Fluxmans Podcasts every Monday and Wednesday

Section 155 of the Companies Act 71 of 2008: A compromise between a company and creditors – by Colin Strime

1. Section 155 of the Companies Act 71 of 2008 (“the Act”) is a seldom used but very important process available to distressed companies.

2. This section was the subject of a judgment (unreported at present) handed down on 29 March 2018 in the Gauteng Division of the High Court per Van Der Linde J. In it certain procedural and substantive aspects of this section were dealt with. The case is The Commissioner of South African Revenue Services versus Logikal Consulting (Pty) Ltd & Others (Case No. 96768/2016).

3. Brief summary of the facts

3.1 Essentially this was an application brought by SARS to rescind a judgment which SARS alleges was granted in its absence. The judgment was in terms of Section 155(7) of the Act pursuant to which the court had sanctioned an offer of compromise entered into between Logikal Consulting (Pty) Ltd (“First Respondent”) and its “preferent creditors” These preferent creditors were SARS and five other employees of the First Respondent. The First Respondent had classified all these creditors as preferent (as this term is defined in The Insolvency Act 24 of 1936, as amended (“the Insolvency Act”).

3.2 Because SARS and the First Respondent’s employees were all preferent creditors, as defined, the First Respondent called for a meeting in terms of Section 155(2) of the Act to compromise their claims save that the employees, unlike the SARS, were being paid in full on their claims and SARS approximately 20% of its claim.

3.3 Section 155(2) of the Act reads as follows:

“155. Compromise between company and creditors.
(2) The board of a company, or the liquidator of such a company if it is being wound up, may propose an arrangement or a compromise of its financial obligations to all of its creditors, or to all of the members of any class of its creditors, by delivering a copy of the proposal, and notice of meeting to consider the proposal, to—
(a) every creditor of the company, or every member of the relevant class of creditors whose name or address is known to, or can reasonably be obtained by, the company; and
(b) the Commission.”

[the writer’s emphasis]

3.4 SARS alleges it did not receive proper and timeous notice of the meeting, did not know of its existence and did not attend the meeting. The relevant letter sent to it was dispatched by registered post, delivered it to the day before the meeting, was not timeously drawn to the attention of the person dealing with the matter to enable this person to attend the meeting and to deal with the matter in a meaningful way. In addition SARS alleges that the posting was contrary to its express advices as to how the letter was to be communicated to it and to whom.

3.5 The issues to be determined by Van Der Linde J. in this matter were whether, inter alia:

3.5.1 proper and timeous notice was given to SARS;

3.5.2 these employees and SARS were as preferent creditors of the same “class” of creditors for purposes of Section 155(2);

3.5.3 on the facts SARS was able in terms of Section 155(2) to compromise its claim with the First Respondent;

3.5.4 all creditors including those who voted in favour of the plan should have been served with the subsequent (sanctioning) application to court in terms of Section 155(7);

3.5.5 First Respondent if the order was rescinded, be placed in liquidation.

4. We deal with these issues below.

5. Was proper notice timeously given to SARS?

5.1 The Court had to determine whether in terms of Regulation 7 as read with Section 6 of the Companies Act proper notice was given to SARS. The Court dealt more specifically with Regulation 7(1) and Section 6(10) or (11) as set out in table CR3 to the Act and held as follows:

“The notice provisions, like any other statutory provision, must be interpreted purposively. The purpose here is that the notice should reach the addressee. The provisions of s.6(1) and of table CR3 were intended to achieve that result. They were also intended, it must be accepted, to lay down methods of giving notice that are reasonably practical from the despatcher’s [sic] perspective; and so they are all methods that are well known in normal commercial communications.”

“With regards to SARS’ request that they be emailed as opposed to received registered post the Court held as follows:

 Was the addressee selection binding on the despatcher [sic]?

 In my view it was. The legislature was concerned, in Section 6(1) and Regulation 7, with designing a practical, inexpensive, and likely successful way of ensuring that notices reach addressees.”

 “The despatcher [sic] deliberately did not comply with the addressee’s request and provided no rational explanation for its failure to have done so. In my view the Respondents’ reliance on Section 6(1) and Regulation 7 accordingly does not in the circumstance avail it and the Respondents therefore did not give proper notice of the creditors’ meeting to SARS …. But if I am wrong in this view I take, it seems to me that at the very least the Respondents ought to have disclosed the facts of the SARS selection of method of notification, and the Respondents’ disavowal of it, to the sanction in Court. In my view that is a consideration relevant to the exercise by that Court of its judicial discretion and, had it been done, the Court would not have sanctioned the compromise without insisting that notice, at least of the sanction application, be given to SARS at its selected email address.

