On
18 January 2013 the plaintiff issued summons against the defendants
for the payment of US$521,686=47 being money lent and advanced to
Onclass Investments (Pvt) Ltd on a credit facility. The defendants
bound themselves as sureties and co-principal debtors.
The
defendants entered an appearance to defend and filed a plea.
In
their plea, the defendants raised a special plea of prescription and
went on to plead over to the merits. When pleadings were closed, the
parties held a pre-trial conference on 8 October 2014 and agreed on
the issues for trial. According to the joint Pre-trial Conference
Minute one of the issues for trial is whether or not the plaintiff's
claim is prescribed.
In
raising the special plea of prescription, the defendants stated that
they bound themselves as sureties and co-principal debtors on 28
February 2008 yet they were served with the plaintiff's summons on
24 January 2013. They averred that the plaintiff's claim prescribed
on 28 February 2011.
Before
the matter was set down for trial, and on 4 March 2015, the plaintiff
was placed in liquidation. There is a court order to that effect. In
terms of that court order, it is stated that the liquidator of the
plaintiff, “shall have the powers set out in section 221(2)(a) to
(h) of the Companies Act [Chapter
24:03].”
With
the plaintiff's change of status, the plaintiff's legal
practitioners filed a notice of change of status on 25 May 2015 in
terms of Rule 85A(1) of the rules of this court. The notice states
that the plaintiff's citation shall be the ALLIED BANK LIMITED (in
liquidation).
The
matter was then set down for trial on 10 June 2015 and the parties
were served with the notices of set down. This prompted the
defendants' legal practitioners to write to the Registrar of this
court on 4 June 2015 stating that since the plaintiff was now under
liquidation they did not believe that the matter could proceed to
trial without the liquidator having obtained leave of the court. They
made reference to section 213 of the Companies Act. On the basis of
that provision they wanted confirmation from the Registrar that the
matter would be removed from the roll. This letter was copied to the
plaintiff's legal practitioners.
In
response to that letter, the plaintiff's legal practitioners also
wrote to the Registrar, on 8 June 2015, disputing the application of
section 213 of the Companies Act to the plaintiff's situation. They
argued that that section only applies to a defendant company not to a
plaintiff company as is the situation in the present case. They
implored the Registrar not to remove the matter from the roll. They
further stated that if the defendants wanted to insist on this issue
the issue could be dealt with as a preliminary point on the date of
the trial. The letter was copied to the defendants' legal
practitioners.
In
response to the letter, the defendants' legal practitioners wrote,
again, to the Registrar stating that in terms of section 221 of the
Companies Act the liquidator needed to obtain the leave of the court
before proceeding with the matter. They also stated that the
plaintiff's Notice of Change of Status, which was filed in terms of
Rule 85A, was improperly filed as that rule does not apply to
companies in liquidation.
On
the date of the trial, 10 June 2015, counsel
for
the defendants raised the preliminary point that the plaintiff had no
locus
standi
to continue with the proceedings in the absence of the court's
leave to that effect now that it was under liquidation. He also
argued that the Notice of Change of Status which was filed pursuant
to Rule 85A was improperly filed because that rule does not relate to
juristic persons but to natural persons.
Counsel
for the defendants argued that the correct provision which requires
the liquidator to obtain the court's leave before proceeding with
the proceedings is section 221(2) not section 213 of the Companies
Act as was earlier on stated by the defendants' legal practitioners
in their correspondence to the Registrar. Counsel for the defendants
was in agreement with counsel for the plaintiff that section 213 of
the Companies Act is only applicable to situations where the company
is supposed to be sued as a defendant.
I
agree with both counsel on this issue. Section 213 of the Companies
Act reads;
“In
a winding up by the court, no action or proceeding shall be proceeded
with or commenced against the company except by leave of the court
and subject to such terms as the court may impose.”
