Singer NO v M J Greeff Electrical Contractors (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Stegmann J
• Judgment Date: 24 February 1989
• Citation: 1990 (1) SA 530 (W)
• Hearing Date: 21 February 1989
• Court: Witwatersrand Local Division

Singer NO v M J Greeff Electrical Contractors (Pty) Ltd
1990 (1) SA 530 (W)

1990 (1) SA p530

Citation	1990 (1) SA 530 (W)
Court	Witwatersrand Local Division
Judge	Stegmann J
Heard	February 21, 1989
Judgment	February 24, 1989

Flynote : Sleutelwoorde

Company — Compromise — Scheme of arrangement in terms of s 311 of I Companies Act 61 of 1973 — Statement in terms of s 312(1)(a) attached to notice summoning meeting of creditors furnishing no explanation of crucial terms in scheme nor of necessity for complex and seemingly pointless scheme — Inference that statement not revealing full explanation — Furthermore not advising as to creditors' prospects of J recovering claims from director or any officers of

1990 (1) SA p531

A company personally — Accordingly creditors not able to determine whether scheme commercially acceptable — Notice also not apprising creditors of conflict of interests arising from director's position as proposer of scheme — Proposal enabling director to avoid any risk of personal liability — Notice accordingly not complying with provisions B of s 312(1)(a)(i) and (iii) of Act 61 of 1973 — Furthermore, condition of scheme that, on sanction thereof, company to be discharged from liquidation — Company would in fact still be insolvent — Against public policy to sanction scheme under such circumstances — This was so to avoid temptation for company to trade in insolvent circumstances — C Court refusing to sanction scheme.

Headnote : Kopnota

G and his wife were the only shareholders in the respondent company. G was the sole director and, furthermore, a creditor of the company. The company was placed in provisional liquidation and G proposed a compromise or scheme of arrangement between the insolvent company and its creditors in terms of which G was to pay R70 000 to the insolvent D company which would issue shares with a nominal value equal to the amount of the company's debts of over R1 million. There would be a pretence that the new shares would be issued to the insolvent company's creditors and at the same time it would be pretended that the creditors would renounce their rights to the new shares which would in fact go to G. The R70 000 would then be used to pay costs and what remained would be distributed among the company's creditors. The effect of the scheme E for the company would have been that it would have changed from being an insolvent company with an issued share capital of R3, all of which had been lost, unpaid debts of over R1 million and liable to be wound up, to an insolvent company with issued share capital nominally of over R1 million, all of which would have been lost in advance, and remaining liable to be wound up for that very reason. It was for this scheme that the provisional liquidator of the respondent company sought the Court's F sanction in terms of s 311 of the Companies Act 61 of 1973.

Held, that the statement in terms of s 312(1)(a), attached to the notice summoning the meeting of creditors which had approved the scheme, had furnished no explanation of certain crucial terms in the proposed scheme and offered no explanation for the necessity for such a complex and seemingly pointless exercise, the inference being that a full explanation was being withheld from creditors.

Held, further, that it was required in terms of s 312(1)(a) of the Act G that the liquidator investigate properly possible liability on the part of a director or any officer of the company and advise the meeting of creditors accordingly, but in this instance the statement accompanying the notice summoning the meeting of creditors had not advised the creditors of their prospects of recovering their losses from G or any officer of the company personally, and until the creditors knew of such prospects they could not determine whether the proposal was commercially acceptable.

Held, further, that the statement accompanying the notice summoning the H meeting of creditors had not apprised the creditors of the conflict of interests arising from G's position as proposer of the scheme in that sanction of the scheme would shield him from any risk of personal liability of anything up to R1 million to the company's creditors and would deprive the creditors of that possible avenue for recovering their losses: such statement was specifically required in terms of s 312(1)(a) to contain such information.

Held, further, since the notice summoning the meeting of creditors had I not complied with the provisions of s 312(1)(a) (i) and (iii) of the Companies Act, that on that ground alone the scheme should not be sanctioned.

Held, further, that one of the conditions of the proposal was that the company should on the date of sanction be discharged from liquidation, but on the facts it would still be insolvent at that stage and it was against public policy to grant the Court's sanction to a scheme of this J kind conditional on simultaneous discharge of the insolvent

1990 (1) SA p532

A company from liquidation, and this was so to avoid the temptation for the company to trade in insolvent circumstances at risk to such suppliers as could be induced to provide goods and services on credit.

Held, accordingly, that the Court's discretion in terms of s 311(2) to sanction the scheme should be exercised adversely to the applicant. B

Case Information

Application for the sanction of a scheme of arrangement in terms of s 311 of the Companies Act 61 of 1973. The facts appear from the reasons for judgment.

S P Pincus for the applicant.

No appearance for the respondent.

C Cur adv vult.

Postea (24 February 1989).

Judgment

Stegmann J:

This is the report-back day of an order issued on 20 D December 1988 in terms of s 311 of the Companies Act 61 of 1973, authorising the calling of meetings of three classes of creditors of M J Greeff Electrical Contractors (Pty) Ltd (in Liquidation), to consider a proposal for an arrangement or compromise between that company, which is insolvent, and its creditors.

In terms of s 312(1)(a) of the Act, the notice summoning the meetings E of creditors had to be accompanied by a statement which explained the effect of the compromise or arrangement; and which, in particular, stated any material interests of the director of the company in liquidation, whether as a director, member or creditor of the company in liquidation, and the effect on his interests of the compromise or F arrangement insofar as it might be different from the effect on the like interests of other persons.

The applicant, Mr E M Singer, is the liquidator of the company. He sent out the notices. According to his affidavit, such a statement was duly sent to creditors. However, no copy of it was placed before me, and I was therefore not in a position to know whether an adequate or appropriate explanation had been given to creditors. I allowed the G matter to stand down for the relevant document to be produced. It has now been handed to me. I shall deal with its adequacy later.

On 17 January 1989 the notices summoning the meetings on 1 February 1989 were posted to creditors of the insolvent company and published as required by the order. The meetings of the three classes of creditors H were held on 1 February 1989 under the chairmanship of the applicant. No creditors attended in person. However, some proxies had been returned by creditors with votes in favour of the proposal. There were no votes against it. The chairman was therefore able to conclude that three-fourths in value of each class of creditors present and voting by proxy had agreed to the proposal.

I I have now to consider whether the discretionary power vested in this Court by s 311(2) to sanction the proposal as approved by the creditors, and thereby to render it binding on all creditors, the company and the liquidator should be exercised favourably or adversely to the proposal.

A few facts have been disclosed about the company in liquidation. It J appears that the company had two shareholders, Mr M J Greeff and his

1990 (1) SA p533

Stegmann J

A wife. Greeff was also its sole director. It had an authorised share capital of R200 divided into 200 ordinary shares of R1 each. Of such authorised share capital, three shares had been issued, two to Greeff and one to his wife. The amount of capital which the members of this company saw fit to place at risk for the purposes of the company's enterprise was therefore no more than R3. Once that capital had been B lost, the company was insolvent and it was liable to be wound up by the Court by virtue of s 344(e) or (f) of Act 61 of 1973.

Mr Pincus has informed me that it appears somewhere in these papers that Greeff is also a creditor of the insolvent company to the extent of R30 000. Presumably the company borrowed that amount from him to pay C some of its debts. I infer that at some stage the company adopted the policy of borrowing from Peter to pay Paul.

The same...