 On this basis the judgment and the order cannot stand as the compromise was not approved by the meeting of creditors duly convened in terms of Section 155(2) of the Act. In the alternative, the judgment and order cannot stand as it was erroneously given, in the absence of a party that should have been notified of the application for sanction.”

[the writer’s emphasis]

5.2 Of interest and although not dealt with in this case is Government Gazette No. 37940 of 25 August 2014, more specifically Government Notice No. 644 titled “Rules for Electronic Communication Prescribed under Section 255(1) of the Tax Administration Act, 2011 (Act No. 28 of 2011)”. This Notice sets out the guidelines for, inter alia, service of processes and notices on SARS.

6. “Class” of Creditors – What does “class” mean for purposes of Section 155?

6.1 What the Court had to consider here was whether SARS as a preferent creditor was correctly treated as having belonged to the same “class” of creditors as the five employees and failing then, whether the employees vote in favour of the compromise was or was not binding on SARS? This was the interesting portion of the judgment. Essentially in this regard:

6.1.1 Section 155(2) does not define what comprises a “class”.

6.1.2 SARS argued that creditors whose “rights” are dissimilar should not be in the same “class”.

6.1.3 However, the Respondents argued that “…. preferent creditors of different hues and stripes may be grouped together as a class, and as the Applicant and the Fifth to Ninth Respondents [employees] are all preferent creditors, they form a class of creditors as contemplated in Section 155 of the Act.”

6.2 In reaching a decision Van Der Linde J. considered the ranking of the preferent creditors as set out in Section 98A of the Insolvency Act and the fact that the employees were not being compromised. He then concluded that for these reasons the rights of SARS and those of its employees were not the same.

6.3 In justification the Court noted that the employees’ rights enjoyed a preference above the SARS rights and accordingly, that “on the face of it, although they are both preferent rights, the five employees were in a stronger position. Add to that fact that their claims were in terms of the proposal not being compromised at all, and the claims of SARS were being expunged for its major part, and it is difficult to see how these six parties could meaningfully consult together with a view to their common interest. Indeed it is difficult to conceive of any common interest at all.”

6.4 For support the Court considered the decision of Raulinga J. in the matter of Commissioner of SARS v Cross Atlantic Properties (Pty) Ltd [2017] ZA GP p82 554 and quoted from it as follows:

“27. The applicant and the employees of the first respondent could not have formed one class of creditors, and could not validly have met and voted as one class of creditors under section 155 of the Act. The procedure under section 155 cannot be invoked if the first respondent would have achieved the same objective of a compromise between the first respondent, its employees and the applicant without the court’s intervention. Moreover, the applicant was precluded by sections 201 and 203 of the Tax Administration Act, 28 of 2001, from entering into the alleged compromise; it thus was not a valid compromise under the section 155 of the Act.”

[the writer’s emphasis]

6.5 It then concluded that the Respondents thus had not shown that their grouping together of SARS into one class complied with the requirements of Section 155(2) of the Act.

7. Was SARS legally entitled to effect a compromise with its taxpayer in terms of Section 155 of the Act?

7.1 This was an interesting issue dealt with by the Court.

7.2 Although not referred to in the judgment SARS’ right in this regard is dealt with in Chapter 14 of the Tax Administration Act 28 of 2011. Chapter 14 is titled “WRITE OFF OR COMPROMISE OF TAX DEBTS” . Subject to certain requirements SARS is authorised to compromise its debt with the taxpayer company pursuant to Section 155 of the Act.

7.3 We do not deal with these requirements. If you wish to seek any advice hereon you should liaise with the author, CJ Strime (011 328 1843 / cstrime@fluxmans.com) or his co-director, Andre Kruger (011 328 1735 / akruger@fluxmans.com).

7.4 The Court found that because the taxpayer did not satisfy certain of these requirements the SARS was precluded from entering into a compromise of its claim with the taxpayer and further that “on this basis too the judgment and order cannot stand and, in fact, since SARS has no power in law to compromise the claim, the judgment order could not have been granted and is a nullity [the judgment order referred to is the Court’s sanctioning of the compromise]”.

