The Minister’s Appeal
During August 2006, Judge Prinsloo ruled in the High Court in Pretoria, on a purely legal interpretation of the Companies Act, that the Minister had no power to intervene in a Companies Act investigation. This interpretation differs with company law in the United Kingdom where the Secretary of State enjoys broad powers to deal with any circumstances as they arise, including where the inspectors do not conduct a proper investigation. The Minister of Trade and Industry appealed against the decision and the matter will be heard in the Appeal Court.
The investigation of Corpcapital under section 258(2) of the Companies Act
The Minister of Trade and Industry appointed inspectors (Advocate John Myburgh SC and Professor Keith Prinsloo) to investigate Corpcapital in terms of section 258(2) of the Companies Act on 19 August 2003 (the Minister’s mandate is on the website index). The mandate emphatically placed the focus of the investigation on Cytech (for background on Cytech see “Corpcapital, A brief history” in the index). The appointment was to cover a four month period, with the report of the inspectors to be submitted mid December 2003.
In December 2003 the inspectors requested an extension from the Minister, and this was granted. The report of the inspectors was completed early in May 2004, some nine months after it commenced, but was only sent to the Minister on 27 July 2004 because of an important and unexpected intervening event, the insistence by the inspectors on an indemnity from the Minister.
The call for indemnity by the inspectors
The delay in the release of the report by the inspectors was caused by a demand from the inspectors for an indemnity from the Minister. The Minister later reported in his court papers in answer to an application by Corpcapital that the inspectors had released the report “only after the inspectors had, on their insistence, been provided with an indemnity against any possible claim against them flowing from anything done in the bone fide performance of their duties in terms of their terms of reference” (para 12.2 Answering affidavit of the Minister, 20 January 2005). Para 4.1.2 of the Minister’s application for leave to appeal against the judgment in the Corpcapital application also states “The Minister received the report on 27 July 2004 after a dispute whether the inspectors should be indemnified …”
Some questions arise from these developments. If the inspectors were concerned about the possibility of legal action against them why did they not raise this matter with the Minister at the outset? What event caused the inspectors to demand an indemnity at a late stage of the investigation?
The Minister considers the report of the inspectors
The Minister, believing at the time that he had the right to consider the report, commenced doing so. He stated later in his answering affidavit to the Corpcapital application (para 2.5.2) “I am also bound to consider the report and to decide on steps I am authorized to take before directing the report to be forwarded to the Registrar for purposes of making it available to all interested parties.” Corpcapital initially appeared to dispute the right of the Minister to consider the report in their founding affidavit (see below). However, they later appear to have changed their stance in their Heads of Argument as recorded in the Minister’s appeal para 6, “… the applicant clearly stated in its Heads of Argument that the application was not aimed at preventing the Minister from first reading the report before directing the Registrar to send a copy thereof to the registered office of Corpcapital.”
Corpcapital makes application to compel the Minister to release the report
Some seven weeks after the inspectors filed the report with the Minister, on 15 September 2004, Corpcapital made application to the High Court “to direct the respondent (the Minister) to direct the Registrar of Companies to release to the applicant a copy of the report made to the respondent by the inspectors under section 261 of the Companies Act” (para 6 of the Corpcapital application). Corpcapital stated “The inspectors have made a final report to the respondent but he refuses to make available a copy, saying that he first wishes to consider the report. This attitude suggests that the respondent considers that he has a discretion to decide whether or not to release the report to the applicant. Whether or not that is the respondent’s position, I submit that he has no discretion, and is in any event not entitled to insist on taking time to consider the report before releasing it to the applicant.”
