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Kaniah v WPC Logistics (Joburg) CC (In Liquidation) and Others (5794/2016) [2017] ZAKZDHC 45 (13 December 2017)

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IN THE HIGH COURT OF SOUTH AFRICA

KWAZULU-NATAL LOCAL DIVISION, DURBAN

CASE NO. 5794/2016

In the matter between:

JAMES KANIAH APPLICANT

and

WPC LOGISTICS (JOBURG) CC (IN LIQUIDATION) FIRST RESPONDENT

CHAVONNES BADENHORST ST CLAIR COOPER N.O. SECOND RESPONDENT

LUKE BERNARD SAFFY N.O. THIRD RESPONDENT

CHENG-MING CHAO FOURTH RESPONDENT

DILNAWAAZ FIRFIREY FIFTH RESPONDENT

MASTER OF THE HIGH COURT, DURBAN SIXTH RESPONDENT

ORDER

[1] Paragraph (1)(a) of the rule nisi issued on 23 June 2016 is confirmed. The remainder of the relief contained in the rule nisi granted on 23 June 2016 is discharged.

[2] The applicant is directed to pursue the action instituted by the second and third respondents (the liquidators) in their capacities as liquidators of the first respondent under Western Cape High Court Case Number 469/2015 (the action) in the name of the liquidators and at his own cost.

[3] The applicant hereby indemnifies and holds the liquidators harmless in respect of:

[3.1] any and all claims which may arise against the liquidators resulting from the institution of the action, the pursuance thereof by the applicant and the ultimate success or otherwise thereof;

[3.2] any costs incurred by the liquidators in respect of the action from the date of this order;

[3.3] any cost orders granted by the High Court against the liquidators and/or the first respondent in the course of the pursuance by the applicant of the action.

[4] In relation to the orders in paragraphs 2 and 3 hereinbefore the parties hereby specifically agree that:

[4.1] no orders as to costs in the pursuance of the action will influence or prejudice the position of the creditors of the first respondent in any way;

[4.2] in the event that a costs order is granted against the liquidators and/or the first respondent in the course of the pursuance of the action by the applicant, the liquidators are hereby directed to levy a contribution in respect of such costs upon the applicant and the fourth and fifth respondents jointly and severally in their capacities as members of the first respondent (the members);

[4.3] Upon the levying of any such contribution, the members are directed to make immediate payment thereof and the liquidators are hereby authorised to set-off any such costs order against the contribution to be levied upon the members;

[5] The defendants’ rights to approach the Western Cape High Court for an order directing the applicant to set security for costs in the action are reserved.

[6] That the costs of this application are costs in the winding-up of the first respondent.

JUDGMENT

HENRIQUES J

Introduction

[1] The applicant seeks an order inter alia directing the liquidators (the second and third respondents) to pursue an action instituted against the fourth respondent, in terms of inter alia s 66 of the Close Corporations Act, read with s 387(4) of the Companies Act 61 of 1973 (the Act).

[2] The relief foreshadowed in the notice of motion was the following:

‘2. That a Rule Nisi do issue calling upon the Respondents and/or all interested parties to show cause why an order should not be made in the following terms:

(a) That in accordance with the provisions of Section 66 of the Close Corporations Act, read with Section 387(4) of the Companies Act of 1973, the court directs that the Second and Third Respondents are interdicted and restrained from withdrawing the action instituted by them out of the Western Cape Division of the High Court of South Africa under case number. 469/2015 against the Fourth Respondent;

(b) That the Second and Third Respondents are further directed to pursue the action instituted as aforementioned, notwithstanding the resolution purported to having been passed by creditors and members of the First Respondent on 04 May 2016;

(c) That should the Second and Third Respondents, consider that it is no longer appropriate or desirable to pursue the action aforementioned and they wish to withdraw such action, they are to seek the directions of this court relating to such withdrawal;

(d) That the Second and Third Respondents are directed to investigate whether it is appropriate to institute an action against the Fifth Respondent in relation to a breach of her fiduciary obligations towards the First Respondent and if considered appropriate, to institute such action;

(e) That the costs of this application are to constitute costs in the winding up of the First Respondent and are to pay the costs of the winding up; …’[1]

[3] On 23 June 2016 the rule nisi was issued, the applicant obtaining interim relief, interdicting the second and third respondents from withdrawing the action against the fourth respondent. Such rule nisi was extended until confirmed or discharged on 10 August 2016.

