THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

REPORTABLE
Case No: 528/98

In the matter between:

BRIAN ST CLAIR COOPER NO

1st Appellant
BASIL NEL NO

2nd Appellant
LESLIE COHEN NO

3rd Appellant
OLIVER POWELL NO

th Appellant

and

SOUTH AFRICAN MUTUAL LIFE ASSURANCE
SOCIETY                                                                                   1st  Respondent
JACOBUS CORNELIS STASSEN

2nd  Respondent
CS STEWART NO

3rd  Respondent

Coram:
SMALBERGER, VIVIER, HARMS, & ZULMAN JJA and

MPATI AJA
Heard:
7   NOVEMBER 2000
Delivered: 22 NOVEMBER 2000
Subject:
Sections 414(2) and 424 of the Companies Act 61 of 1973

JUDGMENT

HARMS JA/

HARMS JA:
[1] 
This appeal concerns the review of a ruling made by the
Deputy Master of the Supreme Court (Transvaal Provincial Division) in
his capacity as officer presiding at a meeting of creditors and in which he
authorised the issue of a subpoena in terms of s 414 (2) of the
Companies Act 61 of 1973 (“the Act”).  The decision was taken on 3
February 1997 at the behest of the joint liquidators of two companies in
liquidation and the witness involved is Mr JC Stassen, the chief legal
adviser of the SA Mutual Life Assurance Society (the “Old Mutual”).
Reviews of this kind are governed by s 151 of the Insolvency Act 24 of
1936.
[2] 
In the court a quo Roux J, on the application of the Old
Mutual and Stassen (presently the first and second respondents
respectively), set the subpoena aside.  The Deputy Master (to whom I
shall refer as “the Master” for the sake of convenience) abides the
decision of the court and is at this stage the third respondent.  The first
and second appellants are the co-liquidators of Supreme Holdings Ltd
(“Holdings”) and the third and fourth appellants those of Supreme
Investment Holdings (Pty) Ltd (“Investment”).  They, with the leave of

Roux J, appeal against his order.
[3] 
At a lengthy and heated hearing the Master was bombarded
with arguments and documents, largely irrelevant.  The subpoena
requires of Stassen to testify and to produce a mass of documents.  These
fall into twenty-seven different classes and it seems that the court below
was informed from the bar that the documents would fill a shipping
container.  According to the ruling, Stassen was called upon to be
examined -
“on issues relating to s 424 [of the Act] liability arising from the combined summons issued by the
liquidators against Old Mutual and others . . . under case number 24748/95.”
Further, in terms of the ruling -
“questions relating to negligence or delict will be allowed insofar as they may relate to s 424 liability,
and will be disallowed if they are shown to be entirely irrelevant to the s 424 claims.”
[4] 
In order to understand the ruling and its qualification, a
substantial number of background facts have to be related.   Holdings
and Investment conducted their businesses as one and for that reason
further references will be to them jointly. A major part of their business
was the acceptance of money from the public by way of deposits,
purportedly against the issue of secured debentures and by way of

subscription for redeemable preference shares.  It can be accepted that
the business was conducted fraudulently and that as a result a large
number of innocent members of the public have lost substantial amounts
of money.  More detail of the business methods can be found in Durr v
Absa Bank Ltd and Another 1997 (3) SA 448 (SCA).  They were
liquidated in November 1992.
[5] 
In marketing their products, the companies made use of
independent brokers, often employed by other financial institutions such
as banks (as in Durr) or insurance companies (as in the present instance).
The general pattern followed was that the companies misled the often
incompetent or negligent brokers:

“Rather than documents in a form which past experience has embedded in the
statutes as a requirement, brokers were edified with glossy brochures, dossiers containing
laudatory but largely irrelevant press cuttings, and they were exhorted to invest at marketing
conferences. The two companies' names were played down. Rather the 'Supreme Group' was
put forward as disposing over the operational companies and their assets, and particularly the
three quoted companies. Completely spuriously, the 'Supreme Group' was dated back to
1923, whereas Holdings had been formed in 1986 and Investment in 1989. The actual facts
concerning the two companies themselves were suppressed. What was also suppressed was

where the major investments were being made by the 'Supreme Group', not in the operational
companies, but in a trio called Insulated Structures (Pty) Ltd ('Insulated'), Sandton Finance
(Pty) Ltd ('Sandton') and Pier Investments (Pty) Ltd  ('Pier'). Insulated was an intermediary
financing company which was having problems with the Financial Services Board. Sandton
was involved in what the witness Goldhawk called the 'loan-sharking business', lending
small amounts to the man in the street at high rates, a business, according to him, 'which
involves unusual collection tactics whereby letters are not necessarily used but large people
knocking on the door go to collect money very often'. Pier bought repossessed properties
from the participation bond company, properties that did not generate income, and put them
together in property portfolios.

The broad substance was that the two companies were running an illegal bank,
taking deposits from the public, and, through their intermediaries, lending to other members
of the public at a rate higher than that paid to the depositors. Of course, they had no licence
to conduct a bank, so that they could not openly solicit deposits from the public. Becoming a
bank would have entailed rigorous regulation. Openly raising  capital by offering shares or
debentures would have required a prospectus with no room to quibble. That would have
entailed a scrutiny which they could not bear. So it was also no good. The expedient that was
devised was to use the participation bond  company as a stalking horse. It was a registered
financial institution and was entitled to solicit funds. What was done, as explained by

Goldhawk, was to advertise participation bonds and then to add that, by the way, secured
debentures and preference shares were also on offer. That no doubt explains the 'bond' in the
earlier names of the two companies . . ..”
(Durr at 457H - 458G.  Goldhawk was not a deponent in this case, but
the Master was generally aware of these facts.)
[6] 
In Durr the particular broker and his employer, Absa, were
held liable in delict for the damages suffered by an investor who was
negligently advised  to invest in Supreme debentures and preference
shares.  Such claims of investors have nothing to do with the winding-up
of the companies and ought not to concern the liquidators.  The
liquidators felt duty bound to assist, for remuneration, the investors in
pursuing their delictual claims against brokers and their employers.  To
do this an ingenious scheme was devised.  Investors were asked to cede
their claims to the liquidators in their capacity as trustees for a common
pool.  Monies recovered would fall in the pool and all members of the
pool would share therein, irrespective of the success of their individual
claims.   The scheme of arrangement was sanctioned in terms of s 311 of
the Act during May 1994.
[7] 
Instead of suing individual brokers or their employers, the

liquidators began using a known expedient, namely the provisions of s
414 (2) and 415 of the Act, to subpoena and interrogate brokers.  Their
object was to exert pressure to procure settlements rather than to obtain
information, and the liquidators were somewhat successful until the
point was taken by a group of brokers at Newcastle that the delictual
claims could not be the subject of such an inquiry.  At the time a
comprehensive inquiry in terms of s 417 read with s 418 had been
conducted under the chairmanship of  the Honourable O Galgut QC, who
had submitted a full report on the manner in which the business of
Supreme had been conducted and the possible liability of others,
including brokers and their employers.   He found that the brokers had
been misled by the companies, that they may have been negligent and
that delictual claims by investors might succeed.  Although fully alive to
s 424 liability, the report did not even remotely suggest that possibility as
far as brokers were concerned.   In addition, the liquidators had been
acting on a thorough overview prepared by their erstwhile counsel who
has an intimate knowledge of all the facts concerning Supreme.  Having
considered all possible claims, he concluded that only delictual claims
were available against the brokers and their employers.

