An inquiry into the affairs of an insolvent company to trace the company's missing assets or reveal misconduct by the company's directors
Where mismanagement or other misconduct has led to the insolvency of a company, the statutory inquiry into its affairs should be conducted by way of oral questions and answers, and not written interrogatories
The most fundamental principle in company law is that a company is a legal persona in its own right, separate from its shareholders and directors. From this it follows that debts incurred by the company are liabilities of the company, and not of its shareholders or directors, unless the circumstances are such that the law allows for a piercing of the corporate veil.
Nonetheless, a company's creditors are often seriously aggrieved if it goes insolvent and is unable to pay what is owing to them. Indeed, it is notorious that, in the past, unscrupulous businesspeople have formed one company after another, all of which have gone insolvent in turn with unpaid debts, whilst the directors and shareholders have walked away, financially unscathed and seemingly with well-lined pockets.
The law provides that an inquiry may be held into the affairs of an insolvent company
The provisions of the Companies Act which lay down a process for an investigation into the affairs of an insolvent company are an important protection for its creditors. It is notorious that, when a company is sliding toward bankruptcy, its assets and funds have a tendency to mysteriously vanish, leaving the entity as a mere shell without the means to pay its creditors.
An important aspect of the new Companies Act 71 of 2008 is that the provisions of the otherwise repealed Companies Act 61 of 1973, contained in Chapter XIV of the latter Act, remain in force in relation to the winding-up of insolvent companies. This is merely a stop-gap measure until a comprehensive new Insolvency Act finds its way onto the statute book.
In the meantime, the creditors of an insolvent company must look to the provisions of Chapter XIV of the Companies Act 1973 to protect their interests. Fortunately, this chapter is far from toothless. One of its most important provisions is section 424 which empowers a court to declare a director of a company to be personally liable for its debts or other liabilities where he or she has knowingly been party to the reckless or fraudulent carrying on of business by the company. This provision thus remains in force when an insolvent company is being wound up, despite there being a new Companies Act. The section does not apply in the winding up of a solvent company but, in these circumstances, such a measure would serve little purpose since the company has the means to pay its creditors in full and there is no compelling reason for the law to make its directors personally liable for its debts.
Other significant provisions of chapter XIV of the Companies Act 1973 which remain in force in relation to the winding up of an insolvent company are sections 417 and 418 which allow the holding of an enquiry into the affairs of an insolvent company and empower the Master of the High Court to summon any director or officer of the company to answer questions, where that person is known to have, or is suspected of having, any property of the company in his possession or is believed to owe the company money. The Master can similarly summon any person whom he believes can give relevant information regarding the company.
These provisions create an effective system for tracing missing assets of the company and generally to reveal the circumstances that led to the insolvency of the company and whether there had been any unlawful conduct by directors or other persons.
A High Court judgment regarding an application by the directors of an insolvent company for the inquiry into its affairs to take the form of written interrogatories
In the recent case of Nyathi v Cloete NO 2012 (6) SA 631, the South Gauteng High Court handed down an interesting and informative judgment in regard to the provisions of the Companies Act 1973, outlined above, which provide for an inquiry into the affairs of an insolvent company.
In this case, the company had been placed in final liquidation and the Master of the High Court had authorised an enquiry in terms of sections 417 and 418 of the Companies Act 1973. The Commissioner of the enquiry summoned the company's erstwhile director, managing director and the chief executive officer for questioning. Counsel for these persons asked the Commissioner to rule that they be examined by way of written interrogatories, rather than orally.
It is not difficult to surmise why a director or other officer of the company who has something to hide would prefer to be given a written list of questions to which he can reply in writing, because this allows him time to frame his answer carefully and tactically, rather than having to face oral questioning where he is required to give an immediate answer. Significantly, section 417(2)(b) provides that a person is obliged to answer any question put to him in such an enquiry, notwithstanding that the answer may be incriminating.
The Commissioner refused the request for written interrogatories and the individuals then applied to the High Court for a review of that ruling.
The circumstances in which written interrogatories are appropriate
In its judgment, the court pointed out that the Commissioner had a discretion (in terms of section 417(2)(a) of the Companies Act 1973) to decide whether the questioning at the inquiry should be conducted orally or by way of written interrogatories. The court said (at 635B-D) that a written interrogatory would be appropriate where the information being sought was merely formal in nature. On the other hand, where mismanagement, fraud or theft by the directors or other officers of the company seemed, prima facie, to have led to the demise of the company, the submission of written questions would undermine the object and purpose of the enquiry.
The court said that, in the present case, the considerations that had led to the holding of an enquiry were a lack of information and an absence of financial records and documents concerning the company, and that such information was necessary to enable the recovery of substantial sums of money that were owed to the company.
The court said (at 636C) that a lack of cooperation by the company's erstwhile directors necessitated an oral interrogatory into the affairs of the company.
The court accordingly dismissed the application for the enquiry to be held by way of written interrogatories and upheld the decision of the Commissioner that questions and answers must be oral.