South Africa: High Courts - Gauteng

[1] This judgment deals with applications for the setting aside of nine summonses issued by a commissioner appointed by the Master in terms of s 418 of the Companies Act 61 of 1973 to inquire into a massive fraud perpetrated on more than 10 000 investors consecutively by two close corporations and two private companies known as the Krion Pyramid Scheme (“Krion”) since 1998. The scheme collapsed in 2002 and was placed in liquidation under an order of this Court. On the probabilities it appeared that as from 1 March 1999 Krion’s liabilities had exceeded its assets.
[2] The question arose whether investors would lose the capital which they invested plus the earnings. Hartzenberg J held that since Krion had intended to give preference to certain investors above other investors in so far as the gains were concerned, the capital was not repayable. The earnings were repayable in terms of s 30 of the Insolvency Act 24 of 1936, as amended. On appeal from the liquidators this judgment was confirmed by the Supreme Court of Appeal, Case no 522/2003 1 April 2004 but it was held that s 30 was not the correct section under which the gains were set aside. No intention to give preference could be inferred from the side of Krion. The correct section in terms of which the dispositions could be set aside was section 26, which deals with dispositions without value. The order of the court a quo was accordingly amended to read: “All actual payments, whether as profit or interest, from and after 1 March 1999 by the aforesaid investment scheme to the second, third, fourth, fifth and further respondents, in so far as they exceed the investment of each particular investor are set aside, under s 26 of the Insolvency Act as dispositions without value by the scheme to investors at times when its liabilities exceeded its assets, provided that the right of investors to rely on the provisions of s 33 of the Insolvency Act is in no way affected by this order.”

[3] The reasoning of the Supreme Court of Appeal was based on the condictio ob iniustam causam, which applied in favour of the investors of the capital in the circumstances. Reference was made to Visser en `n Ander v Rousseau en Andere NNO 1990(1) SA 139(A). Of course, thousands of investors who had not received their capital back were stranded since there was simply no way in which they could reclaim their full capital investment from the insolvent coffers of Krion. Initially a Mr Edeling had acted as an “investor representative” and had obtained mandates from a large number of investors to act for them in the recovery of their lost capital. He was, in fact, appointed by the Master as an “investor representative” on the 3^rd July 2002. This Court provisionally approved that an arrangement be put to the creditors under which the investor representative is approved. This arrangement was approved by a meeting of Creditors on the 8^th October 2002. Thereafter the arrangement was approved by a Court order in terms of s 311 of the Companies Act. 19 November 2002. It should be mentioned that the Supreme Court of Appeal Case 522/2003 (1 April 2004) at para [11]. regarded the appointment of the investor representative as invalid, since the Insolvency Act does not provide for such an appointment. Mr Edeling featured in the SCA case as the first respondent and is also a respondent in the applications before me. After his position was criticized by the SCA, On 1 April 2004 he transferred his mandates to a newly set up legal persona, known as the Krion Losers Group (“KLG”). The association, constituted on 24 April 2004, three weeks after the SCA judgment, would represent the interests of those investors who had lost all their capital. The association represents more than 4000 investors. It has, according to its invitation to investors to join, had more than 4900 summonses issued (although not served) in the name of the liquidators in terms of s 32(1)(b) of the Insolvency Act, on the basis that the liquidators had failed to have dispositions set aside in terms of s 29 of the Insolvency Act. The KLG creditors pledged their claims against the Krion estate to the KLG, which was authorised to subtract its costs from the dividend as received.
[4] The KLG applied to the commissioner to issue summonses in terms of section 418 of the Companies act to a number of investors and she did so. Some of these investors , the applicants before this Court, approached this Court in October 2004 in an urgent application to set aside the summonses. A settlement was reached in that, without prejudice, the summonses would not be executed before this Court decided the issue as to the validity of the summonses. On this occasion a creditor, Lamb, applied to intervene and filed an affidavit in which he confirmed that he had mandated KLG to act on his behalf. The application to intervene is also before this Court.
[5] Advv van der Merwe and Strydom, for the applicants, essentially argued that the KLG had no locus standi to have applied for the summonses since it was not a creditor, that it had not provided indemnification to the liquidators in terms of s 32(1)(b) of the Insolvency Act, that it was high-jacking the liquidation, that the summonses could lead to an oppressive and unfair questioning of the applicants and that a s 418 inquiry was not applicable to a close corporation, the structure under which Hartzenberg J had combined the estates for purposes of liquidation. It was also argued that the Master had conveyed to the commissioner that she should not allow questioning by the KLG.I do not believe that the last two arguments are valid: it is clear that the estate is a combined estate for purposes of the liquidation and that the term “cc” is of no legal consequence within that context; See para [3] of Fourie NO and Others v Edeling and Others (Case 522/2003(SCA) 1 April 2004) the letters to the commissioner by the Master also do not order her to cease, but merely express displeasure at the questioning. In the light of the conclusion which I have reached, it is unnecessary to decide whether the KLG has “high-jacked” the liquidation. I should, however, point out that the prescriptive nature of the proposed instructions of the KLG to the liquidator attorneys as to how the dividends should be dealt with once the KLG has filed proceedings in terms of s 32(1)(b), would seem to impinge upon the function of the liquidator (see Botma p310-312). Other points raised by the two advocates need not be dealt with for purposes of this judgment, since I believe that the validity of the summonses may be decided within the ambit of some of the earlier mentioned grounds. Mr Bergenthuin SC argued that s 418 did not require that a creditor should have provided security to the liquidators, that there was nothing oppressive in the questioning of the applicants and that the KLG had not high-jacked the interrogation from the liquidators. It was also argued that the liquidators had conveyed that they were not proceeding under s 29 of the Insolvency Act and that this failure had entitled the KLG to have summonses issued in the name of the liquidators in terms of s 32(1)(b) of the Insolvency Act. If the applicants had problems to appear on the specific day, they should have approached the commissioner and she would have considered the justifiability of their reasons for not being available on the days in question. In any case, if they had nothing to hide, why did they not simply give their co-operation? Argument as to the setting aside of previous orders of this Court was not persisted in by the applicants and the only question before me is whether the summonses were validly issued and the question of costs of the urgent application and this application.

