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

• Jurisdiction: South Africa
• Citation: 1993 (1) SA 493 (A)

Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (In Liquidation)
1993 (1) SA 493 (A)

1993 (1) SA p493

Citation	1993 (1) SA 493 (A)
Court	Appellate Division
Judge	Corbett CJ, Van Heerden JA, Goldstone JA, Nicholas AJA and Harms AJA
Heard	November 2, 1992
Judgment	November 27, 1992

Flynote : Sleutelwoorde

Company — Directors and officers — Liability of for debts of company — I Generally — Company trading while liabilities exceeding assets — Mere incurring of credit by directors of such company not constituting implied representation that assets exceed liabilities — Directors impliedly representing no more than that company able to pay debts when due — Incurring of further debts when liabilities exceed assets thus not J necessarily constituting fraudulent

1993 (1) SA p494

A or reckless conduct — Existence and terms of subordination agreement relevant to deciding whether expectation of being able to pay debts when due reasonable — Fact that major creditor subordinated claim also relevant in determining subjective state of mind of those conducting debtor's business.

B Company — Winding-up —Creditors — Subordination agreement — Legal effect of — Debt continues to exist but enforceability subject to fulfilment of condition (usually) that debt enforceable only when value of debtor's assets exceeds its liabilities, excluding subordinated debt — In C event of debtor's insolvency, sequestration or liquidation usually meaning that condition upon which enforceability depends incapable of fulfilment — Debt thus dies and erstwhile creditor has no claim provable on insolvency.

Company — Winding-up — Creditors — Subordination agreement — Has no effect on statutory ranking of claims on insolvency or liquidation — D Creditor with subordinated claim having no claim unless other creditors paid in full — Liquidator obliged to have regard to subordination agreement in force at date of liquidation.

Company — Compromise — Scheme of arrangement in terms of s 311 of Companies Act 61 of 1973 — Application for leave to convene meetings of E creditors to consider such scheme — Salutary practice for draft of statement required by s 312(1) to be placed before Court in all such applications.

Headnote : Kopnota

Assuming that a company is liable to be wound up because its liabilities exceed its assets, the mere carrying on of business by its directors and incurring credit does not constitute an implied representation to those F with whom they do business that the assets of their company exceed its liabilities: the implied representation is no more than that the company will be able to pay its debts when they fall due.

The dictum in R v Latib 1973 (3) SA 982 (A) at 984G-H approved and applied.

The essence of a subordination agreement, generally speaking, is that the enforceability of a debt, by agreement with the creditor to whom it is owed, is made dependent upon the solvency of the debtor and the prior payment of its debts to other creditors. Save possibly in exceptional G cases, the terms of a subordination agreement will have the following legal effect: the debt comes into existence or continues to exist (as the case may be), but its enforceability is made subject to the fulfilment of a condition, the condition usually being that the debt may be enforced by the creditor only if and when the value of the debtor's assets exceed its liabilities, excluding the subordinated debt. In the event of the insolvency of the debtor, sequestration would normally mean that the H condition upon which the enforceability of the debt depends will have become incapable of fulfilment. The legal result of this would be that the debt dies a natural death and that the erstwhile creditor would, in consequence, have no claim which could be proved in insolvency.

The fact that the liabilities of a company exceed its assets does not necessarily mean that the incurring of further debts would constitute fraudulent or reckless conduct. In that context, the existence and terms of a subordination agreement would be material and relevant in deciding I whether the persons conducting such business incurred the debts with the reasonable expectation of their being paid in the ordinary course. The fact that a major creditor has subordinated its claim, and to that extent created a moratorium for the benefit of other creditors, is obviously relevant in determining the subjective state of mind of the debtor or those conducting its business.

Where a debt has been subordinated there is no interference with the statutory ranking of claims on insolvency or liquidation: the creditor has no claim unless other creditors receive payment in full. The liquidator would be obliged to have regard to a subordination agreement which was J valid and in force as at the date of liquidation.

1993 (1) SA p495

A At the stage of an application in terms of s 311 of the Companies Act 61 of 1973 for leave to convene meetings of creditors to consider an offer of compromise the Court is primarily concerned with the probable response to the offer of creditors. While that is the primary question, the Court is also concerned that the offer, on the face of it, appears to have been made in good faith and honestly, and that its terms are unambiguous and understandable. The Court considering such an application should also be satisfied that sufficient information has been gathered and could be B furnished to the creditors to enable them to assess the relative merits of the proposal and the alternatives thereto. For these reasons, while a draft of the statement containing the information set out in s 312(1)(a) need not be placed before the Court at the stage of an application for leave to convene meetings, it would be a salutary practice, in all such applications, for such a draft to be placed before the Court at the convening stage.

