Roering NO v Mahlangu (581/2015) [2016] ZASCA 79 (30 May 2016) per Wallis JA (Willis, Saldulker and Zondi JJA and Tsoka AJA concurring)

The Supreme Court of Appeal (SCA) allowed the appeal of the liquidators of 3P Consulting (Pty) Ltd (in liquidation) against an order of the High Court declaring that the enquiry proceedings were an abuse of process.  Justice of Appeal MJD Wallis traced the origins and purpose of the process, dating back to Victorian times.  He stated that

“If there is to be a challenge to the conduct of an enquiry that must either be a review falling under PAJA or a residual category of review derived from the common law.  In either event, the proper way in which to challenge the summoning of a witness is by way of review proceedings and the decision that falls to be attacked is that of the commissioner not the liquidators” [52] – footnotes omitted.

SCA summary:

Company law – Enquiry in terms of ss 417 and 418 of the Companies Act 61 of 1973 – summons to attend – application to set aside summons – abuse of process – what constitutes – fact that the issues canvassed may overlap with issues in pending or contemplated civil litigation not as such a ground for inferring abuse.

 Excerpts without footnotes

[32] The same approach to similar powers of enquiry is adopted in Singapore.  In W & P Piling Rajah V-C said:

‘Section 285 is couched in extremely generous terms.  It should not therefore be interpreted in a constricted manner by reference to any apocryphal purposes.  It clearly cannot be used for any collateral purpose that affords no benefit to the company.  Other than that, it may be invoked for any proper purpose that can benefit the company and which is within the statutory powers of the liquidator and the scheme of the companies legislation.  … Furthermore, a liquidator has no mandate to commence litigation which has no real prospect of succeeding.’

The learned judge went on to say that:

Information may be sought and facts and documents discovered in relation to a specific claim that the liquidator contemplates against the examinee or a related entity.  There is no rule that precludes the ordering of information against a proposed witness or someone connected with him …’

[33] I have no doubt that this approach correctly reflects the law in South Africa.  In Ferreira, Justice Ackermann cited Lord Slynn’s conclusion in Spicer & Oppenheimwith approval.  In Bernstein, he specifically rejected the narrow understanding of Cloverbay that the purpose of an enquiry was limited to reconstituting the state of knowledge that the company should possess.  It would be a work of supererogation on my part to cite the countless cases in South Africa, of which Bernstein was one, where the clear purpose of an enquiry was to determine whether the company in liquidation had a sound claim against a third party.  The proposition by counsel that the purpose of the enquiry must be so limited must be rejected.

[34] The second aspect of counsel’s proposition is more directly connected to the issue of abuse.  There is no doubt that courts have the power, and indeed the obligation, to restrain the use of the power of enquiry where it would constitute an abuse.  The more difficult issue lies in determining what constitutes an abuse.  Counsel’s argument was that it is an abuse when the person sought to be examined is a potential witness in future proceedings and as a result of the examination of that witness the liquidators acquire insight into what the witness may say if called at the trial.  Unspoken, but lurking behind this submission, was a fear of the potential risk that interrogation might extract valuable admissions from the witness, or the witness might be shown to be flawed or unreliable.

[35] While the Constitutional Court in both Ferreira and Bernstein said that our courts must be astute to prevent enquiries in terms of ss 417 and 418 from being used as an instrument of abuse, it did not seek to expand on the meaning of that expression.  But it did refer to Australian cases as a helpful guide to the approach to be adopted by South African courts.  Thus it quoted with approval the following statement by Gleason CJ in Hong Kong Bank:

‘(w)hile the Court would not permit a liquidator, or other eligible person, to abuse its process by using an examination solely for the purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures, such as discovery or inspection, on the other hand, the possibility that a forensic advantage will be gained does not mean that the making of an order will not advance a purpose intended to be secured by the legislation.’

Immediately after this Justice Ackermann added the following far-reaching comment:

The liquidator is entitled to obtain information, not only to ascertain whether she/he has a cause of action, but also in order to assess whether the case is sufficiently strong to justify spending the creditors’ money in pursuit of it, and, conversely, whether there is an adequate defence to a claim against the company.’

[36] What constitutes an improper forensic advantage will depend upon the circumstances of each case.  Summoning a witness in order to benefit a third party, such as a creditor, in pursuing proceedings against that witness or an entity that they represent, would be such a case.

In Hong Kong Bank the example was given of an attempt to summon a witness with a view to destroying their credit as a witness or to ‘enable a dress rehearsal of the cross-examination’.  Another example mentioned in Excel Finance was of a summons directed at obtaining pre-trial discovery when a discovery order had been refused in proceedings already on foot.  In Re Sasea Finance the court refused to consent to an enquiry where its sole purpose was to extract ‘damaging admissions and unconvincing justifications’ for the purpose of a possible negligence claim against auditors.  Engineering an enquiry shortly before a trial in which the liquidator is the plaintiff in order to obtain ammunition to attack the defendant in the trial has been described as ‘a classic example of harassment’.

[37] Where the evidential material is available to the liquidators from an alternative source, or it can be obtained simply and expeditiously without resort to the process of an enquiry, that will tend to show that the liquidators have an ulterior motive in seeking to examine the witness and that the commissioner should not have acceded to the request to summon that witness.  But the fundamental issue in determining whether there is abuse is whether the enquiry is being used for a purpose not contemplated by the Act.

As it was put in Excel Finance:

‘Whether there will be, in a particular case, a use of the process or an abuse of it will depend upon purpose rather than result.  The consequence of an examination may well be that the examiner has conducted a “dress rehearsal” of cross-examination which may take place at a subsequent trial.  The fact that the trial has commenced, or is contemplated, may throw light upon the purpose.  But merely because other proceedings had been commenced, or are contemplated, would not involve, of itself, an abuse of process.’

[38] Once it is accepted that a permissible purpose in causing a witness to be summoned to an enquiry is to enable the liquidator to make an informed assessment of the merits of a potential claim or defence to a claim, it must follow that the fact that the individual concerned is a potential witness in other civil litigation, actual or contemplated, is neutral in determining whether the summons is an abuse.  Something more must be identified as constituting the abuse.

It is inherent in the process of such an enquiry that there is a possibility that the examination of the witness will be advantageous in future litigation.  It may generate information that proves valuable in that litigation or helpful lines of enquiry.  It may demonstrate that a witness is a poor witness who is unlikely to withstand cross-examination.  Admissions may be made that are of assistance.  The inability of a witness to provide a credible explanation for a transaction may be extremely helpful.  As any experienced practitioner knows, often what is important is not what the witness can say, but what they are unable to say.

Provided the underlying purpose remains the proper one of assessing the merits of a claim or a defence on an informed basis, if these advantages accrue to the liquidator along the way they are not illegitimate.