[5]In the light of s 38 of the Constitution Act 108 of 1996 the applicants had the right to approach this court directly. The Commissioner, who is appointed by the Master, is an organ of state Even if the commissioner is not an organ of state, the commissioner’s powers are circumscribed by s 418 and, in this case, also by s 32(1)(b) of the Insolvency Act 24 of 1936. since she exercises public power. See s 239 of the Constitution Act 108 of 1996. Her powers are circumscribed by sections 417 and 418 of the Companies Act 61 of 1973 read, for present purposes, with s 32(1)(b) of the Insolvency Act 24 of 1936. The present applications have a direct bearing on her powers and differ from the instances where mere procedural matters are raised with her in connection with a summons, e.g. whether the date of questioning could be altered or whether an answer in writing would suffice. Compare Mondi Ltd and Another v The Master and Another 1997(2) SA 450(N). A comparable situation arose under the Commissions Act 8 of 1947 in the so-called Erasmus Inquiry conducted in the late seventies of the previous century. The previous Minister of Home affairs, Dr Connie Mulder, had been summoned to appear before the one man commission. On advice of his counsel, Johann Kriegler SC, he declined to testify. He was charged with declining to testify in terms of the Commissions Act and the Supreme Court discharged Dr Mulder on the ground that the mandate of the Commission was so widely and vaguely defined that he was legally justified in declining to testify. In effect, the summons to testify was held to have been invalid in the light of the mandate given to the Commission. See S v Mulder 1980(1) SA 113(T); Bongoza v Minister of Correctional Services 2002(6) SA 330(THC). The notice to testify issued against Mr PW Botha, the second last State President under the previous dispensation, to testify before the Transformation and Reconciliation Commission in 1997, was also set aside by the High Court. See S v Botha 1999(2) SACR 261(C). The basis was that the notice had been issued for an appearance before the Commission after its term had expired. Although the present proceedings are not criminal, the omission of the applicants to appear would have amounted to a criminal offence in terms of section 418(5)(b) of the Companies Act 61 of 1973. There is, accordingly, no reason why this Court cannot, on application, intervene directly and apply the same principles concerning the validity of the summonses, even if it is done by way of a civil application. If a summons is invalid, it will be declared to be so by a Court independently from the manner in which it reaches the Court. Section 38 of the Constitution grants wide constitutional access to the High Court. Acts of organs of state alleged to be ultra vires are a Constitutional matter, as a result of their incompatibility with the rule of law. See note 17 hereunder. The commissioner has also, as one of the respondents, filed a full report and the audi alteram partem rule has consequently been complied with.