Issues for determination

[4] Whether the court should:

[4.1] confirm the rule nisi in its present form thereby interdicting the liquidators from withdrawing the action instituted in the Western Cape High Court under Case No. 469/2015 in circumstances where a decision was made to withdraw the action by resolution of the majority of creditors and members at a creditors’ meeting of the first respondent (in liquidation).

[4.2] direct the second and third respondents to pursue the action notwithstanding such resolution;

[4.3] in the alternative direct the applicant to pursue the action in the name of the second and third respondents subject to a suitable indemnity for costs.

[5] The application is opposed by the fourth and fifth respondents. The second and third respondents have filed an affidavit explaining what transpired at the meeting of creditors, and have indicated they will abide the decision of the court, provided no costs order is pursued against them.

Background facts[2]

[6] It is common cause that:

[6.1] The first respondent was placed in provisional liquidation by order of the above honourable court on 3 May 2013 under Case No. 3700/2013[3] and a final order of liquidation made on 10 July 2013.[4]

[6.2] The second and third respondents are the liquidators of the first respondent;

[6.3] The applicant and the fourth and fifth respondents are members of the first respondent, the applicant and fourth respondent each holding a 45 percent members interest and the fifth respondent holding a 10 percent interest.

[6.4] The first respondent was wound up as a solvent close corporation on just and equitable grounds due to a breakdown in the relationship between the applicant and the fourth respondent, its principle members. At the time of the provisional liquidation, it was envisaged that the first respondent’s creditors would be paid in full and it subsequently transpired they have been paid in full.

[6.5] As a consequence of an investigation into the affairs of the first respondent and an interrogation of the fourth respondent,[5] specifically in relation to his loan account and monies allegedly paid by him to the WPC Hong Kong entity, it became apparent that amounts totalling R6 689 988.30 had been withdrawn or paid from a banking account of the first respondent on behalf of the fourth respondent.

[6.6] The fourth respondent acknowledged the payments made but explained that same were paid by him on behalf of the first respondent to the WPC Hong Kong entity in respect of monies due to him as he funded the setting up of the entity. It also emerged that the fourth and fifth respondents had carried on a business under the name and style of Cheetah Shipping and the applicant alleged the fifth respondent was in breach of her fiduciary obligations to the first respondent and its members.

[7] In an endeavour to recover the amount paid on behalf of and to the fourth respondent, an action was instituted against the fourth respondent and his spouse, Shi Ping Wang, by the second and third respondents as liquidators of the first respondent. The action was instituted on the advice of counsel and an attorney appointed by the second and third respondents in the Western Cape High Court. A reading of the particulars of claim instituted in the action reflects an amount of R6 689 988.30 claimed in respect of withdrawals made from the bank account of WPC Logistics (Joburg) as follows:

‘9.1 … are monies due and payable by the First Defendant on loan account, which amounts are repayable on demand and which demand is hereby made.

9.2 in the alternative, constitute unlawful withdrawals and the misappropriation of funds of WPC Logistics (Joburg) by the First Defendant,

9.3 in the further alternative, are the loss suffered by WPC Logistics (Joburg) as a result of the breach of the duty arising from the First Defendant’s fiduciary relationship towards WPC Logistics (Joburg),

9.4 in the further alternative, are the economic benefits derived by the First Defendant by reason of the breach of duty arising from the First Defendant’s fiduciary relationship towards WPC Logistics (Joburg),

9.5 in the further alternative, are the amounts by which the estate of WPC Logistics (Joburg) was impoverished and the joint estate of the First Defendant and the Second Defendant, alternatively the partnership of which the First and Second Defendant are partners, has been unjustly enriched at the expense of WPC Logistics (Joburg).’[6]

[8] Whilst the action was pending, the fourth respondent attempted to persuade the second and third respondents not to pursue the action as the only person who would benefit from such a claim was the applicant as all the creditors were paid in full. Pursuant to this, the fourth respondent’s attorneys of record addressed correspondence to the applicant indicating that if he wished to pursue a claim he should do so on his own and this should not form part of the proceedings in the liquidation. Despite this request, the second and third respondents, on the advice of counsel, decided to proceed with the action.

[9] Subsequently, the fourth respondent’s attorneys called upon the first and second respondents to convene a meeting of creditors. However, the second and third respondents were of the view that there was no point in a meeting as creditors were to be paid in full. At the insistence of the attorneys of the fourth respondent, a meeting of creditors was convened by the second and third respondents on 19 August 2015. That meeting was subsequently adjourned. On 11 September 2015, the second and third respondents confirmed that it was necessary for a special general meeting to be convened. Notice of the meeting was provided and same was to be conducted on 21 October 2015.

