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Companies in liquidation

10 February 2011

My firm is attending to the transfer of various properties sold by the liquidators of a company in liquidation to various purchasers. The company took out certificates of registered title for the various erven depicted on a general plan and passed a bond over each property. The company was in voluntary liquidation, in this case a creditor's voluntary liquidation. Supporting documents lodged with the transfers to the various purchasers included a certificate by the liquidators that the company is unable to pay its debts and a certificate by the Master of the High Court, Port Elizabeth, that the winding up of the company was being done under supervision of the Master of the High Court on behalf of the High Court.

The transfers were rejected with a simple note raised: The company is in voluntary liquidation and the bonds must be lodged for cancellation. This despite the supporting documents placing the transactions squarely within the ambit of the proviso to section 56(1)(b) of the Deeds Registries Ac 47/1937(DRA), namely that in the case of transfer of mortgaged land by the liquidator of a company in liquidation which is unable to pay its debts, and which is being wound up under supervision of the Court, it is not necessary to cancel the bonds over the property. This more or less coincided with Mr. West's article in GhostDigest dated 26th August 2010 regarding companies in liquidation. The conclusion drawn at the end of that article, with respect, is open for argument. It ignores part of the section, namely the phrase "…or under the supervision of the Court". RCR 9/1980 states proof must be lodged that the company is being liquidated by or under the supervision of the Court.

A big e-mail argument involving various Masters, Deputy Masters, trainers, the local deeds registry etc. ensued, which seemed to hinge on exactly that little phrase "…under supervision of the Court". The "opposition" is convinced that the Master's supervision, although they acknowledge that the Master does in fact supervise the liquidation, is not what is meant in that phrase, i.e. it is not supervision by the Court.

This caused our correspondent, the liquidators and us much frustration as we could not get the transfers registered. The Registrar at Cape Town deeds office refused to budge, as he preferred to wait for the matter to be decided at conference, as it was on the agenda directly as a result of this matter. An understandable attitude. All of this was despite us referring in our defence to RCR 9/1980, which was already made on the facts exactly as per the matter in hand. We managed to obtain the bonds, only to have the mortgagee refuse to sign consents. The mortgagee's argument was that they had already proved their claim at the meeting of the creditors, and that in their opinion they need not cancel the bonds. The mortgagee relented eventually and the matters were lodged again.

The opposition of course, in the meantime played the ace up their sleeve and Registrars Conference Resolution (RCR) 37/2010 was passed.

Let us look at the situation regarding the winding up of companies vis-a-vis the proviso to section 56(1), the RCR's and the various arguments against the applicability of the proviso to section 56(1) that were variously raised by the opposition in the argument:

  1. Section 56(1)(b) provides that in certain circumstances, inter alia in the case of the transfer of mortgaged land belonging to a company sold by the "…liquidator of a company….which is unable to pay its debts and which is being wound up by or under the supervision of the court…" it is not necessary to cancel the bond(s) upon transfer. The section has four definite components:

    1. That the company must be in liquidation. In terms of the Companies Act 61/1973(CA) (section 343) there are two modes of winding up of a company:
      a) By the Court; or
      b) Voluntary

      The voluntary winding-up of the company may be:

      a) A creditor's voluntary winding-up; or
      b) A members' voluntary winding-up. In this case I am dealing specifically with a creditor's voluntary winding-up.
      When a company is liquidated by the Court, it is a matter of the Court granting an order placing the company in liquidation upon petition by a creditor (in general, although not only a creditor). A copy of the order must be transmitted to the Master (section 17 of Insolvency Act 24/1936).

      In the case of a voluntary winding-up of a company a special resolution in which it is decided to place the company in voluntary liquidation must be passed by the company. The resolution must state whether the voluntary liquidation is a members' or creditors' voluntary liquidation. The resolution must be registered with CIPRO (s200 of CA) and the Registrar of Companies must then transmit a copy of the resolution to the Master (section 352 (2) of CA).

