Joint CEO: Fluxmans
A persons initial gut feeling should suggest that the answer to this question appears to be a simple one.
Until the decision of the Supreme Court of Appeals in the matter of Mayo N.O v De Montlehu (2015) ZA SA 127 (reflected on in the second article) the answer to the question was not that simple at all.
A complicated landscape
There are a number of reasons why this was complicated prior to the Mayo judgement.
Section 44(1) of the Insolvency Act provides that a claim can be proven against a sequestrated estate (as opposed to a liquidated estate) at any time before final distribution of that estate subject to the provision of Section 104 (of the Insolvency Act). The can be done so provided that no claim shall be proved against an estate after the expiration of a period of three months as from the conclusion of the second meeting of creditors of the estate except with the leave of the Court or the Master and on payment of such sum to cover the costs or any part thereof, occasioned by the late proof of the claim, as the Court or the Master may direct.
Section 104(1) of the Insolvency Act provides that subject to Section 95(2), a creditor of a sequestrated estate who has not proved the claim before the trustee has submitted a liquidation and distribution account to the Master is not entitled to share in the distribution in that L & D Account provided that the Master may at any time before the account is confirmed permit such creditor who has proved his claim after the lodging of the account. The caveat to this is: if the Master is satisfied that the creditor has a reasonable excuse for the delay in proving his claim.
Section 104(2) which should be read with 104(3). These sections allow for a creditor who has proved a claim against an estate, but who was not permitted to share in the distribution of assets under that plan, to be entitled under a further L & D Account to be paid an amount which would have been awarded to him under the previous account if he had proved his claim provided that the Master again being satisfied that the creditor had a reasonable excuse for the delay in proving his claim and provided further that a creditor who was aware that proceedings had been brought by other creditors to impeach certain transactions and who delayed proving his claim until the Court had given judgment, would not be entitled to share in the distribution of any money or the proceeds of any property recovered as a result of that litigation.
Furthermore, such a creditor would not be entitled if he did not delay in proving his claim until judgment has been given, to benefit out of any cash or the proceeds of any property recovered pursuant to that litigation until the creditors who brought the litigation has been paid in full with costs (“the Repealed Act”).
Chapter 14
Chapter 14 of the repealed Companies Act 61 of 1973 still applies to the winding-up of companies unable to pay their debts notwithstanding the promulgation of the new Companies Act 71 of 2008 (“the Companies Act”).
The Companies Act only applies to the winding-up of solvent1 companies.
Section 366(2) of the repealed Companies Act reads as follows:
366(2) The Master may, on the application to the liquidator, affix a time or times within which creditors of the company are to prove their claims or otherwise be excluded from the benefit of any distribution under any account lodged with the Master before these debts are approved.
Therefore, on the surface, it appears that Section 366(2) of the Repealed Act regulates the timing for the proving of claims in liquidations and Section 44(1) applies to the proving of claims in sequestrations.
This was the view taken by Flemming J. in the case of Stone & Stewart v The Master (an unreported decision of the South Gauteng Division of the High Court as it was then known).
Photo By: Canva
However, the court a quo in the Mayo NO v De Montlehu case (in the matter of De Montlehu v Mayo NO & Others [2014] JOL 32508 (TJ) Kathree-Setiloane J. stated as follows:
I remain unpersuaded by Flemming J.’s interpretation of Section 366(2) of the Companies Act for the following reasons:
In terms of Section 336(1) [sic] of the Companies Act, whether the winding-up is by the court or is a creditors’ voluntary winding-up, proof of creditors’ claims must be in accordance mutatis mutandis with the relevant provisions of the Insolvency Act, i.e both procedural and substantive. Section 366(2) provides that the Master may, on the application of the liquidator, fix a time or times within which creditors of the company are to prove their claims or otherwise be excluded from the benefit of any distribution under any account lodged with the Master before those debts are proved. On a proper interpretation of Section 366(2) a liquidator may apply to the Master to fix a time or times within which creditors are to prove their claims in order to participate in a distribution under a particular account lodged with the Master before such proof. The use of the conjunction “or” between the words “[t]he Master on the application of the liquidator fixed a time or times within which creditors of the companies are to prove their claims and otherwise be excluded from the benefits of any distribution under any account lodged with the Master before those debts are proved.
Calls for the two parts of the section to be read conjunctively. When read as such, it is clear that the purpose of Section 366(2) is not to prevent proof of claim after the time fixed by the Master, as contemplated in the proviso of Section 44(1) of the Insolvency Act but rather as expressed by Professor Meskin.
