Winding-up a company – who benefits?

December 1st, 2019

Picture source: Gallo Images/Getty

Professor Anneli Loubser, in her lecture on being conferred the honour of professorship in law, stated that in the future it is likely that liquidations will be conducted under the guise of business rescue. Prof Loubser’s words accurately forecasted and predicted what is currently happening, namely that in many cases, companies are placed in business rescue and business rescue practitioners dispose of the company’s assets and eventually the company is liquidated. What normally happens is that a company is liquidated, and a provisional liquidator or liquidator takes charge of the assets before business rescue proceedings are instituted.

The aim of this article is to suggest that in a situation like this, there should be communication and cooperation between liquidators and the business rescue practitioner (BRP).

Proper communication needs to take place provided that both the liquidator and the business rescue practitioner care about the best interests of the general body of creditors.

A further reason for encouraging communication is to prevent a situation that often occurs, where a business rescue application is brought in order to avoid inquiries in terms of the Companies Act 61 of 1973 (the Companies Act) to pin personal liability on the directors. It is all good and well to suggest that the liquidator communicates with the BRP. The real issue with this statement is: Who is in control of the assets of a company in liquidation when a s 131 application for business rescue is launched?

Another fundamental question to this article is: Who controls the assets of the company when a liquidation order is obtained and, thereafter, a business rescue application is brought?

There is a lacuna in the legislation in this regard. It is my view that the reluctance or uncertainty by the liquidators and by the BRPs to meaningfully discuss the situation in respect of company assets is as a result of the absence of a provision in the Companies Act that deals with the situation.

The courts have made it clear that liquidators are still in charge until a BRP is appointed. However, the real problem area is the lack of clarity as to what the liquidators can do and what they are allowed to do in order to preserve the assets? The BRP has not yet been appointed so they cannot give permission or consent to the liquidator. Obviously the directors also cannot give this consent. The result, of course, is that the liquidator is in a difficult and untenable position.

A typical example will be where a company deals in products that need to be marketed and sold immediately after the manufacturing and production thereof. Another example is where the product is classifieds as a deteriorating product (for example seeds or fertilizer) or the product has been made for a specific project.

If, after liquidation, these products are stored, the damage caused is irreparable because the value of these products will rapidly diminish.

The liquidator then asks the question as to whether they are entitled to sell the products in the face of the pending business rescue application. The obvious problem is that the business rescue application can be delayed for an extremely long time and clearly the liquidator cannot – in any way – sell the assets until the business rescue application is adjudicated on.

There are a number of questions in the back of a legal practitioner’s mind when instituting a business rescue application when a company is in provisional or final liquidation, some examples include:

  • What will be suspended by the launching of the business rescue application?
  • What steps can be taken to ensure that the distressed company does not become rudderless?
  • Can the distressed company continue to trade with suppliers, customers and creditors in the period when the business rescue application is opposed?
  • How can the stock or assets of the business, which require immediate marketing and sale be best utilised knowing that if they are not utilised, their value will plunge and effectively they become valueless?

The position can be ascertained and better understood by an analysis of the judgments that have up to now given some clarity in the matter.

In the matter of Jansen Van Rensburg NO and Another v Cardio-Fitness Properties (Pty) Ltd and Others (GJ) (unreported case no 46194/13, 4-3-2019) (Kgomo J), it was decided by Kgomo J that once a provisional winding-up order is granted, the directors no longer have any control over the company’s property.

The judge held at para 55:

‘[U]ntil the business rescue application is finalised or a final liquidator is appointed, the [provisional liquidators] are liable for everything. As such, it should only be prudent that they remain in charge until the court pronounces on the business rescue application’.

In Maroos and Others v GCC Engineering (Pty) Ltd and Others (GP) (unreported case no 36777/2017, 15-6-2017) (Fabricius J), Fabricius J expressed that the judgment of Kgomo J in the Jansen van Rensburg case was incorrect, as was the judgment in Knipe and Another v Noordman NO and Others 2015 (4) SA 338 (NCK). Accordingly, Fabricius J decided it was incorrect to conclude that the provisional liquidator is under a continuing obligation to secure and preserve the assets pending the outcome of the business rescue application. As a consequence, Fabricius J decided that the directors of the distressed company were re-vested with the assets of the company.

The court, in finding that the directors were re-vested with control, decided to appoint an independent manager with the powers of a director to manage the business affairs of the distressed company until termination of business rescue. It is my view that Fabricius J tried to create a workable and business-like answer. There are serious difficulties to the suggestion by Fabricius J because what the judge was suggesting, was that a business manager can do what a BRP should be doing.

The Maroos judgment went on appeal to the Supreme Court of Appeal (SCA) and the judgment was delivered on 3 December 2018.

