Section 417 & 418 Inquiries: What Liquidators and Creditors Need to Know
Ever been in a situation where a company owes you money but then all of a sudden, they go under? Wouldn’t you just love to be a fly on the wall, invisible but able to discover exactly what happened behind closed doors? Riffling through their papers, confidential documents, questioning whoever you deemed relevant and unveiling secrets in order to ascertain the exact moment the apple cart turned bad?
Well, under The Companies Act 61 of 1973 (“the Act”) you can (well kind of).
The Act makes provision for the convening of insolvency enquiries to obtain the necessary information from relevant parties to assist with determining the affairs of a company which has been wound up. In this regard, insolvency enquiries are regulated in terms of Section 417 read with Section 418 of the Act.
Section 417 & Section 418 of the 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.
“417 Summoning and examination of persons as to affairs of company Cases
(1) In any winding-up of a company unable to pay its debts, 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. [Sub-s. (1) substituted by s. 9 (a) of Act 29 of 1985.]
(1A) Any person summoned under subsection.
(1) may be represented at his attendance before the Master or the Court by an attorney with or without counsel. [Sub-s. (1A) inserted by s. 9 (b) of Act 29 of 1985.]
(2) (a) The Master or the Court may examine any person summoned under subsection (1) on oath or affirmation concerning any matter referred to in that subsection, either orally or on written interrogatories, and may reduce his answers to writing and require him to sign them. [Para. (a) substituted by s. 9 (c) of Act 29 of 1985.]
(b) Any such person may be required to answer any question put to him or her at the examination, notwithstanding that the answer might tend to incriminate him or her and shall, if he or she does so refuse on that ground, be obliged to so answer at the instance of the Master or the Court: Provided that the Master or the Court may only oblige the person in question to so answer after the Master or the Court has consulted with the Director of Public Prosecutions who has jurisdiction. [Para. (b) substituted by s. 11 (a) of Act 55 of 2002.]
(c) Any incriminating answer or information directly obtained, or incriminating evidence directly derived from, an examination in terms of this section shall not be admissible as evidence in criminal proceedings in a court of law against the person concerned or the body corporate of which he or she is or was an officer, except 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; or
(iv) a failure to answer lawful questions fully and satisfactorily. [Para. (c) added by s. 11 (b) of Act 55 of 2002.]
(2) The Master or the Court may require any such person to produce any books or papers in his custody or under his control relating to the company but without prejudice to any lien claimed with regard to any such books or papers, and the Court shall have power to determine all questions relating to any such lien. [Sub-s. (3) substituted by s. 9 (d) of Act 29 of 1985.]”
Section 418 of the Act, makes provision for a Magistrate, or any person appointed by the Master or the court to function 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.
Section 417 Must Be Read with Section 418
We know this now, but this wasn’t always a given.
In the matter 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. The appeal concerned the interpretation of Section 417 of the Act. More particularly, it concerned the question of who may interrogate witnesses summoned to appear at an enquiry convened by the Master of the high court (the Master) in terms of the section. The principal question is whether only the Master, and no one else, may examine such witnesses as is contended by the second respondent.
The appellants in this matter 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 complaint here was that the respondent didn’t provide the appellants with the relevant financial information and agreements that were necessary for them to wind-up BZM Transport (Pty) Ltd.
The SCA held at paragraphs 15 – 19 of the order –
“[15] By prefixing s 417(2)(a) with the word ‘only’ before the phrase ‘the Master or the Court may examine’, Mr Engelbrecht imposes restrictive language not provided in the text. Furthermore, it cannot be said that the phrase, ‘summoned before him’ indicates that only the Master may interrogate a witness or that the expression has a bearing on the nature or the conduct of the enquiry. The contention by Mr Engelbrecht is untenable.
[16] Contrary to the submission made on behalf of Mr Engelbrecht, and the court’s finding in Swart, ss 417 and 418 are not distinct but rather complementary provisions. They provide for a dual method for holding the enquiry and are to be read together. An important prism overlooked by the high court is the effect of the 1985 amendment and the original nature of the power conferred by the section, which granted the Master the same powers as that of a court. The proceedings over which the Master presides are quasi-judicial in nature. He or she determines which witnesses should be called, the manner in which evidence will be received and how to conduct the enquiry.
[17] The absence of a corresponding provision which identifies a category of persons who may be represented and interrogate witnesses in s 417 is of no moment. In my view, its presence in s 418 is consistent with the legislative intention to define the parameters of the delegation whenever an enquiry is delegated by the Master to an external party. As the source of the delegation, the Master cannot delegate a function or power she does not already possess. An absurdity would result if s 418(c) were interpreted to limit the original powers and functions of the Master. In holding that only the court but not the Master has inherent discretion to determine who may attend the enquiry and interrogate witnesses, the high court and the courts in Swart and Garcao I erred.
[18] There can be no doubt that whenever a s 417 enquiry is called for, the liquidators, the court or the Master will be strangers to some of the intricate operations and affairs of the company in liquidation. Depending on the circumstances of each case, the information may lie in the exclusive domain of a creditor or some other party with an interest in the matter. Practically, it makes logical sense that the party in possession of the relevant information is best placed to interrogate a particular witness. To say that only the Master may interrogate witnesses because it is not explicitly provided for in s 417 is inconsistent with its purpose and would stultify the provision and the objectives confirmed in Bernstein.
[19] The high court and the courts in Swart and Garcao I misconstrued the section and thus erred. The appeal must succeed. Given the importance of the matter and the question of law involved, I am of the view that costs of two counsel are warranted.”
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 –
i. the witnesses to be called,
ii. the manner in which evidence is given and
iii. how to conduct the enquiry.
Accordingly, the appeal was upheld with costs and the order of the High Court was set aside.
We have taken the utmost care to ensure that the above information is correct having taken information directly from the Act and SAFLII, but we urge you to consult with a suitably qualified legal practitioner who will be able to answer any questions you may have on Section 417 and 418 Enquiries. In this regard, we would be more than happy to support you. Please feel free to contact us to see how we can best assist.
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(Sources used and to whom we give thanks – CDH; Journals and Turnaround Talk).