[6] The Rule of Law is a founding value in our Constitution. S 1(c) of the Constitution Act 108 of 1996 All organs of state are bound by it. In Pharmaceutical Manufacturers Association of SA and Another: In re Ex Parte President of the Republic of South Africa and Others [2000] ZACC 1; 2000 (2) SA 674 (CC) at para [17] Chaskalson P (now CJ) states that the exercise of public power is regulated by the Constitution: “One of the constitutional controls referred to is that flowing from the doctrine of legality.”

[7] Since the Commissioner exercises her functions in terms of sections 417 and 418 of the Companies Act 61 of 1973, she has to act within the ambit of the aim of those sections. The aim of the sections has been the subject of two Constitutional Court judgments. It was held in Bernstein v Bester NNO 1996 (2) SA 751 (CC). that the aim of the two sections is to obtain information so as to take informed decisions as to litigation. Litigation for the setting aside of dispositions by Krion in terms of s 29 of the Insolvency Act is a stated aim of the KLG in many of its letters and I need not dwell on this. At para [33] Ackermann J states as follows:

“The liquidator is entitled to obtain information, not only to ascertain whether she/he has a cause of action, but also in order to assess whether the case is sufficiently strong to justify spending the creditor’s money in pursuit of it, and, conversely, whether there is an adequate defence to a claim against the company.”

“The enquiry in question is an integral part of the liquidation process pursuant to a court order and in particular that part of the process aimed at ascertaining and realizing assets of the company. Creditors have an interest in their claims being paid and the enquiry can thus, at least in part, be seen as part of this execution process.”

In Venter v Williams 1982( 2) SA 310( N) at 313 D-F. Friedman J said the following:

“Section 417 gives the court the power to summon before it persons believed to be capable of giving information, concerning the trade, dealings, affairs or property of the company, and gives the court the power to examine such persons on oath. Section 418 in effect gives the court the power to delegate its powers under section 417 to a commissioner. It also provides that various persons, including the liquidator (for whom in the present case one must read the judicial manager) and any creditor or member, has the right of representation and audience at such an enquiry.”

[8] Before a commissioner may issue a summons the following jurisdictional facts must be present: that the applicant is the Master or a liquidator or one of the other persons mentioned in s 418(3): a creditor, contributory or member of the company; secondly, that it would not be a futile exercise in the sense that even if the necessary facts as to quantification emerge from the questioning, the applicant would not be permitted in terms of s 32(1)(b) of the Insolvency Act to file proceedings in the name of the liquidators, who have failed to take steps to do so and have been indemnified against costs in the proceedings. I do not agree with the point of view that s 418 should be judged in isolation and that it would be irrelevant whether proceedings would be instituted.

[9] I shall first deal with the question whether the KLG, or its attorney, has locus standi in terms of s 418 to question persons on behalf of the creditors whom it represents. S 418(1)(c) of the Companies Act provides as follows:

“ The Master, if he has not himself been appointed under paragraph (a), the liquidator or any creditor, member or contributory of the company may be represented at such an examination or enquiry by an attorney, with or without counsel, who shall be entitled to interrogate any witness : Provided that a commissioner shall disallow any question which is irrelevant or would in his opinion prolong the interrogation unnecessarily.”

