CAN ONE PROVE A CLAIM AGAINST AN INSOLVENT COMPANY MORE THAN THREE MONTHS AFTER THE CONCLUSION OF THE SECOND MEETING OF CREDITORS by Colin Strime - 14 Jun 2016
Prima facie the answer to this question appears to be a simple one.
Until the decision of the Supreme Court of Appeals in the matter of Mayo N.O v De Montlehu (2015) ZA SA 127 the answer to the question was not that simple at all. This is so because:
Section 44(1) of the Insolvency Act provides that a claim can be proven against a sequestrated estate (as opposed to a liquidated estate) at any time before final distribution of that estate subject to the provision of Section 104 (of the Insolvency Act) “provided that no claim shall be proved against an estate after the expiration of a period of three months as from the conclusion of the second meeting of creditors of the estate except with the leave of the Court or the Master and on payment of such sum to cover the costs or any part thereof, occasioned by the late proof of the claim, as the Court or the Master may direct.”
Section 104(1) of the Insolvency Act provides that subject to Section 95(2) (the section dealing with the late proving of a claim by a creditor who was secured against the insolvent’s immovable property by way of a mortgage bond and who has not yet proved a claim) and Section 98A(3) (the section which allows employees to claim salary, wages, leave or other payments without proving his or her claim but subject to the trustee requiring such employee to submit an affidavit in support of his or her claim) - a creditor of a sequestrated estate who has not proved the claim before the trustee has submitted a liquidation and distribution account to the Master is not entitled to share in the distribution in that L & D Account provided that the Master may at any time before the account is confirmed permit such creditor who has proved his claim after the lodging of the account “if the Master is satisfied that the creditor has a reasonable excuse for the delay in proving his claim”.
Section 104(2) which should be read with 104(3). These sections allow for a creditor who has proved a claim against an estate but who was not permitted to share in the distribution of assets under that plan to be entitled under a further L & D Account to be paid an amount which would have been awarded to him under the previous account if he had proved his claim provided that the Master again being “satisfied that the creditor had a reasonable excuse for the delay in proving his claim” and provided further that a creditor who was aware that proceedings had been brought by other creditors to impeach certain transactions and who delayed proving his claim until the Court had given judgment, would not be entitled to share in the distribution of any money or the proceeds of any property recovered as a result of that litigation. Furthermore, such a creditor would not be entitled if he did not delay in proving his claim until judgment has been given, to benefit out of any cash or the proceeds of any property recovered pursuant to that litigation until the creditors who brought the litigation has been paid in full with costs (“the Repealed Act”).
Chapter 14 of the repealed Companies Act 61 of 1973 still applies to the winding-up of companies unable to pay their debts notwithstanding the promulgation of the new Companies Act 71 of 2008 (“the Companies Act”).
The Companies Act only applies to the winding-up of solvent 1 companies.
Section 366(2) of the repealed Companies Act reads as follows:
“366(2) The Master may, on the application to the liquidator, affix a time or times within which creditors of the company are to prove their claims or otherwise be excluded from the benefit of any distribution under any account lodged with the Master before these debts are approved.”
Therefore, prima facie, it appears that Section 366(2) of the Repealed Act regulates the timing for the proving of claims in liquidations and Section 44(1) applies to the proving of claims in sequestrations. This was the view taken by Flemming J. (as he then was) in the case of Stone & Stewart v The Master (an unreported decision of the South Gauteng Division of the High Court as it was then known).
However, the court a quo in the Mayo NO v De Montlehu case (in the matter of De Montlehu v Mayo NO & Others [2014] JOL 32508 (TJ)) Kathree-Setiloane J. stated as follows:
“I remain unpersuaded by Flemming J.’s interpretation of Section 366(2) of the Companies Act for the following reasons:
In terms of Section 336(1) [sic] of the Companies Act, whether the winding-up is by the court or is a creditors’ voluntary winding-up, proof of creditors’ claims must be in accordance mutatis mutandis with the relevant provisions of the Insolvency Act, i.e both procedural and substantive. Section 366(2) provides that the Master may, on the application of the liquidator, fix a time or times within which creditors of the company are to prove their claims or otherwise be excluded from the benefit of any distribution under any account lodged with the Master before those debts are proved. On a proper interpretation of Section 366(2) a liquidator may apply to the Master to fix a time or times within which creditors are to prove their claims in order to participate in a distribution under a particular account lodged with the Master before such proof. The use of the conjunction “or” between the words “the Master on the application of the liquidator fixed a time or times within which creditors of the companies are to prove their claims” and “otherwise be excluded from the benefits of any distribution under any account lodged with the Master before those debts are proved” calls for the two parts of the section to be read conjunctively. When read as such it is clear that the purpose of Section 366(2) is not to prevent proof of claim after the time fixed by the Master, as contemplated in the proviso of Section 44(1) of the Insolvency Act but rather as expressed by Professor Meskin:
To prevent the holding up of a distribution under an account lodged with the Master as a result of proof of claims after such lodgement (e.g. by creditors who elect not to prove until it is established that there is to be a distribution); for such proof would necessitate an amendment to the account. Thus, if the Master fixes a date, claims may be proved before and after such date (subject to compliance with the requirements for late proof); but once an account is lodged with the Master, i.e after such date, claims proved after such date are excluded from the distribution under such an account if they are proved after the account was lodged. The fixing of the date by the Master is only to serve as a warning to creditors who have not proved their claims that if an account is lodged before they prove them they will be excluded from the distribution under it.
