Can one prove a claim against an insolvent company more than three months after the second creditors meeting? (Part 2)

Two weeks ago, we started to take a look at one prove a claim against an insolvent company more than three months after the second creditors meeting. As we saw, the legal landscape in this regard is very complex.

During that article, reference was made to the Mayo N.O v De Montlehu (2015) ZA SA 127 case. Following this case, the legal landscape governing this becomes a little easier and clearer.

Legal headaches
Summary of the facts in the Mayo case:

• The company in question is Chevreau Construction (Pty) Ltd (“the Company”).

• It was wound-up by special resolution on 22 July 2011.

• No claims were proven at the first or second meeting of creditors. The second meeting of creditors was held on 11 May 2012.

Two litigation matters arose after the second meeting as follows:

the joint liquidators and a creditor known as Starspan launched an application against Zemprop CC and Premium Hotel & Property Investments (Pty) Ltd to set aside a sale by the Company of immovable property to them (before it was wound-up). This application was opposed on the basis that Starspan had not proved any claims against the Company and that Starspan’s alleged claims against the Company were disputed;

Zemprop CC and Premium Hotel & Property Investments (Pty) Ltd then brought counter applications to set aside the liquidation of the Company on the basis that it was no longer insolvent and it had no proved creditors’ claims against it.

To overcome these legal points Starspan requested the liquidator to convene a special meeting of creditors at which it was successful in proving two claims against the Company.

De Montlehu was the sole shareholder and director of the Company. He brought the review application to set aside the Master’s decision on the basis that:

• the second meeting was convened merely to overcome the counter application proceedings and to ensure that the disputed claims were proved against the Company without the benefit of a fair hearing and trial; and

• the claims were proven more than three months after the holding of the second meeting of creditors (i.e almost six months after the conclusion of the second meeting) and that accordingly the claims were proven late without the Master’s or the Court’s leave and without the costs occasioned by the late proving of the claim by Starspan being paid.

Starspan argued that the proviso to Section 44(1) did not apply to the Company as it was limited in application to sequestrations and that the time period for proving claims in liquidations was regulated by Section 366(2).

Does Section 44(1) apply to liquidators?
The simple question thus on review was whether the proviso to Section 44(1) applied to liquidations or not.

Obviously Starspan and the liquidators were dissatisfied with the Kathree-Setiloane’s judgment and they took it on appeal to the Supreme Court of Appeals.

The Supreme Court of Appeals judgment was handed down in September 2015. All five Judges were in agreement and in effect agreed with Kathree-Setiloane’s views that:

Flemming J.’s judgment was wrong;

Section 44(1) applies to liquidations as much as it does to sequestrations;

Section 366(2) does not set out the formal time periods within which creditors would be required to lodge and prove their claims;

Section 366(2) does not therefore affect the applicability of Section 44(1) of the Insolvency Act to companies in liquidation.

The SCA found support for their contention in Meskin and in Hennochsberg and concluded as follows:

Section 366(2) therefore affects a creditor’s right to benefit under a distribution and does not affect the time for proof of creditors’ claims; the issue related to the fixing of costs and thereafter the payment thereof by creditors seeking to prove late claims remain unaffected thereby.

The court a quo accordingly correctly relied on these cases in drawing its conclusions. As mentioned earlier, the three month period stipulated in Section 44(1) of the Insolvency Act relating to the proof of claims is the benchmark in both sequestrations and liquidations. Therefore, apart from the proof thereof, the Master must fix costs for a late claim and there must be payment in respect of an order for such a late claim against the company in liquidation to be valid.

In summary then for the late proving of claims in general the following is to be noted:

Section 44(1) (more specifically the proviso to the section) applies equally to both sequestrations and liquidations. In other words, in a liquidation or a sequestration when one wishes to prove a claim more than three months after the conclusion of the second meeting of creditors, one needs the leave of the Master or the Court and the creditor is to pay the wasted costs occasioned by the late proving of the claim as determined by the Court or the Master.

Section 104(1) of the Insolvency Act does not apply to liquidations. It is limited in its application to sequestrations. This means that a claim proven late in a sequestration after the lodgement of an L & D Account may still participate in the account if it has not yet been confirmed and if the creditor satisfies the Master that he has a reasonable excuse for his delay in proving his claim.

In both liquidations and sequestrations claims proven late may participate in subsequent (to the proving of that claim) liquidation and distribution accounts subject to the following qualifications:

• the creditor satisfying the Master that he has a reasonable excuse for his delay in proving his claim;
• that account has not yet been lodged;
• that subsequent account has not yet been confirmed;

if it is shown that a creditor delayed in proving its claim as it was awaiting the outcome of a judgment in a litigation matter brought by another creditor(s), that creditor cannot benefit from the money or the proceeds of any property recovered pursuant to that litigation;

to the extent that it cannot be shown that a creditor delayed in proving his claim to await the outcome of this litigation, that creditor can’t benefit from the proceeds of the money or property recovered pursuant to that litigation until the creditors who brought the litigation had been paid their claims in full with costs;

Dealing with consequence
Section 366(2) does not deal with the late proving of claims. It deals with the consequences of the proving of a claim in a liquidated estate after an L & D Account has been lodged, i.e the creditor of the late proven claim cannot benefit under any distribution under that account;

the setting of a time limit by the Master in terms of Section 366(2) can be extended by the Master. Claims can be proven before the stipulated date or after the stipulated date. Claims proven after the stipulated date and after a Liquidation and Distribution account has been lodged will not benefit under any distribution under that account.

A once uncertain position has somewhat now been clarified. The test is commercially solvent in the sense that a company is able to pay its debts as and when they full due for payment.

Colin Strime is the Joint CEO of Fluxmans & Director: Business Rescue & Insolvency, Litigation