Lordan NO v Dusky Dawn Investments (Pty) Ltd (In Liquidation) (Pearmain and Another Intervening)

• Jurisdiction: South Africa
• Citation: 1998 (4) SA 519 (SE)

Lordan NO v Dusky Dawn Investments (Pty) Ltd (In Liquidation) (Pearmain and Another Intervening)
1998 (4) SA 519 (SE)

1998 (4) SA p519

Citation	1998 (4) SA 519 (SE)
Case No	523/98
Court	South Eastern Cape Local Division
Judge	Horn A J
Heard	June 11, 1998
Judgment	June 17, 1998
Counsel	RG Buchanan for the respondent; No appearance for the respondent; PE Jooste for the first and second intervening creditors

Flynote : Sleutelwoorde

Company — Compromise — Scheme of arrangement in terms of s 311 of the Companies Act 61 of 1973 — Application I for offer of compromise to be sanctioned and company discharged from liquidation — Wishes of majority of creditors having bearing on Court's discretion to sanction scheme — Court's discretion limited by requirement that it be exercised judicially — Majority of creditors voting in favour of scheme a strong indication that offer fair and reasonable — Nothing amiss or irregular when offer put to J

1998 (4) SA p520

vote and no cogent reasons why offer to be rejected — Offer meeting requisite test that it was one a man of business A would reasonably approve of — Proposed scheme to financial benefit of all creditors and geared towards restoring company to market place — Court exercising discretion in favour of sanctioning compromise and discharging company from liquidation. B

Company — Compromise — Scheme of arrangement in terms of s 311 of the Companies Act 61 of 1973 — Liquidator's report in terms of s 312(1) of the Companies Act — Liquidator to give good reason why company to be funded by loan before recommending acceptance of offer — Report to be compiled according to merits of each situation and not to be stereotypical and predictable — Liquidator not dealing with prospects of company's success if scheme approved nor C financial state of company when wound up — Court not merely rubber stamp to sanction recommended arrangements as a matter of course — Court's discretion remaining unfettered.

Company — Compromise — Scheme of arrangement in terms of s 311 of the Companies Act 61 of 1973 — Application D for offer of compromise to be sanctioned and company discharged from liquidation — Such opposed on basis of it affecting creditors' rights in terms of ss 415, 417 and 424 of Companies Act 61 of 1973 and ss 26--32 of Insolvency Act 24 of 1936 — Where purpose of interrogation to expose misdemeanours or liability of directors with respect to E management of the company, utilisation of ss 415 and 417 not permitted — No proper case having been made out for relief in terms of ss 26--32 of the Insolvency Act — Compromise in terms of s 311 not affecting rights in terms of s 424 — Purpose of application not to enquire into liability of directors — Court refusing to take matter further. F

Headnote : Kopnota

The applicant, the liquidator of the respondent company in liquidation, had successfully applied to a Local Division in terms of s 311 of the Companies Act 61 of 1973 (the Act) for the convening of a meeting of creditors in order to consider and vote on a scheme of arrangement which proposed the funding of the insolvent company G by the offeror in the form of a loan. When calling for the meetings, the applicant had attached his report in terms of s 312(1) of the Act and at the separate meetings of creditors the offer of compromise had been accepted by the required majority of creditors. The applicant had then applied to Court to have the offer of compromise sanctioned and the respondent discharged from liquidation. This application was opposed by the H intervening creditors on the basis that the relief claimed would deprive them of their rights in terms of ss 415 and 417 of the Act and ss 26--32 of the Insolvency Act 24 of 1936. Furthermore, the opposing creditors alleged mismanagement of the affairs of the company by the directors and contended that sanctioning the scheme of arrangement would jeopardise the creditors' rights to take action against the directors in terms of s 424 of the Act. I

Held, that an interrogation in terms of s 415(1) of the Act was only permissible where it was directed at facts which might be to the financial benefit of the creditors. Where the purpose of the interrogation was to expose misdemeanours or the liability of directors with respect to the management of a company, such enquiry could not be permitted by the utilisation of the provisions of ss 415 and 417. Furthermore, no proper case had been made out by the opposing creditors for any relief mentioned in ss 26--32 of the J

1998 (4) SA p521

Insolvency Act. Section 311 of the Act provided for an attempt to establish the financial liability of the directors A and therefore also did not sanction an inquisition where the enquiry was not linked to obtaining compensation from the directors. A compromise in terms of s 311 did not affect the rights of creditors in terms of s 424 of the Act but the mere fact that a company traded in insolvent circumstances did not necessarily infer irregularity and mismanagement on the part of the directors. However, as the function of the Court with regard to the application B was to adjudicate on the scheme of arrangement and not to enquire as to the liability of the directors with regard to the management of the company's affairs, it refused to take the matter any further. (At 524E, 525B/C--D/E, 529D--E, F and 529I--530A.)

