Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (In Liquidation)

• Jurisdiction: South Africa
• Judge: Corbett CJ, Van Heerden JA, Goldstone JA, Nicholas AJA and Harms AJA
• Judgment Date: 27 November 1992
• Citation: 1993 (1) SA 493 (A)
• Hearing Date: 02 November 1992
• Court: Appellate Division

Goldstone, JA.:

The appellants are the joint liquidators of Carbon I Developments (Pty) Ltd ('the company'). They applied unsuccessfully to the Witwatersrand Local Division (Stegmann J) for leave to convene meetings of the creditors and members of the company to consider an offer of compromise between the company and its creditors and members proposed by Mr K M MacDonald pursuant to the provisions of s 311 of the Companies Act J 61 of 1973 ('the Act'). Its terms are contained in a

Goldstone JA

A written contract between MacDonald and the appellants which is dated 17 July 1991. The judgment of Stegmann J has been reported Ex parte De Villiers and Another NNO: In re Carbon Development (Pty) Ltd (in Liquidation) 1992 (2) SA 95 (W).

Clause 3.2 of the contract provided that the offer would remain B irrevocable until 30 September 1991. In terms of a deed of amendment dated 28 September 1992, MacDonald has undertaken that the offer will now remain irrevocable until 31 January 1993 or until sanction or rejection thereof, whichever is the earliest. This Court has also been informed by the joint liquidators that some of the assets whose value was only estimated at the time of the application have now been realised and their value has been C established. The result is that the projected dividend to concurrent creditors under the offer of compromise will now be 1,78 cents in the rand and not 1,48 cents as earlier estimated. All the financial and other information furnished to the Court a quo is, we are told, still correct. It follows that if the appeal succeeds, the offer of compromise remains D capable of implementation. The appellants accordingly seek an order substantially in the terms sought in the Court a quo.

The company was incorporated in 1986. It had an authorised share capital of R10 000 comprising 2 500 ordinary shares of R1 each and 750 000 12% redeemable cumulative preference shares of 1 cent each. Initially it E issued 132 ordinary shares of R1 each and during 1989 it issued a further 300 000 redeemable cumulative preference shares of 1 cent each.

The company was formed in order to carry on business as a manufacturer of activated carbon. The technology which it was to employ was experimental and complex. If the technical difficulties were surmountable then it was expected by the founders that the business would become very F profitable and of considerable strategic importance for South Africa in the light of the economic sanctions which were then applied to this country. In the result, however, the technical difficulties proved insoluble, the company failed, and it was placed under a provisional winding-up order which was made final on 15 January 1991.

At its inception the company incurred considerable expenses on fixed and G movable assets. The earliest balance sheet of the company which is contained in the record is that for the year ending 30 September 1989. It is there reflected that the value of fixed assets as at the end of the preceding (1988) financial year was R2 217 890. The company's stock was then valued at R495 675. It had not yet begun to trade.

H The small issued share capital of the company was obviously insufficient to provide it with the funds which it required, especially as it must have been contemplated that trading, and hence income, would only follow a substantial time after the preliminary expenses had been incurred. Accordingly, the major shareholders lent considerable sums of money to the company. At the time of its provisional liquidation on 20 September 1990, I Camms Services and Finance Corporation (Pty) Ltd ('Camms') had lent to the company the amount of approximately R1,8 million. UAL Merchant Bank Ltd (acting through Strategic Capital Investment Trust) ('UAL') had advanced to the company approximately R3,5 million.

In their founding affidavit, the appellants referred to the loans as J 'capital' contributed by the shareholders. They did so on the basis that:

Goldstone JA

A 'All of the aforesaid loans were subordinated by the grantors thereof in favour of the other creditors of the company until such time as the assets of the company, fairly valued, exceeded its liabilities and notes to that effect were contained in the annual financial statements of the company.'

The notes in question record that the loans had been

B '. . . subordinated in favour of the other creditors until such time as the assets of the company, fairly valued, exceed its liabilities'.