The Minister opposes the Corpcapital application
The application by Corpcapital was opposed by the Minister who stated (para 2.5 of his answering affidavit) “This contention (the Corpcapital assertion that the Minister had no discretion) is factual and, I am advised, legally not correct. I am not refusing to make a copy of the report available… It is not my contention that I have a discretion to decide whether or not to release the report.” The Minister then explains his understanding of his powers in para 2.5.3, “I am advised and respectfully submit that as is apparent from the provisions of the Companies Act 1973, the Minister is authorized, inter alia –
(a) to determine whether the investigation had taken place in the manner directed by him or her and whether the circumstances which in his or her view required investigation have indeed been investigated;
(b) to determine whether the report ought to be printed and published;”
Then in para 2.5.4 “Furthermore, I am advised and respectfully submit that the Minister is by necessary implication empowered to refer the matter back to the inspectors for further investigation and consideration and to report afresh thereon”.
In para 2.5.5, “As is apparent from the intervening application filed and correspondence addressed to the Minister on behalf of Mr Frangos in this matter, there are allegations that the investigation was not in all respects fair, which I simply cannot ignore.”
In para 2.5.6, “The release of the report may have serious implications to one or more persons and it is my function and duty to ensure, inter alia, that the investigation had taken place, that all relevant matters have been investigated, that the investigation had taken place in accordance with a fair procedure and that it would be in the public interest to publish the report or to act thereon.”
In para 2.5.7, “It could never have been the intention, so I am advised, of the legislature that the Minister, being the instance who appointed the inspectors concerned to investigate some of the affairs of the Applicant Company, is bound to blindly release the report without first considering its contents and applying his or her mind to all issues he or she is duty bound to consider.”
In para 2.6.4, “As already indicated, I am advised that the Minister is empowered to refer the matter back to the inspectors for further investigation and consideration and to report afresh thereon.”
In para 2.6.5, “Because I have not yet had the opportunity to duly consider the report of the Inspectors, I am not yet in a position to determine whether the matter had been fully investigated or whether there are issues which still require further investigation and consideration, and reconsideration of their findings and recommendations, by the Inspectors which may included issues raised by Mr Frangos in his application.”
The Minister went on to explain what the issues were in regard to the investigation of Corpcapital in para 2.6.6 and 2.6.7,
2.6.6 “Should I decide in due course to refer the matter back, the Inspectors would, so I am advised, be bound, as they have done in the course of their initial investigation –
(a) to provide Mr Frangos with any reports or other documentation pertaining to such further investigation which have hitherto not yet been made available to Mr Frangos, as envisaged in paragraph B1(a) of the Notice of Motion of Mr Frangos;
(b) to afford Mr Frangos a fair opportunity to make representations or to present evidence in response to such reports or other documentation as envisaged in paragraph B1(b) of the Notice of Motion of Mr Frangos;
(c) to consider revising their report, as envisaged in paragraph B1 (c) of the Notice of Motion of Mr Frangos,
2.6.7 It follows that I cannot and will not release the report until such time as any such further investigation had been undertaken and the Inspectors have reported to me in that regard.”
I joined the Minister in opposing the Corpcapital application on the following basis, taken from paras 10.1 and 10.2 of my Founding Affidavit; “to allow me leave to intervene in the Corpcapital application in order to oppose the relief sought by Corpcapital; and to direct the Minister to reopen the investigation in order to allow me access to the reports of those Corpcapital experts that have not previously been made available to me so that I may comment on such reports.”
My basis for seeking to reopen the investigation fell away when it became apparent from a reading of the Minister’s Answering Affidavit that he was willing to apply his mind to the fundamental matters that I had brought to his attention regarding my concerns that the investigation had not been conducted properly.
The integrity of the investigation is challenged
Early in 2004 it was apparent that a number of serious circumstances had occurred which in my view and in the opinion of my legal counsel affected the integrity of the investigation. These matters were immediately raised with the inspectors by my attorneys, but regrettably were not satisfactorily dealt with. As a result they were brought to the attention of the Minister. Substantial communication on these matters took place which will at the appropriate time be shown on the website. It remains my opinion that the inspectors did not conduct a proper investigation in respect of material matters contained in the mandate of the Minister, and that they strayed outside of the mandate on matters which shifted the focus away from Cytech.
