6 April 2021 by and Dispute Resolution Alert

Residuary powers of directors of companies in provisional liquidation

It is a principle of our law, as established in Attorney-General v Blumenthal 1961 (4) SA 313 (T) (Blumenthal), that directors are divested of their powers when a company is placed in liquidation. Control of that company is then transferred to the liquidator. The assumption is that the liquidators step into the shoes of the former directors, who must now seek gainful employment and occupation elsewhere.

But initially, and often, liquidators are appointed on a provisional basis under section 368 of the Companies Act 61 of 1973 (Act). Here the position is a little less cut and dried. A provisional liquidator enjoys specified, statutory powers listed in sections 386 to 390 of the Act. But the provisional liquidator enjoys only those powers and nothing more.

There is therefore a gap that appears between those specified powers, and the capacity of the company to act as a juristic person, which powers are normally exercised through its board. In light of this, it has subsequently been held in O’Connell Manthe & Partners v Vryheid Minerale 1979 (1) SA 553 (T) (O’Connell) that the principle established in Blumenthal is not without qualification.

A very important power the directors retain in provisionally liquidated companies is the power to oppose, on behalf of the company, the making of the provisional liquidation order final. This has been held in Ex Parte G Pagan Enterprises [1983] 3 All SA 400 (W) (Pagan), and again in ABSA Bank v Rhebokskloof 1993 (4) SA 436 (C) at 440A-F (ABSA). In fact, when affirming this specific power, the court in Pagan held that where there is a conflict between a provisional liquidator and directors, it is the directors that speak for the company, being empowered to instruct legal representatives on its behalf, and not the provisional liquidator.

Both of these cases reached this conclusion after first asserting that directors of companies in provisional liquidation enjoy residuary powers despite not enumerating what these are in their entirety.

The court in O’Connell quoted a passage with approval from the English case of Re Union Accident Insurance (1972) 1 All ER 1105 (Union Accident Insurance). This passage establishes that when testing the extent of directors’ residuary powers, the question is whether a power has been assumed by the liquidator. If not, then the board retains that as a residuary power. Put differently the directors of a provisionally liquidated company retain all powers not expressly removed by law.

Directors of companies placed in provisional liquidation should be mindful that they are not totally toothless or without the ability to challenge the steps being taken against the company.

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