The judgment is an important development in South African company law, insolvency law and civil procedure. It confirms both the breadth and the limits of section 20(9) in that while a court may disregard separate juristic personality and relocate rights, obligations and liabilities where there has been an unconscionable abuse of corporate personality, that power does not justify relief that is unnecessary or inappropriate to give effect to the declaration – in this instance, liquidating companies in the absence of separate liquidation applications being launched against such companies. Furthermore, the judgment also confirms that orders granted in the absence of affected parties, and in procedurally irregular circumstances, may be vulnerable to rescission.

The facts

As an episode within the State Capture saga, this case arose from the financial collapse of the Trillian group and the subsequent efforts by the liquidators of Trillian Management Consulting (Pty) Ltd (TMC) to obtain relief under section 20(9) of the Companies Act against several related Trillian entities (subject companies).

Investigations by the South African Revenue Service (SARS) and a forensic auditor revealed that substantial sums, including approximately R595 million paid by Eskom to TMC, were channelled through a network of the subject companies, some of which performed no legitimate business. The evidence showed that the subject companies’ affairs were extensively intermingled, that funds moved freely between them, and that fictitious invoices were used to disguise the source and destination of the money. On this evidence, the liquidators contended that the subject companies had been used in a manner constituting an unconscionable abuse of their separate juristic personalities.

The High Court agreed and granted a provisional order, later made final, which effectively:

• deemed the subject companies not to be separate juristic persons in respect of their rights, obligations and liabilities;
• collapsed those companies into TMC, which was already in liquidation; and
• treated the subject companies as part of a consolidated winding-up process from the date on which TMC was placed in liquidation.

One of the subject companies’ creditors, Centaur Mining South Africa (Pty) Ltd (CMSA), was not cited in the section 20(9) proceedings. It only became aware of the order after the liquidators instituted action against it under the Insolvency Act 24 of 1936 to recover alleged voidable dispositions arising from loan agreements CMSA concluded with Trillian Shared Services (Pty) Ltd and Trillian Financial Advisory (Pty) Ltd. CMSA then launched a rescission application, contending that by collapsing multiple companies into one liquidated entity, the section 20(9) order had materially altered its contractual and litigation positions.

CMSA’s arguments

CMSA argued that it had standing to seek rescission because the High Court’s order directly prejudiced it. It said the order impaired its contractual rights against specific counterparties and exposed it to claims by TMC’s liquidators that would not otherwise have arisen in the same way.

Relying on Rule 42(1)(a), CMSA argued that the order was granted in its absence and was erroneously sought or granted because the High Court gave relief it was not competent to grant in those proceedings. CMSA also contended that the process was irregular because the statutory requirements for winding-up relief had not been followed in respect of the subject companies.

On section 20(9), CMSA argued that the provision allows a court to disregard separate juristic personality and reallocate rights, obligations and liabilities, but not to liquidate a company. According to CMSA, liquidation is governed by separate statutory procedures that had not been invoked for the subject companies.

The liquidators’ arguments

The liquidators argued that the High Court had not in fact liquidated the subject companies. Rather, the order recognised that they were never truly separate from TMC and that their rights, obligations and liabilities should be treated as part of TMC in liquidation.

In the alternative, the liquidators argued that section 20(9)(b) empowers a court to make “any further order” needed to give effect to a declaration under section 20(9)(a), and that this wording was broad enough to permit liquidation-type relief.

They also argued that rescission was unavailable because the order was not erroneously granted, CMSA’s challenge was effectively an appeal, and the winding-up process was already too far advanced to undo.

The Constitutional Court’s reasoning

The order was rescindable under Rule 42(1)(a)

The Constitutional Court held that CMSA had a current, direct and substantial legal interest in the section 20(9) order. The order affected CMSA’s ability to enforce rights arising from its loan agreements and exposed it to claims by TMC’s liquidators.

As CMSA had not been cited and was unaware of the section 20(9) proceedings, the order was granted in its absence. Furthermore, while the order in effect liquidated the subject companies, it did not comply with the numerous procedural requirements specified in terms of section 346(4A) of the Companies Act 61 of 1973 (1973 Companies Act), specifically that a copy of a liquidation application must be furnished to:

every registered trade union;

employees of the relevant companies; and

SARS.

Consequently, the Constitutional Court held that Rule 42(1)(a) was available because the order had been erroneously sought and granted in circumstances involving procedural irregularities, including non-compliance with statutory requirements applicable to winding-up relief. In such circumstances, rescission was a competent remedy rather than a disguised appeal.

Section 20(9)(b) did not justify the liquidation component of the order

Section 20(9) of the Companies Act provides:

“If, on application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may:

(a) declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a member of the company, or of another person specified in the declaration; and

(b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a).”

As for the scope of section 20(9), the Constitutional Court emphasised that paragraph (a) permits a court to disregard a company’s separate juristic personality in respect of specified rights, obligations or liabilities, while paragraph (b) authorises only those further orders that are appropriate to give effect to that declaration. The Constitutional Court concluded that although the language of section 20(9)(b) is broad, it is not a free-standing source of remedial power.

The Constitutional Court drew a clear distinction between veil-piercing relief and liquidation: liquidation serves the different function of winding up a company, creating a concursus creditorum and regulating the administration and distribution of assets under a dedicated statutory regime. On the facts, the liquidation of the subject companies was unnecessary to achieve the relocation of their rights, obligations and liabilities to TMC. Therefore, the Constitutional Court set aside the portions of the High Court order that purported to liquidate the subject companies, while preserving the relocation of their rights, obligations and liabilities to TMC (in liquidation).

Practically, the effect of the Constitutional Court’s new order was unchanged in that all contractual rights and claims and company obligations were shifted from the subject companies to TMC as the entity undergoing liquidation. Consequently, the subject companies were left as empty shells, and the liquidators still possessed the necessary rights to litigate against CMSA.

Key takeaways

Affected parties may seek rescission where orders are granted in their absence

Rule 42(1)(a) remains an important remedy where an order is granted in the absence of a party whose rights are directly and substantially affected, particularly where procedural irregularities are present.

Section 20(9) is not a Hail Mary solution

Even though section 20(9)(b) is widely worded, the powers it affords a court are not unlimited. Any order or remedy under section 20(9)(b) must be “appropriate” in that it must be curtailed to facilitate any declaration pertaining to the reallocation of rights, obligations or liabilities between companies in terms of section 20(9)(a). Even in cases of fraud or abuse, the remedy must be carefully tailored to achieve the objects of section 20(9)(a) and cannot extend beyond what is needed to address the abuse.

Specifically, section 20(9) is not a shortcut to liquidation

A liquidator should not seek to liquidate additional companies through section 20(9) of the Companies Act, particularly where the winding-up procedures under the 1973 Companies Act have not been followed. The Constitutional Court indicated that liquidations must instead be pursued under the applicable legislation.