      The 1926 Companies Act did not provide for a distinction between a members' and a creditors' voluntary liquidation, but it did provide that a company could resolve "…by extraordinary resolution that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up". This amounts to a sort of creditors' voluntary liquidation. (s160(c)); and

    2. That the company must be unable to pay its debts. This is the responsibility of the liquidator and as per RCR 38/2010 only a certificate by the liquidator to this affect will in future be accepted. RCR 2/1978 which provided for the acceptance of a conveyancer's certificate in this regard has now been withdrawn. Keep in mind that the s56 of DRA since its inception contained the phrase "..the liquidator of a company which is unable to pay its debts and which is being wound up by or under supervision of the Court".

      In terms of the old Companies Act it would also have been the liquidator who would determine whether the company was or was not able to pay its debts. Section 112 of the old act determined when a company was unable to pay its debts, and did not exclude companies in voluntary liquidation. Furthermore, s169 of that act provided for an arrangement to be reached between the company in liquidation and the creditors of the company, as well as review by the Court of such an arrangement should an aggrieved creditor request such a review; and

    3. That the company is being wound up by the Court. This is simple. The Court issues an order upon petition by some party that the company is placed in liquidation. This cannot include voluntary liquidation; or

    4. That the winding up must be done under the supervision of the Court. This innocent looking phrase "…under the supervision of the Court…", caused much debate as the opposing side simply argued that the Court and the Master are different entities. That is obviously true. One must therefor look at what each of these bodies do in the process of liquidation of a company to unravel what that simple phrase might mean. When a company is wound up by the Court, the process is basically that the Court grants a liquidation order, the Registrar of the High Court serves a copy of the order on the Master, the Master appoints a liquidator who must then liquidate the company as per the statutory rules contained in the Companies Act, etc. When a company takes a resolution to go into voluntary liquidation, it passes a special resolution which must state whether the voluntary liquidation is a members' or creditors' voluntary liquidation (s350 and 351 of CA). What therefor is the Master's real role in the process, and how does the Court supervise the winding up?

      In South Africa the Court does not have the personnel or infrastructure to do the supervision itself. The Master does the supervision on behalf of the Court, which is why liquidation orders, sequestration orders and special resolutions to voluntarily wind up companies, etc. are transmitted to the Master.

      When a company is liquidated by the Court, it is the Registrar of the High Court who must transmit a copy of the liquidation order to the Master (s17 (1)(a) of the Insolvency Act. The previous Companies Act contained a similar provision in section 119(1)(b)). The Master appoints a liquidator who then proceeds with the liquidation, taking instructions from the creditors, who must prove their claims. In the case of a creditors' voluntary liquidation the special resolution is registered with CIPRO as required in s200 of CA. In terms of s352 (2) the Registrar of Companies must transmit a copy of the resolution to the Master. Thereafter the process is the same as for a liquidation by the Court, i.e. claims must be proved, etc…(see section 163(2) of 1926 Companies Act).

      In Gilbert v Bekker 1984 (3) 774 the Court explains the situation as follows: "Our early insolvency legislation had much in common with English bankruptcy law. The Court was much more closely involved with insolvency administration than now. Subsequent legislation transferred some important functions to the Master. There has been a general thrust in this direction which caused drastic alterations in insolvency practice…..Our Courts are not entrusted with insolvency administration as in England. The Court, when called upon to do so, merely applies the law to a given situation. In England, however, bankruptcy administration is conducted not only by the Judges and the Registrars of the Courts (which function also as 'bankruptcy Courts") but by certain officers appointed for the purpose of bankruptcy administration. They are official receivers and trustees…There is therefore a completely different approach to insolvency administration in England where it is fundamentally the Court's function. The day to day administration is done through its officers…". The Court demonstrates this shift in South African insolvency law with the example of how the Court's power to remove a trustee from office has diminished and that function largely moved to the Master. The point of this is that "…under the supervision of the Court" cannot mean anything but what the Master does in the case of liquidation and insolvency, and has meant that for a very long time.

      It is therefor clear that, in order to not have to cancel the bonds when mortgaged land of a company in liquidation is being transferred by the liquidator, the company must be unable to pay its debts, and in addition must either be wound up by the court (i.e. a formal court order was issued placing the company in liquidation upon the application by someone) or under the supervision of the Court (i.e. not necessarily by the Court, but the process must be supervised by the Court). Not all four of the abovementioned factors have to apply, or can indeed apply.


