an amount of
R5 000 000 in settlement of any amounts that
JCI Limited
(“JCI”), an affiliate of Randgold, might have against
him.
In the first settlement agreement, Randgold undertook, as against
Kebble only, to cease funding the Master’s enquiry to
the
extent that Kebble might be called upon to give evidence at the
enquiry.
Kebble contends that the effect of the settlement agreements was to
discharge Randgold’s claim against
the Company
with the
result that there are no longer any proved creditors of the Company.
Kebble maintains that, insofar as the liquidators now seek to
interrogate him at the enquiry, the enquiry is an
“abuse”
for the following reasons:
[12.1] The only proved creditor of the Company, Randgold,
allegedly does not want the enquiry to continue and Randgold’s
claim has allegedly been satisfied pursuant to the settlement
agreements.
[12.2] The Liquidators are allegedly possessed of sufficient
information to attend to the winding-up of the Company, including
the pursuit of any litigation contemplated by them, and no further
enquiry is therefore necessary.
The Liquidators dispute these contentions.
II. ANALYSIS OF THE FACTS
A.
Events Preceding The Winding-up Of The Company
In paragraph 19 of the founding affidavit, Kebble relies upon
allegations made by Randgold in support of its application to wind
up the company. He does not appear to contest the accuracy of these
allegations. The following appears from the allegations
in the
winding-up petition upon which he relies:
[14.1] Both Kebble and Brett (who were the sole directors of the
Company) were directors of Randgold.
[14.2] On 24 August 2005, Brett and one of the other
directors of Randgold, Buitendach resigned from Randgold’s
Board and P H Gray and J C Lamprecht were appointed as new
directors. On 7 October 2005, a certain Nurek was appointed to
the Board as a non-executive director.
[14.3] The new directors suspected the former members of the old
Board of Randgold of managing the affairs of Randgold in
a
reckless and fraudulent manner. They therefore appointed forensic
accountants Umbono Financial Advisory Services (“Umbono”)
to investigate.
[14.4] Umbono’s investigation allegedly revealed that the
Company had been used as a vehicle to perpetrate a fraud
on
Randgold.
[14.5] Consequent upon this investigation, Randgold launched
successful winding-up proceeding against the Company. The Company
was placed in provisional liquidation on 10 March 2006 and the
order was made final on 11 April 2006.
[14.6] Kebble makes the following statements in his founding
affidavit:
“
18 I have no personal
knowledge in relation to these allegations. Although I was
registered as a director of BNC between
1996 and 2004, I was
never aware of or involved in any of its activities;
to
the best of my knowledge, it was a dormant entity that never
traded.
...
41.1 As is set out in the
founding affidavits filed respectively by Randgold in the
liquidation application, and by the
liquidators in the Section
386 (5) application, BNC was a dormant entity that did not
conduct any business or trading activities
and had no employees.
BNC was only ever
used as a vehicle for the misappropriation of funds flowing from
the sale of the DRD shares.
”
It is common cause that Brett was a shareholder in the Company and
that his deceased estate is insolvent.
B.
The First Settlement Agreement
On 1 October 2006 Kebble, Randgold and JCI concluded the first
settlement agreement.
The following were material terms of the first settlement agreement:
[17.1] The
“Randgold claims”
were defined as:
“
All and any claims of
whatsoever cause arising enjoyed by Randgold and/or any Associate
Company of Randgold
against
Kebble
”.
[emphasis added]
[17.2] The
“Randgold amount”
was defined as:
“
The amount of
R30 000 000...which Kebble has agreed to pay Randgold
on account of the Randgold Claims”.
[emphasis added]
[17.3] Pursuant to clauses 6 and 7, Kebble undertook to pay an
amount of R30 million in instalments on account of the
Randgold claims and an amount of R5 million to JCI in
instalments on account of JCI’s claim against Kebble.
[17.4] The following clauses are also relevant:
“
12.1 Upon the
fulfilment of all of Kebble’s obligations in terms of this
Agreement, Randgold accepts payment of the
Randgold amount
in
settlement of the Randgold Claims.
12.2 Upon signature of this
Agreement by Kebble all or any claims of whatsoever nature from
whatsoever cause arising enjoyed
by Kebble against Randgold
and/or its associate and/or its subsidiary company shall be
deemed to have been waived in their
entirety and Kebble shall
have no further entitlements in respect thereof.
19.1 The parties record,
that the 417 enquiry has been convened at the instance of
Randgold to take place on the 2
nd
October 2006.
19.2 Randgold shall
instruct Tabacks Incorporated, to postpone the 417 enquiry
sine
die
on the
2
nd
October 2006. Furthermore, Randgold undertakes to Kebble not to
fund the 417 enquiry into the trade, dealings and affairs
of BNC
any further...