[10] On 19 October 2015, the attorneys acting for the fourth respondent gave notice that at the meeting of 21 October 2015 they would represent those creditors with proved claims as well as the fourth and fifth respondents. They intended to provide a direction to the second and third respondents to withdraw the legal proceedings instituted in the Western Cape High Court against the fourth respondent and his spouse.

[11] Correspondence was then exchanged subsequent to the meeting. The applicant’s attorneys indicated to the second and third respondents’ attorneys that there was a material conflict of interest in the consideration of the resolution insofar as the fourth respondent was concerned, and he ought to have been precluded from voting. They further suggested that the second and third respondents make application to the High Court for directions from the court relating to the further conduct of the litigation, specifically the withdrawal of the action as against the fourth respondent and his spouse.

[12] The special general meeting did not take place as same was not properly constituted. In the interim, the second and third respondents through their attorneys of record, indicated, they were obtaining a legal opinion. Subsequently, on 15 April 2016 a special general meeting was convened. A resolution was tabled terminating the action against the fourth respondent and his spouse. The applicant acting on behalf of WPC Logistics (SA) CC voted against the resolution. Nichola Cronje acting for the second and third respondents, who also had a power of attorney for the fourth respondent voted on behalf of creditors, in favour of the resolution. As a consequence, given the holding of members’ interests in the close corporation, the resolution was passed by the majority of members.

[13] As a consequence of the second and third respondents’ failure to institute the application for directions from the court, and the legal advice they received indicating they were bound by the resolutions passed at the meeting, the applicant instituted this application.

Submissions of the respective parties

[14] The applicant submits the following:

[14.1] He is aggrieved by the decision of the liquidators, to withdraw the action against the fourth respondent and his wife;

[14.2] This court has an unfettered judicial discretion by virtue of s 387(4) of the Companies Act to ‘make such order as it thinks just’;

[14.3] The section allows a court to interfere in the administration of the company’s estate in the following circumstances:

[14.3.1] Where a liquidator has acted in a way in which no reasonable liquidator would have acted;

[14.3.2] Although acting in good faith, a liquidator took into account considerations which ought not have been taken into account, alternatively failed to take into account considerations which ought to have been taken into account;[7]

[14.3.3] The liquidators have failed to apply their minds as although s 387(1) requires them to have regard to directions given to them at a meeting by way of resolution of creditors and members, they have dealt with the matter as though the subsection binds them to follow such resolution;

[14.3.4] They have failed to consider the following relevant facts, namely that the close corporation is solvent and at the time of liquidation, it was known that all creditors would be paid in full and have subsequently been paid in full. As a consequence the creditors have no interest in the outcome of the action instituted in the Western Cape High Court.

[14.3.5] The reason for the liquidation of the first respondent was that the company was deadlocked and a minority shareholder would, had the company not been liquidated, been entitled to bring a derivative action either at common law or under the statute.[8] Once liquidation has occurred, then an aggrieved minority shareholder can either ask the liquidator to bring an action in the name of the company, in which case the liquidator will seek an indemnity for costs, or if a liquidator is unwilling to bring such action or seeks an unreasonable basis for doing so, the minority shareholder can then apply in terms of s 387(4) of the Act for directions from the court. Where the minority shareholder approaches the court in terms of s 387(4), the court can authorise the action in the name of the company or direct the liquidator to do so seeking a suitable indemnity for costs.[9]

[15] The second and third respondents have indicated that they do not oppose the relief sought and abide by the decision of the court, save insofar as it relates to any cost order being sought against the liquidators. In the heads of argument submitted by Mr van Rooyen on behalf of the second and third respondents, the following submission is made:

‘It is submitted that a feasible resolution to the issue in question should be that the applicant take cession of the first respondent’s claim against the fourth respondent. Litis contestatio have been reached and the applicant is permitted to continue the litigation in the name of the first respondent post litis contestatio. This is however subject to the submissions made regarding the provision by the applicant of a suitable indemnity and acceptable security for an adverse costs order.’[10]

[16] The second and third respondents submit that they have a duty and obligation when administering a company in liquidation not only to act in the interests of creditors but to also consider the interests of members. Once the resolutions were adopted at the meeting, they acted reasonably given the circumstances and called upon the applicant to act in terms of s 387 of the Act and provided an undertaking not to act in terms of such resolution provided he took the necessary steps.

