BOAF-10,000POL – INSOLVENCY MATTERS – DO DIRECTORS HAVE ANY RESIDUAL POWER IN PROVISIONAL LIQUIDATION?

The question of the day that speaks to the lack of a shared understanding among BOAF-10,000POL members who believe that if one doesn’t know something, it is important to be part of the solution by being surrounded by people who may know better, is whether directors of companies have any residual power to represent a company under provisional liquidation.

Unknown to many, it is a principle of South African law, as established in Attorney-General v Blumenthal 1961 (4) SA 313 (T) (Blumenthal), that directors are divested of their powers when a company is placed in liquidation.

Control of that company is then transferred to the liquidator.

The assumption is that the liquidators step into the shoes of the former directors, who must now seek gainful employment and occupation elsewhere.

It is the case that in terms of s368 of the Companies Act 61 of 1973 (Act). liquidators are appointed initially by the Master of the High Court on a provisional basis.

A provisional liquidator enjoys specified, and prescribed statutory powers listed in sections 386 to 390 of the Act.

In the case, O’Connell Manthe & Partners v Vryheid Minerale 1979 (1) SA 553 (T) (O’Connell) it was held that the principle established in Blumenthal is not without qualification.

It is the case that directors of a company under provisional liquidation, is the power to oppose, on behalf of the company, the making of the provisional liquidation order final. It follows that until a final order is granted, directors who have an obligation to attend the first meeting of creditors, the authority of the company to litigate is vested in the directors and not the provisional liquidator.

This has been held in Ex Parte G Pagan Enterprises [1983] 3 All SA 400 (W) (Pagan), and again in ABSA Bank v Rhebokskloof 1993 (4) SA 436 (C) at 440A-F (ABSA). In fact, when affirming this specific power, the court in Pagan held that where there is a conflict between a provisional liquidator and directors, it is the directors that speak for the company, being empowered to instruct legal representatives on its behalf, and not the provisional liquidator.

In O’Connell, the Court quoted a passage with approval from the English case of Re Union Accident Insurance (1972) 1 All ER 1105 (Union Accident Insurance).

This passage establishes that when testing the extent of directors’ residuary powers, the question is whether a power has been assumed by the liquidator.

If not, then the board retains that as a residuary power.

Accordingly it is the law that directors of a provisionally liquidated company retain all powers not expressly removed by law.

The law exoects directors that their duty of care in respect of the company remains and that they are not totally toothless or without the ability to challenge the steps being taken against the company.

Below is a conversation between two 10,000 POLs who are members of BOAF.

BOAF00051 is a paid-up member of BOAF and one of the 10,000 POL who is a director of a company that was placed under liquidation by way of a court order.

The application for liquidation was opposed and after the dismissal of an application for leave to appeal the liquidation judgment, the directors of the company decided to apply for a review of this judgment.

The lawyer acting on behalf of the company who is also member of the 10,000 POL community is not familiar with the review procedure.

A question arose after the review application was launched from the lawyers of the mortgator as to whether directors who launched it have the title to act on behalf of a company placed under provisional liquidation.

Rikki, also a member of the 10,000POL community, who is now based in Finland, weighed in on the question of whether a company under provisional liquidation can be represented by its directors.

Please read below to appreciate the relevance of being part of a community in which knowledge sharing is celebrated.

[4/8, 8:50 PM] BOAF00051: The question that they gave raised in their Rule 7 notice whether a company under liquidation can be represented by former directors.
[4/9, 12:31 AM] Rikki: Indeed
[4/9, 12:33 AM] Rikki: Don’t think so, but I can be wrong. We normally bring the application in the name of the shareholder
[4/9, 6:33 AM] BOAF00051 https://www.cliffedekkerhofmeyr.com/en/news/publications/2021/Dispute/dispute-resolution-alert-6-april-residuary-powers-of-directors-of-companies-in-provisional-liquidation.html
[4/9, 6:54 AM] Rikki: Interesting but the company is now in final liquidation. Or are you saying for as long as final liquidators are not yet appointed the directors remain in control?
[4/9, 6:56 AM] Rikki: So effectively the interdict of the first meeting is sought to prevent the locus of the directors being removed while they challenge the validity of the liquidation order.
[4/9, 6:57 AM] Rikki: I think if you approach it from this angle the potential prejudice of the directors outweighs that of the creditors represented by the provisional liquidators.
[4/9, 6:57 AM] Rikki: Very good to learn something new this morning
[4/9, 6:57 AM] BOAF00051: The company is in provisional liquidation hence the need for the interdict. The directors remain in control to avoid a power vacuum.
[4/9, 6:57 AM] Rikki: The power of research and constructive thinking can never be overlooked. Well done
[4/9, 6:58 AM] BOAF00051: Provisional liquidators are only a bridge mechanism.
[4/9, 6:58 AM] Rikki: Why does it remain in provisional liquidation if a final order was given? Was it a final order for provisional liquidation?
[4/9, 6:58 AM] BOAF00051: ABSA’s lawyers don’t know thism
[4/9, 6:59 AM] Rikki: Many lawyers don’t know this including me
[4/9, 6:59 AM] Rikki: We learn everyday
[4/9, 7:00 AM] BOAF00051: Usually there is a return date and the court will have to issue a final order if no objections are made.
[4/9, 7:00 AM] Rikki: Hence I always insist that one needs to know the rules of the game better than your opponent and even the Judge. So what are the rules of liquidation?
[4/9, 7:01 AM] Rikki: But a final order was made. What is the wording of the order and what is the relief sought in their notice of motion?
[4/9, 7:01 AM] mdmawere1: Provisional liquidators only exist to protect the assets from being dissipated. In the case of property, a mortgator in any event being protected by a bond on the property.
[4/9, 7:22 AM] Rikki: It does not specify final. So when does provisional end and final start?
[4/9, 7:24 AM] mdmawere1: The judge should have stated that it was a provisional order and also the return date. The appointment states that the liquidators are provisional.
[4/9, 7:26 AM] BOAF00051: The Master will convene the first meeting of creditors that directors are compelled to attend to provide claims and once the claims are admitted as proved, then the creditors will then vote for the provisional creditors to be appointed as final liquidators.