By Don Mahon

Until recently it was accepted among legal practitioners that although a court could exercise its discretion against the winding-up of a company, a creditor who brought an application for such a winding-up was entitled ex debito justitiae (as of right) to such an order if he could establish the requirements provided for by the previous Companies Act 61 of 1973 (1973 Act).

This position may, however, have changed as a result of the recent decision in Absa Bank Ltd v New City Group (Pty) Ltd (unreported case no 45670/2011); Cohen v New City Group (Pty) Ltd and Another (unreported case no 28615/2012) (21-8-2012) (GSJ) (Sutherland J).

The New City case

This matter came before Sutherland J in the form of a return day of a provisional liquidation order granted on 13 June 2012. Absa had applied for New City to be placed under final liquidation on the grounds that it was deemed to be unable to pay its debts as provided for in s 344(f), read with s 345(1)(a), of the 1973 Act.

Absa claimed that New City was indebted to it in the amount of R 30 million pursuant to a surety bond New City had signed in favour of Absa for a debt owed to the latter by a hotel company in respect of a development property loan facility.

The hotel company had failed to pay the outstanding capital amount in respect of the loan facility, including capitalised interest, charges, premiums and other amounts, by the due date.

On 13 July 2011 Absa delivered a letter of demand as contemplated in s 345(1)(a) of the 1973 Act as New City had failed to pay the amount due. In the circumstances, Absa contended that New City was deemed unable to pay its debts as provided for in s 344(f), read with s 345(1)(a), of the 1973 Act.

At the provisional liquidation stage, New City requested a postponement of the application in order to afford the hotel company, the principal debtor, to conclude negotiations that had commenced between it and a third party investor (pursuant to the hotel company being placed under business rescue), which would provide the hotel company with sufficient funds to discharge the principal debt.

The application for a postponement was dismissed for reasons irrelevant to this article.

By the time of the return day, however, the hotel company had not been able to procure funding from the third party investor and the principal debt remained unpaid.

It was common cause that although New City was commercially insolvent inasmuch as it was unable to pay the debt demanded by Absa when it fell due, it was, nonetheless, factually solvent in that its assets exceeded its liabilities, including the debt claimed by Absa.

These assets included a number of properties that had been sold by New City to raise funds to put toward the discharge of the debt claimed by Absa but in respect of which transfer had not yet taken place. In addition to these properties, New City owned a further property that could be sold to raise funds to discharge the debt owed to Absa.

When the matter came before Sutherland J, New City argued that, in the circumstances, the court ought to discharge the provisional liquidation order, exercise its discretion against the granting of a final winding-up order and find that the ex debito justitiae principle had been done away with on commencement of the new Companies Act 71 of 2008 (2008 Act).

It was further requested that the court, instead of granting a final winding-up order, grant an order compelling New City to dispose of its assets by a certain date in order to discharge its indebtedness to Absa.

The court’s findings

In considering whether the ex debito justitiae principle remains good law since the inception of the 2008 Act, Sutherland J accepted that the 2008 Act prescribes a fresh approach to corporate governance as a whole and it now seems to be incorrect to speak of an entitlement to a winding-up order ‘simply because the applicant is an unpaid creditor’.

In addition, Sutherland J recognised ‘a principled preference of a rescue over the demise of a company’.

The court held that New City had advanced a sufficient body of fact and rationality in what was ‘an offer to result in a reasonable, pragmatic programme of payments that could avoid the extinction of New City’. As a result, the judge discharged the provisional order, granted Absa leave to approach the court again for a winding-up of New City in the event of non-compliance with any aspect of the order and ordered New City to undertake what was, in effect, the realisation of its assets without the supervision of a liquidator.

Support for the court’s findings

The court noted that the procedure for winding-up is currently regulated by the provisions of the 1973 Act. Section 344 thereof is the sole source of authority that vests a court with the power to liquidate a company on the basis that it is unable to pay its debts.

Section 347 stipulates the powers of a court when considering an application:

‘The court may grant or dismiss any application under section 346, or adjourn the hearing thereof, conditionally or unconditionally, or make any interim order or any other order it may deem just, but the court shall not refuse to make a winding-up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets.’

The court therefore has a discretion to grant or dismiss the application or make any other order it deems just.

On a plain reading of the provisions of s 347, the court has a wide discretion that may be exercised against the granting of an order for the final winding-up of a company. However, I submit that the exercise of the court’s discretion has been narrowed by the effect of the various judgments dealing with s 347.