Seriti JA handed down the judgment in the SCA in GCC Engineering (Pty) Ltd and Others v Maroos and Others 2019 (2) SA 379 (SCA). Seriti JA said that the main issue to be considered was whether the appointment and powers of the duly appointed joint provisional liquidators are suspended in terms of s 131(6) of the Act.

The two subsidiary issues were whether the control and management of the property – of a company already placed in liquidation by a court order – can validly and legally be re-vested in the directors of that company and whether the Master has any role to play in business rescue proceedings.

In para 11 of the SCA judgment, Seriti JA stated that the functions of a provisional liquidator are essentially to take physical control and to manage the administration of the property and affairs of the company pending the appointment of a liquidator. The judge referred to the judgment of Kgomo J in Jansen van Rensburg and said that Kgomo J correctly remarked that the responsibilities of the provisional liquidators are to take physical control and to supervise the administration of the company’s property and affairs pending the appointment of a permanent liquidator.

Importantly, in para 15, Seriti J said that s 131(6) of the Companies Act does not change the status of the company in liquidation nor does it suspend the court order that placed the company under liquidation and that the appointed provisional joint liquidators must proceed with their duties and functions to protect the assets of the company for the benefit of all the creditors of the company.

In para 17, Seriti J said, in terms of s 131(6), it is the liquidation proceedings and not the winding-up order that is suspended. What is suspended is the process of continuing with the realisation of the assets of the company in liquidation with the aim of ultimately distributing the proceeds to the various creditors.

The winding-up order is still in place and prior to the granting or refusal of the business rescue application, the provisional liquidator secures the assets of the company in liquidation for the benefit of the general body of creditors.

Importantly, the court said that the appointment, office and powers of the provisional liquidators are not suspended and that the word ‘suspend’ does not mean termination of the office of the liquidator. Simply put, the SCA decided that what is suspended by s 131(6), is the process of winding-up and not the legal consequences of a winding-up.

In a subsequent SCA case, namely Van Staden NO and Others v Pro-Wiz Group (Pty) Ltd 2019 (4) SA 532 (SCA), Wallis JA held that the liquidators of the close corporation in liquidation were entitled to oppose the s 131 business rescue application. The important part of this judgment is para 9, which states: ‘If correct, the High Court’s view of the legal position of liquidators, when confronted with an application to place a company in liquidation under business rescue, would have had the consequence that those with perhaps the greatest knowledge of the affairs of the company would have had no locus standi to participate in the application for business rescue’.

In my view, the critically important point made by Wallis J is that the liquidators themselves have the ‘greatest knowledge of the affairs of the company’. The judge emphasised the fact that on the compulsory winding-up of a company, its directors are deprived of their control of the company, which is then deemed to be in the custody or control of the Master until the appointment of liquidators and, thereafter, it is in the custody or control of the liquidators.

In so doing, the judge concluded that the Maroos case was incorrectly decided. It is important to note that Wallis J ordered that the costs of the liquidators be paid on a punitive scale and in para 22 of the judgment, the judge held:

‘It has repeatedly been stressed that business rescue exists for the sake of rehabilitating companies that have fallen on hard times but are capable of being restored to profitability or, if that is impossible, to be employed where it will lead to creditors receiving an enhanced dividend. Its use to delay a winding-up, or to afford an opportunity to those who were behind its business operations not to account for their stewardship, should not be permitted’.

I think these words are extremely appropriate in that the SCA emphasised in this judgment delivered on 8 March 2019 that business rescue must not be used to delay a winding-up.

It is often overlooked that the liquidators who were looking after the distressed company, before the s 131 application, have the greatest knowledge of the affairs of the company and are fully aware of the strengths and weaknesses of the distressed company.

It is my thinking that before a s 131 application is drawn, there should be detailed and in-depth discussions with the liquidators in control of the company so that the court hearing the business rescue application will have the benefit of a factual foundation setting out the reasons for the demise of the company and the factual (not speculative) reasons for a future possible successful turnaround.

I think everybody must recognise that Prof Loubser was correct and what is currently happening in many cases is that the assets of the distressed company are being sold in business rescue and, thereafter, the companies are liquidated. It would be in the best interest     of creditors if the assets were sold much earlier. This can only be achieved if there are meaningful and proper discussions as I have suggested in this article.

I think it is clear and makes legal and common sense that if a business rescue order is granted, the BRP has to consult with the liquidators, who were in control, in order to discharge the BRPs’ fiduciary duties to act in the best interests of the company. However, it is hoped that the process of consultation can take place well in advance of the order, placing the company into business rescue.

Keith Braatvedt BCom LLB (Wits) is a legal practitioner at Brooks and Braatvedt Inc in Johannesburg.

This article was first published in De Rebus in 2019 (Dec) DR 16.