The
import of this section is that a company which is in liquidation
cannot be sued without the person seeking to sue it first obtaining
the leave of the court. Even if proceedings are commenced before the
defendant company is placed under liquidation, once it is placed
under liquidation those proceedings cannot continue without the
plaintiff first obtaining the court's leave. I draw support from
the case of Thirdline
Trading (Pvt) Ltd and Another v Boka Investments (Pvt) Ltd and
Another
HH130-11
wherein UCHENA J said;
“There
is no doubt in my mind that section 213(a) of the Companies Act deals
with the proceeding with or commencement of actions against the
company. This means actions by the company itself are not covered
under section 213(a).”
In
Langey
Construction (Brixham) Ltd v Wells, Wells Estate (Dartford) Ltd v
Wells
1969
2 All ER 46 LORD WIDGERY stated that the purpose of seeking leave to
proceed against a company in liquidation is to ensure that when a
company goes into liquidation, the assets of the company are
administered in a dignified and orderly fashion for the benefit of
all the creditors. No creditor should be able to obtain an advantage
over other creditors by bringing proceedings against the company.
LORD WIDGERY was interpreting section 231 of the English Companies
Act of 1948 which provision is similar to section 213(a) of our
Companies Act. This English provision requires a person intending to
sue a company under liquidation to first obtain the leave of the
court before suing.
Counsel
for the defendants argued that because the plaintiff's liquidator
did not obtain the leave of the court, in terms of section 221(2) of
the Companies Act, the plaintiff lacked locus
standi
to continue with the proceedings.
Section
221 of the Companies Act deals with the powers that the liquidator
has. In particular, section 221(2) reads;
“The
liquidator shall have the power, with the leave of the court or with
the authority mentioned in subsection (4) or in paragraph (a) of
subsection (4) of section two
hundred and eighteen -
(a)
To bring or defend, in the name and on behalf of the company, any
action or other legal proceeding of a civil nature, and, subject to
any law relating to criminal procedure, any criminal proceeding.”
In
opposing the point in limine, counsel for the plaintiff raised quite
a number of issues.
His
first argument was that an objection on locus standi
should
have been raised as a special plea in the proceedings as is required
in terms of Rule 137. He argued that because the special plea was not
raised in the pleadings the objection should be dismissed. He also
argued that in terms of Rule 139 a party is required to state all his
special pleas and exceptions and make all his applications to strike
at one time. Counsel for the plaintiff
argued
that the failure by the defendants to comply with these two Rules
warrant the dismissal of their point in limine. He said that it did
not matter that the plaintiff was placed in liquidation after the
pre-trial conference had been held. He argued that the fact that
liquidation happened after the pre-trial
conference
had been held would have been the basis for the defendants to seek
condonation for non-compliance with Rule 137 and Rule 139.
I
find the arguments by counsel for the plaintiff on these two points
without merit.
The
cause of action which gave rise to the defendants raising the point
in limine arose after pleadings in the case had been closed. Even the
pre-trial conference had been held. It defies all logic for anyone to
argue that the defendants should have raised the issue of locus
standi at the time they pleaded to the plaintiff's claim. This is a
case where clearly Rules 137 and 138 are not applicable. I do not
even see why the defendants would need to seek condonation in order
to raise this issue of locus standi. There is no basis whatsoever for
the defendants to seek condonation because the plaintiff was only
placed in liquidation after the pre-trial conference had been held
but before trial had commenced. As such, the date of the trial was
the proper forum for the defendants to raise their objection. In any
case, the objection is based on a point of law and a point of law can
be raised at any stage of proceedings.
Counsel
for the plaintiff's other argument was that counsel for the
defendants was supposed to argue the defendants' special pleas at
once. He submitted that since he raised the special plea of
prescription in the pleadings that special plea was supposed to be
argued together with the issue of locus standi at once.
Counsel
for the defendants objected and I find sense in his objection.
The
first hurdle that has to be crossed is whether or not the plaintiff
has the
locus
standi
to
continue with the proceedings in the first place. If the answer is in
the affirmative, then it means that the trial can commence. In the
trial, the parties should then deal with the issues outlined in the
Pre-trial Conference Minute. If the answer is in the negative, that
is the end of the matter, the trial does not commence. There will not
even be any need to deal with the issue of prescription.