  2. The next argument against the applicability of the proviso to section 56(1) DRA finding application was that any decision made by the Master will be open for review by the Court. This of course true. One must, however, keep in mind that both "Court" and "Master" are very clearly defined in the CA and if one looks at the definitions closely they are in fact closely linked so as to establish exactly who has jurisdiction, i.e. which Court or which Master. Therefor, in the case of an aggrieved party approaching the Court to review a decision by the Master, in the case of winding-up by the Court, it will be exclusively to the Court who granted the liquidation order. Also, Master is very clearly defined in CA as to the Master who has the jurisdiction in a specific matter, to link up with the Court who has jurisdiction over the matter. If the liquidation is a voluntary liquidation and a creditor feels aggrieved by a decision of the Master, again a very specific Court as defined in CA will be approached for a review of the decision, just as the Master in question will be the Master as per the definition of Master in CA.

    The fact is that review by the Court will only happen upon petition by an aggrieved party, and not on an on-going basis. The "…under the supervision by the Court" is done by the Master of the High Court, as the name so aptly states. Also, the definition of "Master" in the CA does not mean any other type of Master than the Master appointed in terms of section 2 of the Administration of Estates (AEA) Act 66/1965, in exactly the same way that the Deeds Registries Act (DRA) and the Insolvency Act also refer to "Master". Thus, the fact that the Master's decisions are open for review by the Court reinforces the notion that "…supervision by the Court" can only point to it being the process of supervision of the winding-up procedure by the Master, as the administrative tool or arm of the Court. The situation is merely that a specific Master supervises the liquidation process on behalf of a specific division of the High Court.


  3. The fact that the Master is, for the purposes of the CA, not an officer of the Court, was also cited as reason why the proviso to section 56 (1) DRA does not find application in the case of creditors' voluntary liquidations. That the Master is indeed not an "officer of the Court" is indeed true (Mars "The Law of Insolvency in South Africa", 7th ed p14), but what or who exactly is an officer of the Court? In the Gilbert case the Judge says the following on the subject:
    "Officer of the court" is a nebulous concept at best. Although it is frequently used I could not find a definition of it. The ordinary meaning of the word "officer" is a person who has been appointed to an office, that is a person who has been appointed to perform certain duties which have been duly described as the duties of that office - per Watermeyer J in Ketteringham v Cape Town City Council 1933 CPD 316 at 318. In this sense an officer of the Court can only be someone like the Registrar or a Taxing Master… Judges shrink from the exact definition of who might in the widest sense be called officers of the Court. Cf Engelbrecht v Sheriff 1904 TS 615 at 617(Innes CJ) and Chermont v Lorton 1929 AD 84 at 92. This does not surprise me. Canning fog is not easy. I can only conclude that it is a vague term without legal content when it is not used in a statutory enactment where it is either defined or an ascertainable meaning arises from the context.....Attaching labels to positions held by persons cannot be a source of their rights, duties or the powers of the Court to regulate their conduct. For that the statute of which the office which he holds is a creature has to be examined".

    The Registrar of the High Court is therefor one of the few examples of an officer of the Court in South African law, being appointed in terms of section 34(1)(a) of the Supreme Court Act and referred to as an officer of the Court in the Act, with duties duly described by statute. Fact is that whether the Master is "an officer of the Court" or not is irrelevant. It will not take away or diminish in any way from the functions that the Master performs. Conversely, if the Master could have been referred to as an Officer of the Court in this instance, it would have added nothing to his position in this argument. The Master is a creature of statute and derives his powers and duties from statute, be it the AEA or CA or any other piece of legislation. As for the definition of "Master" in the old Administration of Estates Act 24/1913, the differences between the wording in the old act and the wording of the definition of Master in the current act will make no difference to this argument.

  4. De Beer and Rorke in "Newall's Law and Practice of Conveyancing in South Africa", Hall in "Maasdorp's Institutes of South African Law" and Jones in "Conveyancing in South Africa" all make a bland statement in this regard, namely that section 56(1)(b) of DRA does not find application in the case of a company in voluntary liquidation. With respect, it would appear that none of the learned authors considered the situation fully and may have been merely quoting old deeds office practice, seemingly older than the old Insolvency, Deeds Registries and Companies Acts. None of them gives an explanation as to how the conclusion or statement is arrived at nor is any type of consideration whatsoever of the law existing at the time given in their various books. This despite it seeming that the Master has been supervising the liquidation process on behalf of the Court for some considerable time already and that the insolvency law in this country has for some time been substantially the same as today. Similar enough to the current law to not change anything, I submit, from what I have stated above.

