Launching business rescue applications in liquidation proceedings – (successfully) flogging a dead horse?

August 25th, 2015

Richter v Absa Bank Limited (SCA) (unreported case no 20181/2014, 1-6-2015) (Mhlantla, Leach, Pillay JJA, Fourie and Dambuza AJJA)

By Bouwer van Niekerk

A potentially far-reaching decision regarding the launching of business rescue proceedings in liquidation proceedings was handed down on 1 June 2015 in the Supreme Court of Appeal in Richter v Absa Bank Limited (SCA) (unreported case no 20181/2014, 1-6-2015) (Mhlantla, Leach, Pillay JJA, Fourie and Dambuza AJJA).

The appeal was concerned with the issue as to whether it is competent to apply for business rescue in terms of s 131 of the Companies Act 71 of 2008 (the Act) after a final liquidation order has been granted against a company. The appellant appealed against the decision of the court a quo, which found that it was not competent to apply for business rescue after a final winding-up order had been issued. In deciding this issue, the court’s primary focus was on the interpretation of ‘liquidation proceedings’ within the context of s 131(6) of the Act, which interpretation would ultimately determine the outcome of the appeal.

Sub-sections 131(1) and (6) of the Act provide that:

‘(1) Unless 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.

(6) If 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 until –

(a) the court has adjudicated upon the application; or

(b) the business rescue proceedings end, if the court makes the order applied for.’

In interpreting the concept ‘liquidation proceedings’, the court placed significance on the fact that s 131(1) of the Act entitles affected persons to apply to court for an order placing a company under supervision and commencing business rescue proceedings at any time. The court then extrapolated on this by pointing out that s 131(7) also empowers the court, when considering an application for business rescue, to grant orders provided for in subs 131(4) and (5) at any time during the course of liquidation proceedings.

The court then turned its attention to the meaning of ‘liquidation’. It pointed out that ‘[g]enerally, in law and in business, liquidation is the exhaustive process by which a company is brought to an end, and the assets thereof, if any, are redistributed’.

The court continued by pointing out that the position on the granting of a final order of liquidation is that the company continues to exist; it is merely the control of its affairs that is transferred from the director(s) to the liquidator(s). In terms of s 348 of the Companies Act 61 of 1973, liquidation by the court commences on presentation to it of the application for the winding-up, and continues until the affairs of the company have been finally wound up and the Master’s certificate to that effect is published in the Government Gazette, thus dissolving the company.

The gist of the court’s thinking is contained in para 12: ‘I do not think the phrase “liquidation proceedings” in any way alters the significance of what is meant by liquidation. In terms s 136(4) of the Act if liquidation proceedings have been converted into business rescue proceedings, the liquidator is regarded as a creditor of the company to the extent of any outstanding amounts owing to him or her for any remuneration due for work performed, or compensation for expenses incurred before the commencement of business rescue proceedings. Under s 1(1) and sch 5(9) of the 1973 Act, which applies to liquidation of insolvent companies, the definition of “liquidator” includes a provisional liquidator and a final liquidator. Consequently, the conversion of liquidation to business rescue even after a final liquidation order has been granted, was clearly envisaged by s 136 (4)’.

In discussing the practicalities of its decision, the court then formed the view that it would be fairly easy to contemplate instances, after the issue of the final winding-up order, which could lead to circumstances where the company improves drastically, to the point where it would become profitable, should it be allowed to trade. It sights examples of the company being awarded a contract previously tendered for, securing of funding for future projects and the subordination of claims by major creditors. Accordingly, the court remarked that ‘… in the scheme of things, where, during liquidation, evidence becomes available that business rescue proceedings will yield a better return for shareholders and creditors and jobs will be retained, there could be no reason to deny business rescue only because a company is in final liquidation. Indeed, to allow it to do so would fall into the very scheme of business rescue envisaged by the Act and fulfil the objectives of providing for revival of a financially distressed company with all its attendant social benefits’.

During argument, the respondent raised various concerns with what it termed a ‘liberal interpretation’ of s 131(1) of the Act. The concerns included repetitive disruptions and uncertainly resulting from various affected parties launching business rescue proceedings (even at different times), a company’s capacity (or lack thereof) to conduct effective business and conclude and implement contracts under final winding-up conditions and the revision of business control to the very directors who may have caused the company’s financial distress (thereby putting the proverbial rabbit in charge of the lettuce).

The court conceded that these concerns are valid, but was not persuaded to revert to what it termed ‘an unduly restrictive approach’ in interpreting the Act. It dealt with these concerns thus: ‘The simple answer is that a court can dismiss any application for business rescue that is not genuine and bona fide or which does not establish that the benefits of a successful business rescue will be achieved.

‘There is no sensible justification for drawing the proverbial “line in the sand” between pre and post final liquidation in circumstances where the prospects of success of business rescue exist. The legislature did not do so and to restrict business rescue to those cases in which a final winding up order has not been granted is inimical to the Act’.

On a cursory reading the judgment may tend to offend the insolvency practitioner; surely it could not have been the intention of the legislature to allow for applications for business rescue to be made at any time before the dissolving of a company? Surely such a state of affairs can only harm the self-evident legal belief that interpretations of statutes should lead to, or at the very least advance, legal certainty? Where can we find any certainty in liquidation proceedings if any Joe Soap can apply to place a company under supervision at any (even an advanced) stage of being wound-up?

However, one must keep in mind that it is not the purpose of the courts to clarify what it believes the thinking of the legislature ought to have been. If the wording of the Act is clear and unambiguous, it must be interpreted as such. Should it perceive its mandate to extend further than that, the judiciary will run the risk of meddling in another sphere of government. That, and the unavoidable allegations of disregarding the separation of powers that accompany such meddling, is something that the judiciary should best avoid.

Bouwer van Niekerk BA (Law) LLB (SU) Post Grad Dip Labour Law (UJ) Cert Business Rescue Practice (UNISA and LEAD) is an attorney at Smit Sewgoolam Inc in Johannesburg.

This article was first published in De Rebus in 2015 (Sep) DR 50.