It is clear that for some years prior to its liquidation the company's liabilities (including the subordinated loans) substantially exceeded its assets. On liquidation the financial position was aggravated by reason of C the difference between the valuation of the assets of the company on a going concern basis and the amount they would realise on a forced sale. The directors had valued the assets in an amount in excess of R3 million. After liquidation they realised only R369 000.

In the result, on liquidation, the company's financial position was such D that the assets were insufficient to yield any dividend for the concurrent creditors. The claims of trade creditors amounted to R213 357. The remaining concurrent creditors were the Industrial Development Corporation in an amount of R1 485 944 and Nedbank Ltd in an amount of R342 687. As already mentioned, if the offer of compromise is accepted and implemented, E there will be a small dividend of 1,78 cents in the rand available for concurrent creditors.

Stegmann J refused to grant the order sought by the appellants because he was of the view that they had failed to gather and furnish to the creditors of the company sufficient information to enable them

F 'to assess the relative merits of the proposal and of the alternatives to the proposal'

(at 103F-G).

The concern of the learned Judge, and the only question in respect of which he concluded there was insufficient information, related to the possible personal liability of the directors of the company under s 424(1) of the Act, ie for knowingly being parties, inter alia, to carrying on the G business of the company recklessly or with intent to defraud creditors or for any fraudulent purpose. In such a case, the Court is empowered by the subsection, on the application inter alia of a liquidator or a creditor, to declare

'that any person who was knowingly a party to the carrying on of the H business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct'.

More particularly, the Judge a quo held that:

1.

The effect of the offer of compromise, if duly sanctioned, would be I to preclude proceedings against directors under s 424(1) of the Act. He came to that conclusion because, in his view, s 424 may not be invoked at all unless, at the time of the application, the company has creditors. And, in the case of an application brought by a creditor, he would be required to establish a debt owing to him at the time of the application. Consequently, a judicial exercise of the J Court's discretion to grant an order convening meetings under

Goldstone JA

A s 311 requires it to be satisfied that the creditors' prospects of recovery under s 424(1) have been appropriately investigated by the liquidators.

2.

In the present case there was a reasonable prospect of establishing that the directors of the company, at material times, were conducting B the business of the company in a manner which rendered them liable to an order under s 424(1).

3.

The question of such personal liability of the directors had not been sufficiently investigated and therefore the appellants had failed to gather the information required to inform the creditors of a relevant alternative to the offer of compromise and, in particular, C information which would enable them to assess their prospects in proceedings against the directors.

There was no other reason given by Stegmann J for refusing the order to convene meetings. Indeed, on substantially the same papers such an order had been granted some weeks earlier in the same Court by Flemming DJP. D That order fell away because the appellants did not summon a meeting of secured creditors. Furthermore, additional information had come to the attention of the appellants which required a fresh application to be made. It is this application which came before Stegmann J.

The application before the Court a quo was brought ex parte. It followed that in the appeal to this Court there was no respondent. Because of the E importance of the issues raised, Mr M Tselentis SC and Mr P Boruchowitz were appointed to act as amici curiae and Nathan Friedland Inc were appointed as attorneys to assist them. This Court is indebted to them for the considerable assistance which they rendered by way of full and helpful heads of argument and counsel's submissions during the hearing of the F appeal.

It was the submission of counsel for the appellants, and the amici curiae agreed, that a duly sanctioned offer of compromise, which has the effect of extinguishing the company's debts, does not preclude a declaration being made by the Court under s 424(1) of the Act. It was argued that the reference to 'debts' in the subsection is to debts which were incurred by the company at the time of the alleged wrongful conduct, G and not necessarily to debts which were still owing by the company at the time of the application under the subsection: compare Pressma Services (Pty) Ltd v Schuttler and Another 1990 (2) SA 411 (C). In the view I take in this matter, it is not necessary to decide this interesting and difficult question. I shall assume that the effect of the offer of H compromise, on sanction by the Court, would be to preclude relief under s 424(1) at the instance of a creditor.

The...