  5. In 1980 the Cape Supreme Court made a decision in Joubert N.O. v Welgemoed Dorpsgebiede (Edms) Bpk in which the Court ruled that a company in voluntary liquidation which was unable to pay its debts and was being wound up by or under supervision of the Court was a company as envisaged in section 56(1). RCR9/1980 was passed on the basis of that case. Reading RCR 9/1980 there can be no doubt that the facts were the same as in my rejected deeds as I set out at the beginning hereof. RCR 9/1980 was not withdrawn at the latest conference and therefor RCR 37/2010 is in direct conflict therewith. In fact, the entire argument should never have taken place and the documents should not have been rejected, given RCR 9/1980!

    RCR 9/1980 did make a curious ruling and which I deal with in paragraph 7 below. Most certainly if it was a voluntary liquidation in the Joubert case then liquidation by the Court was not an issue. The resolution also treats "by the Court" and "under supervision of the Court" as though they are synonyms, which they cannot be, with respect. The Joubert case was unfortunately not reported and we were unable to obtain the text thereof.

    However, despite the Joubert case being an unreported case, it would seem that RCR 9/1980 cannot now be withdrawn. The Court decided on the principle, conference took cognisance of the case and passed the resolution.

  6. CRC 37/2010 seems to simply ignore the phrase "…or under the supervision of the Court". The word "or" in my opinion does not signify that the phrase "…or under the supervision of the Court" is an alternative form of saying "by the Court" - it points to an alternative. A company liquidated by the Court is also liquidated under supervision of the Court, but the phrase can only be seen as referring to something other than "by the Court". How can the resolution then be correct? Certainly one cannot ignore part of the section to arrive at a convenient answer to a problem? Clearly, section 56(1)(b), when referring to "the liquidator of a company…which is unable to pay its debts and which is being wound up by or under supervision of the Court" has a wider scope than limiting the application of the proviso to section 56(1) to only those companies which are wound up by the Court. The process of winding-up of a company liquidated by the Court and in creditors' voluntary liquidation is the same - why distinguish between the two? RCR 9/1980 treats "by the Court" and "under supervision of the Court" as though they mean the same thing. They do not. Liquidation "by the Court" is where the Court, upon application by an interested person, grants an order placing a company in liquidation. "Under supervision of the Court" is the overseeing of the liquidation process by the Master on behalf of the Court. …". Even the 1918 Deeds Registries Act no 13/1918, stated in s 14 as follows: "…but this section shall not apply if the transfer…is to be passed,-

    a)…
    b)…or by the liquidator of a company which is being wound up by or under supervision of the Court;…".

    It is clear from the provisions of the old and the current Companies Acts as well as the old and the current Insolvency Acts, and in fact the Deeds Registries Acts, that "… under the supervision of the Court" is nothing new and that it must be the process overseen by the Master. If that is not what was meant by that phrase in either the current DRA and the 1918 Deeds Registries Act, please somebody then explain exactly what that phrase means. That question was not answered by the opposition up to this point.

In the light of my arguments above I therefor beg to differ from the conclusion in Mr. West's article in GhostDigest dated 26th August 2010 as well as RCR 37/2010, which resolution in my opinion should be withdrawn or amended. In my humble opinion Mr. West and the resolution both equate supervision by the Court with liquidation by the Court. The fact that the section says "or" seems to be conveniently ignored. The legislator does not repeat itself to clarify what a phrase or concept means. "Or" in that section can only mean an alternative to liquidation by the Court. It cannot mean anything else. The legislator will also not refer to a non-existent process - for more almost a century!

I submit that the proviso to section 56(1) of DRA must find application in the case of a company in creditors' voluntary liquidation which is unable to pay its debts and when mortgaged land of such a company is transferred, the bonds need not be cancelled, provided the company is unable to pay its debts. Proving that the liquidation is done under the supervision of the Court appears to be unnecessary as that is done in any event in any liquidation, by the Master of the High Court.

Dudley Lee
4/1/2011


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