Kathree-Setiloane J. then quoted Trans-Drakensberg Bank Limited v The Master Pietermaritzburg & Another 1966 Natal case where the court found, inter alia, that it is not the date fixed by the Master that is of importance as regards sharing in a certain distribution, but rather the date when an account was lodged with the Master.
Thus Section 366(2) of the Companies Act which deals with the consequences of late proof of claims in winding-up of companies and the proviso to Section 104(1) of the Insolvency Act which allows the Master in a sequestration to permit a claim proved late to participate in a liquidation and distribution account already lodged (provided the Master is satisfied that the creditor has a reasonable excuse for his delay in proving his claim and that the plan of distribution has not been confirmed), has no application to the proof of claims in winding-up of companies. Section 366(2) deals with the scenario insofar as companies are concerned. Therefore Section 104(1) does not apply to companies.
Kathree-Setiloane concluded with regard to Flemming’s Judgment as follows:
“… that the proviso to Section 44(1) of the Insolvency Act has no application to a proof of claim in the winding-up in light of the provisions of Section 366(2) of the Companies Act” to be clearly wrong and further “to arrive at the conclusion that Flemming J did, would require reading the words of the Section that precedes the conjunction or in “disjunctively” from the words of the Section that appear after it and in the process to completely ignore the latter. This is a flawed approach to the interpretation of Section 366(2) as it does not give effect to its purpose, which is to prevent the holding up of a distribution under an account lodged with the Master, as a result of proof of claim after lodgement of such account by for instance a creditor who elects not to prove his or her claim until it is established that there is to be a distribution.”
And further that:
“similarly, I see no merit in the first to fifth respondents’ contention that to interpret Section 366(2) of the Companies Act in the manner contended for by the applicant and endorsed by the court, would result in an inconsistency because if both the proviso to Section 44(1) of the Insolvency Act and Section 366 to the Companies Act apply to proof of claims in a winding-up then proof of claims in a winding-up would be subject to two time limitations, first under the proviso to Section 44(1) of the Insolvency Act and second under 366(2) of the Companies Act. I disagree completely. As demonstrated the two sections are functionally different and have different objectives. Section 366(2) of the Companies Act is a special provision intended to enable participation in a distribution under particular accounts. It has no application to the late proof of claims in general which is governed by the proviso to Section 44(1) of the Insolvency Act by virtue of the operation of Section 366(1)(a) of the Companies Act. Simply put, its objective is to nullify an attempt by a creditor to delay proving his or her claim until a lodged account shows that a distribution is to occur. The proviso to Section 44(1) of the Insolvency Act on the other hand is to prevent proof of a claim after the expiration of a period of three months as from the conclusion of the second meeting of creditors, except with leave of the court or the Master. The overall purpose of the proviso to Section 44(1) of the Insolvency Act is to ensure that the administration of the Estate is concluded expeditiously.
Section 366(2) of the Companies Act only applies, where on application of the liquidator the Master fixes a time within which creditors of a company are to prove their claims in order to participate in the distribution under an account already lodged with the Master before the debts are proved. Clearly, the category of creditors envisaged in this section are those who have not already proved their claims before the liquidation and distribution account has been lodged …… As indicated the fixing of a date by the Master on application of the liquidator serves as a warning to creditors who have not proved their claims, that if an account is lodged before they have proved such claims, they will be excluded from the benefit of any distribution under that account. It is intended to cause them to prove their claims by the date fixed by the Master should they wish to benefit from the distribution of the account lodged before their debts are proved and prevent them from holding up distribution under an account lodged with the Master.
Accordingly, I am of the view that the proviso to Section 44(1) of the Insolvency Act, and not Section 366(2) of the Companies Act, applies to the late proof of claims in a winding-up of a company.
[all of the underlining is the authors]
Summary of the facts in the Mayo case:
The company in question is Chevreau Construction (Pty) Ltd (“the Company”).
It was wound-up by special resolution on 22 July 2011.
No claims were proven at the first or second meeting of creditors. The second meeting of creditors was held on 11 May 2012.
