When early-bird creditors may trump the NDPP

December 1st, 2012
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By Kara van de Pol

The Supreme Court of Appeal has handed down a judgment that will be of interest to creditors of an insolvent company whose assets are subject to a restraint order under the Prevention of Organised Crime Act 121 of 1998 (POCA).

Although the recent judgment in Bester NO and Another v National Director of Public Prosecutions: In re National Director of Public Prosecutions v Kleinhans and Others [2012] 2 All SA 453 (SCA) dealt with the broader operation of s 36 of POCA – which is titled ‘Effect of winding-up of companies or other juristic persons on realisable property’ – the case turned on the particular sequence of three critical events, namely –

  • the presentation of an application for the winding-up of an insolvent company;
  • the granting of a restraint order in terms of s 26 of POCA; and
  • the granting of a winding-up order.

One of the professed aims of POCA is to provide for the recovery of the proceeds of unlawful activity. Briefly, this happens by way of a confiscation order that may be granted on the conviction of the defendant.

A restraint order, in turn, ring-fences assets where a confiscation order has been (or may be) made. In terms of s 26 of POCA, the court may grant an order restraining a defendant’s ‘realisable property’.

In terms of s 1 of the Act, ‘property’ covers everything from money, movables and immovables to incorporeal things, rights, privileges, claims and securities.

Once a court has made a restraint order, it may appoint a curator bonis to take the property into custody and may authorise the curator to realise that property.

But what happens where that ‘realisable property’ also forms part of the assets of a company in liquidation?

As the SCA, per Maya JA, said in the opening paragraph of the judgment, the appeal ‘raises the question as to the effect of a restraining order under section 26 of POCA on the assets of a company in liquidation where that order is made after the presentation of an application for the winding-up of the company, but before the actual winding-up order is granted’.

The extract from s 36 below reveals that POCA does indeed anticipate such situations:

‘36. Effect of winding-up of companies … on realisable property

(1) When any competent court has made an order for the winding-up of any company … which holds realisable property … –

(a) no property for the time being subject to a restraint order made before the relevant time

… shall form part of the assets of any such company … .

(2) Where an order mentioned in subsection (1) has been made in respect of a company …, the powers conferred upon a High Court by sections 26 to 31 and 33(2) or upon a curator bonis appointed under this chapter, shall not be exercised in respect of any property which forms part of the assets of such company … .

(3) Nothing in the Companies Act, 1973 (Act 61 of 1973), or any other law … shall be construed as prohibiting any court or curator bonis appointed under this chapter from exercising any power contemplated in subsection (2) in respect of any property or proceeds mentioned in subsection (1).

(4) For the purposes of subsection (1), “the relevant time” means –

(a) where an order for the winding-up of the company … has been made, the time of the presentation to the court concerned of the application for the winding-up …’ (my emphasis).

Background and court a quo decision

The factual matrix in this matter, which was common cause, was confined to the following:

  • 19 November 2008: A creditor files an application for the liquidation of Aquila Holdings (Pty) Ltd on the basis that the company is unable to pay its debts.
  • 3 July 2009: After bringing charges against the sole director and shareholder of Aquila Holdings, the National Director of Public Prosecutions (NDPP) is granted a restraint order – one of the effects of which is to place certain shares held by Aquila Holdings under the control and custody of a curator.
  • 10 March 2010: An order is granted placing Aquila Holdings under provisional liquidation, which in time is followed by a final order.

At the outset, the stance adopted by the liquidators was that the winding-up order had to trump the restraint order, as the winding-up application had been presented prior to the restraint order. This would be in keeping with s 348 of the Companies Act 61 of 1973, which provides that a winding-up of a company by the court shall be deemed to commence at the time of presentation to the court of the application (the reference is to the earlier Companies Act as the proceedings were brought under this legislation. In any event, sch 5 to the Companies Act 71 of 2008 provides that the earlier legislation continues to apply in the present circumstances). It is at this date that the hand of the law is laid on the assets of the company – establishing a ‘concursus’ of the general body of creditors, protecting their interests and erecting a barrier to the attachment and execution of the assets (s 359 of the 1973 Companies Act).

