Thursday, October 23, 2008

The law can get tricky when a company subject to liquidation proceedings has sold an immovable asset. 
In Legh v Nungu Trading 353 (Pty) Ltd and another 2008 (2) SA 1, a shareholder of a company instituted urgent liquidation proceedings in the Witwatersrand Local Division on the basis that the company was unable to pay its debts. 
A provisional order liquidating the company was granted. An apparently straightforward situation – were it not that the sole asset of the company, immovable property, had been sold to B Company and was awaiting registration. 
B Company predictably applied to intervene in the liquidation proceedings, seeking an order discharging the provisional liquidation order – alternatively, that it was entitled, in terms of section 20 (1) (c) of the Insolvency Act 24 of 1936, to registration and transfer of the property, notwithstanding the provisional liquidation order being made final. 
The court granted an order provisionally liquidating the company, found that B Company was entitled to take registration and transfer of the property, and awarded costs to B Company.  
The shareholder appealed to the Supreme Court of Appeal (SCA) against the order declaring that B Company was entitled to take transfer and against the costs order. 
The SCA had to decide whether section 20 (1) (c) of the Act was applicable to a company in provisional liquidation by virtue of section 339 of the Companies Act 61 of 1973. 
Section 20 (1) (c) of the Act reads:  
            The effect of the sequestration of the estate of an insolvent shall be –  
                                    (c)        as soon as any sheriff or messenger, whose duty it is to execute any judgment given against an insolvent, becomes aware of the sequestration of the insolvent’s estate, to stay that execution, unless the court otherwise directs.  
Section 339 of the Companies Act provides that when a company is liquidated because it is unable to pay its debts, the provisions of insolvency law should be applied mutatis mutandis to any matter not specifically provided for in the Companies Act.  
The SCA indicated that section 20 (1) (c) could not be viewed in isolation. It was necessary to look at other provisions of section 20. 
·         The SCA looked at section 20 (1) (a) and found that its effect was to divest the insolvent of his estate and to vest it in the Master and then, upon his appointment, in the liquidator;
·         Section 20 (2) (a) provides that the estate of the insolvent shall, for the purposes of section 20 (1), include all the insolvent’s property on the date of sequestration, including property or its proceeds which are in the hands of the sheriff or messenger under a writ of attachment; but
·         The estate of the company in liquidation remains vested in the company.  
In terms of s 361(1) of the Companies Act, all the property of a company in liquidation is deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed and has assumed office. 
Yet the company’s property, although in his custody and under his control, does not vest in its liquidator unless the court so orders in terms of s 361(3) of the Companies Act.  
Therefore, the court concluded, sections 20 (1) (a) and 20 (2) (a) of the Act, in so far as they vested the property of the insolvent in the liquidator, were not applicable to a company in liquidation. Thus, section 339 of the Companies Act was not applicable to either of the sections.  
The court further concluded that section 20 (1) (b), which stays all civil proceedings instituted by or against an insolvent until the appointment of a trustee, had no application to a company in liquidation. This section has corresponding counterparts in sections 358 and 359 of the Companies Act. Furthermore, section 20 (1) (d) is, by its nature, unique to an individual insolvent and therefore also inapplicable. 
However, the most decisive point was section 361 (1) of the Companies Act, which provides that in any liquidation by the Court, all the property of the company concerned shall be deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed. 
Moreover, section 342 (1) of the Companies Act provides that in every liquidation of a company the assets shall be applied in payment of costs, charges and expenses incurred in the liquidation and the claims of creditors. Therefore, the purpose of both section 361 (1) and 342 (2) could hardly be achieved once the sole asset of the company has been transferred out of the company into the name of a third party.  
The court therefore concluded that the grant of orders finally liquidating the company on the one hand, and authorising its sole asset to be transferred into the name of a third party on the other, were mutually contradictory and created what could only be described as a legal anomaly. The appeal thus had to succeed.  
Isaac Nsizwane is an associate in the Dispute Resolution Department of commercial law firm Bowman Gilfillan.