In
dealing with the substance of the point in limine
on
locus standi counsel for the plaintiff argued that the point in
limine
is misplaced because when the Notice of Change of Status was filed,
in terms of Rule 85A, it did not seek to substitute the liquidator as
the plaintiff in the proceedings but to show that the Bank's status
has changed as it is now under liquidation. He argued that the Bank
in liquidation remained the plaintiff. He said that the liquidator
was not substituting the Bank as the plaintiff.
It
appears to me that counsel for the plaintiff
did
not properly understand counsel for the defendants argument.
Counsel
for the defendants argument was simply that since the liquidator did
not obtain the court's leave to continue with the proceedings, in
terms of section 221(2) of the Companies Act, the plaintiff, which is
a company under liquidation, has no locus standi
to
litigate. Counsel for the defendants thrust of argument was never
that the liquidator was being cited as a party to the proceedings but
Zimbabwe Allied Bank Limited. Counsel for the defendants remained
alive to the fact that the company under liquidation remains the
party to the proceedings.
However,
counsel for the defendants was wrong in arguing that Rule 85A, which
deals with the change of a party's status, relates to natural
persons alone and not to juristic persons.
Rule
85A(1) says;
“No
proceedings shall terminate solely as a result of the death,
marriage, or other change of status of any person
unless the cause of the proceedings is thereby extinguished.”…,.
The
Rule goes on to say that if a party to the proceedings has a change
of status, a Notice of Change of Status may be filed with the
Registrar and served on all other parties to the proceedings. Nothing
in this Rule says that the rule is only confined to natural persons.
At law, the definition of a person includes both natural and juristic
persons. The plaintiff was therefore right in filing a Notice of
Change of Status when it was placed under liquidation.
HERBSTEIN
and Van WINSEIN, The
Civil Practice of the High Courts of South Africa,
5ed,
Volume 1…, says that the expression locus
standi in judicio
literally means “place to stand before a court.” It states that
the term is used in two senses;
(i)
Firstly, it refers to the capacity of a natural person, or juristic
person, to institute and defend legal proceedings.
(ii)
Secondly, it refers to the interest which a party has in the relief
claimed or the party's right to claim a relief.
In
casu,
the
defendants are concerned with the plaintiff's capacity to sue. They
are saying that the plaintiff, being a company now under liquidation,
it has no capacity to sue because its liquidator did not obtain the
leave of the court to sue or to continue with litigation from the
time it was placed under liquidation.
What
is in issue is whether or not a company which is the plaintiff in
proceedings which have commenced requires the leave of the court to
continue with the proceedings if it is placed under liquidation
before the proceedings are finalised.
Counsel
for the plaintiff submitted that there is a distinction between a
situation where a company wants to institute proceedings for the
first time and where a company wants to continue with proceedings
which have already commenced. He argued that, in terms of section
221(2) of the Companies Act, the liquidator only requires the leave
of the court in a situation where he intends to commence proceedings
on behalf of the company. He said that in a situation where
proceedings commenced before placement in liquidation, like what
happened in the present case, the liquidator does not require the
leave of the court to continue with the proceedings.
The
effect of a winding up order is to freeze the company's affairs in
a number of respects and this includes legal proceedings, attachments
and executions (section 213(a) and (b) of the Companies Act).
Dispositions of property and share transfers of the company may only
be made with the leave or permission of the court (section 213(c) of
the Companies Act).
In
my view, the mischief behind seeking the leave of the court is to
preserve the assets of the company for the benefit of the creditors.
The powers of the directors cease – section 253 of the Companies
Act. A liquidator is appointed to run the affairs of the company
instead. In terms of section 221 of the Companies Act, which sets out
the powers of the liquidator, there are powers that the liquidator
exercises without further authority. There are some powers that he
exercises with the authority of a joint meeting of creditors and
contributories. There are some powers which require him to exercise
with the leave of the court.
