The Liquidation Process: Part 7 – The role of Interrogations in unravelling corporate affairs

In this next instalment, we turn our attention to a critical yet often misunderstood part of the process: interrogations. These proceedings are designed to gather information necessary to piece together the full picture of a company’s affairs and facilitate the proper winding up of its estate.

The Purpose of Interrogations

The primary objective of an interrogation is to gather as much information as possible about the company’s financial situation. As highlighted in Leech and others v Farber NO and others, sections 417 and 418 of the Companies Act allow for an investigation designed to "piece together" the financial puzzle. These sections give the court or the Master of the High Court the authority to summon individuals who might hold relevant information. Essentially, interrogations serve to enable a more thorough winding up of the company's affairs, ensuring that any misconduct or asset concealment is uncovered.

Types of Interrogations

Depending on who’s being questioned and the specific circumstances of the liquidation, interrogations can vary in scope and style:

1. Public Interrogations.
   
   A public interrogation occurs during a meeting of creditors, convened under  section 415 of the Companies Act, 1973. These sessions focus on gathering information about the company’s dealings, assets, and potential improper transfers. Directors of the liquidated company, as well as those involved in its financial affairs, may be asked questions. What makes these sessions particularly significant is that creditors who have already proved their claims are allowed to pose questions, providing a forum for collective inquiry.
   
   However, public interrogations are often postponed to a later date specifically reserved for this purpose, ensuring adequate preparation. The questions asked during these interrogations focus on the company’s business affairs, its estate, and any property that might be connected to the liquidation process. The goal is to uncover any facts that may assist in tracing assets or identifying voidable transactions that need to be reversed for the benefit of creditors.
   
   
   
2. Private or Confidential Interrogations
   
   Confidential interrogations, conducted in terms of section 417 and 418 of the Companies Act, are typically more focused and sensitive than public sessions. These inquiries can involve the company’s directors, liquidators, or any other individuals with knowledge of the company’s financial situation. Unlike public interrogations, these sessions are closed to the public and aim to delve into matters that may reveal incriminating information. Such sessions are ideal when the stakes are high, and sensitive details must be handled discreetly to avoid compromising any subsequent legal action.
   
   The presiding officer, often the Master of the High Court, has the authority to summon witnesses and compel them to answer questions about the company’s assets, business dealings, or even property that may belong to a third party. Bank managers, accountants, and legal advisors, for example, may be called upon to shed light on transactions involving the insolvent company. 

Interrogations in the Voluntary Winding-Up of a Company

While section 417 interrogations are pivotal in court-ordered liquidations, there is some debate around their applicability in voluntary windings-up. The challenge arises because voluntary liquidations, unlike court-ordered ones, do not involve a judicial ruling. As the Supreme Court of Appeal has ruled, section 417 does not apply in such cases.

However, there are ways to work around this. For example, converting the voluntary liquidation into a court-ordered one under section 346(1)(e) allows for interrogations under section 417. Similarly, applying to the court for leave to convene an enquiry under section 388 can open the door for such interrogations, even in voluntary windings-up. It’s important to note, though, that interrogations serve no purpose in situations where the company can fully pay its debts—commonly known as “members’ voluntary” liquidations.

Relevant Considerations for Choosing an Interrogation Type

There are several factors to consider when deciding on the type of interrogation to pursue in a liquidation. These include:

1. Who should be questioned? Directors of companies should generally be interrogated under the Companies Act, while members of close corporations should be questioned under the Insolvency Act.

2. Nature of the questions: If the investigation is likely to uncover sensitive or self-incriminating information, confidential interrogations under section 417 are preferable.

3. Presiding officer: Section 417 enquiries are conducted by a commissioner, while other types of interrogations are usually presided over by the Master or a magistrate.

Wrapping Up

Interrogations in liquidation cases are powerful tools for gathering crucial information and holding individuals accountable. Whether public or private, these proceedings can make the difference in uncovering assets and ensuring creditors’ rights are protected.