19.5 Following the
conclusion in all respects of the mediation and arbitration
processes as envisaged in the Mediation Agreement
and provided
that Kebble has complied with all of his obligations in terms of
this Agreement,
Kebble
shall have an option to acquire Randgold’s proved claim in
the insolvent estate of BNC from Randgold on terms
acceptable to
Kebble and Randgold at a purchase price not exceeding
R100 000 .00...
25. This Agreement together
with Annexures constitutes the entire Agreement between the
parties as to subject matter hereof
and no Agreements,
representations, undertakings, conditions, terms or warranties
other than those contained herein shall
be binding on the
parties, unless reduced to writing and signed by all of the
parties hereto.”
[emphasis added].
After conclusion of the first settlement agreement, Kebble made
various payments to Randgold and the enquiry was postponed
sine die
.
Kebble alleges that a dispute subsequently arose which led to his
withholding payment of the amounts for August, September
and October
2007.
As a result of this dispute, the parties concluded the second
settlement agreement on 28 February 2008. Pursuant to the
second settlement agreement, the parties settled the disputes
between them relating to the provisions of the first settlement
agreement.
The material terms of the second settlement agreement were as
follows:
“
10.1 Randgold
undertakes within 4 (four) days of signature hereof to address a
letter to the Liquidators of BNC, requesting
them to take no
further action against Kebble, and Michael Patrick Crawford
and/or M P Crawford Holdings (Pty) Limited
and/or Fordcraw
Properties (Pty) Limited (hereinafter collectively referred to as
“the Crawford Parties”).
Randgold
however furnishes no warranty that the liquidators of BNC will
heed such request.
It should
moreover be understood that the failure on the part of the
Liquidators of BNC to heed the said request will in
no way impact
on the liability which Kebble has undertaken in terms of this
Agreement.
10.2 Randgold undertakes
not to fund any litigation between the Liquidators of BNC may
institute (sic). Should the Liquidators
of BNC, however, raise a
contribution against Randgold, in terms of the laws governing the
winding-up of companies, Randgold’s
compliance therewith
shall not be construed as the provision of funding as herein
contemplated.
10.3
Should
the Liquidators of BNC recover monies from any of the Crawford
Parties and should such recovery or any portion thereof
form part
of any dividend which Randgold receives from the Liquidators of
BNC pursuant to the claim which Randgold has
proved in the estate
of BNC, then and in such event Randgold shall, within 14
(fourteen) days of payment of the dividend
to it, pay that
portion of the dividend that derives from the recovery from the
Crawford parties to Kebble.
11.1 The settlement
agreement as read together with this agreement shall constitute
the parties agreement.
11.2 Insofar as this
Agreement is in any way inconsistent with the Settlement
Agreement and/or introduces new terms and/or
has the effect of
deleting any terms contained in the Settlement Agreement, this
Agreement shall take precedence over the
Settlement Agreement.
11.3 Save for as is amended
by this Agreement, the Settlement Agreement shall be binding on
the parties and of full force
and effect between them.”
[emphasis added]
The Liquidators were not party to either of the settlement
agreements. Kebble alleges that the Liquidators were invited to
participate in the settlement agreements but declined to do so
unless they were
“paid their usual fee which they contended
was due to them calculated on the settlement amount of
...R30 million
1
.”
Kebble and Randgold allegedly refused to pay these amounts to the
Liquidators.
In paragraph 27 of the founding affidavit, the Liquidators state:
“
It is correct that in
2006 the Liquidators were approached by Randgold who requested that
we be party to the settlement agreements.
The liquidators were of
the view of that we had insufficient knowledge to do so and we could
not settle in the manner apparently
proposed by the Randgold/Kebble
settlement, namely,
that
nothing be realised within BNC itself.
This course of conduct was too risky for the liquidators: other
creditors could have appeared and demanded realisations in
respect
of which they would have been entitled to a dividend.
The
liquidators requested Randgold to indemnify us should other
creditors (not party of the settlement) sue the liquidators for
compromising BNC’s claims.
Randgold
was not prepared to furnish such an indemnity. Accordingly (and
contrary to what is stated in paragraph 41.10 of the
founding
affidavit) the liquidators had not become party to the settlement
because Randgold and the Applicant had refused to
pay Liquidators
fees on the settlement amount, but because of the reasons I have
just given”.
[emphasis added].
It appears that Kebble is referring to the percentage of the
settlement amount that the Liquidators would have been entitled
to
recover under the statutory tariff had the settlement amount been
paid to the Company instead of directly to Randgold.