Needless to say, the NDPP took a different view. In the court a quo (with the citation NDPP v Kleinhans and Others (WCC) (unreported case no 13327/09, 9-12-2010) (Fourie J)) the liquidators then intervened to seek a variation of the restraint order, arguing that –

  • the presentation of the winding-up application (19 November 2008) pre-dated the restraint order (3 July 2009); and
  • as a result of s 36(2) of POCA, the court and the curator could no longer exercise their respective powers in terms of ss 26 and 28 of that legislation.
  • The NDPP, however, contended that s 36 created three distinct legal scenarios when applied to the timing of the critical events:
  • The first scenario, created by s 36(1), would only arise when a restraint order had been made before the relevant time (in other words, before 19 November 2008), in which case the property subject to the restraint order would not form part of the assets of the company in liquidation.
  • The second scenario, governed by s 36(2), would arise only when a winding-up order ‘had already been made’ before a restraint order is made – with the result that the property of the company in liquidation would remain outside of the curator’s reach.
  • A third scenario – the sequence of events in the present instance – would be governed by neither s 36(1) nor s 36(2).

The NDPP argued that in this third scenario – where a restraint order is made after an application for liquidation is launched, but before the court orders the winding-up of the company – the liquidators could not rely on the prior deemed date of winding-up, given that s 36(3) specifically restricts the operation of company law (which would include s 348 of the 1973 Companies Act) in the context of POCA.

These contentions found favour with the court a quo, which dismissed the application and held that the reference in s 36(2) to a winding-up order that ‘has been made’ was ‘plainly a reference to an event which has actually taken place at the time when the restraint order is made’ (para 12).

SCA

When the matter reached the SCA, counsel for the liquidators posed three questions:

  • In determining ‘the relevant time’ as contemplated in s 36(4) of POCA, does the phrase ‘the time of the presentation to the court concerned of the application for the winding-up’ in s 36(4)(a) bear the same meaning the courts have attributed to the phrase ‘the time of the presentation to the court … [concerned] … of the application for the winding-up’ used in s 348 of the 1973 Companies Act, namely the time when the application is lodged with the registrar?
  • If so, in terms of s 36(2) of POCA, are the powers conferred on a court by ss 26 to 31 and 33(2) or on a curator bonis appointed under chapter 5 of POCA removed if the lodging of the winding-up application pre-dates the restraint order?
  • Do the provisions of s 36(3) of POCA preclude an affirmative answer to the question above?

Counsel for the liquidators noted that although s 36(1) expressly stipulates what happens to an insolvent company’s realisable property if a restraint order precedes the relevant time, there was no express provision in the remainder of s 36 that stipulates what happens if the restraint order is made after the relevant time.

However, their argument was that such circumstances were indeed catered for in s 36(2), as is evident in the language employed in that subsection. They also pointed out that part of the wording of that subsection could find application only in situations where a winding-up order is granted after a restraint order is granted – given the forward-looking provision that ‘the powers conferred upon a curator bonis appointed’ under chapter 5 ‘shall not be exercised’ in respect of the property subject to an existing restraint order.

In its judgment, the SCA accepted the liquidators’ arguments and agreed that the NDPP’s construction of s 36(2) would generate situations that would be governed by neither s 36(1) nor s 36(2). The SCA also held that, on the NDPP’s construction of s 36(2), s 36(1) would be rendered superfluous, as ‘[a]ny restraining order that precedes the winding-up order will take preference to the latter order and it matters not whether the restraining order was granted before or after the relevant date’ mentioned in s 36(1). ‘If that was so,’ the court said, ‘the whole field would be covered by section 36(2).’

In conclusion, the SCA upheld the appeal and held that a restraint order had to precede the filing of a winding-up application as otherwise, by virtue of s 36(2), a concursus creditorum is established over the assets of the company (at para 16).

Kara van de Pol BA (Wits) LLB (Unisa) is an attorney at Bowman Gilfillan in Cape Town. Bowman Gilfillan represented the liquidators of Aquila Holdings in this matter.

This article was first published in De Rebus in 2012 (Dec) DR 46.

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