[17] The fourth and fifth respondents submit the following. The liquidators acted pursuant to a meeting called on 4 May 2016 where a resolution of creditors and members was passed directing them to withdraw the action against the fourth respondent and his wife. Liquidators are obliged to adopt the directions given by resolution of creditors and members in terms of s 387(1) of the Act. As a consequence, there is no basis for arguing that the liquidators failed to apply their minds to the issue at all. The liquidators acted reasonably and the action caused a conflict between the interests of the applicant and the interests of everyone else. The liquidators pursuing the action with available funds in the first respondent’s estate would have eroded the estate of the first respondent. It would also prevent the finalisation of the liquidation process which had been ongoing for more than three years.

[18] The fourth and fifth respondents further submit that a court will not lightly interfere with the bona fide decision of liquidators and where there is no lack of bona fides, the question is whether in the circumstances the liquidators have acted in a way that no reasonable liquidator could have acted. The fourth and fifth respondents submit that this court cannot find that the liquidators acted in circumstances which no reasonable liquidator would have acted in by following the directions of the majority of creditors and members of the first respondent. In addition, had they pursued the action, they would have exposed the solvent estate of the first respondent to the risk of litigation which action the fourth respondent submits has no merit. The fourth respondent submits that there exist no exceptional circumstances to interfere with the decision of the liquidators nor can it be said that they acted ‘utterly unreasonably’.

Analysis

[19] Section 384(7) reads as follows:

‘Any person aggrieved by any act or decision of a liquidator may apply to the Court after notice to the liquidator and thereupon the Court may make such order as it thinks just.’

[20] Section 387 of the Act provides for an aggrieved person to approach the court for relief in circumstances where the liquidator refuses to follow directions or where the liquidator acts unreasonably given the circumstances. What is meant by an aggrieved person has been the subject matter of a number of decisions. In Gore NO v Shaff[11] Binns-Ward J considered this term:

‘The term 'any person aggrieved' employed in s 387(4) is somewhat imprecise, and it is thus perhaps not surprising that its import has been the subject of debate; cf. Francis George Hill Family Trust v South African Reserve Bankand Others 1992 (3) SA 91 (A), at 98I – 102E, Strauss and Others v The Master and Others NNO 2001 (1) SA 649 (T), at 659H-661G, and LL Mining Corporation Ltd v Namco (Pty) Ltd (In Liquidation) and Others 2004 (3) SA 407 (C), at 414A-G. As Beadle ACJ observed in Concorde Leasing Corporation (Rhodesia) Ltd v Pringle-Wood NO and Another 1975 (4) SA 231 (R), a person who is able to show that he should be afforded a remedy in terms of s 387(4) (or its equivalent in other statutory regimes) obviously qualifies as a 'person aggrieved' for the purposes of the provision; approached in that manner, attempting to define the term is to beg the question. I shall therefore proceed directly to consider whether Mrs Wolpe has established an entitlement to the remedy.’

[21] The Privy Council[12] held ‘The words “person aggrieved” are of wide import and should not be subjected to a restrictive interpretation. They do not include, of course, a mere busybody who is interfering in things which do not concern him; but they do include a person who has a genuine grievance because an order has been made which prejudicially affects his interests’.

[22] It seems to me that the applicant falls within the definition of an aggrieved member for purposes of this application although nothing further need be said about this. The parties agree that the applicant has locus as a minority member to seek relief in terms of s 387.

[23] Subsection 4 empowers the court to make whatever order ‘as it thinks’ just. Such discretion is not restricted.[13] The authorities have held that a court will not lightly interfere with a bona fide act or a decision bona fide taken by a liquidator.[14] In circumstances where there is no lack of bona fides by the liquidator, then the question to be asked is whether in the circumstances the liquidator has acted in a way in which no reasonable liquidator could have acted, having regard to the objects of winding-up and a liquidator’s duty in general. In Re: Edennote Ltd the court of appeal in applying the comparable provisions of s 167(5) of the English Insolvency Act 1986 held the following as constituting the correct test to follow:

‘(fraud and bad faith apart) … the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it.’