[8] 
In order to overcome the objection raised by the Newcastle
brokers and to interrupt prescription, the liquidators instituted actions
against some financial institutions and the brokers in their employ who
had marketed Supreme products.  In the case referred to in the Master's
ruling, action was instituted during October 1995 against the Old Mutual
and 137 brokers who were or are in its employ claiming some R52
million in damages relating to 997 investments in the companies.  The
number of investors involved are slightly less because some had made
more than one investment.  It is clear that the liquidators have no serious
intention to bring the case as a whole to trial because, as they say, many
of the investors are not prepared to testify, are not helpful witnesses
because they are old or unsophisticated, or gave statements that are
unfavourable or are not available or reliable.  It is also not feasible to
consult with and call such a large number of witnesses.
[9] 
The claim against Old Mutual is on alternative bases: s 424
or delictual liability.  The claims against the brokers are formulated
similarly.  Armed with this, the liquidators applied to the Master for the
subpoena in order to enable them to interrogate Stassen on all the issues
contained in the particulars of claim.  The list of documents, for instance,

has, on the face of it, little or nothing to do with  s 424 liability, but that
is by the way.  Because the Master was of the view that the liquidators
were not entitled to use the machinery of the Act to pursue the delictual
claims, he issued the quoted qualification to the ruling.  As Roux J said,
the qualification provides but scant comfort because nearly every
question posed in relation to the s 424 liability would probably be
relevant to the delictual claims.
[10] The Master's authority to issue a subpoena is to be found in
s 414 (2):

“The Master or officer who is to preside or presides at any meeting of creditors, may
subpoena any person-

(a)
who is known or on reasonable grounds believed to be or to have been in
possession of any property which belongs or belonged to the company or to be indebted to the
company, or who in the opinion of the Master or such other officer may be able to give material
information concerning the company or its affairs, in respect of any time before or after the
commencement of the winding-up, to appear at such meeting, including any such meeting which has
been adjourned, for the purpose of being interrogated; or

(b)
who is known or on reasonable grounds believed to have in his possession
or custody or under his control any book or document containing any such information as is referred

to in paragraph (a), to produce that book or document or an extract therefrom at any such meeting or
adjourned meeting.”
(Underlining added.)
[11] It is for the Master to form the opinion that the proposed
witness may be able to give material information concerning the
company or its affairs.  In the fairly lengthy reasons for his ruling the
Master nowhere states that he in fact formed the opinion.  Whether one
can surmise that he did form the required opinion is open to doubt but
the answer does not necessarily dispose of the case because of the nature
of the review.  Both parties accepted, as I shall do, that a court exercising
its powers of review in terms of s 151 of the Insolvency Act is not
restricted to those cases where some irregularity has occurred; it acts as a
court of appeal and is entitled to adjudicate the matter anew (the
authorities on the point have been collected in Gilbey Distillers &
Vintners (Pty) Ltd and Others v Morris NO and Another 1991 (1) SA
648 (A) 655G - J).   Another aspect which the Master failed to consider
is whether the information or documents alleged to be available from
Stassen or the Old Mutual is “material”, an aspect of major importance if
regard is had to the number of documents that have to be produced.

[12] The Master by implication held that the delictual claims do
not, in the words of s 414 (2), concern the companies or their affairs.
The liquidators, in spite of a different approach before the Master, quite
rightly accept the correctness of his ruling in this regard (see Simon &
Another v The Assistant Master and Others 1964 (3) SA 715 (T);  James
v Magistrate, Wynberg, and Others 1995 (1) SA 1 (C) 16A - D).  That
leaves for consideration the s 424 claims.
[13] Under the provisions of the Companies Act 46 of 1926,
examination of witnesses during the course of winding-up was regulated
by s 155.  It provided in ss (1) that the court may summon -
“any person whom the Court deems capable of giving information concerning the trade, dealings,
affairs, or property of the company.”
Ex parte Brivik 1950 (3) SA 790 (W) 791E - H dealt with the threshold
test for exercising its powers in these terms:
“The Court orders the inquiry at its own discretion on information brought before it by any interested
person. Normally it is the liquidator who would apply, but if the liquidator fails to apply there is no
objection to entertaining an application by a creditor or contributory who has given notice to the
liquidator to enable him to put his views before the Court. The Court is careful to see that the
inquisitorial powers of the section are not used for purposes of vexation or oppression . . ., but an

applicant is not required to make out a prima facie case that there has been misfeasance or actionable
conduct of any kind. It is sufficient if the Court is satisfied that there is fair ground for suspicion . . .,
and that the person proposed to be examined can probably give information about what is suspected.”
Counsel accepted the applicability of this test for an examination under s
414 (2) of the current Act (cf Katz v Colonial Realty Trust (Pty) Ltd
1954 (4) SA 302 (W)).   It hardly need be stated that the Master can only
form the required opinion if he has at his disposal some basic facts which
create a fair ground for suspicion.
[14] In order to hold someone liable under s 424(1)1, the
following has to be established:
(1) the business of the company was carried on