In Rosenbach & Co (Pty) Ltd v Singh’s Bazaars (Pty) Ltd 1962 (4) SA 593 (D) at 597 Caney J held that:

‘If the company is in fact solvent, in the sense of its assets exceeding its liabilities, this may or may not, depending upon the circumstances, lead to a refusal of a winding-up order; the circumstances particularly to be taken into consideration against the making of an order are such as show that there are liquid assets or readily realisable assets available out of which, or the proceeds of which, the company is in fact able to pay its debts.’

However, Caney J also held that a creditor who cannot obtain payment of his debt is entitled as between himself and the company ex debito justitiae to an order if he brings his case within the relevant Act (at the time of the judgment, this would have been the Companies Act 46 of 1926).

Further, in Absa Bank Ltd v Rhebokskloof (Pty) Ltd and Others 1993 (4) SA 436 (C), the court stated at 440F to 441A: ‘It matters not that the company’s assets, fairly valued, far exceed its liabilities: Once the court finds that it cannot [meet current demands on it and remain buoyant], it follows that it is entitled to, and should, hold that the company is unable to pay its debts within the meaning of section 345(1)(c) as read with section 344(f) of [the 1973 Act] and is accordingly liable to be wound-up.’

However, both the Rosenbach and Rhebokskloof decisions were decided prior to the commencement of the 2008 Act.

In Koen and Another v Wedgewood Village Golf & Country Estate (Pty) Ltd and Others 2012 (2) SA 378 (WCC), Binns-Ward J stated at para 14:

‘It is clear that the legislature has recognised that the liquidation of companies more frequently than not occasions significant collateral damage, both economically and socially, with attendant destruction of wealth and livelihoods. It is obvious that it is in the public interest that the incidence of such adverse socio-economic consequences should be avoided where reasonably possible.’

It can be accepted that while the provisions of ch 14 of the 1973 Act remain applicable, the way in which such provisions are to be implemented and interpreted are to be revisited in light of the change in mindset occasioned by the introduction of the 2008 Act and, more particularly, the business rescue regime (see Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2012 (3) SA 273 (GSJ) at paras 6 – 11).

This is amplified by s 7(k) of the 2008 Act, which states that one of the Act’s purposes is ‘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’.

While it is clear that the introduction of the business rescue regime provides an alternative to liquidation, it was argued before Sutherland J (and impliedly accepted by him) that even if a company does not meet the requirements for the granting of a business rescue, the court must still apply the change in mindset when considering whether to exercise its discretion against granting a winding-up order.

Therefore, a court exercising its discretion not to grant a winding-up order (apart from whether or not it ought to place a company under business rescue) ought to place greater emphasis on the fact that, given more time, the realisation of the company’s assets would result in payment to the creditor(s) in full and, in consideration of this fact, ought to refuse the granting of a final winding-up order to avoid the deleterious consequences of a liquidation. The devastating effect of liquidations on a nation’s economy has been recognised by the courts (see the Oakdene Square case).

Therefore, the remedy of liquidation appears to have been relegated to a ‘last resort’ that ought not to be granted if an alternative remedy is available to the applicant, notwithstanding that such remedy might not take the form of business rescue.

Conclusion

It appears that the effect of Sutherland J’s judgment is that, where it can be demonstrated by a company in respect of which an application for final liquidation is brought that the company is factually solvent and, given more time, will be able to realise its readily ascertainable assets, the court ought not to grant the liquidation.

Whereas in the past the doctrine of ex debito justitiae dictated that a creditor that brought itself within the provisions of ss 344 and 347 of the 1973 Act would be entitled to a liquidation order as of right, this is no longer the case.

The liquidation regime has been relegated to a last resort in light of the provisions of the 2008 Act and, under the circumstances, a liquidation will not be granted where a company, given more time, is able to realise its assets and discharge the debt it owes.

Where to from here?

The decision in the New City case does not, at the time of writing this article, appear to have been considered by any subsequent court.

However, the matter of Oakdene Square is currently on appeal at the Supreme Court of Appeal, where it is likely that consideration will be given to Sutherland J’s judgment.

Don Mahon LLB AIPSA Dip Insolvency law (UP) is an advocate in Johannesburg. He acted for New City and Cohen in this matter.

This article was first published in De Rebus in 2013 (March) DR 38.