It is because of these crucial developments that the question of the Minister’s powers under the Act has became an issue. The key question is what power does the Minister have when matters are brought to his attention indicating that an investigation has not been conducted properly? While this question is relevant to the Corpcapital investigation it is also a serious issue which must be addressed in relation to all investigations under the Companies Act.
The statement issued by the Minister when he released the report on Corpcapital clearly sets out his reservations about the investigation. It is unprecedented in South Africa that the Minister should release a report with significant disclaimers (see the Minister’s press release 21 November 2007 on the website index).
Comparative English law
The English Companies Act 1985 is materially different to section 261 of the South African Companies Act 1973 in the discretion and power provided to the Secretary of State (in South Africa the Minister of Trade and Industry). Specifically, inter alia, in the United Kingdom, the Secretary of State has the discretion of whether or not to release and/or publish a report commissioned in similar circumstance to those contemplated in section 261 of the Companies Act. This means that if information comes to the attention of the functionary, for example that the investigation is not being conducted properly, or that it may have become corrupted, the functionary could decide not to release a flawed report until and unless the defect is remedied.
My understanding is that the Secretary of State (UK) may then be able to invoke powers under the Companies Act to call for a fresh investigation, which would include, should it be necessary, the appointment of new inspectors.
The Corpcapital application is heard in court
On 3 and 4 May 2006, the Corpcapital application was heard in the Pretoria High Court before Prinsloo J and judgment was reserved. The court papers consisted of the Corpcapital application, answering affidavits by the Minister and myself, a replying affidavit by Corpcapital, and various supplementary and other affidavits.
The judgment is handed down
On 22 August 2006, Judge Prinsloo handed down his judgment. The court ruled, on a legal interpretation of the Act, that the Minister had no power to intervene in an investigation in terms of Section 254 of the Companies Act. The court instructed the Minister to “forthwith, in terms of section 261(2)(a) of the Companies Act 61 of 1973, to direct the Registrar of Companies to send a copy of the report of the inspectors(Advocate John Myburgh SC and Prof Keith Prinsloo) who were appointed in terms of section 258(2) of the Companies Act to investigate the affairs of the Corpcapital Group of Companies (“the inspectors report”) to the registered office of the applicant.”
Thus, according to the ruling of Prinsloo J, the South African Companies Act differed substantially from English law in respect of the power of the Minister.
The Minister applies for leave to appeal
On 7 September 2006, the Minister lodged an application for leave to appeal against the judgment on the grounds that the judge had erred in his interpretation of the Act.
I did not join the Minister in the application as the appeal concerns a legal interpretation of whether or not the Minister has the power to intervene in an investigation, and is not about the actual investigation into Corpcapital, nor whether or not it was conducted properly, and the contents of the report.
The Minister is of the view that another court may come to a different conclusion to Prinsloo J. Corpcapital’s Heads of Argument clearly stated that “the application was not aimed at preventing the Minister from first reading the report before directing the Registrar to send a copy thereof to the registered office of Corpcapital.”
The Minister outlined six factors that in his opinion the Judge failed to consider;
Para 5.1, “Firstly, the fact that, if regard is had to Chapter IX of the Companies Act, 1973, read in context, the Legislature intended to grant certain remedies to members to ensure that companies conduct their affairs in a proper name.
5.1.1 The Legislature has clearly as its aim to protect the public interest where the parties involved in the administration of the company are unable to resolve certain issues in the company amongst themselves.
5.1.2 In doing so, the Minister is empowered to appoint inspectors to investigate the affairs of companies and to report thereon, in such manner as he may direct.
5.1.3 In so far as the intention is that the inspectors must report thereon to the Minister, the Legislature must have by necessary implication intended that the Minister should be empowered, if not obliged, to consider the report so as to establish whether the Inspectors have duly investigated the affairs of the company concerned and whether they have done that in the manner he or she directed.”