Two litigation matters arose after the second meeting as follows:
The joint liquidators and a creditor known as Starspan launched an application against Zemprop CC and Premium Hotel & Property Investments (Pty) Ltd to set aside a sale by the Company of immovable property to them (before it was wound-up). This application was opposed on the basis that Starspan had not proved any claims against the Company and that Starspan’s alleged claims against the Company were disputed;
Zemprop CC and Premium Hotel & Property Investments (Pty) Ltd then brought counter applications to set aside the liquidation of the Company on the basis that it was no longer insolvent and it had no proved creditors’ claims against it.
To overcome these legal points Starspan requested the liquidator to convene a special meeting of creditors at which it was successful in proving two claims against the Company.
De Montlehu was the sole shareholder and director of the Company. He brought the review application to set aside the Master’s decision on the basis that:
the second meeting was convened merely to overcome the counter application proceedings and to ensure that the disputed claims were proved against the Company without the benefit of a fair hearing and trial; and
the claims were proven more than three months after the holding of the second meeting of creditors (i.e. almost six months after the conclusion of the second meeting) and that accordingly the claims were proven late without the Master’s or the Court’s leave and without the costs occasioned by the late proving of the claim by Starspan being paid.
Starspan argued that the proviso to Section 44(1) did not apply to the Company as it was limited in application to sequestrations and that the time period for proving claims in liquidations was regulated by Section 366(2).
The simple question thus on review was whether the proviso to Section 44(1) applied to liquidations or not.
Obviously Starspan and the liquidators were dissatisfied with the Kathree-Setiloane’s judgment and they took it on appeal to the Supreme Court of Appeals.
The Supreme Court of Appeals judgment was handed down in September 2015. All five Judges were in agreement and in effect agreed with Kathree-Setiloane’s views that:
Flemming J.’s judgment was wrong;
Section 44(1) applies to liquidations as much as it does to sequestrations;
Section 366(2) does not set out the formal time periods within which creditors would be required to lodge and prove their claims;
Section 366(2) does not therefore affect the applicability of Section 44(1) of the Insolvency Act to companies in liquidation.
The SCA found support for their contention in Meskin and in Hennochsberg and concluded as follows:
“Section 366(2) therefore affects a creditor’s right to benefit under a distribution and does not affect the time for proof of creditors’ claims; the issue related to the fixing of costs and thereafter the payment thereof by creditors seeking to prove late claims remain unaffected thereby.
The court a quo accordingly correctly relied on these cases in drawing its conclusions. As mentioned earlier, the three month period stipulated in Section 44(1) of the Insolvency Act relating to the proof of claims is the benchmark in both sequestrations and liquidations. Therefore, apart from the proof thereof, the Master must fix costs for a late claim and there must be payment in respect of an order for such a late claim against the company in liquidation to be valid.”
In summary then for the late proving of claims in general the following is to be noted:
Section 44(1) (more specifically the proviso to the section) applies equally to both sequestrations and liquidations. In other words, in a liquidation or a sequestration when one wishes to prove a claim more than three months after the conclusion of the second meeting of creditors, one needs the leave of the Master or the Court and the creditor is to pay the wasted costs occasioned by the late proving of the claim as determined by the Court or the Master;
Section 104(1) of the Insolvency Act does not apply to liquidations. It is limited in its application to sequestrations. This means that a claim proven late in a sequestration after the lodgement of an L & D Account may still participate in the account if it has not yet been confirmed and if the creditor satisfies the Master that he has a reasonable excuse for his delay in proving his claim.
In both liquidations and sequestrations claims proven late may participate in subsequent (to the proving of that claim) liquidation and distribution accounts subject to the following qualifications:
the creditor satisfying the Master that he has a reasonable excuse for his delay in proving his claim;
that account has not yet been lodged;
that subsequent account has not yet been confirmed;
if it is shown that a creditor delayed in proving its claim as it was awaiting the outcome of a judgment in a litigation matter brought by another creditor(s), that creditor cannot benefit from the money or the proceeds of any property recovered pursuant to that litigation;
to the extent that it cannot be shown that a creditor delayed in proving his claim to await the outcome of this litigation, that creditor can’t benefit from the proceeds of the money or property recovered pursuant to that litigation until the creditors who brought the litigation had been paid their claims in full with costs;
Section 366(2) does not deal with the late proving of claims. It deals with the consequences of the proving of a claim in a liquidated estate after an L & D Account has been lodged, i.e. the creditor of the late proven claim cannot benefit under any distribution under that account;
the setting of a time limit by the Master in terms of Section 366(2) can be extended by the Master. Claims can be proven before the stipulated date or after the stipulated date. Claims proven after the stipulated date and after a Liquidation and Distribution account has been lodged will not benefit under any distribution under that account.
A once uncertain position has somewhat now been clarified.
This is a summary of the presentation by Colin Strime to the SARIPA North Gauteng Conference held on 9 June 2016.
The test is commercially solvent in the sense that a company is able to pay its debts as and when they full due for payment.