In fact, had the payment been made to the Company, it would have
been available for distribution to creditors, including any
other
creditor that might wish to prove a claim once there was no longer a
risk of a contribution. Had Kebble wished to be released
from any
claims that the estate might have had against him, this would have
been the proper and legitimate way to obtain such
a release.
The machinery of the Insolvency Act sets its face against Creditors
entering into side deals with the former principals of an
insolvent
company as these types of arrangements frequently lead to one
creditor being preferred over others. The Liquidator’s
refusal to make the estate a party to any settlement agreement in
the absence of a benefit to the estate would be entirely proper.
In my view, it is not necessary to resolve the dispute between
Kebble and the Liquidators concerning the Liquidator’s
motivation in refusing to participate in the settlement. Suffice it
to say, it would have been legitimate for the Liquidators
to refuse
to participate in the settlement unless the settlement proceeds
flowed into the insolvent estate. Had the settlement
proceeds been
paid to the Liquidators, they would have been entitled to their
statutory remuneration percentage. Liquidators
are entitled to be
remunerated and the entire machinery of our insolvency law provides
for such remuneration.
2
If the Liquidators refused to make an insolvent company a party to
the settlement without obtaining an indemnity from Randgold,
that
would also have been a legitimate approach in the circumstances. In
doing so, they were merely looking out for the interests
of other
creditors who might to come to light later, while at the same time
protecting themselves.
C.
Events Subsequent to the Conclusion of the Second
Settlement Agreement
On 10 March 2008, after conclusion of the second
settlement agreement Randgold’s attorneys, Van Hulsteyns,
addressed correspondence to the Liquidators referring to the
settlement agreements. Paragraph 3 of the letter stated:
“
3. In terms of the
Agreement concluded between the parties on 28 February 2008, we
have been requested by our client to
address this letter to you
and to request on its behalf, that the liquidators of BNC
Investments (in liquidation) take
no further action against
Kebble, Michael Patrick Crawford and/or M.P. Crawford Holdings
(Pty) Limited and/or Fordcraw
Properties (Pty) Limited.”
On 1 October 2008, the Liquidators obtained an order directing
Randgold to contribute towards the legal costs of litigation
initiated by the Liquidators to recover assets for the Company.
Thereafter, on 10 December 2008, the Liquidators procured the issue
of the summons against Kebble to compel him to testify in
the
pending 417 enquiry. Kebble now moves to quash that summons.
III. KEBBLE’S CONTENTION THAT THE RANDGOLD CLAIM HAS BEEN
SATISFIED PURSUANT TO THE SETTLEMENT AGREEMENT
In paragraph 41.3 of the founding affidavit Kebble states:
“
41.3 Randgold
compromised its claim against BNC by entering into the aforesaid
settlement agreements with me.”
This contention is central to Kebble’s argument that the
enquiry is an abuse. He maintains, as this estate no longer
has
any proved creditors, it is no longer in the interests of
creditors to conduct an enquiry. It appears to be his case
that,
in pursuing the enquiry, the Liquidators are off on a frolic of
their own with the intention to generate fees for
themselves
rather than acting in the interests of creditors.
The Liquidators dispute Kebble’s contention that Randgold’s
claim has been compromised.
In reply, Kebble contends, for the first time, that, when he
acknowledged liability to Randgold he was
“assuming”
the Company’s liability to Randgold. In support of this
contention he alleges in the replying affidavit that:
“
8.1 Randgold did not
enjoy any claims against me whatsoever.
8.2 The
“Randgold
claims”
arose against me on 1 October 2006 only by virtue of my
having assumed BNC’s liability immediately prior
to the
conclusion of the settlement agreement.
8.3 The intention and the
effect thereof was to compromise Randgold’s claim against
BNC.”
I find this contention difficult to follow. There is no language in
either of the settlement agreements that suggests that Kebble
assumed
the Company’s
liability to Randgold or that it
was ever the intention of the parties to extinguish
the Company’s
liability to Randgold.
On the contrary, the language of both settlement agreements negates
this contention. The first settlement agreement affords
Kebble an
option to purchase Randgold’s claim against the Company for
R100 000 00. If it was the intention of the
parties that the
Randgold claim against the Company would be extinguished, then it
could not thereafter have been assigned to
Kebble.
Moreover, if Kebble in fact assumed the liability of the Company to
Randgold, there would have been no claim to cede to him.
He could
not as a matter of law have acquired a claim against himself by way
of cession.
For whatever reason Kebble did not exercise the option afforded to
him under the first settlement agreement. That option was
subsequently extinguished pursuant to clause 7 of the second
settlement agreement.