The KLG is an agent for the creditors whom it represents and it was also on this basis that it approached the commissioner, through its attorney (Thys Cronj Ingelyf), See e.g. the letter of Thys Cronj at p196-7 and 278 of the Eksteen application. to summon other investors, in whose favour dispositions had been made but which had not been set aside under s 29 of the Insolvency Act. In the light of the restrictive nature of the inquiry and the privacy of the proceedings, I do not believe that it would be justified to attach a wide meaning to the word “creditor”, which would allow for agents to apply for such an inquiry and be present at the inquiry, appoint an attorney with or without counsel, and interrogate the witness who has been summoned. If the Legislature had intended to include agents, it could have done the same as it did in section 65(1) of the Insolvency Act, where an agent of a creditor is explicitly mentioned and permitted to question the persons who appear before a meeting of creditors. Also see s 9 of the Insolvency Act where an agent is explicitly permitted to apply for a sequestration. In the case of s 65 the inclusion of an agent is probably justified in the light of the fact that the section does not provide for an attorney, with or without counsel, to question a person summoned. In the case of section 418, the persons mentioned are, however, permitted to brief an attorney, with or without counsel, to question a person summoned. The judgment of the Full Bench of the Cape Provincial Division in Minister of Trade and Industry and Others v Nieuwoudt and Another 1985(2) SA 1(C). also illustrates the restrictive nature of the interrogatory sections in the Companies Act well. It was held that inspectors who are authorized by s 260(2) to interrogate directors, officers and employees are not, in the absence of explicit authorization in the sections, permitted to instruct an attorney or counsel to question the said persons : delegatus non delegare potest. The difference between a creditor and his or her agent is also illustrated well in judgments which deal with the question whether an agent may sue on behalf of a creditor. Myburgh v Walters 2001(2) SA 127(C) at 130B. Of course, as argued by Mr Bergenthuin, s 418 does not deal with proceedings to recover. Nevertheless, the limitation as to the categories which are explicitly mentioned in s 418(1)(c) is, to my mind, imperative. It is true that the judgment of Daniels J in Trust Bank van Afrika Bpk v van der Westhuizen en Andere 1991(1) SA 867(W). permits other creditors to be present and question a person while he or she is being questioned as a result of an application by another person mentioned in s 418(1)(c). It would, however, not be justifiable to extend the reasoning in that matter to categories other than those mentioned in the subsection.

My conclusion is, accordingly, that a commissioner may not summon a person based on the application of a person not mentioned in the section. Agents are not mentioned and may, accordingly, not apply for a summons so that he or she or his attorney may question the person summoned. On this ground alone the issue of the summonses by the s 418 commissioner was ultra vires her powers.
[14] The next question is whether the summonses were not also invalid because the information gathered would procedurally be of no use for the KLG as an agent. It clearly appears from the papers Letter of Thys Cronj Ingelyf to the commissioner : pp 192 and 197 of the Eksteen application that the main reason for the questioning of the investors was to determine whether it would be worth while to have them sued in the name of the liquidators in terms of section 32(1)(b) of the Insolvency Act and to quantify the amount owed. Section 32(1) Which is also applicable to the liquidator or creditors of a company – see s 340 of the Companies Act. provides as follows:

(a) Proceedings to recover the value of property…to set aside any disposition of property under section 26, 29, 30 or 31 …may be undertaken by the trustee.

(b) If the trustee fails to take any such proceedings they may be taken by any creditor in the name of the trustee upon his indemnifying the trustee against all costs.”

However, section 32(1)(b) only allows a creditor and not his or her agent to take the steps necessary for issuing the summons in the name of the liquidator. The attorney who signs that summons must be mandated by a creditor See Myburgh v Walters NO 2001(2) SA 127(C). and not his agent. If an attorney is not involved, the creditor must sign the summons. It is the creditor who, ultimately, has preference over the proceeds of the action in the name of the liquidator. See s 104(3) of the Insolvency Act Any dividends recovered beyond the claim of the creditor must go into the coffers of the insolvent estate. The liquidator then insures that the dividends are paid over to the person who filed the proceedings. Any balance on the proceeds goes to the estate. Since the KLG is not a creditor it is not permitted to mandate an attorney to institute proceedings for recovery in the name of the liquidator. And yet this is exactly what the KLG has done : it mandated the attorney of the liquidators to also institute actions in the name of the liquidator for the benefit of the creditors whom it represents. Hennie Grobler from the KLG, writes as follows to Strydom & Bredenkamp on the 14th June 2004:

“Ek heg hierby aan die konsep mandaat wat KLG van plan is om aan sy prokureurs te gee vir kennis van u en u kli nt en kommentaar indien enige. Laat weet asseblief of u firma bereid is om op daardie basis opdragte van KVA te neem. Dit sal natuurlik op risiko moet wees aangesien die prokureurs wat die werk doen slegs uit invorderings betaal sal kan word.”