In an appeal from the refusal of an application for leave to convene C meetings of creditors to consider an offer of compromise on the grounds that the appellant liquidators had failed to gather sufficient information to be placed before the creditors,

Held, that the offer of compromise was, prima facie, fair and reasonable and should be placed before the creditors and members for their consideration.

Held, further, that, apart from any other relevant information, the creditors and members should be informed, inter alia, (a) of all the relevant facts relating to the subordination agreements entered into D between the company and two of its major creditors; (b) that, contrary to what the appellants had stated, the effect of the subordination agreements had not been to make the company solvent and that it had traded in a state of factual insolvency virtually from its inception; and (c) that, in the light of the subordination agreements, the directors prima facie had reasonably been able to trade in the belief that trade creditors would be paid in the ordinary course.

Held, further, that at the stage of seeking leave to convene meetings E under s 311, the absence of all the relevant circumstances and terms of the subordination agreements was not a bar to the success of the application: the required information should be obtained to the extent that was possible and placed before the creditors and members, who could then decide for themselves whether they required further investigations to be made prior to voting on the offer of compromise. The appeal was accordingly allowed.

Quaere: Whether the effect of the sanction of an offer of compromise is to F extinguish the right of creditors afforded by s 424(1) of the Act to proceed against directors of a company in liquidation.

The decision in Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in Liquidation) 1992 (2) SA 95 (W) reversed.

Case Information

Appeal from a decision in the Witwatersrand Local Division reported at G 1992 (2) SA 95 (Stegmann J). The facts appear from the judgment of Goldstone JA.

N N Lazarus (with him K Bailey) for the appellants referred to the following authorities: As to the liberty of the appeal Court to substitute its discretion for that of the Court a quo, see Mahomed v Kazi's Agencies (Pty) Ltd 1949 (1) SA 1162 (N) at 1167-1169; Ensor NO v South Pine H Properties (Pty) Ltd and Another 1978 (2) SA 755 (N) at 771E-G; Borgelt v Millman NO and Another 1983 (1) SA 757 (C) at 776A-B; Tjospomie Boerdery (Pty) Ltd v Drakensberg Botteliers (Pty) Ltd and Another 1989 (4) SA 31 (T) at 33F-40J. As to the Judge a quo's approach in previous judgments, see Ex parte De Villiers NO: In re M S L Publications (Pty) Ltd (in Liquidation) 1990 (4) SA 59 (W) at 67D-70I; Ex parte Lebowa Development I Corporation Ltd 1989 (3) SA 71 (T) at 88G-91F. As to the exercise of the Court's discretion in deciding whether to order the holding of meetings of creditors, see Ex parte Bruyns NO: In re Mammoth Construction and Drilling Co 1973 (3) SA 721 (T) at 722A-E; Ex parte Turkstra and Others 1941 TPD J 169 at 172; Bagus Allie v Meer-Onia (Pty) Ltd 1948 (4) SA 550 (C) at

1993 (1) SA p496

A 552-3; Ex parte Power and Others NNO: In re Natal Oil Products (Pty) Ltd 1959 (1) SA 7 (D) at 10B-D. As to the exercise of the Court's discretion at the sanction stage, see E Sacks Futeran and Co (Pty) Ltd v Linorama (Pty) Ltd; Ex parte Linorama (Pty) Ltd 1985 (4) SA 686 (C) at 688A-B; Bagus Allie v Meer-Onia (Pty) Ltd (supra at 552); Mahomed v Kazi's Agencies (Pty) Ltd (supra at 1171); Ensor NO v South Pine Properties (Pty) B Ltd (supra at 765H-768B). As to the issues on which the Court must be satisfied at the sanction stage, see Du Preez and Another v Garber: In re Die Boerebank Bpk 1963 (1) SA 806 (W) at 825G-H; Ex parte Venter and Another NNO: In re Rapid Mining Supplies (Pty) Ltd (in Provisional Liquidation); African Gate and Fence Works Ltd...