Held, further, that the weight of the wishes of the majority of the creditors who voted in favour of a scheme of C arrangement had a bearing on the Court's discretion to decide whether to sanction a scheme. The Court's discretion was only limited by the requirement that it be exercised judicially. Where the majority of the creditors had voted in favour of the compromise, it was a strong indication to the Court that the offer was fair and reasonable and the Court would not impose its own views on the wishes of the majority of creditors. (At 528E/F--F and I..) D

Held, further, that the Court was not persuaded that there was anything amiss or irregular when the offer was put to the the vote. Furthermore, no cogent reasons had been advanced as to why the offer should be rejected or the compromise not be sanctioned. The Court was satisfied that the offer met the requisite test in that it was evident that the compromise was one which a man of business would reasonably have approved of, as the scheme of E arrangement would be to the financial benefit of all the creditors and would restore the company to the market place and enable it to trade with the operating capital provided by the offeror. (At 530E/F--H/I.)

Held, further, that liquidators should give good and valid reasons why a company was to be funded by a loan, as was the situation in the present case, rather than by way of a capital injection or other form of investment which F would strengthen the asset base of the company before recommending the acceptance of an offer. For this reason, liquidators should compile the s 312(1) reports in accordance with the merits of each situation and not in a stereotypical and predictable manner which did not always serve the purpose for which the reports were intended. In casu the applicant had not in his report dealt with the prospects of the company's success in the G event of the scheme being approved and had further not dealt adequately with what the financial state of the company had been when it had been wound up. The Court was not merely a rubber stamp and the sanctioning of a scheme of arrangement was not a matter of course once the liquidator had compiled his report and submitted his recommendations, as the Court's discretion remained unfettered. (At 531C--F and F/G--G/H.) In the H circumstances, the Court exercised its discretion in favour of sanctioning the compromise and discharging the respondent from liquidation.

Cases Considered

Annotations

Reported cases I

Agyrakis and Another v Gunn and Another 1963 (1) SA 602 (T): dictum at 604 applied

Borton NO v Dundas & Miller (Pty) Ltd 1970 (3) SA 107 (E): dictum at 108H--109A applied

Ex parte Chenille Corporation of SA (Pty) Ltd and Another: In re Chenille Industries (Pty) Ltd 1962 (4) SA 459 (T): considered J

1998 (4) SA p522

Cooper v A & G Fashions (Pty) Ltd; Ex parte Millman NO 1991 (4) SA 204 (C): dictum at 208H applied A

Ex parte De Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in Liquidation) 1993 (1) SA 493 (A): dicta at 503G--J and 504C--E applied

Ex parte De Villiers NO: In re MSL Publications (Pty) Ltd (in Liquidation) 1990 (4) SA 59 (W): B considered and criticised

Dundas & Miller (Pty) Ltd v Borton NO 1971 (1) SA 106 (E): referred to

Ensor NO v South Pine Properties (Pty) Ltd and Another 1978 (2) SA 755 (N): referred to

Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T): considered and criticised C

Levin v Felt & Tweeds Ltd 1951 (2) SA 401 (A): dictum at 410 applied

Philotex (Pty) Ltd and Others v Snyman and Others; Braitex (Pty) Ltd and Others v Snyman and Others 1998 (2) SA 138 (A): referred to

Pressma Services (Pty) Ltd v Schuttler and Another 1990 (2) SA 411 (C): dictum at 416J--417A applied

Simon and Another v The Assistant Master and Others 1964 (3) SA 715 (T): dictum at 718C applied D

Ex parte Strydom NO: In re Central Plumbing Works (Natal) (Pty) Ltd; Ex parte Spendiff NO: In re Candida Footwear Manufacturers (Pty) Ltd; Ex parte Spendiff NO: In re Jerseytex (Pty) Ltd 1988 (1) SA 616 (D): considered

Ex parte Thrustor Manufacturing Industries (Pty) Ltd 1983 (4) SA 364 (E): referred to E

Ex parte Utility Shoe Manufacturing Co and Others: In re ABC Store (Pty) Ltd (in Liquidation) 1948 (4) SA 1 (W): referred to.

Statutes Considered

Statutes

The Companies Act 61 of 1973, ss 311, 312(1), 415, 417, 424: see Juta's Statutes of South Africa 1997 vol F 2 at...