Brian St Clair Cooper NO and Others v South African Mutual Life Assurance Society and Others

Supreme Holdings Ltd ("Holdings") and Supreme Investment Holdings (Pty) Ltd ("Investment") conducted fraudulent business accepting deposits from the public against purported secured debentures and redeemable preference shares. They were liquidated in November 1992. The companies used independent brokers, often employed by financial institutions, to market their products. The brokers were misled by the companies about their true financial position. After liquidation, investors ceded their delictual claims against brokers and their employers to the liquidators who established a common pool scheme sanctioned under s 311 of the Companies Act. The liquidators instituted action against SA Mutual Life Assurance Society (Old Mutual) and 137 of its brokers claiming R52 million in damages relating to 997 investments, based on alternative grounds of s 424 liability or delict. The liquidators applied to the Deputy Master for a subpoena under s 414(2) to examine JC Stassen, Old Mutual's chief legal adviser, and to produce extensive documents on all issues in the particulars of claim. The Master issued the subpoena with a qualification limiting examination to matters relating to s 424 liability. Old Mutual and Stassen applied to review and set aside the subpoena.

• Whether the Master had authority under s 414(2) of the Companies Act 61 of 1973 to issue a subpoena to examine a witness on matters relating to s 424 claims against brokers and their employer
• Whether brokers who marketed Supreme's products to investors were 'party to the carrying on of the business' of Supreme for purposes of s 424(1)
• Whether an employer can be held vicariously liable under s 424 for the conduct of its employees
• Whether the Master had fair grounds for suspicion that Old Mutual and its brokers had the requisite knowledge for s 424 liability
• What constitutes 'material information concerning the company or its affairs' under s 414(2)

The appeal was dismissed with costs, including costs of two counsel. The order of Roux J setting aside the subpoena was upheld.

A person is only a 'party to the carrying on of the business' of a company for purposes of s 424(1) of the Companies Act if they associate with the company in common pursuit of the company's business, not merely by facilitating or enabling the company to conduct its business while pursuing their own business ends. Independent brokers who market a company's products for commission are not parties to carrying on the company's business. Section 424 does not create vicarious liability for employers in respect of employees' conduct - it only applies to persons who themselves carried on the business with the requisite knowledge. Before issuing a subpoena under s 414(2), the Master must form an opinion based on fair grounds for suspicion that the proposed witness can give material information concerning the company or its affairs, and such opinion must be supported by factual basis, not mere allegations in pleadings.

Harms JA noted, without deciding the point, that Roux J in the court below had held that s 424 creates liability only for natural persons and not juristic persons based on the phrase 'personally liable', but observed this was contrary to other authority (Anderson v Dickson) and was unnecessary for the appeal. The Court also noted it was unnecessary to decide whether the subpoena was oppressive, vexatious, unfair or applied for with an ulterior purpose, given the finding that the Master acted beyond his competence. The Court criticized the liquidators' scheme of using s 414(2) examinations to 'exert pressure to procure settlements' in respect of delictual claims ceded to them, rather than to obtain information for the winding-up.

This case is significant in South African company law for clarifying the scope and limits of s 424 of the Companies Act 61 of 1973 (personal liability for reckless or fraudulent trading). It establishes that: (1) s 424 cannot be used to impose vicarious liability on employers for employees' conduct; (2) the concept of being a 'party to the carrying on of the business' requires active participation in the company's business in common pursuit, not merely facilitating or enabling the business; (3) independent contractors or agents pursuing their own business ends (like brokers earning commission) do not fall within s 424; (4) the inquisitorial powers under s 414(2) cannot be used for ulterior purposes unrelated to the proper administration of the insolvent estate; (5) there must be a fair ground for suspicion supported by factual basis before the Master exercises powers to subpoena witnesses. The case limits attempts by liquidators to use statutory examination procedures to pursue matters beyond the scope of the winding-up, particularly delictual claims that belong to individual creditors rather than the estate.