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Think twice before purchasing an asset from a company in liquidation

Think twice before purchasing an asset from a company in liquidation

Except for the well-seasoned litigator, the average person may perceive the law as inaccessible. However there are times that the court hands down a judgment which sheds light on some core tenets of our legal system. The case of Chater Developments (Pty) Ltd (In Liquidation) and Waterkloof Marina Estates (Pty) Ltd is one such judgment, wherein the court deals with the notion of ultra vires, good faith and simple legislative interpretation.

In this particular instance, Chater Developments had been placed into liquidation due to it being unable to satisfy or pay its debts. Initially a single liquidator was appointed to wind up Chater Developments affairs, which included selling off its assets in order to satisfy creditor’s claims.

After his appointment at a first meeting of creditors, and having been authorised by Chater Development’s creditors, the liquidator (acting on behalf of Chater Developments) entered into an agreement with Waterkloof Marina Estates in terms whereof Waterkloof Marina Estates purchased from Chater Developments certain of the company’s assets, those being shares which Chater Developments owned in another company.

Some time later and before effect could be given to the sale agreement a second liquidator was appointed to assist the first liquidator to finalise the winding up of the company.

The second liquidator refused to comply with the sale agreement and refused to transfer the shares against a tender of payment of the purchase price alleging that the sale of shares agreement was invalid and unenforceable due to the fact that the first liquidator had acted ultra vires of his powers; meaning that the first liquidator had acted outside of their legal authority or power which has been vested in him.

The allegation was that the first liquidator had not obtained the requisite authority as stipulated in terms of Section 386(3)(a) of the 1973 Companies Act as read with Section 386 (4)(h) which he needed to sell any movable property belonging to Chater Developments by private treaty. That section required the liquidator to have obtained the authority from the creditors and the members, alternatively from the Master of the High Court.

Waterkloof Marina Estates’ claim was that the sale was valid as the first liquidator had acted pursuant to resolutions adopted by the company’s creditors, alternatively that the sale of the shares was valid and enforceable as provided for in section 82(8) of the Insolvency Act read with the provisions of section 339 of the Companies Act.

In relation to the second part of the claim, the court referred to the case of Griffin and Others v The Master wherein the court made it clear that a liquidator may only exercise certain powers given by legislation, if granted the authority to do so – by meetings of creditors and members or contributories or on the directions of the Master.  In this instance, the liquidator had not obtained that authority.

In relation to the first part of the claim, the question which the court needed to answer was whether the sale of property was valid and enforceable notwithstanding the liquidator having acted ultra vires?

The court made specific reference to section 82(8) of the Insolvency Act which provides that “If any person … has purchased in good faith from an insolvent estate any property which was sold to him in contravention of this section, … the purchase or other acquisition shall nevertheless be valid, but the person who sold or otherwise disposed of the property shall be liable to make good to the estate twice the amount of the loss which the estate may have sustained as a result of the dealing with the property in contravention of this section.’’ (Court’s emphasis)

A liquidator, who has been authorized in terms of the Act to sell the company property, performs a juristic act on behalf and in the name of the company. The liquidator accordingly acts in a representative capacity and the rights and obligations arising from his acts accrue to the company in liquidation.

The court held that this sale was a “purchase made in good faith from the liquidator who was not authorised” to sell the property, and having applied the provisions of the Insolvency Act, the court deemed the purchase valid and enforceable.

This would certainly not have been the outcome if Waterkloof Marina Estates could not have shown that they had acted in good faith when negotiating the sale of the shares with the first liquidator.

This case serves as a warning that when seeking to purchase movable property from a liquidator acting on behalf of a company in liquidation, be safe and ensure that the liquidator has the requisite authority to sell the property before incurring hefty litigation costs and unnecessary stress.

The full citation of the case is Waterkloof Marina Estates (Pty) Ltd v Charter Development (Pty) Ltd and Others (64309/2009) [2013] ZAGPPHC 543 (10 May 2013)

By Jaryd Kay

Jaryd has experience in labour law and consumer protection. He also has experience in drafting commercial and non-commercial contracts. Jaryd also has a keen interest in non-contentious legal matters and is available for all queries pertaining to succession, property, consumer protection and matrimonial law.