Clause 10 of the second settlement agreement also demonstrates that
it was never the intention of the parties to extinguish Randgold’s
claim against the Company. This clause expressly contemplated that
Randgold’s claim against the Company would remain in
effect
and that, if there was any recovery of moneys from
“the
Crawford parties”
based upon Randgold’s claim, that
recovery would be paid to Kebble.
There is another obstacle to Kebble’s contention. An
“assumption of liability”
is a delegation. That
is a
tripartite agreement
pursuant to which one party agrees
to assume the liability of another with the consent of the creditor.
In the present case,
the Liquidators (i.e. the representatives of
the alleged delegating company) were not party to the
“assumption”
agreement. Therefore, no legally enforceable assumption or
delegation occurred.
On 5 February 2008, Randgold filed an affidavit dealing with the
alleged assumption and extinction of Randgold’s claim
against
the Company. Randgold disputes that the effect of the settlement
agreements was to extinguish Randgold’s claim
against the
Company.
Randgold has also put up an affidavit by Peter Gray (who represented
Randgold in concluding the settlement agreements) to the
following
effect:
“
6. I deny that it was
ever agreed that the liability of BNC to Randgold would be
assumed by Kebble or for that matter that
the claim by Randgold
against BNC has been compromised and moreover that the
1 October 2006 settlement agreement
and the 28 February
2008 agreement contemplates this eventuality.”
Kebble put up a replying affidavit to Randgold’s affidavit.
In that document he contended that Gray had orally advised
him that
he confirmed Kebble’s version - i.e. that there was an
assumption by Kebble of the Company’s liability to
Randgold.
He maintained that Gray had agreed to sign an affidavit to that
effect, but had thereafter refused to do so.
I do not need to resolve this dispute. As a matter of law the
parties statements of intent with regard the meaning of an Agreement
are inadmissible in evidence.
3
In any event, I am of the opinion that the express language of the
settlement agreement negates any intention by the parties
to
discharge Randgold’s claim against the Company. It is plain
from the express language of the settlement agreement that
the
parties intended that Randgold’s claim against the Company
would remain in force and that there might even be a subsequent
dividend on it.
It follows that Randgold remains a significant creditor of the
Company. The Company apparently has no assets to satisfy this
claim
other than claims against third parties.
Accordingly, even if Randgold’s claim falls to be reduced by
R30 million (i.e. the amount allegedly paid by Kebble
to
Randgold), the Company remains insolvent in a very significant
amount. All of the machinery of the Insolvency Act appertaining
to
companies
“unable to pay their debts”
as
contemplated by sections 339 and 417 of the Companies Act therefore
remains at the disposal of the Liquidators.
Once Kebble’s contention that the only claim against the
Company has been settled falls away, he cannot rely upon this
fact
in support of his argument that the proposed enquiry is an abuse.
During the course of argument Kebble’s counsel appeared to
evolve a secondary argument based upon the terms of the settlement
agreements. He maintained that Randgold had disclaimed any interest
in the enquiry and that any recovery against Kebble by the
Liquidators on a claim under Section 424 of the Companies Act
would indirectly enable Randgold to recover more from Kebble
than it
was entitled to under the settlement agreements. In this context,
the enquiry allegedly amounted to an abuse. This
secondary
contention is analysed in more detail below.
IV. CLAIMS BY OR AGAINST THE INSOLVENT COMPANY
A.
Potential Claims of Other Creditors
The liquidators contend that, although Randgold is the only creditor
that has a proved claim, there are other potential creditors.
The Liquidators allege in their answering affidavits that, where
creditors are aware, as is in the present case, that there is
a risk
that creditors will have to make a contribution, creditors usually
wait to see whether there are realisations in the estate
before
proving claims. This allegation is not contested by Kebble. In any
event, it accords with commercial reality in insolvency
matters.
The Liquidators contend that there are potential additional claims
by Hawkhurst Management and Consolidated Mining Services (Pty)
Limited, which could easily exceed R70 million.
In the view I take of the matter, it is enough that Randgold has a
significant proven and unsatisfied claim that runs into many
millions of rand. However, the potential for other claims supports
the Liquidators’ argument that there is a need for
an enquiry.
B.
The Claims to be Investigated in the Proposed Insolvency
Enquiry
The Liquidators list certain potential claims by the Company that
the Liquidators wish to investigate during the course of the
enquiry. These include:
[52.1] A transfer of JCI shares to Fordcraw Properties (Pty)
Limited that may be capable of being set aside as a disposition
without value under section 26 of the Insolvency Act.
[52.2] A potential claim against Kebble under Section 424 of the
Companies Act.
