Legh v Nungu Trading 353 (Pty) Ltd

The appellant, John Alistair Legh, and Gregory Francis Porteous purchased shares in Rietfontein General Galvanisers (Pty) Ltd ('the Company') in 1998, each acquiring 50% of shares and a loan account of R219,964. The appellant claimed to have acquired Porteous's entire interest in 2003, which Porteous disputed. The Company owned a property of 6.0214 hectares but conducted no business. The property fell into disrepair and the Ekurhuleni Metropolitan Municipality obtained a default judgment for R134,473.22 in November 2003 for unpaid charges since 1998. The property was sold in execution on 22 June 2005 to Nungu Trading 353 (Pty) Ltd for R100, with the purchaser responsible for rates, taxes and arrears (approximately R3.5 million). On 15 August 2006, the appellant launched an urgent application for winding up the Company, which was provisionally granted. Nungu intervened, seeking discharge of the winding up order or, alternatively, transfer of the property pursuant to section 20(1)(c) of the Insolvency Act.

• Whether section 20(1)(c) of the Insolvency Act 24 of 1936 is rendered applicable to a company in winding up by virtue of section 339 of the Companies Act 61 of 1973
• Whether the court should exercise its discretion to grant a final winding up order
• Whether Nungu was entitled to transfer of the property despite the provisional winding up order
• Whether civil proceedings for transfer could be instituted against a company in provisional liquidation without complying with section 359(2) of the Companies Act

The appeal was upheld with costs, including costs of two counsel. The first respondent's conditional cross appeal was dismissed with costs, including costs of two counsel. The order of the court a quo was set aside and replaced with: (i) confirmation of the rule nisi provisionally winding up the respondent company and issuance of a final order of liquidation; (ii) dismissal of the intervening party's application with costs, including costs of two counsel.

Section 20(1)(c) of the Insolvency Act 24 of 1936 is not rendered applicable to a company in winding up by virtue of section 339 of the Companies Act 61 of 1973. The provisions of section 20 of the Insolvency Act, which deal with the effect of sequestration, including the vesting of property in the trustee and the staying of execution, do not apply to companies in liquidation because: (1) the property of a company in liquidation remains vested in the company and does not vest in the Master or liquidator unless the court so orders under section 361(3); (2) section 339 only applies insolvency law provisions to matters not specially provided for by the Companies Act; and (3) the Companies Act contains its own scheme for dealing with company property in liquidation (sections 361, 342, 391) which would be frustrated by applying section 20(1)(c). The grant of orders both winding up a company and authorizing transfer of its sole asset to a third party creates a legal anomaly that is inconsistent with the statutory scheme for liquidation.

Heher JA, while concurring in the result, expressed the view that it was unnecessary to decide whether section 20(1)(c) was rendered applicable by section 339, and preferred to leave that question open. He suggested that the sections of the Companies Act referred to by Ponnan JA do not necessarily speak to the matter of staying execution after attachment. However, he held that in any event, Nungu's counter-application for transfer of the property constituted civil proceedings against the company which, in the face of a provisional winding up order, could only be commenced or continued after compliance with section 359(2) of the Companies Act. Since Nungu had not complied with section 359(2), the court a quo had no valid application before it enabling it to make an order for transfer. Ponnan JA also observed that generally speaking, an unpaid creditor has a right ex debito justitiae to a winding up order against a company unable to pay its debts, though the court retains a discretion under section 344 of the Companies Act.

This case is significant in South African company law and insolvency law as it authoritatively establishes that section 20(1)(c) of the Insolvency Act 24 of 1936, which stays execution upon sequestration, does not apply to companies in winding up despite the general incorporation provision in section 339 of the Companies Act 61 of 1973. The judgment clarifies the relationship between the Insolvency Act and the Companies Act, confirming that insolvency provisions are only applied mutatis mutandis where matters are not specially provided for in the Companies Act. It reinforces the principle that property of a company in liquidation remains vested in the company (not in the Master or liquidator as in individual insolvency) and that the liquidation process must be allowed to function according to the scheme established by the Companies Act. The case also demonstrates the court's concern to prevent legal anomalies that would arise from allowing a company's sole asset to be transferred while simultaneously winding up the company.