What
is clear to me from the reading of section 221(2) of the Companies
Act is that in every case where a liquidator intends to initiate
legal proceedings which have not commenced at all on behalf of the
company, be they of a civil or criminal nature, he cannot do so
without seeking the leave of the court.
What
is not clear on the face of the provision is whether or not the leave
of the court is required in proceedings which commenced before
liquidation which the liquidator now wants to proceed with after
taking over the running of the company. The question is: can the
liquidator simply take over the proceedings and continue with them
without first obtaining the leave of the court?
The
answer to this question lies in the interpretation of the phrase, “to
bring an action”. The question is what is to bring an action? The
catch here is, does the phrase “to bring an action” also include
or mean 'to continue or proceed with an action?'
The
Concise
Oxford English Dictionary,
12ed, defines the word 'bring' as;
(i)
Cause to move or to come into existence; and
(ii)
Initiate (legal action).
With
these definitions in mind, one has to consider that the effect of a
liquidation order is to freeze the affairs of the company with a view
to preserve its assets. Any disposal of the assets of the company,
without the leave of the court, is void (section 213(c) of the
Companies Act). When the affairs of the company have been frozen it
means that they have been stopped or rendered motionless. The assets
of the company are prevented from being used for that time. So when a
liquidator is appointed he starts running the affairs of the company.
I believe that if he wants to bring any legal proceedings to court on
behalf of the company, be they fresh legal proceedings, or
proceedings which commenced before liquidation, he has to seek the
leave of the court. In my view, the whole idea for seeking the
court's leave, even in proceedings which commenced before
liquidation, is to protect the company assets and prevent unnecessary
expenditure of what would otherwise be available to satisfy the
demands of the creditors.
As
correctly submitted by counsel for the defendants, litigating
involves costs and sometimes the costs that are involved can be
disproportionate to the company's resources. Some legal proceedings
may even result in prejudice to the creditors. As such, I do not
believe that it was the intention of the legislature to let the
liquidator simply proceed with actions which commenced before
liquidation without obtaining the leave of the court.
Obviously,
when an application for leave to bring an action is made by the
liquidator, the court will exercise its judicial discretion on
whether or not to grant it. It will consider various factors such as
the amount and seriousness of the claim; the degree and complexity of
the legal and factual issues involved; the stage to which the
proceedings may have progressed; whether the claim has arguable
merit; and whether the proceedings will result in prejudice to the
creditors - among other factors.
In
the Kenyan case of Trade
Bank Ltd and Anor v Elysium Ltd and 2 Ors
(2012)
eKLR, a case whose facts fall almost on all fours with the present
case, the plaintiffs sued the three defendants for money advanced to
the first defendant which money the first defendant failed to pay
back. The second and the third defendants, who were the directors of
the first defendant, had bound themselves as guarantors. The two
plaintiffs were companies that were under liquidation. The
defendants, relying on section 241(1) of the Kenyan Companies Act,
submitted that the plaintiffs had no capacity to institute the
proceedings without the leave of the court. Section 241(1) of the
Kenyan Companies Act states:
“The
liquidator, in a winding up by the court, shall have power, with the
sanction either of the court or of the committee of inspection –
(a)
To bring or defend any action or other legal proceeding in the name
and on behalf of the company.”
OGOLA
J held;
“The
liquidator in this matter has not provided any evidence to this court
to show or prove that he secured the leave of the court to commence
or to continue with these proceedings in the name of the company.
That being so, in my view, and being supported by the provisions of
the law I have cited above, the plaintiff lacked the capacity to
bring this suit.”
The
wording of section 241(1) of the Kenyan Companies Act is no different
from section 221(2) of our Companies
Act. In the Kenyan case, the phrase to bring an action was taken to
mean to commence or to continue with the proceedings.
The
foregoing makes me agree with counsel for the defendants that the
plaintiff, being a company now in liquidation, cannot proceed with
the legal proceedings without the liquidator first obtaining the
leave of the court to do so.
In
the result, I uphold the point in limine.
The matter is struck off the roll and the plaintiff is ordered to pay
costs.