Para 5.2, “Secondly, if the Minister is not empowered to do so that the power to determine –
(a) whether the investigation had been properly conducted; and
(b) whether the affairs of the company concerned have been conducted properly,
has in effect been transferred to the inspectors, who incidentally, have apart from reporting on the issues they investigated, no powers to act against a company who failed to properly conduct its affairs.”
Para 5.3, “Thirdly, there is the question why the Legislature deemed it necessary to impose the duty to release the report upon the Minister, if it was not the intention that he should be entitled, empowered or even obliged to consider the report since the Legislature could then just as well imposed that duty directly on the Registrar or a clerk in the Department or even perhaps directly on the Inspectors'”
Para 5.4, “Fourthly, there is the fact that the Minister may be held liable if any person or body has been wrongfully and unlawfully defamed in the report.”
Para 5.5, “Fifthly, the fact that the Minister may direct inspectors to submit interim reports is a clear indication that the submission of any such reports would be a futile exercise, but that it is rather the intention that the Minister is empowered, if not obliged, to take cognizance of the inspectors’ investigation as contained in not only such interim reports, but also their final report.”
Para 5.6, “Sixthly, the expression “if it appears to the Minister from any such report” in section 262 of the Act is a clear indication that the Minister is required to consider the report in so far as he or she is required to do so there is no reason to say that he can only do so after having released the report.”
Prinsloo J will have to decide whether to grant the Minister leave to appeal on these grounds.
The Minister releases the report with significant disclaimers
On 21 November 2006, the Minister of Trade and Industry released the report of the inspectors to Corpcapital and myself, and accompanied the release with a public statement. This statement can be viewed on the website. In his statement the Minister stated that the inspectors had strayed outside of the ambit of the mandate in respect of the manner in which they had dealt with the attack on my character and motives by the directors of Corpcapital. In addition, he questioned whether procedural fairness had been applied by the inspectors in the manner in which they had accepted evidence on Cytech from Corpcapital’s experts but had not furnished these expert reports to me for comment. This matter is dealt with in more detail on the original home page of this website, which is now contained in the index as “Corpcapital, A brief history”.
Court hearing for leave to appeal
On 1 June 2007, the parties were advised that Judge Prinsloo would consider the application for leave to appeal by the Minister to determine whether it should be referred to the Supreme Court of Appeal. The crisp issue is whether another court could come to a different conclusion on the legal interpretation of the Companies Act. The merits or otherwise of the investigation and the report are not at issue.
Minister secures the right to appeal
On Friday, 1 June 2007, Judge Prinsloo granted the Minister leave to appeal to the Supreme Court in connection with the judgment in the Corpcapital application. In granting the appeal, Judge Prinsloo stated that the interpretation of Sections 257 to262 of the Companies Act 61 of 1973 is a matter of public interest, and therefore the Appeal Court should have the opportunity to re-consider his judgment.
The matter before the Appeal Court will focus on the legal interpretation of the powers that the Minister has to intervene in a Companies Act investigation which he has authorized and mandated. The reason why this issue is important is that circumstances can occur during an investigation which can only be resolved by such intervention. This would include not only matters that require more scrutiny but also information indicating that a proper investigation has not been conducted, matters which directly affect the public interest. The background referred to contains some of the contributing factors.
The Corpcapital application asserted that the Minister has no powers to intervene, and that his role is purely mechanical, a post box in a sense. According to Corpcapital after the investigation has been completed by the inspectors the Minister must immediately and “forthwith” send the report to interested parties. On the other hand, the Minister, in his papers, stated that he was authorized by the Act to “determine whether the investigation had taken place in the manner directed by him or her and whether the circumstances which in his or her view required investigation have indeed been investigated.”
It is interesting to note that English Law prescribes wide discretionary powers to the Secretary of State, the British equivalent of our Minister, during a Companies Act investigation. Such powers provide, inter alia, a mechanism to the Secretary to take appropriate action if he has reason to believe that a proper investigation has not been conducted.
The decision of the Appeal Court is likely to have wide repercussions for future investigations under the Companies Act, including the status of the Corpcapital investigation.