[52.3] A claim against Hawkhurst Investments (Pty) Limited
(“Hawkhurst”) to set aside a pledge of shares in
JCI
to Hawkhurst;
[52.4] A claim against Sociéte Generale (“SocGen”)
to set aside dividends paid by the Company to SocGen
with respect
to preference shares, allegedly in contravention of Section 90
and 98 of the Companies Act.
Kebble does not dispute that these are legitimate claims that a
liquidator might ordinarily be entitled to pursue in liquidation.
Instead, it is Kebble’s case that the Liquidators at this
stage know so much about these claims that an enquiry is
unnecessary.
According to Kebble, if the Liquidators pursue an
enquiry on these issues they would simply be trying to
“dot
their i’s or cross their t’s”
or
“enquire
into credibility”
. Kebble maintains that this is not the
proper purpose of an enquiry.
V. THE CONCEPT OF
“ABUSE”
IN A
417 ENQUIRY
In 1995, in
Bernstein and Others v Bester and Others N.O.
1996 (2) (SA 751) (CC), the Constitutional Court considered the
constitutionality of Section 417 and 418 of the Companies Act
in the
light of our new constitutional dispensation. The Court held those
sections to be constitutional.
In the process of delivering its judgement, the Court carefully and
exhaustively analysed the nature and purpose of the 417 enquiry
and
the proper approach under our modern law to evaluate whether there
is an abuse of the machinery of the Act.
Ackermann J held as follows:
“
[15] Some of the
major statutory duties of the liquidator in any winding-up are:
(a)
to
proceed forthwith to recover and reduce into possession all the
assets and property of the company, movable and immovable;
to give the Master such
information and generally such aid as may be requisite for enabling
that officer to perform his/her duties
under the Act;
to examine the affairs and
transactions of the company before its winding-up in order to
ascertain –
(i) whether any of the
directors and officers or past directors or officers of the
company have contravened or appear to
have contravened any
provision of the Act or have committed or appear to have
committed any other offence;
in respect of any of the
persons referred to in subpara (i), whether there are or appear to
be any grounds for an order by the
court under s219 of the Act,
disqualifying a director from office as such;
except in the case of a
member’s voluntary winding-up to report to the general meeting
of creditors and contributories of
the company, the causes of the
company’s failure, if it has failed;
if the Liquidator’s
report contains particulars of contraventions or offences committed
or suspected to have been committed
or of any of the grounds
mentioned in above, the Master must transmit a copy of the report
to the Attorney-General.
[16] The Enquiry under ss417
or 418 has many objectives.
It is undoubtedly meant to
assist liquidators in discharging these aforementioned duties so
that they can determine the most advantageous
course to adopt in the
liquidation of a company.
In particular it is aimed at
achieving the primary goal of liquidators, namely to determine what
the assets and liabilities of
the company are, to recover the assets
and to pay the liabilities and to do so in a way that would best
serve the interest of
the company’s creditors.
Liquidators have a duty to
enquire into the company’s affairs.
This is as much one of their
functions as reducing assets of the company into their possession
and dealing with them in a prescribed
manner, and is an ancillary
power in order to recover properly the company’s assets.
It is only by conducting such
enquiries that liquidators can:
(i) determine what the
assets are 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.
It is permissible for the
interrogation to be directed exclusively to the general credibility
of an examinee, where the testing
of such persons veracity is
necessary in order to decide whether to embark on a trial to obtain
what is due to the company being
wound-up.
Not infrequently the very
persons who are responsible for the mismanagement of and
depradations 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 interests of creditors and the public
generally to compel such persons to assist.
The interrogation is essential
to enable the liquidator, who most frequently comes into the company
with no previous knowledge
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.
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 of its varying aspects.
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 an 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.
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 as 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...
[19] In
Clover
Bay Ltd (Joint Administrators) v Bank of Credit and Commerce
International SA
the
Court of Appeal outlined the following criteria for the exercise of
the Court’s discretion whether to order an examination:
“It is clear that in
exercising the discretion the Court has to balance the requirements
of the liquidator against any
possible oppression to the person to
be examined. Such balancing depends on the relationship between the
importance to the liquidator
of obtaining the information on the one
hand and the degree of oppression to the person sought to be
examined on the other.
If the information required is fundamental
to any assessment of whether or not there is a cause of action and
the degree of oppression
is small (for example in the case of
ordering the premature discovery of documents) a balance will
manifestly come down in favour
of making the order.
Conversely,
if the Liquidator is seeking merely to dot the i’s and cross
the t’s on a fairly clear claim by examining
the proposed
defendant to discover his defence, the balance would come down
against making the order.
