Does the suspension of liquidation of Proceedings in terms of section 131(6) [1] Preclude the conduct of a section 417/418 inquiry? By Colin Strime

  1. This question was dealt with in a recent decision (unreported as yet) of the High Court [3] where the court (per Petersen AJ) gave its interpretation of paragraphs 15 to 17 and 19 of the Maroos Judgment[4].  These paragraphs read as follows:

“[15]     Section 131(6) of the Act does not change the status of the company in liquidation nor does it suspend the court order that placed the company under liquidation in the hands of the Master in terms of s 141(2)(a)(ii) of the Act. The appointed provisional joint liquidators must proceed with their duties and functions to protect the assets of the company for the benefit of all the creditors of the company.

[16]      Successful liquidation proceedings constitute a complete process by which a company is brought to an end and the liquidation process culminates in the dissolution of the company up to its deregistration (See Richter v ABSA Bank at 60D).

[17]      In terms s 131(6) of the Act, it is liquidation proceedings, not the winding-up order, that is suspended. What is suspended is the process of continuing with the realisation of the assets of the company in liquidation with the aim of ultimately distributing them to the various creditors. The winding-up order is still in place; and prior to the granting or refusal of the business rescue application, the provisional liquidators secure the assets of the company in liquidation for the benefit of the body of creditors.

[19]      I find that the appointment, office and powers of the provisional liquidators are not suspended. In s 131(6) the legislature used the word ‘suspend’ and which not mean termination of the office of the liquidator. In my view the term ‘liquidation proceeding’ refers only to those actions performed by a liquidator in dealing with the affairs of a company in liquidation in order to bring about its dissolution. What is suspended is the process of winding-up and not the legal consequences of a winding-up order.”

  1. At issue was the conduct of a Section 417/418 Inquiry before a Commissioner (the first respondent).  
  1. In the matter the liquidators of the close corporation in question (third and fourth respondents) had applied to the Master (the fifth respondent) for leave to conduct this inquiry and were successful.  The applicant, the former business rescue practitioner of the close corporation, was subpoenaed and applied to the court to suspend the inquiry pending:

3.1 finalisation of a review application; and

3.2 finalisation of an application placing the close corporation back into business rescue.

  1. The applicant argued that on a proper interpretation of the finding in the Maroos judgment that “liquidation proceedings” “are suspended by Section 131(6) of the Companies Act – suspends an inquiry in terms of Section 417 and 418 (of the old Companies Act) this for the period whilst an application before the High Court again placing the same company into business rescue is pending”. AccordinglySo the applicants argued what is suspended is the process of continuing with the realisation of the assets of a company in liquidation and this they submitted is wide enough to include the holding of an inquiry.
  1. The second respondent, a creditor (NUMSA), did not agree with this interpretation. They submitted that the correct interpretation of paragraphs 15, 17 and 19 of the Maroos judgment obliges liquidators to in effect do everything they are entitled to do “up to the point of realising and distributing the assets” and this then entitles the second respondent to proceed with the inquiry as “An inquiry under the sections is in essence an information gathering mechanism” and that consequently “an inquiry which does amount to the realisation of assets, or the dissolution of the company, is not suspended by a business rescue application in terms of Section 131(6)”.
  1. The court found the following:

6.1 that the Court Order placing the close corporation in liquidation is not suspended by an application to place the close corporation into business rescue in terms of Section 131(6);

6.2 that liquidators are thus duty bound to proceed with their duties and actions “to protect the assets of the close corporation for the benefit of all creditors of the close corporation”;

6.3 and the Commissioner’s duties “are analogous to those of liquidators, to conduct an inquiry which is directed as with the duties of the joint liquidators, to gather information, which seek to protect the assets of the close corporation”;

 6.4 “the pending business rescue application ……… does not suspend the winding-up order and prior to granting or refusal of such application, the third and fourth respondents [in their capacity as joint liquidators] have a duty to secure the assets of the close corporation for the benefit of the general body of creditors. In similar vein the first respondent [the commissioner] as delegated by the master has a duty to enquire into the business affairs of the close corporation, in the interests of the body of creditors”.

  1. In effect the courts interpreted the words “suspend the liquidation proceedings” as utilised in Section 131(6) and interpreted by Seriti JA in the Maroos judgment narrowly and restrictively. The Maroos judgment did not set out any definitive terms as to what the duties and functions of liquidators were whilst there was this pending application for business rescue. This court appears to have interpreted these words to mean that all that is suspended during the period of the outcome of the business rescue application is the power to sell and/or realise assets with a view to bringing about the final dissolution of the close corporation or company.
  1. If this is so then certainly from a liquidators and a creditors’ perspective this judgment is most welcome. It clearly supports the view that the suspension of the liquidation proceedings does not prevent a liquidator or creditor from utilising the beneficial tool of conducting an inquiry in terms of Sections 417 /418.
  1. During the nine years since the promulgation of Chapter 6 of the Companies Act our courts have been subjected to applications for business rescue being launched for unlawful and/or ulterior motives, i.e other than the purpose for which they were intended. Mostly these applications were launched in attempts to prevent investigations such as a Section 417 /418 investigation. This judgment certainly assists creditors and/or liquidators in bringing about these inquiries where they are aware that management / directors have been involved in unlawful activities such as frauds, reckless trading, collusive dealings and transactions which are potentially impeachable and wish to investigate them. This case makes it clear that an application brought in terms of Section 131(6) cannot thwart these proceedings.
  1. Hopefully this judgment will be followed in subsequent judgments and is not overturned on appeal.

[1] Of the Companies Act 71 of 2008

[2] Of the repealed Companies Act 61 of 1973, as amended

[3] Muller v Rene Bekker NO & Four others High Court North West Division, Case No. UM/2019

[4] GCC Engineering (Pty) Ltd & Others v Maroos & Others 2019 (2) SA 379 SCA