8. Is notification to all creditors of the sanction application necessary?

8.1 In this regard the Courts held that creditors who had an interest in the matter should have been notified of the application to Court for sanctioning in terms of Section 155(7). It again for this view quoted with approval from Raulinga J. in the Cross Atlantic cases as follows:

“25. Sanction orders under section 155 of the Act should not be moved or granted ex parte. It is a basic principle that a court does not ordinarily grant orders affecting the right of third parties without them being joined as parties to the proceedings. Herbstein & Van Winsen, The Civil Practice of the High Court of South Africa 5th Ed pages 289/9.In Bowing NO v Vrededorp Properties CC and Another 2007(5) SA 391 (SCA) at 21, the Court held:

“The substantial test is whether the party that alleged to be a necessary party for purposes of joinder has a legal interest in the subject matter of the litigation which may be affected prejudicially by the judgment of the Court in the proceedings concerned”. In view of the fact hat the applicant has a claim for over 7 million rands and is purported to be compromised to 20c in the rand by virtue of a court order which under section 155(8) purports to be final and binding on the applicant from the date of filing of the order with the first respondent, therefore the applicant had a legal interest which would ordinarily require it to be joined as a party in the sanction application. The fact that the applicant was not joined ought to have prompted the court not to entertain the sanction application.
[the writer’s emphasis]

26. In section 311 applications under the 1973 Companies Act, the courts required that notice be given to all interested parties of the date on which the application for sanction will be moved before the court, because such parties must have the opportunity to be heard and to persuade the court not to sanction the proposed compromise. Ex parte Federate Nywerhede Bepade 1975 (1) SA 826(W) at 835 C – F. There was therefore no good reason why the applicant was not given notice, by electronic means or registered post. Had the applicant been given notice, it would have opposed the application given the fact that it was owed an amount in excess of R7 million.”

“As I have pointed out above, the practice followed in Johannesburg was that all creditors who were notified of the meeting of creditors were also necessarily notified of the report back date. They were thus self evidently, entitled to oppose the application to sanction the compromise.

The respondents admit that an ex parte application was the correct from [sic] and process to follow. But that submission skirts around the real issue, which was whether SARS should have been notified of the application that was being made to the court to sanction the compromise. On that issue, given the pre-existing practice and SARS’ interest, SARS ought at least to have been but was not notified of the application.”

[again, the underlining is the writers]

8.2 Raulinga held in this regard that SARS ought to have been joined as a party and that the ex parte application proceedings were in the circumstances inappropriate.

9. Van Der Linde J. concluded then that Raulinga’s judgment accords with accepted practice that has been followed for a considerable time (a reference to Section 311 of the old Companies Act) at least insofar as notification is concerned and concluded that on the facts of the case SARS ought to have been joined as a party to the application to sanction the compromise. On this basis alone the order sanctioning the compromise cannot stand.”.

10. There were other issues of interest dealt with in this matter worth reading.

11. However, the lessons to be taken out of the judgment are the following:

11.1 when giving notice to an affected party as provided for in the 2008 Companies Act one should use the method which will come to the affected person’s attention. There are a number of methods that can be used, namely:

11.1.1 electronically / email;

11.1.2 by hand;

11.1.3 tele-facsimile;

11.1.4 by registered post.

11.2 it appears that the registered post method should be used as the least favourable and only in circumstances where the other methods cannot be successfully applied.

11.3 at least one of the methods nominated by SARS to receive such communications should be adhered to when giving notice to SARS and certainly when convening meetings and giving notice of court proceedings;

11.4 when determining whether creditors fall into the same “class”, for the purposes of a Section 155 compromise / scheme one should have regard to their “rights” as creditors. Such rights would include:

11.4.1 the ranking of each creditor(s) in that class;

11.4.2 whether they in the compromise itself were being treated equally or not;

11.4.3 whether there was any law operating against one or more of the creditors in that class which would preclude or qualify them from compromising their claim.

11.4.4 when endeavouring to compromise tax with SARS one must comply with the statutory requirements for such a compromise. As it appears that SARS’ rights and requirements are different to those of other creditors it in a 155 compromise should vote in its own class of creditors.

11.5 when applying to court to sanction a scheme or compromise in terms of Section 155(7) it is advisable that all creditors to the compromise be notified of the application so that they can oppose it even if they voted in favour of the compromise. The failure to notify or serve these creditors as such puts the sanction compromise and the entire compromise itself at risk of being set aside at a later date.