THE EFFECT OF WINDING-UP OF A COMPANY AFTER SALE OF IMMOVABLE PROPERTY IN EXECUTION, BUT PRIOR TO TRANSFER OF SUCH IMMOVABLE PROPERTY – TAFADZWA MUSHONGA

Tuesday, May 06, 2008
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Purchasers of property at a sale in execution should be aware of the risk particularly where the execution debtor whose property has been sold is a company, rather than an individual. The transfer of property almost invariably takes from about six to eight weeks. In the unfortunate situation that the seller, (where such a seller is a company), is liquidated prior to transfer being registered into the purchaser’s name, the property sold in execution falls under the control of the Master of the High Court pending the appointment of a liquidator. The purchaser does not have an automatic right to transfer of the property.
 
However, where the seller is a private individual, whose property is sold in execution, the property vests in the Master of the High Court upon the provisional sequestration of the seller, and the Sheriff is obliged to stay the execution process, unless the Court orders otherwise. The distinction between a company and an individual is that, with an individual the court may, in its discretion, allow the Sheriff to proceed with the execution and transfer the property to the purchaser, whereas in the case of a company the court does not have such discretion. This means the purchaser of a property from a company, (assuming that the liquidator elects not to continue with the transaction) will then have to prove a claim against the company in liquidation, upon which he may be awarded a dividend, if dividends are, in fact, paid. This situation also of course carries the risk of a contribution to the costs of winding –up of the company, should the hapless purchaser decide to prove his claim.
 
The distinction between the effect of a winding-up of a company and a sequestration of an individual on the transfer of immovable property sold pursuant to a warrant of execution, was considered by the Supreme Court of Appeal in the matter of Legh v Nungu Trading 353 (Proprietary) Limited & another [2007] JOL 20696 (SCA) (“Legh v Nungu”).
 
In the Legh v Nungu matter, the appellant was a shareholder in the second respondent (the insolvent company) which was the owner of property situate in the Erkurhuleni Municipality (“the municipality”). The insolvent company had fallen into arrears in respect of certain rates and taxes and the municipality had obtained a judgment against it and an order declaring that the property could be sold in execution. At the sale in execution, the first respondent bought the property for the sum of R100 subject to payment of arrear rates and taxes in the sum of R3,5 million. First respondent paid 10% of the purchase price and obtained a rates clearance certificate.
 
Before the property could be transferred to the first respondent, the appellant brought an urgent winding-up application in respect of the second respondent. The first respondent (the purchaser) then intervened and sought a declaratory order that, in the event that a provisional winding-up order was granted, the property should be transferred to it. The court a quo granted the declaratory order that the property be transferred by the Sheriff of the Court to the first respondent by virtue of section 20(1)(c) of the Insolvency Act (Act 24 of 1936, as amended)(“the Insolvency Act”), read with section 339 of the Companies Act, Act 61 of 1973 (as amended) (“the Companies Act”). Section 339 of the Companies Act is the section which generally makes the Insolvency Act applicable in the case of companies being wound-up.
 
The SCA confirmed the principle that the property of a company in liquidation falls under the control of the Master of the High Court, pending the appointment of a provisional liquidator. Thus where property is sold in execution, and the seller is thereafter liquidated before the transfer of such property to the purchaser, the property will fall under the control of the Master of the High Court.
 
The purchaser in the court a quo had successfully contended that in terms of section 20(1)(c) of the Insolvency Act, read with section 339 of the Companies Act, it was entitled to registration of transfer of the property. Section 20 (1) (c) of the Insolvency Act, provides that: “the effect of the sequestration of the estate of an insolvent shall be…as soon as any sheriff or messenger, whose duty it is to execute any judgment given against an insolvent, becomes aware of the sequestration of the insolvent’s estate, to stay that execution, unless the court otherwise directs” (my emphasis).
 
The question was whether this section applied in the case of the winding-up of a company.Section 339 of the Companies Act provides that, “In the winding-up of a company unable to pay its debts the provisions of the law relating to insolvency shall, in so far as they are applicable, be applied mutatis mutandis in respect of a matter not specially provided for by this Act”. The main thrust of the purchaser’s argument was thus that section 20(1)(c) of the Insolvency Act was applicable to the winding-up of a company by virtue of section 339 of the Companies Act.
 
The appellant however appealed against the declaratory order, and the SCA was tasked with deciding whether or not section 20(1)(c) of the Insolvency Act applied to the winding-up of a company by virtue of section 339 of the Companies Act.
 
The SCA upheld the appeal and decided that section 20(1)(c) of the Insolvency Act did not apply to the winding-up of a company, holding that a reading of section 20 in its entirety clearly points to the fact that the legislature did not intend section 20 of the Insolvency Act to apply to winding-up of companies but to the sequestrated estates of individuals. Section 361(1) of the Companies Act gives control of the assets of a company in provisional liquidation to the Master of the High Court pending the appointment of a provisional liquidator. In addition, the Court noted that section 342(1) of the Companies Act provided that the assets of a company in liquidation shall be applied towards the payment of costs of the liquidation and claims of creditors. This would not be achieved should the transfer of the property to the first respondent be allowed. Thus section 20(1)(c) of the Insolvency Act does not find application to the Companies Act because the legislature did not intend this and it would only have applied by virtue of section 339 of the Companies Act where the matter was not specifically provided for elsewhere in the Companies Act. The court a quo had opened the door to purchasers of property, bought at a sale in execution, where the seller (being a company) is subsequently liquidated, before transfer of such property, to intervene in the liquidation proceedings and request that the court allow the Sheriff to proceed with the execution and transfer the property to the purchaser. The SCA closed this door and confirmed the principle that such property belonging to the seller in provisional liquidation falls under the control of the Master of the High Court pending the appointment of a provisional liquidator.
 
Had the seller in the Legh v Nungu matter been a private individual and not a company, section 20 of the Insolvency Act would have been applicable, and the purchaser could have approached the court to obtain a declaratory order, in terms of section 20(1)(c), that the Sheriff proceed with the execution and transfer the property to it.
 
Although a purchaser may be successful in picking up a bargain at a sale in execution, the identity of the execution debtor has to be borne in mind. A sale in execution is in itself is a good indication that the debtor company is in financial difficulty and could possibly be liquidated. In the event, however that the company does go into liquidation before the transfer is registered, the purchaser has no remedy to approach the Court to enforce the transfer of property to it. The enquiry then moves into the realms of the election which a liquidator would have to accept the transfer of the property – if the liquidator does not do so, then the purchaser must simply join the queue of concurrent creditors of the company in liquidation.
 
Tafadzwa Mushonga is an associate in the Litigation Department at Bowman Gilfillan.