Ex parte Liquidator, Vautid Wear Parts (Pty) Ltd (In Liquidation)

• Jurisdiction: South Africa
• Judge: Vorster AJ
• Judgment Date: 08 May 2000
• Counsel: B E Gradidge for the applicant.
• Docket Number: 00/6651
• Court: Witwatersrand Local Division

Vorster AJ:

[1] This is an application by the liquidator of Vautid Wear Parts (Pty) Ltd (in liquidation) (the company) in terms of s 311 of the Companies Act 61 of 1973 (the Companies Act) for leave to convene C meetings of the secured, the preferent and the concurrent creditors of the company in order to consider an arrangement proposed by a director and shareholder of the company (the proposer). In the founding affidavit the liquidator correctly states that this is not a typical scheme of arrangement proposed by a party who wishes to compromise with D creditors for purposes of reviving the company. It is stated that it has been the intention of the liquidator to institute proceedings against the proposer with a view to a declaration pursuant to the provisions of s 424 of the Companies Act. It is contended that, prior to liquidation, the affairs of the company were carried on recklessly in that the company incurred substantial debts without any reasonable E expectation of being able to discharge those debts. It is further alleged that the proposer, and certain undisclosed others, were knowingly parties to the carrying on of the affairs of the company in this manner. No proceedings have been instituted against the proposer but negotiations have taken place between him and the liquidator, which F negotiations have culminated in an offer of settlement which is now before me as an 'arrangement' and which it is contended is within the ambit of s 311 of the Companies Act.

[2] The offer of settlement is on the basis that the proposer will pay an amount of R100 000 to the liquidator and that that payment will discharge the proposer from all liability under s 424 of the G Companies Act to the liquidator (in respect of administration costs, liquidator's fees and value-added tax, amounting in the aggregate to R50 000), to all creditors and contributories of the company (who will receive the sum of R50 000) and will, in addition, disentitle the Master of the High Court from exercising his powers under s 424 of the H Companies Act. It is stated in para 4.1.4 of the deed of arrangement that the settlement, if concluded, will constitute 'individual covenants by the liquidator and creditors [and presumably also the Master] not to sue'. It is intended that, in consideration for the receipt of the settlement sum,

'the liquidator, the company and every creditor of the company and the Master undertakes (sic) not to I sue any of (sic) the proposer in respect of any alleged liability or obligation of the company, pursuant to s 424 of the [Companies] Act. This arrangement if sanctioned, will constitute a complete defence to any such action as may be launched in contravention of this undertaking.'

See clause 4.1.2 of the deed of arrangement (my emphasis). J

Vorster AJ

What the liquidator hopes to achieve by this arrangement is that, upon sanction thereof, the payment of the settlement sum by the A proposer will disentitle the company, the liquidator, all creditors of the company and the Master from proceeding against the proposer for a declaration in terms of s 424 of the Companies Act. The liquidator recommends the proposal. In terms of para 3.2 of the 'deed of arrangement' the proposer is entitled to notify the liquidator that he does not wish to proceed with the arrangement. Upon receipt of such B notification, the liquidator may either abandon the arrangement, in which event the proposer will remain liable for costs and expenses incurred by the liquidator, or the liquidator may decide to proceed with the arrangement. The effect of this provision is that upon receipt of the notice of abandonment from the proposer, the liquidator becomes C the master of the ultimate destiny of the arrangement.

[3] When the matter was called on the unopposed motion roll, I indicated to Mr Gradidge, who appeared for the applicant liquidator, that I had difficulties with the application. First, I am not convinced that the offer of settlement by the proposer constitutes D an arrangement in respect of which the procedure contemplated in s 311 of the Companies Act could be invoked. Secondly, as this is an ex parte application, the Master has not been joined and I am, in any event, not convinced that the Master could be deprived of his locus standi under s 424 of the Companies Act in terms of the s 311 machinery. Thirdly, I am not convinced that the Court should E exercise its discretion to convene meetings in terms of s 311 of the Companies Act in respect of an arrangement which may be withdrawn by the proposer at any time prior to the sanctioning contemplated in s 311(2) of the Companies Act. I invited counsel to file heads of argument and, for this purpose, allowed the matter to stand down until F 10:00 on Friday, 5 May 2000.

[4] Counsel for the liquidator, in his brief and impromptu response to the difficulties I raised when the matter was first called, correctly conceded that the arrangement now before me is not a 'compromise' between the company and its creditors within the meaning of s 311. A compromise in this sense would entail some concession on G the part of the creditors of their claims against the company or, for that matter, some concession by the company of any claims which it may have against the proposer. As I understand the arrangement, it does not (in spite of the wording of 4.1.2 of the deed of arrangement to which I have referred above) involve any claims of the company or of its H creditors against the company and there is nothing in this sense that is being compromised. In dealing with s 103 of the Companies Act, 1926 (now s 311 of the Companies Act) Trollip J (as he then was) in Ex parte Cyrildene Heights (Pty) Ltd 1966 (1) SA 307 (W) at 308G - H expressed himself as follows:

'A ''compromise'' there [ie in s 103(1) of the Companies Act, 1926] presupposes some dispute about rights to be compromised or I some difficulty in enforcing them. Per Younger J in In Re Guardian Assurance Company [1917] 1 Ch 431 at 432 - 4, which was not affected on this point by the reversal of the judgment by the Court of Appeal. The petition does not say that there is any dispute about rights of creditors or any difficulties in their enforcing them against J

Vorster AJ

the company because the creditors other than the Botbyls are to be paid in full, and the Botbyls have agreed to accept some lesser A amount in settlement of their claims.

Consequently the offer cannot be said to constitute a ''compromise''.'

A compromise ordinarily occurs between a company and its creditors (see Henochsberg on the Companies Act 5th ed vol 1 (Butterworths, Durban, 1994) at 604) and, as I have said, the arrangement now before me does not entail a compromise of any rights or B obligations between the...