In the case of insolvent companies, the Companies Act 61 of 1973 (Companies Act) provides a mechanism, in the form of sections 417 and 418, to enable liquidators to investigate the affairs of the entity in order to recover and reduce into their possession all the assets and property of the company, both movable and immovable. Almost three decades ago, in Bernstein and Others v Bester NO and Others [1996] (4) BCLR 449 (CC), the apex court found that an enquiry under sections 417 and 418 has many legislated objectives, including achieving the primary goal of liquidators, namely to determine what the assets and liabilities of the company are, to recover the assets, pay the liabilities of the entity and to do so in a way which will best serve the interests of the company’s creditors, as well as to enquire into the company’s affairs.

However, more often than not, the very people who are responsible for the (mis)management and financial ruin of the company are the only persons who have knowledge of the workings of the company prior to its liquidation, such as directors and other officers, and are, for this very reason, reluctant to assist the liquidator voluntarily and tend to be recalcitrant witnesses.

For example, in the well-known case of Kebble v Gainsford and others NNO [2010] (1) SA 561 (GSJ), Kebble was confronted with a summons compelling him to testify in a section 417 enquiry. Although he willingly admitted in an affidavit that the company had been used as a vehicle to perpetrate a fraud against another company, he refused to submit to such an enquiry and brought an application for the proceedings to be set aside. Kebble was the sole surviving director of the insolvent company prior to its liquidation. In this case, the court found that the enquiry was warranted because, amongst other things, Kebble was the only surviving director of the company, the only reason the company was formed was for fraudulent purposes, the company was hopelessly insolvent, and the liquidators had a duty to enquire as to the causes of the company’s failure.

As seen in the Kebble case, directors and other officers who are responsible for the insolvent company’s failure are usually reluctant to testify in an enquiry for fear of incriminating themselves, especially in circumstances where there are pending criminal proceedings against such directors for criminal acts performed during their tenure as directors of the company. Section 35(1)(c) of the Constitution provides that a person arrested for allegedly committing an offence has the right not to be compelled to make any confession or admission that could be used in evidence against them. Section 35(3)(j) further protects the right not to be compelled to give self-incriminating evidence. This protection would therefore throw a spanner in the works in respect of witnesses summoned to a section 417 and 418 enquiry, to the extent that they wish to exercise their rights in terms of section 35 of the Constitution.

Weighing up self-incrimination

Prior to its amendment, section 417(2) of the Companies Act provided that any person summoned for an examination into the affairs of a company may be required to answer any question put to them at the examination, notwithstanding that the answer might tend to incriminate them, and any answer given to such question may thereafter be used in evidence against them. The Constitutional Court in Ferreira v Levin NO and Others and Vryenhoek and Others v Powell NO and Others [1996] (1) BCLR 1 (CC) found that section 417(2)(b) was in fact unconstitutional as it limited the fundamental rights of the person summoned to the enquiry as envisaged in the Constitution, and such limitation could not be justifiable in terms of section 36 of the Constitution.

In view of this, section 417(2)(b) and section 417(2)(c) were amended by the legislature and now provide that any person being interrogated may be required to answer any question put to them at the examination, notwithstanding that the answer might incriminate them and, if they do refuse on that ground, they shall be obliged to so answer at the instance of the Master provided that the Master may only oblige the person to answer after the Master has consulted with the Director of Public Prosecutions who has jurisdiction. Further, any incriminating answer or information directly obtained, or incriminating evidence directly derived from an enquiry, is not admissible in criminal proceedings in a court of law against the person concerned, except in criminal proceedings where the person concerned is charged with an offence relating to the administering or taking of an oath or the administering or making of an affirmation; the giving of false evidence; the making of a false statement; or failure to answer lawful questions fully and satisfactorily.

Consequently, the amended section now provides immunity to the witness in respect of incriminating statements made in an enquiry, for purposes of fulfilling the primary objectives of the liquidator through a section 417 and 418 enquiry.

Conclusion

In light of the increasing number of enquiries that seek to ascertain insolvent companies’ assets and liabilities in order to recover the assets and pay the liabilities of the entity, commissioners ought to be aware that they may solicit responses that may potentially incriminate a witness but should only do so within the confines of the amended section.