According to Professor Meskin, the purpose of Section 366(2) is to prevent the holding up of a distribution under an account lodged with the Master as a result of proof of claims after such lodgement (eg by creditors who elect not to prove until it is established that there is to be a distribution); for such proof would necessitate an amendment to the account. Thus, if the Master fixes a date, claims may be proved before and after such date (subject to compliance with the requirements for late proof); but once an account is lodged with the Master. Claims proved after that date are excluded from the distribution under such an account if they are proved after the account was lodged. The fixing of the date by the Master is only to serve as a warning to creditors who have not proved their claims that if an account is lodged before they prove them, they will be excluded from the distribution under it.
Kathree-Setiloane J. then quoted the Trans-Drakensberg Bank Limited v The Master Pietermaritzburg & Another 1966 case where the court found, inter alia, that it is not the date fixed by the Master that is of importance as regards sharing in a certain distribution, but rather the date when an account was lodged with the Master.
Thus, Section 366(2) of the Companies Act – which deals with the consequences of late proof of claims in the winding-up of companies and the proviso to Section 104(1) of the Insolvency Act which allows the Master in a sequestration to permit a claim proved late to participate in a liquidation and distribution account already lodged (provided the Master is satisfied that the creditor has a reasonable excuse for his delay in proving his claim and that the plan of distribution has not been confirmed) – has no application to the proof of claims in winding-up of companies. Section 366(2) deals with the scenario insofar as companies are concerned. Therefore Section 104(1) does not apply to companies.
No application to proof of claim
Kathree-Setiloane concluded with regard to Flemming’s Judgment as follows:
… that the proviso to Section 44(1) of the Insolvency Act has no application to a proof of claim in the winding-up in light of the provisions of Section 366(2) of the Companies Act” to be clearly wrong and further “to arrive at the conclusion that Flemming J did, would require reading the words of the Section that precedes the conjunction or in “disjunctively” from the words of the Section that appear after it and in the process to completely ignore the latter. This is a flawed approach to the interpretation of Section 366(2) as it does not give effect to its purpose, which is to prevent the holding up of a distribution under an account lodged with the Master, as a result of proof of claim after lodgement of such account by for instance a creditor who elects not to prove his or her claim until it is established that there is to be a distribution.
and further that:
similarly, I see no merit in the first to fifth respondents’ contention that to interpret Section 366(2) of the Companies Act in the manner contended for by the applicant and endorsed by the court, would result in an inconsistency because if both the proviso to Section 44(1) of the Insolvency Act and Section 366 to the Companies Act apply to proof of claims in a winding-up then proof of claims in a winding-up would be subject to two time limitations, first under the proviso to Section 44(1) of the Insolvency Act and second under 366(2) of the Companies Act. I disagree completely. As demonstrated the two sections are functionally different and have different objectives. Section 366(2) of the Companies Act is a special provision intended to enable participation in a distribution under particular accounts. It has no application to the late proof of claims in general which is governed by the proviso to Section 44(1) of the Insolvency Act by virtue of the operation of Section 366(1)(a) of the Companies Act. Simply put, its objective is to nullify an attempt by a creditor to delay proving his or her claim until a lodged account shows that a distribution is to occur. The proviso to Section 44(1) of the Insolvency Act on the other hand is to prevent proof of a claim after the expiration of a period of three months as from the conclusion of the second meeting of creditors, except with leave of the court or the Master. The overall purpose of the proviso to Section 44(1) of the Insolvency Act is to ensure that the administration of the Estate is concluded expeditiously.
Photo By: Canva
Section 366(2) of the Companies Act only applies, where on application of the liquidator the Master fixes a time within which creditors of a company are to prove their claims in order to participate in the distribution under an account already lodged with the Master before the debts are proved. Clearly, the category of creditors envisaged in this section are those who have not already proved their claims before the liquidation and distribution account has been lodged …… As indicated the fixing of a date by the Master on application of the liquidator serves as a warning to creditors who have not proved their claims, that if an account is lodged before they have proved such claims, they will be excluded from the benefit of any distribution under that account. It is intended to cause them to prove their claims by the date fixed by the Master should they wish to benefit from the distribution of the account lodged before their debts are proved and prevent them from holding up distribution under an account lodged with the Master. Accordingly, I am of the view that the proviso to Section 44(1) of the Insolvency Act, and not Section 366(2) of the Companies Act, applies to the late proof of claims in a winding-up of a company.
A complicated landscape
This summery was written by Turnaround Talk and not Colin Strime.
As we have seen above, the landscape governing this issue was quite complicated prior to theMayo N.O v De Montlehu case. This once again proves that while a lot of work has been done to establish a legislative framework within which liquidators and other participants in the business rescue/business turnaround profession can operate, a lot more work needs to be done to refine this framework to address the loopholes that current exist in the system.
Does an overly complicated landscape benefit any professional whose sole focus is to find the best value for their client?
Colin Strime is the Joint CEO of Fluxmans & Director: Business Rescue & Insolvency, Litigation