Of course, few cases would be so clear: it would be for the Judge in
each case to reach his own conclusion”
[20] The Court went on in
Cloverbay
to comment on a number of considerations which would specifically be
taken into account in exercising the discretion. The first
consideration is that the purpose of the provisions is to enable the
liquidator to reconstitute the state of knowledge to the
company in
order to make informed decisions. The purpose is not to place the
company in a stronger position in civil litigation
than it would
have enjoyed in the absence of liquidation.
Second,
the appropriate strategy is not to require proof of the absolute
need for information before an order for examination
will be
granted, but proof of a reasonable requirement of the information.
Third, the case for examination would be much stronger
against
officers or former directors of the company, who owe the company a
fiduciary duty, than it is against third parties.
Fourth, an order for oral examination is more likely to operate
oppressively against an examinee that an order for the production
of
documents.
The Court
is also likely to treat an application for the holding of a s417
enquiry from an office holder, such as the liquidator
with more
sympathy than it would treat a similar request from a contributor...
[52] The fact that the power of
subpoena may possibly be abused in a particular case to the
prejudice of the person subjected
to such abuse does not mean that a
power should, for this reason, be characterised as infringing s11(1)
of the Constitution.
The law does not sanction such abuse;
it
merely recognises that it is difficult to control it and that a
clear case of abuse must be established in order to secure
a
discharge from a subpoena
.
Absent such proof it is the duty of persons who are subpoenaed to
co-operate with the courts, and to attend court for the purpose
of
giving evidence or producing documents when required to do so...”
[emphasis added]
In
Clover Bay Limited (Joint Administrators) v Bank of Credit and
Commerce International SA
[1991] 1 All ER 894
(CA) 896 the Court
of Appeal also held:
“
Before doing so, I
must first say something about the correct approach and in
particular about the importance attached by
Slade J to
the
question whether or not the Applicant has reached a firm decision
to sue.
In
my judgement experience has shown that test to be unsatisfactory,
depending as it does on the subjective state of mind
of the
liquidator or administrator, in each case.
Although
I am unable to accept the judge’s finding that the joint
administrators in this case had adopted the attitude
which he
attributed to them, in my judgement there must be a temptation to
seek to get as much information as possible
before taking a
decision whether or not to sue.
The
more information there is as to the facts and possible defences
to a claim the better informed will be any decision
and the
greater the likelihood of such decision being correct.
It is the function of the liquidator or the administrator to do
his best for the creditors. True he is an officer of
the court
and must not act in any improper way but, like a judge, I can see
nothing improper in a liquidator or administrator
seeking to
obtain as much information as possible before committing himself
to proceedings.
Moreover,
a test based on the subjective state of mind of a liquidator or
administrator inevitably leads to undesirable
disputes of fact,
such as have arisen in this case, as to what is his state of
mind...
Nor do I think there is any
simple test that can be substituted.
The
words of the statute do not fetter in the Court’s
discretion in any way. Circumstances may vary infinitely...”
[emphasis added].
In
Ex Parte Clifford Homes Construction (Pty) Limited
1989
(4) SA 610
(W) 61, Stegmann J held:
“
It is by no means
unusual to find in such cases that a scheme of arrangement under
s311 of the Companies Act is put forward;
that it promises the
concurrent creditors a few cents in the rand more than the
liquidators estimate that they would receive
if the winding-up
were to be completed; and the liquidation is brought to an end by
that means.
In such cases the
liquidator’s duty to investigate the question of the
possible personal liability of the insolvent
company’s
directors (including the sequestrating creditor) or other
officers often receive the most formal and superficial
treatment,
if it is noticed at all.
What is needed of course is a
liquidator, who, with great thoroughness, will probe the insolvent
company’s records for indications
as to the probable date by
which the insolvent company had lost its issued share capital; the
probable date by which each of
its directors and officers (including
the sequestrating creditor) must have come to know of the facts, or
else probably deliberately
closed his eyes to it; and, whether, with
knowledge (or a carefully preserved ignorance) of that fact, any of
them thereafter
caused or allowed the insolvent company to obtain
goods and services on credit without disclosing to the supplier that
the company
was in fact trading in insolvent circumstances; and the
liquidator who would set up the facts and the likely inferences to
be
drawn from them, relating to the possible personal liability of
the directors and officers in a careful and thorough report to
the
creditors prepared in terms of s402(d) of the Companies Act”.
Based on the above cases, I cannot conclude that the Liquidator’s
ability to conduct an enquiry is nearly so severely fettered
as
Kebble contends. Whether the proposed enquiry is an abuse must in
all instances depend on the particular circumstances of
the case.
In evaluating whether there is an abuse the Court is required to
cumulatively weigh up all of the factors both for
and against the
holding of an enquiry.