In conclusion I cannot, with respect, do better than quote the following words of Conradie J (as he then was) in Myburgh v Walters NO: Supra at 130G-H.

“Just as a Plaintiff must have a claim to litigate, the person litigating in the name of the trustee must have a claim. If he has no claim, he cannot be considered to be a ‘creditor’. An agent for a ‘creditor’ is not, by virtue of that capacity, himself a creditor.”

And thereby cadit quaestio : the KLG as an agent had no right to initiate the s 32(1)(b) procedure. Accordingly it also had no right to approach the commissioner to issue summonses and question the persons so summoned with the aim of setting the s 32(1)(b) proceedings in motion.

[15] Furthermore, in spite of Mr Edeling’s and Hendrik Grobler’s (the then chair of the KLG) affidavit that the liquidators were indemnified See Bothma p 239 and 296 and Eksteen p166. and the obvious misunderstanding of Judy Grobler in a few letters from the KLG lawyers, Thys Cronj Ingelyf, that the costs referred to concerned the costs of the s 418 interrogation, I could find no evidence in the papers that proper s 32(1)(b) indemnification had taken place. S 32(1) requires that the proceedings may be taken by the creditor “upon his indemnifying the trustee against all costs thereof. ” (my emphasis)

“ 6. Since the KLG creditors must idemnify the liquidators against all costs of the creditors who are party to creditor proceedings, and since the proceeds of creditor proceedings are, in terms of section 104(3) of the Insolvency Act, to be utilised first for the payment of the claims and costs of the creditor proceedings, the attorneys shall deduct the costs of the creditors who are party to creditor proceedings from amounts recovered in creditor proceedings before paying the balance over to the liquidators.”

In the definition section the following appears:

“ Costs of the creditors who are party to creditor proceedings : the costs and charges in respect of creditor proceedings against all debtors, including the costs allocated to creditors in respect of combined matters, and includes adverse costs orders in favour of debtors, and in respect of which the creditors who are party to creditor proceedings indemify the liquidators.”

The “indemnification” is clearly dependent on the condition that the creditor proceedings would produce funds. This is not an indemnification, but nothing more than an undertaking that if funds are successfully claimed, the adverse costs will be paid. “Indemnification” amounts to much more than that : it should at least be in the nature of a guarantee or monies paid into the estate for that purpose. A similar approach to the indemnification is to be found in the affidavit of Mr Edeling : “KLG binds itself as surety in favour of the liquidators in respect of all such costs for which the liquidators might be or become liable.” He then goes on to state that KLG has taken a pledge of the claims of KLG creditors and undertakes to apply any such dividends in payment of any obligations to the liquidators. This is simply not sufficient to indemnify. There was no guarantee that KLG creditors would be successful in their cases in the name of the liquidators in terms of s 32(1)(b). It would be absurd to regard this kind of indeminfication as sufficient. S 32(1)(b) provides for an extraordinary procedure where creditors may file proceedings in the name of the liquidator. Costs would obviously be for the account of the insolvent estate. To simply state that KLG will act as a surety and base such surety on the cessions in securitatem debiti, amounts to placing the cart before the horses. I need not say more : such an undertaking obviously does not amount to an indemnification and needs only to be stated to be rejected. The undertakings referred to by Mr Edeling at Bothma p 272 et seq do not take the matter further. The accent remains on the payment from the successful claims. The pages referred to are contained in an offer to the liquidators, which was never accepted by the liquidators (see Bothma p 276). I was informed that on the day of the the urgent application, based on these papers, an advocate filed an affidavit from one of the liquidators stating that they had not been indemnified. I will not take this ex post fact knowledge into consideratiion in determining whether the indemnification had been properly given.

