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The art of law - winding up a financially distressed company or embarking on an attempt at business rescue

The race between creditors wanting to liquidate a struggling company and directors or employees wanting to embark on business rescue

When a company finds itself in serious financial difficulties and is unable to pay its debts as they fall due, an unseemly race is often unleashed between its directors or employees, desperately trying to get the company into the business rescue regime provided for in Chapter 6 of the Companies Act 71 of 2008 (so that a statutory moratorium will immediately come into place, preventing the company's creditors from enforcing their claims for the duration of the business rescue process) and creditors of the company urgently seeking to have the company placed in liquidation so that its assets cannot be further depleted by its continuing to trade at a loss, and so that its remaining funds and assets can be utilised to pay its creditors.

The applicable provisions of the Companies Act 2008

Who wins that race will often be determined by section 131(6) of the Companies Act 71 of 2008 which provides that -

'If liquidation proceedings have already been commenced by or against the company at the time an application [for business rescue] 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.'

A critical question in the interpretation of this provision is the juncture at which liquidation proceedings have been commenced, as envisaged in this sub-section. Do those proceedings commence with the mere filing of an application at court for a provisional or final liquidation order (in which event, creditors will be barred from even making application to court for such an order if an application has already been made to commence business rescue) or do liquidation proceedings commence with the legal process of winding up the company that follows on and gives effect to an order of liquidation?

If the former is the correct interpretation, then the entry of a company into the business rescue regime bars the company's creditors from even bringing a liquidation application to court and suspends any liquidation proceedings that have already commenced.

In this context, account needs also to be taken of section 129(2) which provides (though it is expressed somewhat differently) that the directors of a financially distressed company cannot adopt a resolution to place the company in business rescue -

'if liquidation proceedings have been initiated by or against the company'.

The Pretoria High Court rules on the interpretation of these provisions

The decision in Absa Bank Ltd v Summer Lodge (Pty) Ltd 2013 (5) SA 444 (GNP) concerned the interpretation of the expression liquidation proceedings in section 131(6). At issue was whether the mere filing of an application to court in terms of section 131(1) for a company to commence business rescue automatically suspends any application for the company's liquidation.

In an earlier application in the same proceedings, Van der Byl AJ had held in the Pretoria High Court (see Absa Bank Ltd v Summer Lodge (Pty) Ltd 2014 (3) SA 90 (GNP)) that liquidation proceedings refer to the process of winding up that follows a court order for the liquidation of a company.

In the present matter, Makgoba J (at para [10]) sought an interpretation of the words liquidation and proceedings in their 'ordinary grammatical meaning'. This is a significant weakness in the judgment, for the Supreme Court of Appeal has recently held in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) that the meaning of words in a statute cannot be determined in the abstract, shorn of their context, and that the proper approach is that -

'from the outset one considers the context and the language together, with neither predominating over the other'.

The new principles of statutory interpretation

In Natal Joint Pension Fund, the Supreme Court of Appeal quoted with approval from a judgment by Sir Anthony Mason CJ in K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HLA 48 ((1985) 157 CLR 309 at 315 where he said that -

'Problems of legal interpretation are not solved satisfactorily by ritual incantations which emphasise the clarity of meaning which words have when viewed in isolation, divorced from their context.'

In the present case, Makgoba J should (it is submitted) have sought the meaning of the words of the Act in their context and in the light of the overall objectives of the Act, and not merely in their ordinary or dictionary meaning.

The deemed juncture at which the winding up of a company commences

Significantly, section 348 of the Companies Act 61 of 1973 which (in terms of the transitional arrangements of the new Companies Act of 2008 set out in Schedule 5) remain in force in relation to the winding-up of an insolvent company, provides that -

'A winding-up of a company by the Court shall be deemed to commence at the time of the presentation to the Court of the application for the winding-up.'

The full bench in Vermeulen and Another v CC Bauermeister (Edms) Bpk 1982 (4) SA 159 (T) (approved in Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A)) held that -

'Section 348 is a deeming provision, whereby a winding-up by the Court is deemed to have commenced when the application is presented . . .'

In the result, Makgoba J (at para [16]) held in the present case, agreeing with Van der Byl AJ in the earlier application in the same proceedings, that -

'I am of the opinion that s 131(6) of the Act means that once the liquidation proceedings have commenced by the granting of a liquidation order, whether provisional or final, the mere issue and service of a business rescue application in terms of s 131(1) of the Act would suspend the liquidation process.' (Emphasis added.)

It follows that if a court order has been granted for the provisional or final liquidation of a company, the mere filing of an application to court in terms of section 131(1) for the company to be placed under supervision for the purpose of business rescue (but not - see section 129(2), quoted above - the mere passing of a board resolution in terms of section 129(1) for the company to embark on business rescue) will suspend the liquidation process, with the result that none of the steps involved in the winding-up of the company can be initiated and, if they have been initiated, they will forthwith and ipso facto be suspended for the duration of the business rescue proceedings.

The court in the present case also quoted with approval from the judgment of Swain J in FirstRand Bank Ltd v Imperial Crown Trading 143 (Pty) Ltd 2001 (4) SA 266 (KZD) where he said that -

'Simply put s 131(6) provides that, if the application for business rescue, after adjudication, is refused, the suspension of liquidation proceedings is ended. If, however, the application is granted, the suspension of liquidation proceedings endures until the business rescue proceedings end in terms of s 132(2).'

In policy terms, the Companies Act therefore gives greater weight to an attempt at business rescue, with the potential to save an economically productive enterprise and prevent the loss of jobs, than to the interests of creditors who wish to draw a line under the misfortune of a financially struggling company and place it in liquidation.

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