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Rescue the business before liquidation is considered

Updated: Jul 19, 2018


In terms of s 132(1)(a)(i) of the Companies Act 71 of 2008 (the Act), business rescue proceedings commence when a company files a resolution to place itself under supervision in terms of s 129(3) of the Act.


But what happens if a creditor has already served an application for the liquidation of the company? Section 129(2)(a) of the Act determines that a resolution contemplated in s 129(1) of the Act, may not be adopted if liquidation proceedings have been initiated by or against the company.


Liquidation proceedings


What is meant by liquidation proceedings? Is it the mere service and filing of an application with the Registrar of the court, or does it mean that the application for liquidation must actually have been adjudicated?


There are two sides of the coin, begging for an answer. On the one hand, companies against whom liquidation applications have been issued, may want to commence business rescue proceedings, as there is a reasonable prospect of rescuing the company and the company may even be successfully rescued before adjudication of the liquidation application. On the other hand, creditors launching liquidation applications may be disrupted by subsequent resolutions to commence business rescue proceedings.


What the courts say


In FirstRand Bank Ltd v Imperial Crown Trading 143 (Pty) Ltd 2012 (4) SA 266 (KZD), the court interpreted the meaning of ‘initiated’ and it was held that ‘the word “initiated” in s 129(1) must have been intended to have the same meaning as the word “commenced” in s 131(6)’.


In ABSA Bank Ltd v Summer Lodge (Pty) Ltd 2013 (5) SA 444 (GNP) the court granted the following declaratory order:


‘The meaning of the words liquidation proceedings in s 131(6) of the Companies Act 71 of 2008 is confined to the actual process of winding-up a company consequent upon an order of winding-up having been issued by a court, and is the actual process followed in winding-up and overseen by the liquidators and the masters. The words liquidation proceedings do not include the legal proceedings taken by a creditor for purposes of obtaining an order that a company be wound-up’.


In ABSA Bank Ltd v Summer Lodge (Pty) Ltd 2014 (3) SA 90 (GP), the court held the following at para 17:


‘[17] In terms of s 348 of the Companies Act, 1973, a winding-up order by the court is, by way of a fiction (obviously for purposes of the proper administration of a winding-up order), “deemed to commence at the time of the presentation to the Court of the application for the winding-up”, but this deeming clause only comes into operation after it has been determined ex post facto that a winding-up order had been granted. If no such order has been granted, any liquidation proceedings cannot be deemed to have commenced’.


Companies Act 71 of 2008


Section 131(1) of the Act provides that ‘[u]nless a company has adopted a resolution contemplated in section 129, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings.’


Section 131(6) of the Act provides that ‘[i]f liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of subsection (1), the application will suspend those liquidation proceedings …’.


In the Summer Lodge case the court considered three applications for provisional liquidation orders and considered whether applications in terms of s 131(1) of the Act, by virtue of s 131(6) of the Act, suspended the applications for provisional liquidation orders. The court held the following:


‘[21] The applicant in these applications is accordingly not debarred from moving for the orders claimed in its applications filed long before the applications for business rescue proceedings were filed.


[22] …


[23] Any order for the liquidation or the provisional liquidation of the respondents will, however, on the one hand, be suspended, and on the other, prevent any further legal proceedings being instituted against the companies, until such time, as provided in para (a) or (b) of s 131(6), the process set in motion by the application for business rescue has been finalised’.


Logic has it that, if an application in terms of s 131(1) of the Act does not bar the granting of a liquidation order (or results in the suspension of an application for a liquidation order), a mere application for a liquidation order does not bar a company from adopting a resolution in terms of s 129(1) of the Act. The logic lies therein that if an application for a liquidation order is not susceptible for suspension by an application in terms of s 131(1) of the Act, such application for a liquidation order does not amount to ‘liquidation proceedings’ as contemplated in s 131(6) of the Act.


Consequently, if an application for a liquidation order does not amount to liquidation proceedings, the launching of such an application would not amount to initiation of liquidation proceedings and will not prevent a company from adopting a resolution in terms of s 129(1) of the Act, as no liquidation proceedings have been initiated or commenced by or against the company.


Companies Act 61 of 1973


In support of the above reasoning, the provisions of the repealed Companies Act 61 of 1973 (the old Act) are considered. Chapter 14 of the Act still applies in respect of winding-up and liquidation of companies. Where a specific chapter or section is repealed, same will be indicated in brackets.


Business rescue proceedings can be compared to the repealed judicial management in terms of chap 15 (repealed) of the old Act. Section 427(3) (repealed) of the old Act provides as follows: ‘When an application for the winding-up of a company is made to Court under this Act and it appears to the Court that if the company is placed under judicial management …’.


Section 348 of the old Act provides that ‘[a] winding-up of a company by the Court shall be deemed to commence at the time of the presentation to the Court of the application for the winding-up’ (my italics). The wording of this section is wide enough to allow for interpretation to an extent. For a full discussion on the interpretation of this section, see Meskin Philip L (formerly edited by The Late Hon Mr Justice PM Meskin), assisted by JA Kunst, P Delport, and Q Vorster Henochsberg on the Companies Act 61 of 1973 5ed (Durban: LexisNexis 2011) at 740(1) to 740(3).


Section 354 of the old Act provides that ‘(1) [t]he Court may at any time after the commencement of a winding-up, on the application of any liquidator, creditor or member, and on proof to the satisfaction of the Court that all proceedings in relation to the winding-up ought to be stayed or set aside, make an order staying or setting aside the proceedings or for the continuance of any voluntary winding-up on such terms and conditions as the Court may deem fit’.


Section 358 of the old Act provides that a company may apply to court for a stay of legal proceedings ‘[a]t any time after the presentation of an application for winding-up and before a winding-up order has been made …’.


Section 367 of the old Act provides that ‘[f]or the purpose of conducting the proceedings in a winding-up of a company the Master shall appoint a liquidator or liquidators as hereinafter provided’.


From the wording of the above sections, it is clear that a distinction is made between an application for the winding-up of a company and the winding-up proceedings itself. If the application for the winding-up of a company was the commencement of winding-up proceedings, the legislator would uniformly have referred to ‘winding-up proceedings’ or the commencement thereof. In terms of s 367, the Master appoints a liquidator for the purpose of conducting the proceedings in a winding-up of a company. A liquidator is not appointed before an order for the liquidation of a company is granted. As a result, the period before an order for liquidation is granted does not amount to liquidation proceedings.


Conclusion


Section 5(1) of the Act provides that the Act must be interpreted to give effect to its purposes as set out in s 7(k), which includes to ‘provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders’.


As a result, s 129(2)(a) of the Act should be interpreted in favour of the purpose of the Act as set out in s 7(k), opposed to favouring liquidation, which is not a purpose of the Act.


A creditor has remedies in terms of s 130 of the Act to object to a mala fide resolution by the board of a company to commence business rescue proceedings, but the board of a company does not have a corresponding remedy if liquidation proceedings are commenced by the mere service and filing of an application for liquidation. Only affected persons (which excludes directors and/or the board of a company) may apply in terms of s 131 of the Act to a court for an order to place the company under supervision and commence business rescue proceedings, after liquidation proceedings have commenced.


A mere application for a liquidation order should not be interpreted as ‘liquidation proceedings’ for the purpose of s 129(2)(a), to enable the board of a financially distressed company to commence business rescue proceedings and probably rescue the company, before an application for its liquidation is adjudicated.


Schalk Bezuidenhout BCom LLB (UP) (cum laude) is an attorney at Botha Bezuidenhout Attorneys in Pretoria.


This article was first published in De Rebus in 2016 (March) DR 22.

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