[16] I am also not convinced on a balance of probailities that the liquidators had finally decided not to pursue proceedings in terms of s 29. There is a letter Eksteen p 303. dated 23 April 2004 from Strydom & Bredenkamp’s Judy Grobler, Who, at that stage, still worked for the liquidators’ attorneys. By October 2004 she was in the employ of Thys Cronj Ingelyf, the KGL attorneys. the liquidators’ attorneys at the time, that it had been decided not to pursue s 29. However, the contrary was conveyed to GP van der Merwe attorney by KPMG, for the joint liquidators, on the 10th August 2004 and the 6th October 2004 to Hendrik Grobler, the then Chair of the KLG. Eksteen p 274. It was also conveyed on the same dates that the matter of s 29 proceedings had been referred for an opinion.

[17] There are sufficient grounds for the conclusion that the KLG or a creditor would not have been justified in filing proceedings in terms of s 32(1)(b).
[18] By way of an obiter dictum the following should be added to this judgement.I have serious doubts whether it could be said that the liquidators have indeed “failed” in terms of s 32(1)(b). Although I am aware that the Supreme Court of Appeal (“SCA”) has only applied its mind to dispositions without value in terms of s 26 and has held that s 30 is not applicable, I do not believe that the liquidators are free, after the SCA judgment, to institute proceedings in terms of s 29. Of course, s 29 is based on a different set of requirements and facts, but is it open to the liquidators, who had the full opportunity to place s 29 before the SCA, to now initiate proceedings in terms of s 29? The last paragraph of the heads of argument of the appellant liquidators in the matter before the SCA, significantly, reads as follows:

The SCA does state that investors not involved The SCA rejected the notion that Mr Edeling, as the first respondent and “investor’s representative” was
properly mandated to put their case. in the proceedings could still argue that the gains should not be paid back. The following is said:

“Para 5 of the order envisages recovery proceedings. Any investor against whom such recovery proceedings are brought would be free to maintain that he or she is, for lack of notification or by reason of having been misled by the terms of the publication, not bound by the order of Hartzenberg J. It may be that fresh setting aside proceedings against such an investor would then have to be combined with the recovery proceedings. It seems unlikely that it will come to this since an investor would have to deny that the gains paid out by the scheme were dispositions without value, a proposition that has not been challenged by any of the parties and one that I consider to be correct.” (emphasis added)

I am of the view that once the SCA held that the insolvent had an obligation under the condictio ob iniustam causam to return the monies invested, such an “obligation” cannot be cancelled by s 29 proceedings, even if it is argued that the investor is a creditor who has objectively been preferred in terms of s 29 during the last six months before liquidation. The right of investors to keep their capital was confirmed by the SCA and it would be utterly unfair to now attempt to claim that very same capital under s 29.The condictio is based on public policy’s regard for “justice between man and man” Jajbhay v Cassim 1939 AD 536 at 544. and I do not believe that such “justice” should now be judged differently under s 29, in spite of the different requirements of s 29. The liquidators have put their case before the SCA within the ambit of section 26 against all investors who have made gains and cannot now switch to another mechanism to claim the capital, which has already been declared to be free from the section 26 proceedings. To approach the matter on a piecemeal basis would not be in the interests of justice. The necessity for legal certainty must prevail. I accordingly do not believe that the liquidators have “failed” in law to institute proceedings as intended in s 32(1)(b) of the Insolvency Act.> They are, in the light of the ambit of their approach to the SCA, not permitted to do so. Creditors would, accordingly, also not have the right to institute proceedings under s 29 in terms of s 32(1)(b) since the liquidators have not “failed” in law.
The order which I make is the following:
Eksteen v KVA and Others : the application for the setting aside of the summons of the applicant is acceded to with costs to be paid by the First Respondent.
Lamb in re Eksteen v KVA and Others : Leave is granted to intervene. The intervening creditor is ordered to pay the costs of the application for intervention.
Bothma and Others v KVA and Others : the application for the setting aside of the summonses of the applicants is acceded to with costs to be paid by the First Respondent.