South African superior court ruling gives guidance on consent needed for creditor meetings

In this case, Botha N O and Others v Jonker and Others, Jonker Products CC (the company) was placed in final liquidation by court order on 29 October 2020. In terms of section 78 (1)(a) of the Close Corporations Act (CC Act), the liquidators of the company had one month to summon the first meeting of creditors - at which meeting creditor’s claims can be proven. However, the first meeting of creditors was only convened six months after the final liquidation.

When the first meeting of the creditors of a close corporation is convened more than one month after the granting of the final winding-up order, the liquidator must obtain consent from the Master in terms the CC Act to convene the meeting.

Despite this, the liquidators convened the first meeting of the creditors and various resolutions were passed. This included a resolution to summon the sole member of the company, being Mr Jonker and Mrs Jonker in her capacity as a shareholder and the sole director of an entity related to the company. The Jonkers were summoned to appear at the second meeting of the creditors for an enquiry into the running of the company prior to its winding-up.

The Jonkers refused to attend the enquiry on the basis that the resolutions taken at the first meeting were invalid because the liquidators had failed to obtain the Master’s consent for the late convening of the first meeting. When the liquidators addressed correspondence to the Master requesting retrospective consent for the first meeting of creditors, the Master was of the view that there was no statutory provision permitting her to give consent after the meeting was held. Therefore, the Jonkers approached the High Court seeking an order declaring the first meeting of the creditors invalid.

In their submissions to the High Court, the liquidators of the company argued that on a proper interpretation of section 78 of the CC Act, the Master’s consent can be obtained after a meeting has been held. They argued that since no substantial injustice or prejudice to creditors flowed from the absence of the Master’s consent, the failure to obtain such consent, did not invalidate the proceedings of the first meeting.

The High Court disagreed with the liquidators. It found that section 78 did not confer on the Master the authority to consent to the first meeting of the creditors after it had been held. Accordingly, the first meeting of the creditors was found to be irregular and therefore invalid. The High Court’s decision was taken on appeal by the liquidators to the SCA.

Thus, the issue for determination by the SCA was on the interpretation of section 78 and whether it allows for retrospective consent to be obtained from the Master after the first meeting of creditors has been held.

In a split decision, the majority judgment of the SCA held that the Master’s consent may be obtained after a meeting has been summoned but before the meeting is held. In its reasoning, the majority judgment held that reading section 78 as permitting the Master to consent at any time prior to the meeting being held does not conflict with the purpose served by the section. The Master’s consent is important in fulfilling the objects of the liquidation process. If retrospective consent is granted after the meeting is held, it would be the same as the Master validating conduct that may be invalid.

Notably, the dissenting judgment held that section 78 does not preclude the Master from granting retrospective consent even after the meeting has been held. It reasoned that if consent can be granted before the first meeting of creditors is convened, there is no reason why, if deemed appropriate, the Master’s power cannot extend to similarly granting consent after the meeting has been held.

The SCA judgment highlights three crucial factors. First, practical flexibility. While the statutory requirement to obtain the Master’s consent to convene the first meeting of creditors one month after a final winding-up order remains essential, practical difficulties in liquidation proceedings oftentimes demand flexibility. Secondly, the Master has the authority to grant consent retrospectively after a meeting has been summoned but before it is held. The rationale of this interpretation is aimed at preventing undue disruption of the liquidation process due to procedural lapses, whist also ensuring that the Master is apprised of any defects or irregularities. Lastly, a measure of judicial precedent allows for corrective measures to address procedural oversights. This ensures that the substantive goals of liquidation are not undermined by technicalities.

Co-written by Christopher Majuru and Ashlee Luckhun of Pinsent Masons.