For example, cross-examination as to credibility is in some
circumstances permissible and in others not. Cross-examination for
the purpose of
“dotting i’s and crossing t’s”
is also sometimes allowed and sometimes not.
A fundamental duty of the liquidator is also to investigate whether
offences have been committed. That potential offences are
sought to
be investigated may support the need for an enquiry.
Kebble contends that an enquiry cannot be conducted for the sole
purpose of determining whether offences have been committed.
I do
not see any such limitation in the language of the Constitutional
Court judgment in
Bernstein
. On the contrary, this seems to
be a legitimate purpose for an enquiry.
Even if I am wrong in this regard, the fact that the circumstances
of a major
admitted
fraud need to be investigated is
certainly a factor that will strengthen the need for an enquiry
which also has as its objective
the potential to: (i) recover other
assets for the estate; and (ii) determine the existence or validity
of other potential claims
against the insolvent company.
In the unusual circumstances of this case, where a company was
admittedly formed only as a vehicle for fraud, it is surely
legitimate to conduct an enquiry to interrogate the sole surviving
director of that company concerning his knowledge as to the
nature
and details of that fraud.
VI.
APPLICATION OF THE LAW TO THE FACTS OF THIS CASE
I have noted above that Kebble’s contention that the Randgold
claim against the Company has been discharged is unsustainable.
As
a result, the principal prop to his argument that there is an abuse
falls away. He has to rely upon other considerations.
In my opinion, his ancillary contention that the continuation of the
enquiry against him would effectively deprive him of the
benefit of
his bargain with Randgold is also unsustainable. If he wished to
obtain a release from the Company or the Liquidators,
Kebble should
have taken pains to ensure that the Liquidators were party to the
settlement agreement. To do that, he would have
had to make his
payment to the estate for the benefit of
all
creditors
(whether proved or otherwise).
Kebble’s second main contention is that the Liquidators have
sufficient information at this stage and do not need to conduct
an
enquiry. Kebble seeks to bolster this argument by his submission
that he knows nothing of the affairs of the Company.
This argument is similarly unsustainable. This is not a case in
which the Liquidators have made a subjective decision to sue.
They
are merely of the subjective opinion that they may have a claim
against Kebble and three other entities, which they propose
to
investigate in a 417 enquiry.
Even if the Liquidators had formed a subjective intention to sue, as
pointed out in
Clover Bay
, that would not preclude them from
going forward with an enquiry.
I have reviewed the Liquidator’s summary of some of the
potential claims that they may have. The summary is skeletal.
It
certainly does not indicate that the Liquidators have the kind of
detail that is necessary for them to be able to institute
action.
In this regard, I am mindful of the fact that Liquidators come to
their office without any first hand knowledge of the
manner in which
the Company’s affairs were conducted. Therefore, they need
the assistance of an enquiry to place them
on a level playing field
in any potential litigation that may ensue.
The analysis of the authorities, as set forth above, indicates that
it is not incumbent upon the Liquidators to demonstrate a
need for
the enquiry. It is the obligation of the party wishing to stop the
enquiry to demonstrate a
“clear abuse”
. I
do not believe that Kebble has even come close to making such a
showing.
On the contrary, this is clearly a case where an enquiry is
warranted and should proceed for the following reasons.
First, Kebble is the only surviving director of the Company. He
maintains that he has no knowledge of the affairs of the Company.
It is in the circumstances necessary for the Liquidators to bring
him to an enquiry to explain how it is possible for him to
claim
that he has no such knowledge and to test the veracity of that
contention.
It may very well transpire that, if he is confronted with certain
documentation relating to a particular transaction, his memory
will
be refreshed sufficiently for him to help the Liquidators understand
it better. However, this application is not the appropriate
place
to decide whether there are in fact such documents.
It would be unfair for a Court in an application like this to expect
the Liquidators to expound on all matters on which they
wish to
question the witness and all the documents and facts that they wish
to put to him. If the Liquidators are compelled
to give such a
preview of the evidence, it may weaken their ability to conduct an
effective enquiry.
Second, this is a Company which, on Kebble’s own version
was formed merely as a vehicle for a fraud.
It conducted no
legitimate business. If Kebble’s testimony is taken at face
value, the business of the company was fraud.
In such a situation, it is all the more important that the
Liquidators be afforded an opportunity to interrogate the sole
surviving
director concerning the affairs of the Company.
Kebble argues that the fact that the Company was simply a vehicle
for fraud is somehow a factor in his favour. This argument
is
disingenuous and cynical. In my opinion, the stronger the evidence
of fraud, the more likely that an enquiry is justified.
In this
case, the examinee himself confirms that the sole purpose of the
Company was to commit fraud.
