Timing is everything when liquidation proceedings are initiated

December 1st, 2019

Picture source: Gallo Images/Getty

Chapter 6 of the Companies Act 71 of 2008 introduced the concept of business rescue into South African company law. Unsurprisingly, as with any new piece of legislation, the business rescue provisions have and will continue to give rise to interpretative disputes between parties, litigation and ultimately helpful clarificatory judicial pronouncements. In this article, I address one such recent ‘litigious dispute’ – a dispute about what ‘liquidation proceedings have been initiated’ in the context of s 129(2)(a) of the Companies Act means – and then I will summarise Sutherland J’s judgment in Tjeka Training Matters (Pty) Ltd v KPMM Construction (Pty) Ltd and Others (GJ) (unreported case no 19661/2019, 21-6-2019) (Sutherland J).

On 15 May 2018, the directors of KPMM Construction (Pty) Ltd passed a s 129(1) resolution to voluntarily place KPMM into business rescue. That resolution and accompanying documentation was duly filed with the Companies and Intellectual Property Commission (CIPC) on 15 May 2019 and Messers Miller and Chevalier of Mazars Recovery and Restructuring (Pty) Ltd were subsequently appointed by the CIPC as the business rescue practitioners of KPMM.

On 22 May, a notice in terms of s 129(3) and (4) of the Companies Act was sent, by the business rescue practitioners, to each ‘affected person’, informing them of the fact that KPMM had resolved to begin business rescue proceedings and that Messrs Miller and Chevalier had been appointed as the business rescue practitioners. On 23 May, notice in terms of s 147 of the Companies Act was sent by the business rescue practitioners to all known creditors of KPMM, informing them of the time, date and place of the first meeting of creditors. One such affected person and creditor that received these notices was Tjeka Training Matters (Pty) Ltd.

On 27 May, five days after notice of KPMM’s business rescue was sent to creditors, the business rescue practitioners received an e-mail from Tjeka’s attorney stating that Tjeka had already ‘initiated’ liquidation proceedings against KPMM during April 2019 and that as a consequence KPMM’s s 129(1) resolution was void in terms of s 129(2)(a) of the Companies Act. The business rescue practitioners were thus called on to confirm that they would immediately withdraw and discharge any notices to the CIPC. Tjeka also threatened to launch an urgent application to interdict the business rescue proceedings if the business rescue practitioners did not confirm that they would immediately withdraw and discharge any notices to the CIPC.

On 27 May the legal practitioners for the business rescue practitioners called for a copy of the liquidation application, which neither they nor the directors of KPMM were aware of, and the return of service. A copy of the liquidation application was duly sent to the legal practitioners of the business rescue practitioners on 27 May, but the return of service was only sent to the legal practitioners on 28 May, the same day that the Sheriff served the liquidation application on KPMM. Pursuant to learning that the application had not been served on KPMM prior to 15 May, the business rescue practitioners disputed Tjeka’s contention that KPMM was not lawfully entitled to pass and file a s 129(1) resolution when it did and, as such, refused to comply with Tjeka’s demand. As threatened, a few days later Tjeka launched its urgent application. The urgent application was opposed by the business rescue practitioners.

As appears in Sutherland J’s judgment, Tjeka raised two principal arguments in support of its position on the matter. First, it argued that the word ‘initiate’ is the necessary point of departure and that it ought to be given its ordinary dictionary meaning – that is to say to get something started. Tjeka then submitted that the word ‘commence’ is a synonym of ‘initiate’. On the back of this line of argument, Tjeka raised the case of Marine and Trade Insurance Co Ltd v Reddinger 1966 (2) SA 407 (A) in which Wessels JA held that: ‘Although an action is commenced when the summons is issued the defendant is not involved in litigation until service has been effected’ and submitted that it is necessary and correct to distinguish between the ‘phenomenon of “litigation”’ and the ‘juridically cognisable event of the “issue”’ of a matter.

Secondly, Tjeka relied on the decision in FirstRand Bank Ltd v Imperial Crown Trading 143 (Pty) Ltd 2012 (4) SA 266 (KZD) submitting that the wording of s 348 of the Companies Act 61 of 1973 (the 1973 Act), namely 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’, ought to be attributed to the relevant portion of s 129(2) of the Companies Act.

Sutherland J disagreed with both of Tjeka’s submissions. First, he was of the view that s 129(2)(a) must be read as a whole and that: ‘Whatever “initiated” means, it must be understood to be “… by or against the company”. To omit this aspect is to not do justice to this part of the sentence. It is plain that the liquidation proceedings which are initiated, must be cognisable by reference to its effect upon the company, otherwise the notion of it being “by” or “against” the company is mere verbiage. Thus, it can be asked: If a deed (ie, the issue of an application), which is juridically cognisable occurs, but without the company being in the least aware of its existence, can that deed be said to be an example of a deed initiated against the company? At the levels of both grammar and logic this seems doubtful.’

Secondly, in response to that said by Swain J’s reasoning in the FirstRand Bank case, Sutherland J referred to the dictum in the case of Standard Bank of South Africa v A-Team Trading CC 2016 (1) SA 503 (KZP) and on complete reading of the Reddinger case (both of which were relied on by KPMM). In this regard Sutherland J held that ‘the function of section 348 is different to the function of section 129(2)’ and that the ‘eliding of “commenced” with “initiated” is shown to be inappropriate.’ Sutherland J pointed out, that: ‘The device utilised in section 348 is a fiction triggered by a public formal act that has retrospective effect … . The policy choice that informed that provision in the statute is that a protection was needed against nefarious manipulation after the fact of the application becomes known between the time of presentment and the date of the grant of the order. It cannot be said that a similar problem arises pursuant to a resolution contemplated in section 129(2) in the 2008 Act when unknown to the company a liquidation application has been issued but remains a secret. …Thus the work that section 348 does and the work that section 129(2) does is different’.

In respect of the Reddinger case, Sutherland J also pointed out that in that matter Wessels J stated that: ‘Although an action is commenced when the summons is issued the defendant is not involved in litigation until service has been effected, because it is only at that stage that a formal claim is made upon him’ concluding that ‘a litigant remains unaffected in law until made formally aware of the steps being taken against that litigant.’

On the above basis, Sutherland J dismissed Tjeka’s urgent application, finding that the liquidation proceedings contemplated in s 129(2) of the Companies Act must be served on the company, and not merely issued to meet the requirements of the section. Sutherland J further held that the resolution of 15 May trumps the liquidation proceedings served on 28 May.

Gavin Schär BCom LLB (UCT) is a legal practitioner at Knowles Husain Lindsay Inc in Johannesburg. Knowles Husain Lindsay Inc acted on behalf of the respondents in the matter.

This article was first published in De Rebus in 2019 (Dec) DR 14.