By Dr Justice Mudzamiri
It is trite that business rescue and liquidation (winding up) proceedings are opposites and mutually exclusive. Business rescue aims to rehabilitate a financially distressed company by providing temporary supervision, a temporary moratorium on the legal rights of claimants, and the implementation of a plan to reorganise the company’s affairs, as outlined in s 128(1)(b) of the Companies Act 71 of 2008 (2008 Act). The winding up of solvent companies is governed by ss 79 to 83 of the 2008 Act. Conversely, the winding up of insolvent companies is regulated under ch XIV of the Companies Act 61 of 1973 (1973 Act). The purpose of winding up is to dissolve either a solvent or insolvent company and distribute the proceeds to stakeholders. By analogy, business rescue is likened to human life support, while winding up can be compared to euthanasia; these two processes cannot co-exist. The legal issues raised in Macneil are explored below.
Facts
Macneil Plastics (Pty) Ltd (the appellant) sought to set aside the judgment of the Gauteng Division of the High Court, delivered by Mngqibisa-Thusi J. The court a quo ordered the appellant to reimburse Water Africa Systems (Pty) Ltd (fourth respondent) for amounts given to it after the final liquidation date, along with interest and declared these dispositions void. To clarify the facts at hand, this contribution identifies and chronologically separates the five significant events relevant to the appeal. First, on 28 October 2015, DIP Plastic (Pty) Ltd was granted a final liquidation order for the fourth respondent by Hughes J. Second, on 2 November 2015, despite the final liquidation, the fourth respondent made two payments to the appellant totalling R 189 288,74 and R 217 721,56. Third, after the final order and the payment of R 401 010,30 on 9 December 2015, Tuchten J granted an order to place the fourth respondent under business rescue. Fourth, the business rescue practitioner applied to set aside the business rescue and reinstate the final winding-up, which Potterill J granted on 28 October 2015. Finally, on 30 June 2016, the Master appointed the first, second, and third respondents as liquidators of the fourth respondent. Against this backdrop, the appellant appealed the decision of the court a quo.
Issues
In Macneil, Mogale AJ (with Molopa-Sethosa J and Sethusha-Shongwe AJA concurring) (the Full Bench) grappled with determining the effect of s 131(6) of the 2008 Act order (s 131(6) order) on existing liquidation proceedings. The Full Bench was tasked with deciding between two opposing legal standpoints: whether the s 131(6) order terminates or suspends liquidation proceedings. The issue was whether the judgment and order of Mngqibisa-Thusi J in the court a quo should be set aside because the payments that the liquidators sought to reclaim from the appellant were made after the fourth respondent’s final liquidation proceedings, which were later replaced by business rescue (Macneil at para 12).
Decision
The appellants largely argued that the final liquidation was replaced by business rescue as a result by placing the company in business rescue back to liquidation it created a new concursus creditorum. In contrast, the respondents argued that winding up established concursus creditorum and altering creditors’ rights is prohibited. The respondents correctly submitted that dispositions made after granting a winding-up order are void because control rests with the Master and the liquidator. The respondents further correctly held that business rescue cannot undo void dispositions made after granting of a winding-up order (Macneil at para 22).
The Full Bench held that s 341 of the 1973 Act provides that dispositions after winding up are void. In concurring with the court a quo, the Full Bench correctly held that the payments made to the appellant were void ab initio. The Full Bench also correctly interpreted s 131(6) read with s 131(1) of the 2008 Act, which together suspends liquidation proceedings if a business rescue application is made. The Full Bench further clarified s 131(6) and correctly held that when the court places a company with a pre-existing winding-up order into business rescue, such pre-existing order remains in place and is not terminated until the business rescue practitioner applies to court to lift the suspension of such order and indeed the court grants such application. The Full Bench correctly decided that in this case, the dispositions made to the appellant were void ab initio and the concursus creditorum created by the liquidation order cannot be invalidated by business rescue. The disposition was invalid because, in the circumstances, only the Master and the liquidator had the powers to permit such. In concurring with the court a quo, the Full Bench rejected the appellant’s argument that business rescue had the effect of ending liquidation and confirmed that business rescue cannot validate void dispositions.
Conclusion(s) and comments
The practical implication of the decision is that it mitigates the abuses of functional purposes of the liquidation and business rescue proceedings. This judgment closes the door for companies that may make void dispositions during liquidation and collude in scheming sham business rescue proceedings to validate otherwise unlawful dispositions and revert to liquidation soon after. In this context, as noted, s 341 of the 1973 Act invalidates dispositions by companies during liquidation without the permission of a liquidator or order of the court. The subsection prohibits the trafficking of the company’s assets and shares by companies without the liquidator’s consent and/or court order to avoid inequitable distribution of company assets to stakeholders (including creditors).
Dr Justice Mudzamiri LLB (UFH) LLM (UJ) LLD (UFH) is a legal practitioner at Drake Flemmer & Orsmond (EL) Inc in East London.
This article was first published in De Rebus in 2025 (April) DR 35.
