Insolvency enquiries envisioned under section 417 and 418 of the Companies Act 61 of 1973 (Act) are convened either by the court or the Master of the High Court (Master). Typically, such enquiries provide a useful method for liquidators to obtain the necessary information from relevant parties to assist them in winding up the affairs of a company.
In the recent judgment handed down by the Supreme Court of Appeal (SCA), namely the case of Smith N O and Others v Master of the High Court, Free State Division, Bloemfontein and Another (1221/2021) [2023] ZASCA 21, the role of the Master in insolvency enquiries was unpacked. In particular, the SCA dealt with the question of whether the Master, and only the Master, may examine witnesses.
Background
The appellants were appointed as joint liquidators of BZM Transport (Pty) Ltd (BZM), which was liquidated following failed business rescue proceedings. The respondent, Mr Engelbrecht, was the CEO of BZM before its liquidation. The liquidators complained that Engelbrecht failed to provide them with the relevant financial information and agreements necessary for them to wind-up the company.
As a result, the liquidators applied to the Master to convene an enquiry into the business affairs of BZM in terms of section 417 of the Act. Engelbrecht was summoned to appear before the enquiry which was presided over by the Assistant Master. Engelbrecht’s legal representative protested against the proceedings, stating that “only the Master” and “no one else” was authorised to interrogate witnesses. The Assistant Master dismissed this contention and continued with the enquiry, resulting in Engelbrecht making an application to the High Court to review and set aside the enquiry on the basis that only the Master had the requisite authority to interrogate witnesses, and not the liquidators.
The High Court agreed with Engelbrecht, reviewed the enquiry, and set it aside. The liquidators appealed this decision to the SCA.
Insolvency enquiries in terms of the Companies Act
Section 417 of the Act makes provision for a private enquiry into the trade, dealings, affairs or property of an insolvent company unable to pay its debts. At any time after a winding-up order has been made, including a provisional winding-up order, the court or the Master may summon a wide range of people who the Master or court deem capable of giving information regarding the affairs of the company. The Master or the court may also examine any person summoned above under oath or affirmation.
Section 417 must be read with section 418 of the Act, which makes provision for a magistrate or any person appointed by the Master or the court to act as a commissioner for the purpose of taking evidence or holding any enquiry under the Act in connection with the winding-up of any company. The Master and the court, may in accordance with this delegation of power, refer the whole or any part of the examination of any witness or of any enquiry held in terms of the Act to any such commissioner. The Master, the liquidator or any creditor, member or contributory of the company shall be entitled to interrogate any witness during the proceedings. The section provides that a commissioner shall in any matter referred to him, have the same powers of summoning and examining witnesses and of requiring the production of documents, as the Master or the court which appointed him.
Image By; Canva
In the SCA
The liquidators argued that based on the language and history of the section, the word “may” is directory rather than peremptory, and accordingly the Master or the court has a discretion on how to conduct the enquiry.
Engelbrecht argued that sections 417 and 418 are two distinct provisions under which an enquiry may be conducted. His argument was that the Master did not delegate his authority to a commissioner, as the case would have been had the enquiry been conducted under section 418. Since the subpoena summoning him to appear only made mention of section 417, he argued section 418 was not applicable. Accordingly, only the Master could question witnesses, and the Assistant Master should not have allowed questioning of witnesses by the liquidators.
The court held that when interpreting legislation, a narrowly textual and legalistic approach is to be avoided. The provisions should be considered in terms of the language used, the context, its purpose and its practical effect. By placing “only” before “the Master or court may examine”, Engelbrecht adopted restrictive language, not appropriate to statutory interpretation. After weighing up all the factors, the court found that sections 417 and 418 are complementary provisions and should be read together as they provide a dual method for holding an insolvency enquiry. Since the enquiry is quasi-judicial in nature, the Master determines the witnesses to be called, the manner in which evidence is given and how to conduct the enquiry. The fact that section 417 does not specify who may interrogate witnesses is of no import as, when read together with section 418, it is clear the Master can delegate this power to the liquidator or any creditor, member or contributory of the company.
Importantly, the court held that, when a section 417 enquiry is established, the liquidators, the court or the Master may not know the intricate details of the company. It is for this reason that the legislature envisioned that a person who has the knowledge may question a particular witness, and to say that section 417 only allows for the Master to examine a witness would be inconsistent with its purpose.
Accordingly, the appeal was upheld with costs and the order of the High Court was set aside.
This case illustrates the importance of interpreting a statutory provision in accordance with the purpose of the provision, as without considering its purpose, the interpretation thereof would be illogical. The bedrock of insolvency enquiries is to safeguard the interests of creditors and to ensure that directors of insolvent companies are held to the strictest standard of transparency. Accordingly, the Master (or the court) can delegate his powers to any person(s) whom (the Master or the court) deems appropriate within the confines of the Act in order to accomplish the purpose of such enquiries.
