Judge Megarry in Re Rolls Razor Limited1, aptly describes the necessity of insolvency enquiries:
“The process… is needed because of the great difficulty in which the liquidator in an insolvent company is necessarily placed. He usually comes as a stranger to the affairs of the company which has sunk to its financial doom. In that process, it may well be that some of those concerned in the management of the company, and others as well, have been guilty of some misconduct or impropriety which is of relevance to the liquidation… there are almost certain to be many transactions which are difficult to discover or to understand merely from the books and papers of the company. Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained.”
Private insolvency enquiries are governed under section 417 of the Companies Act 61 of 1973 (1973 Act). Section 417 must be read with section 418. Section 417 deals with the powers of a court or the Master in conducting an insolvency enquiry while section 418 empowers the court or the Master to delegate these powers to commissioner. In practice, a commissioner runs the enquiry.
The powers of the Master of the Court in insolvency enquiries are akin to the powers of a court.
Section 417(1) states:
“the Master or the Court may, at any time after a winding-up order has been made, summon before him or it any director or officer of the company or person known or suspected to have in his possession any property of the company or believed to be indebted to the company, or any person whom the Master or the Court deems capable of giving information concerning the trade, dealings, affairs or property of the company.”
Section 417(2)(b) states that a witness may not decline to answer questions that may lead to self-incrimination. This section has an internal limitation that the Master may only oblige a witness to answer after the Master has consulted with the Director of Public Prosecutions.
Section 417(2)(c) states that incriminating evidence directly obtained or that directly derived from the enquiry can only be used in:
“…criminal proceedings where the person concerned is charged with an offence relating to –
i. The administering or taking of an oath or the administering or making of an affirmation;
ii. The giving of false evidence;
iii. The making of a false statement;
iv. A failure to answer lawful questions fully or satisfactory.”
In terms of section 417(3), the Master may require any witness to produce any books or papers in his custody/control relating to the company that is the subject of the enquiry.
In Gumede v Subel SC, Arnold NO2 , the SCA dealt with issues in relation to the production of documents alleged to be confidential, Lewis JA stated3:
"In my view, the bare assertion made by the appellants that the documents were confidential does not entitle them to withhold them… The proper approach is to determine whether there is reason to believe that the documents requested will throw light on the affairs of the company before the winding-up. If so, their relevance will, in general, outweigh the right to privacy."
Section 417(4) notes that where a person, who has been duly summoned in terms of section 417(1), fails to attend before the Master at the time appointed by the summons, without lawful excuse, the Master may cause him to be apprehended and brought before the enquiry for examination.
Hennochsberg notes that section 417, and thus insolvency enquiries, are only applicable in cases of a compulsory winding-up of a company. There is room for an argument to be made that section 417 should apply also to voluntary winding-up proceedings.
Section 417(1) employs the peremptory language “in any winding-up of a company…”.4 The word any is broad enough to include both voluntary and compulsory winding-up of companies. It is further argued that the spirit of insolvency enquiries is to examine the financial affairs of a company on whether or not there has been mismanagement of the company in liquidation. The question is not who/how the liquidation application is brought, but rather the fact that the company is in liquidation.
If this argument fails, there is further room to argue for an insolvency enquiry to be heard in terms of section 388 of the 1973 Act, which deals with when a “court may determine questions in voluntary winding-up”. It is noted that section 388 only employs the word court, hence there remains a lacuna in whether the Master would have the same powers as a court in terms of section 388. However, in support of this argument, Hennochsberg says that the court under section 388 may direct that there be an examination in the voluntary winding-up such as that envisaged by section 417. Hence, Hennochsberg says that in voluntary winding-up proceedings, an application must first be brought to court in terms of section 388 to determine questionable actions of the company, and then the court may direct that these questions be resolved at an insolvency enquiry in terms of section 417.
As mentioned earlier, section 418 grants the Master the authority to delegate his powers under section 417 to a commissioner.
Hennochsberg notes that a magistrate is a commissioner to whom an enquiry can be referred. But any other person may be appointed as a commissioner by the court of the Master.
In the case of R Miller5 the SCA noted that the commissioner
“is the person who conducts the enquiry. It is her who has to act in a quasi-judicial capacity.”
The establishment of a company as a vehicle for conducting business is not a private matter. It draws on a legal framework endorsed by the community and operates through the mobilisation of funds belonging to members of that community and, as such, concomitant responsibilities attract itself to the management of a company. These responsibilities include full and proper disclosure and accountability to the shareholders of a company and, as the case may be, to the creditors of the company, as creditors have a right to recover any outstanding funds owed to them.
It is submitted that the necessary information in order to ascertain whether a company in/post liquidation has mismanaged its funds, and thus gathering information to possiblypierce the corporate veil, an insolvency enquiry will be the best avenue to do this.
Nikhil Bhogal, candidate attorney