(i) recklessly,

(ii) with intent to defraud creditors (of the company or of any
other person), or

(iii) for any fraudulent purpose; and

It reads:  “When it appears, whether it be in a winding-up, judicial management or
otherwise, that any business of the company was or is being carried on recklessly or with
intent to defraud creditors of the company or creditors of any other person or for any
fraudulent purpose, the Court may, on the application of the Master, the liquidator, the
judicial manager, any creditor or member or contributory of the company, declare that any
person who was knowingly a party to the carrying on of the business in the manner
aforesaid, shall be personally responsible, without any limitation of liability, for all or any of
the debts or other liabilities of the company as the Court may direct.”

(2) the person concerned must
(a) have been a party to the carrying on of the business, and
(b) have had knowledge of the facts from which the conclusion is
properly to be drawn that the business of the company was or is being
carried on

(i) recklessly,

(ii) with intent to defraud creditors (of the company or of any
other person), or

(iii) for any fraudulent purpose.
(See Ozinsky NO v Lloyd and Others 1995 (2) SA 915 (A) 917G - I.)
The requirements under (1), it can be assumed, have been established but
those under (2) are in contention.
[15] As far as the s 424 claim against Old Mutual is concerned, it
founders on many rocks but the most conspicuous one is that Old Mutual
was never a party to the carrying on of the business of Supreme.   In
order to circumnavigate the problem, the liquidators alleged in the
particulars of claim that the brokers carried on the business of Supreme
and that Old Mutual is vicariously liable for their actions.  The validity
of this point was pertinently raised by way of exception before Joffe J in

the liquidators' identical claim against Nedcor Bank Ltd and its brokers
(WLD case 95/24750).  He held that s 424 cannot be invoked against a
person who may be vicariously liable at common law for the conduct of
another person and that the liquidators have failed to make out a cause of
action insofar as conduct on the part of the employer is a requirement of
the section.  His decision conforms with Ensor NO v Syfret's Trust and
Executor Company (Natal) Ltd 1976 (3)  SA 762 (D) 766A-C and
Fisheries Development Corporation of SA Ltd v Jorgensen and Another,
Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty)
Ltd and Others 1980 (4) SA 156 (W) 167D-G and the liquidators accept
its correctness.   For a reason that is not entirely clear, Joffe J did not
strike out the allegation that the employer had the necessary knowledge
required by s 424 but the allegation on its own has no relevance.  The
requisite knowledge must be possessed by the person who conducted the
business in order to attract liability.
[16] Apparently in this context, and rather unnecessarily for the
purposes of his conclusion, Roux J held that s 424 does not create
liability for juristic persons but only for natural persons, mainly because
of the use of the term “personally liable” in the section.  Counsel for the

respondents did not embrace this reasoning and it is unnecessary to deal
with it for purposes of this appeal.  It is, however, contrary to other
authority (eg Anderson and Others v Dickson and Another NNO 1985 (1)
SA 93 (N) 110A - B).
[17] The fact that the s 424 claim against Old Mutual is ill-
conceived, does not mean that Stassen cannot be called to testify and
produce documents about the possible s 424 liability of the brokers.   A
closer look at the liquidators' case based upon this cause is therefore
required.  I have already described the role played by the brokers in the
affairs of Supreme.  They introduced members of the public to Supreme
for commission and Supreme then sold its products to those persons.
Does this mean that the brokers were party to the carrying on of the
business of Supreme?  Dealing with the meaning of that concept, Nugent
J said the following in Powertech Industries Ltd v Mayberry and Another
1996 (2) SA 742 (W) 749D - I:

“Those considerations aside, in my view a more fundamental reason why the plaintiff cannot
succeed is that to which I have already adverted. The submissions by the plaintiff's counsel seem to
assume that one may be a 'party' to the carrying on of a company's business without in some way
participating in it. In my view that is not correct. To be a 'party' to the conduct of a company's

business requires an association with it in a common pursuit. That is the ordinary meaning of the word
as it is used in the statute. The meaning given to that sense of the word by The Oxford English
Dictionary is 'one who takes part, participates, or is concerned in some action or affair; a participator;
an accessory', conveying the idea of a person who associates with the company not in pursuit of his
own ends, but in pursuit of those of the company.

A 'party' to the carrying on of a company's business is one who has joined with the company
in a common pursuit. Generally this would include its directors and managers, all of whom are acting
in common pursuit of the company's business. If the business is conducted recklessly they are liable
therefor, and for good reason, as they ought not to be permitted to shield behind the limited liability
accorded to the company in these circumstances.

Clearly the section is aimed only at conduct which attracts liability to the company, as it is
only that conduct which constitutes the mischief against which the section is aimed. The section does
not extend to those who, while carrying on their own business, incidentally enable the company to
carry on its business. No matter that a landlord, for example, may by letting premises to a company
enable the company to carry on its business, and even enable it to do so recklessly, the landlord is not
carrying on the company's business and he is not a party thereto.”
I find the reasoning compelling and applicable to the case against the
brokers.  Counsel valiantly sought to distinguish the judgment on the
ground that the facts are different but that does not affect the principle of

the matter.  The brokers were pursuing their own business ends and were
not carrying on the business of Supreme in any manner.  No facts were
placed before the Master or court which can create a suspicion to the
contrary, namely that any broker carried on the business of Supreme.
[18] In addition, the Master needed fair grounds for a suspicion
that Old Mutual and the brokers had knowledge of the facts from which
a conclusion may properly be drawn that the business of Supreme was
carried on recklessly or with an intent to defraud or with a fraudulent
purpose (Howard v Herrigel and Another NNO 1991 (2) SA 660 (A)
673I-674A).   All the facts placed before the Master point in the opposite
direction.  The high-water mark of the evidence placed before the court
is that Old Mutual regarded investments in Supreme as carrying a high
risk, that it informed its brokers of this view and that the marketing of
Supreme investments was a breach of the brokers' contract with Old
Mutual.  The Master in his ruling relied on the fact that an allegation of
knowledge had been made in the particulars of claim and that it
“appear[s] to be seriously made”.   The history of the case, in my view,
shows the opposite: the allegation was not seriously made but was made
to meet the point raised by the Newcastle brokers.  The liquidators did

not bother to file an affidavit in the review proceedings expressing any
belief in the allegation.  The answering affidavit made by an insolvency
administrator involved in the estates, does not even touch remotely on
the subject.  The silence is deafening if regard is had to the fact that a full
s 417 inquiry had been held where many brokers and someone from Old
Mutual had testified, the many s 415 interrogations and the hundreds (if
not thousands) of questionnaires completed by investors.
[19] It follows that the Master had no cause for making the
ruling and that Roux J was correct in setting the subpoena aside on the
ground that the Master had acted beyond his competence.  In the light of
this, the questions whether the subpoena was oppressive, vexatious or
unfair (Bernstein and Others V Bester and Others NNO 1996 (2) SA 751
(CC) par 36) or whether it was applied for with an ulterior purpose
(Beinash v Wixley 1997 (3) 721 (SCA), cf Brummer v Gorfil Brothers
Investments (Pty) Ltd en Andere 1999 (3) SA 389 (SCA)) do not arise.

[24] The appeal is dismissed with costs, including the costs of

two counsel.

__________________

L T C HARMS

JUDGE OF APPEAL

AGREE:

SMALBERGER JA
VIVIER JA
ZULMAN JA
MPATI AJA