[24] It must at all times be borne in mind that a liquidator in the winding-up of a company owes a duty both to the company and to creditors. In Van Zyl NO v Commissioner for Inland Revenue[15] Hodes AJ said:

‘It should be remembered that a company in liquidation is administered not only for the benefit of creditors, but that the liquidator is obliged to take the interest of members into account. In terms of s 342(1) of the Companies Act, if there is surplus after payment to creditors, this goes to members. The interest of members in the proper winding-up of the company is recognised in ss 360(1), 386(3)(a) and 387(1) of the Companies Act.’

[25] In Concorde Leasing Corporation supra at 235(A) Beadle ACJ said the following:

‘He owes a duty to the company to see that its assets are realised and its liabilities minimised to the best possible advantage of the company and he owes a duty to the creditors to see that they suffered the least loss and receive the most advantageous dividend.’

[26] The question to be decided in this matter is whether the second and third respondents by following the resolution taken at the meeting of creditors and members acted in a way that no reasonable liquidator could have acted requiring interference by the court. In Concord Leasing supra Beadle ACJ considered what is or is not reasonable in any given circumstance and quoted a passage from the judgment of Watermeyer CJ in Vanderbijl Park Health Committee and Others v Wilson and Others[16]:

'A reasonable man can of course come to an unreasonable conclusion that the test is not merely the decision of a reasonable man but of a reasonable man “applying his mind to the condition of affairs”. I think that means considering the matter as a reasonable man normally would and then deciding as a reasonable man normally would decide.’

[27] Beadle ACJ was of the view that that is the way a court should approach an issue like this. I align myself with the sentiments expressed. I am of the view that the second and third respondents acted bona fide throughout. A reasonable liquidator must not only consider the interests of members but also creditors. I do not believe that the conduct of the liquidators, can be said to be mala fide or that they acted in a way in which no reasonable liquidator would have acted.

[28] The difficulty which the second and third respondents have in this matter is that, given the make-up of the membership the first respondent, the fourth and fifth respondents together with the creditors, may have been in a position to always vote against proceeding with the action instituted. The remedy available to a minority member like the applicant would have been to approach the court to direct that it makes such order as it thinks just. I have come to the conclusion that the second and third respondents did not act unreasonably and acted bone fides and also in a way that a reasonable liquidator would have acted. The next question to be answered is the appropriate order given the circumstances. The second and third respondents have indicated that they have no difficulty with the applicant proceeding with the action provided a suitable indemnity for costs is put up. As already alluded to in this judgment, I am of the view that the applicant can proceed with the action.

[29] When the matter was adjourned I had requested the parties to prepare proposed draft orders for consideration should I be disposed to exercising the discretion in terms of s 387 of the Act.

[30] I have considered the proposed orders. I am of the view that the order proposed by the second and third respondents is the most appropriate one.

[31] The second and third respondents have no difficulty with the applicant proceeding with the action provided proper indemnities are in place. It seems to me to be the best course to follow.

[32] In my view the order proposed by the applicant does not appear to be in line with the authorities I have been referred to. All the authorities I have been referred to suggest that the applicant be allowed to continue the litigation upon giving proper indemnity to the second and third respondents but also to the remaining respondents[17] for the costs of the action. At this point in time what must be borne in mind is that this close corporation was liquidated as a consequence of a complete and total breakdown in the relationship between the members – there is a complete lack of trust, good faith and confidence among the members, and, none of the members can ever be expected to act reasonably in the circumstances.

[33] As the applicant wishes to proceed with the litigation, it seems to me that the appropriate course to follow is that which is set out in the line of authorities I have been referred to[18] which make provision for the applicant to provide a suitable indemnity for costs. It is for this reason that I propose to grant the order proposed by the second and third respondents and not that proposed by the applicant.

[34] A further matter which warrants attention is prayer (1)(d) of the rule nisi directing the second and third respondents to investigate the appropriateness of an action against the fifth respondent in relation to the alleged breach of her fiduciary obligations. It must be borne in mind that an interrogation was held in relation to the fourth and fifth respondents’ role in this matter. The fifth respondent’s conduct has been the subject of an investigation at the enquiry. No action was instituted against her despite the legal opinion obtained by the second and third respondents. In my view, it would serve no purpose to re-investigate the fifth respondent’s potential liability and consequently the relief sought in paragraph 1(d) of the notice of motion is not necessary. Given that the second to fifth respondents were entitled to oppose the application, it is appropriate that the costs of the application be the costs in the winding-up. The parties appear to be ad idem that this is an appropriate order. In light of the orders I propose to issue, the remainder of the relief in paragraphs 1(b) and (c) is superfluous.

[35] In the premises the orders I issue are the following: