The two pathways of initiating business rescue proceedings

February 1st, 2023
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Picture source: Gallo Images/Getty

‘The interpretation of statutes or to be more precise, the judicial understanding of the legal rules, deals with those rules and principles which are employed to construct the correct meaning of the legislative text to be applied in legal disputes’ – Clive Brian Jaars ‘Constitutional interpretation of statutes in the Republic of South Africa’ (www.researchgate.net, accessed 12-12-2022).

There are two pathways in which business rescue proceedings may be initiated, the first one is by way of a resolution by the board of directors of the company in terms of s 129 of the Companies Act 71 of 2008 (the Act) and the second one is by way of application to court by an affected person.

The commencement of business rescue proceedings by an order of court is regulated by s 131 of the Act. ‘Section 131(1) of the Act provides that’, ‘an affected person may apply to court at any time for an order placing the company under supervision and commencing business rescue proceedings’, ‘unless a company has adopted a resolution’ as contemplated in s 129 of the Act (LLGV ‘Business Rescue Proceedings’ (https://thoughtcapitaltest.co.za, accessed 12-12-2022)).

The Act also makes provision for instances where an application in terms of s 131 would have the effect of suspending the liquidation proceedings. Section 131(6) states that ‘if liquidation proceedings have already been commenced by or against the company at the time an application is made … , 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’.

The term ‘at the time an application is made’ is not defined in the Act. As a result, various interpretations have been adopted by the courts over the years in an attempt to provide a reasonable and correct interpretation of what these words mean. ‘What some considered constituting the “making” of a business rescue application is … the mere lodging’ ‘with the Registrar and the’ issuing ‘of the business rescue application’ while other courts have opted for the view that ‘both the lodging and issuing of the business rescue application as well as due compliance with the service and notification requirements of ss 131(2)(a) and (b) of the Companies Act, are required for the suspension of the liquidation proceedings to take effect’ (Nedbank Ltd v Liberty Moon Investments 82 (Pty) Ltd (GJ) (unreported case no 2021 / 4629, 6-6-2022) (Molahlehi J); Taboo Trading 232 (Pty) Ltd v Pro Wreck Scrap Metal CC and Others 2013 (6) SA 141 (KZP)).

Mere lodgement of the business rescue application papers approach

Satchwell J in Standard Bank of South Africa Ltd v Gas 2 Liquids (Pty) Ltd 2017 (2) SA 56 (GJ) at para 13 stated: ‘Respondent’s counsel referred me to Blue Star Holdings (Pty) Ltd v West Coast Oyster Growers CC 2013 (6) SA 540 (WCC) where a business rescue application lodged with the registrar that very day had been handed up to the court, which was to hear a winding-up application. The court found that the operative phrase for consideration was in section 131(6) “at the time an application is made” and that the word “made” must be given its ordinary meaning in the context in which it appears in the statutory setting. … The court found that a functional approach to section 131(6) led to the obvious conclusion that “the lodging of the [business rescue] application with the Registrar for the issue thereof constituted “making” the application and the commencement of proceedings to place the company under business rescue’.

In African Global Holdings (Pty) Ltd and Others v Lutchman NO and Others (Commissioner for the South African Revenue Service and Another as Intervening Parties) and a related matter [2020] JOL 48410 (GJ) at paras 135 – 166, the court held that ‘the Act … draws a distinction between those who need to be served and those who need to be notified. The two places where “the application” has to be “served” … are “on the company” and on the [Companies and Intellectual Property Commission]’. The court further held that ‘the keywords in section 131(6) are “at the time an application is made in terms of subsection (1), the application will suspend …’. The court stated that these words ‘must be read with the words “business rescue proceedings begin when … an affected person applies to the court” in section 132(1)(b) and ‘apply to court’ in section 131(1)’. The court had to consider ‘what meaning would the words used in section 131(6) in grammar and syntax convey to (a reasonable person) having all contextual knowledge, considering the purpose of the legislation, namely, to suspend the winding-up process?’ In this regard, the court held that ‘this process would have required, in part, a contextual analysis of sections 131(1), 131(2), 131(4), and 131(6), including the words “at the time an application is made” and of “the application will suspend those liquidation proceedings” in section 131(6)’. The court stated that ‘part of [the] context is that in our law an application is made when issued, and no express conditions have been built into the legislation before the application would have the legislative effect’. The court held that ‘the wording of section 131(6) of the [Act] is clear, and leaves no room for adding conditions thereto in an interpretative exercise’. The court concurred with Blue Star Holdings and ruled that ‘an application is made when it is issued’, namely, ‘the lodging of the application with the registrar for the issue thereof constituted the “making” of the application’.

Lodging and issuing of the business rescue application, as well as due compliance with the service approach

In Taboo Trading the court held that ‘suspension of the liquidation proceedings, as contemplated by s 131(6) of the Companies Act, has significant consequences, in the context where liquidation proceedings had already commenced. Clearly, such suspension may and probably will in most instances have a disruptive effect on the liquidation proceedings. Any delay in the hearing of a pending liquidation application may in some instances have the result that a company or close corporation continue trading in insolvent circumstances’ (para 11). The court, therefore, held that ‘a business-rescue application is thus only to be regarded as having been made once the application has been lodged with the Registrar, has been duly issued, a copy thereof served on the Commission, and each affected person has been properly notified of the application’.

In Gas 2 Liquids at para 22 and 23 the court held that ‘where there is no service upon the provisional liquidator of the application for business rescue, the provisional liquidator may have absolutely no knowledge of that business rescue application. In fact, knowledge alone would be insufficient. The provisional liquidator is entitled to service in terms of section 131 of the Act. Absent such service, the provisional liquidator does not officially know that he or she is “suspended” in his or her duties and powers if such suspension of the liquidation proceedings were to eventuate solely by reason of lodgement of papers at court and issue of a case number’.

The other reasons that the courts have provided for adopting this approach is that ‘provisional liquidators have, in terms of the Act, those powers statutorily granted to them, those which the Master may specially confer and those which they are granted by the court. They cover a wide range of activities. These may include the carrying on of a business, institution or defense of legal proceedings and the sale (or even the acquisition) of assets. Pursuant to the exercise of such powers, the provisional liquidator may operate on banking accounts, receive, and disburse funds, remunerate employees, conclude contracts and generally carry out the duties of the directors of the company in liquidation’.

Settled position by the SCA

The clarity on the question of when a business rescue application is ‘made’ in terms of s 131(6) of the Act has been recently settled by the Supreme Court of Appeal (SCA) in the case of Lutchman NO and Others v African Global Holdings (Pty) Ltd and Others and a related matter [2022] 3 All SA 35 (SCA), which was on appeal from the Gauteng Local Division of the High Court in Johannesburg.

In this case, African Global Operations (Pty) Ltd (Global Operations), one of the subsidiaries of the Bosasa Group was placed under voluntary winding-up in terms of s 351 of the Companies Act 61 of 1973 together with ten other subsidiaries wholly owned by the Bosasa Group. The directors of Global Operations sought to declare the special resolutions placing Global Operations under liquidation and the appointment of provisional joint liquidators’ null and void. The High Court granted the relief sought by the Bosasa Group. The joint liquidators were granted leave to appeal, and the SCA overturned the decision of the High Court and dismissed the application with costs. This meant that Global Operations and the other subsidiary companies remained under voluntary winding-up. The Bosasa Group then launched an application placing six companies of the Bosasa Group under business rescue proceedings in terms of s 131(1) of the Act. One of the questions that had to be decided by the SCA was ‘when is a business rescue application “made” within the meaning of s 131(6)’ of the Act.

The court noted that ‘there are conflicting High Court judgments on when a business rescue application is “made” within the meaning of section 131(6) of the Companies Act’. The court held that the correct interpretation is that ‘a business rescue application must be issued, served on the company and the Commission, and each affected person must be notified of the application in the prescribed manner, to meet the requirements of section 131(6) in order to trigger the suspension of liquidation proceedings that have already commenced’.

The court held that ‘a proper interpretation of the word “made” in isolation, in the context of section 131 as a whole … , in the context of the Companies Act as a whole (especially the nature and purpose of business rescue proceedings vis-à-vis those of winding-up proceedings as well as section 132(1)(b)), and the apparent purpose to which s 131(6) is directed, its meaning becomes clear’. The court held that ‘significant consequences ensue upon the commencement of liquidation proceedings’, ‘where there is no service upon the provisional liquidator of the application for business rescue, the provisional liquidator may have absolutely no knowledge of that business-rescue application. In fact, knowledge alone would be insufficient. The provisional liquidator is entitled to service in terms of section 131 of the Act’. If there is no ‘such service, the provisional liquidator does not officially know that he or she is “suspended” in his or her duties and powers if such suspension of the liquidation proceedings were to eventuate solely by reason of lodgement of papers at court and the issue of a case number’. The court held that ‘an interpretation that the word “made” in section 131(6) is used to denote the mere issuing of the business rescue proceedings and thereby triggering the suspension of the liquidation proceedings … results in absurdity, militates against logic, leads to an insensible or unbusinesslike result, and undermines the purpose of the section’.

Conclusion

I submit that the approach adopted by the SCA in its judgment is the correct one as far as the practical legal proceedings of both liquidation and business rescue are concerned. This judgment is significant as it illustrates the meaning of ‘making’ an application in terms of s 131(6) of the Act. The accepted principle with regards to these applications is that they ‘must be issued, served on the company and the Commission, and each affected person must be notified of the application in the prescribed manner, to meet the requirements of section 131(6) in order to trigger the suspension of liquidation proceedings that have already commenced’.

Njabulo Kubheka BA LLB LLM (UKZN) is a Legal Counsel with Absa Group Legal in Johannesburg.

This article was first published in De Rebus in 2023 (Jan/Feb) DR 32.

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