A long dispute between a father and son, which progressed through various courts, culminated in an application focusing on the court's powers under section 387(3) of the old Companies Act (61 of 1973). That dispute was heard in the Western Cape High Court, which gave judgment on 10 July 2024 in the matter of Jurgens Johannes Steenkamp N.O. & 3 others v Mark Wehrley & 3 others.
A key question in the matter was whether the Court, in exercising its powers under section 387(3), could set aside creditors' resolutions in terms of which directions are given to a liquidator in a company's liquidation: a question apparently unanswered in our law.
Background
A series of disputes between a father whose company built a yacht and a son who ran a charter business using that yacht led to legal action regarding ownership of the yacht.
In that action, which was referred for arbitration, the arbitrator found that the father's company, "Matrix", and the son had agreed that the son would run a charter business for Matrix, use the profits to pay for the costs of constructing the yacht, and once paid off, the yacht would pass to the son. The remaining issues, being whether the yacht had indeed been paid off and thus acquired by the son, were deferred for future resolution.
Before this determination, Matrix was liquidated and the liquidators repudiated the contract. After a further court battle regarding whether the liquidators could sell the yacht, a court found that the remaining issues still needed to be resolved.
The parties held another arbitration, which concluded by way of a settlement agreement in which the yacht and the associated charter business was agreed to vest in Matrix. Further, given the liquidators' repudiation of the contract, it was agreed that the son had a damages claim of ZAR9 million which he could pursue against the estate.
The liquidators convened a special meeting of creditors to prove the claim. Creditors led by the father objected to the claim, but the Master proved it. Importantly, the objecting creditors did not take the Master's ruling on review.
The objecting creditors had the liquidators convene a general meeting to vote on resolutions that would compel the liquidators to contest the son's claim. The liquidators held the meeting, as required, and the creditors (barring the son, disentitled from voting by section 52(6) of the Insolvency Act 24 of 1936) approved the resolutions.
The liquidators found themselves in a bind as they themselves had concluded the settlement giving rise to the son's claim, and in doing so, had exercised their power to admit a claim against the estate. They found the basis and quantum of the claim reasonable. It would be contradictory to bring proceedings to now challenge their own decision. So, they approached the court for relief under section 387(3), which states that:
"Where the Master has refused to give directions as aforesaid or in regard to any other particular matter arising under the winding-up, the liquidator may apply to the Court for directions."
Section 387(3) proceedings
The liquidators came to court under section 387(3) to ask for two things: that the arbitration award, incorporating their settlement with the son, be made an order of court, and that the creditors' resolutions compelling the liquidators to challenge the son's claim in that settlement be set aside under section 387(3).
Their reasons were many fold, but their argument was essentially that:
- The liquidators were empowered by resolutions unanimously adopted at the second meeting of creditors to settle arbitrations and admit claims against the estate for proof.
- They had done just that when they settled the arbitration, obtaining a competitive dividend for creditors in the process.
- Their conduct in settling the arbitration, including their approach to calculating the son's damages claim, was reasonable and in good faith.
- The creditors' resolutions, directing the liquidators to challenge the claim, were adopted with an improper purpose and were adverse to the proper winding up of Matrix.
- In any case, the creditors had not challenged the Master's ruling to admit the son's claim to proof, which ruling, until set aside, was binding (they here relied on the recent SCA decision in Mantis Investments Holdings v De Jager .)
The creditors, in opposing the application, argued amongst other things that:
- The court is not empowered by section 387(3) to set aside the resolutions.
- The liquidators should have approached the court under section 53(4) of the Insolvency Act after obtaining the Master's consent, not section 387(3).
- There was no basis for the son's claim on the merits so that when the liquidators admitted that there was, they breached their fiduciary duty to creditors.
- The Master's ruling, admitting the claim, was 'provisional' until the liquidators' (proper) review of the claim under section 45 of the Insolvency Act was completed, which review they alleged to be wanting.
Before considering these contentions on the merits, the court needed to answer a key question. If it did find the creditors' resolutions wanting, did it have the power to set them aside? There was no precedent for this in case law and no mention of it in the commentary to the old Companies Act. In other words, there was a gap in the law where one would expect to find this power. Should that gap be filled, or was it there for a reason?
Bridging the gap: the implied powers doctrine
The court's words are quoted directly:
"... Conceivably, a range of circumstances may arise where liquidators may be faced with creditors' directions (or other matters) which they wish to place before the court under s 387(3), for example, where they consider such directions to be adverse to the proper winding-up of the company, or the directions have become impossible to implement or where the validity of the directions is in issue. Given the broad spectrum of matters that may be placed before the court in terms of s 387(3) for directions, I am of the view that the scope of the court's powers in terms of this subsection is to be determined by applying the doctrine of implied powers which has been described in Moleah v University of Transkei and Others 1998 (2) SA 522 (Tk) at 536H-537D (cited with approval in Matatiele Municipality v President of the RSA 2006 (5) SA 47 (CC) at para 50), as follows:
'Applying the principles applicable to the interpretation of statutes, it is clear that, if certain conduct is required or authorised, the authorising act should be interpreted as impliedly including authorisation to do that which is "reasonably necessary" to achieve the main purpose or to perform the action effectively or that which is "reasonably incidental" or "reasonably ancillary" to those powers expressly conferred.'
(See also Lekhari v Johannesburg City Council 1956 (1) SA 567 (A) at 566G-567C)
Applying this principle, I conclude that the court's wide power in terms of s 387(3) to give directions regarding any matter arising under the winding-up impliedly includes the power to set aside creditors' directions or to permit liquidators to disregard directions which are adverse to the proper winding-up of the company inasmuch as these powers may be reasonably necessary and incidental to the court giving directions which are effective."
The result
Having found that it had the implied power under section 387(3) to set aside creditors' directions, the court continued its assessment of whether the creditors' directions in this case should be set aside.
The court held, amongst other things, that:
- The liquidators were entitled to approach the court under section 387(3). They could do so directly and were not obliged to come to Court under section 53(4) after obtaining the Master's prior consent.
- Since no steps had been taken to review the Master's decision to admit the son's claim to proof, that ruling stood as conclusive and enforceable in law against Matrix.
- The creditors' directions lacked good faith: they weren't passed in the best interests of Matrix or its creditors but were motivated by the desire to undermine the son's claim. The directions were aimed at compelling the liquidators to contest a claim at the estate's cost that the objecting creditors had not themselves challenged through means available to them.
- As such, the creditor's directions fell to be set aside.
The court made the arbitration award, incorporating the settlement with the son, an order of the court and set the objecting creditors' resolutions aside.
At the time of writing, the judgment has not been petitioned for appeal nor challenged otherwise. The precedent it sets in the Western Cape stands: a court can set aside creditors' resolutions under section 387(3) of the Companies Act 61 of 1973.
This precedent gives clarity to insolvency law practitioners in the Western Cape and elsewhere. Liquidators, put in a bind by ill-motivated creditors' resolutions, or resolutions adverse to the proper winding of a company, can seek aid from the court under section 387(3), which, we now know, has the power to set those resolutions aside.
*Reviewed by André Symington, Executive in ENS' Insolvency Practice
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