Third, the Company is significantly under water. Randgold’s
claim (even if it has been reduced by R30 million) exceeds
R100 million and remains unpaid as a result of an undisputed
fraud. It is surely in the public interest for the Liquidators
to
use all of the machinery of Section 417 to conduct a full enquiry
into the causes of the Company’s failure.
Fourth, the fraud that was admittedly committed appears to be of a
complex nature. In such a situation it is even more important
that
the sole surviving director of the company be interrogated on the
details of the transaction than in other situations.
Fifth, it is apparent Kebble was willing to pay R30 million out
of his own pocket in order to bring the enquiry to an end
and to
avoid Randgold pursuing further claims against him. This is not the
action of a person who has no knowledge of the affairs
of a company.
Prima facie
,
the very fact that he sought to enter
into such a settlement strengthens the inference that he should be
interrogated.
Sixth, as a matter of public policy, it is undesirable to permit an
examinee, who is a former director of a company that was
conceived
in fraud, to avoid a liquidator’s enquiry through a settlement
to which the Liquidators are not a party.
A former director who wishes to enter into a compromise with all of
the Company’s creditors should include the Liquidators
in the
transaction or use the open and public machinery of section 311 of
the Companies Act. Had Kebble followed the section
311 route, the
Court might have had to consider whether the settlement was fair to
creditors or whether it might permit wrongdoers
to go unpunished
4
.
Kebble chose not to follow this procedure. He has only himself to
blame if the enquiry now proceeds.
Seventh, Kebble himself has conceded that the Company or the
Liquidators may have legitimate claims against the other three
entities listed in the answering affidavit. The Liquidators should
have the opportunity to investigate these claim and to question
the
sole surviving director about them.
Eighth, as long as the Randgold claim against the Company remains
unpaid and it is not yet clear that there are no other unsatisfied
claims, the Liquidators have a duty to diligently pursue all
potential assets, claims and recoveries for the benefit of
all
creditors.
Ninth, the fact that the Liquidators have conducted their own
investigations and have properly prepared the groundwork for their
enquiry can never be held against them. If Kebble’s
contention was sustained, it would be very difficult for a
liquidator
to ever hold an effective enquiry. If a liquidator has
not done his homework and prepared for the enquiry, he will
accomplish
little in the enquiry. If he is well prepared for the
enquiry, according to Kebble, the enquiry then becomes unnecessary.
In deciding this application, I also take account of the fact that
the enquiry against Kebble has not yet commenced. The Commissioner
is an officer of the Court, duly appointed by the Master, to protect
the examinee from improper questions and abuse. If questions
are
asked at the enquiry that are abusive, it will be the duty of the
Commissioner to disallow them. If the Commissioner exercises
her
discretion incorrectly, her decision will be subject to review.
Nothing in this judgment would preclude such a review.
Whatever may happen at the enquiry, there is no indication at this
stage that the questions to be asked of Kebble will be abusive
in
nature. The objection to the interrogation is premature.
VI.
CONCLUSION
Kebble has failed to demonstrated a
“clear abuse”
.
On the contrary, the evidence put forward by Kebble and the
liquidators suggests that there is a need for an enquiry. In
reaching this decision, I do not in any way pre-judge the merits or
strength of the Liquidator’s claims against Kebble or
any
other party.
Both parties were represented by Senior and Junior Counsel. It is
therefore appropriate that any costs award should include
the cost
of two counsel.
Accordingly, I make the following Order:
“
The Application is
dismissed with costs, including the costs of two counsel.”
______________________________________
P.N. LEVENBERG, AJ
ACTING JUDGE OF THE HIGH COURT
Counsel for the Applicant: J G Wasserman SC
G D Wickins
Attorneys for the Applicant Kim Warren, Rambau, & Associates
Counsel for the First to Fourth
Respondents B J Manca SC
J E Smit
Attorneys for the First to Fourth
Respondents Edward Nathan Sonnenbergs
1
Founding affidavit: paragraph 41.10.
2
In Re Calgary and Edmonton and Co Ltd
[1975] 1 All ER 1046
,
1051d.
3
Coopers & Lybrand and Others v Bryant
[1995] ZASCA 64
;
1995 (3) SA 761
(A)
768 D-E;
Delmas Milling Co Ltd v Du Plessis
1955 (3) SA 447
(A) 455 A-C;
Total South Africa (Pty) Limited v
Bekker
N.O.
[1991] ZASCA 183
;
1992 (1) SA 617
(A) 624G.
4
Ex Parte Chenille Corporation of SA (Pty) Limited
1962 (4) SA
458
(T) 464;
Mahomed v Kazi’s Agencies (Pty) Limited
1949 (1) SA 1162
(N); Companies Act, section 311(4).