Business rescue – Where will it end?

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Lucinde Rhoodie, Director, Dispute Resolution, Cliffe Dekker Hofmeyr Cape Town

cdh

lucindeThe commercial landscape in South Africa was forever changed when the business rescue was introduced by Chapter 6 of the Companies Act, 71 of 2008 (“the Act”).

The proverbial “blind leading the blind” comes to mind when one recalls the great uncertainty which existed, and to an extent still exists, in the minds of business owners, creditors, employees and even business rescue practitioners as to the meaning of certain provisions of Chapter 6 of the Act.

With each judgment delivered, our courts are providing clarity on Chapter 6, making it easier for business owners, creditors and business rescue practitioners to navigate their way through this ever changing landscape.

The Supreme Court of Appeal (“SCA”) was recently tasked to determine whether it is competent for an affected person to apply for a company to be placed in business rescue after a final liquidation order has been granted against a company.  It delivered the judgment in Richter v ABSA Bank Limited on 1 June 2015.  A shareholder, creditor, employee and registered trade union representing employees are all defined as “affected persons” in the Act.

In 2012 a final liquidation order was granted against Bloempro CC (“Bloempro“).  ABSA Bank Limited (“ABSA”) was a creditor of Bloempro.

In 2013 Mr Dawid Richter (“Richter“), at all material times employed by Bloempro, brought an application for an order to place Bloempro under business rescue, which application was dismissed.  Richter then applied for rescission of the judgment dismissing the business rescue application.  ABSA opposed the rescission application.

The court a quo dismissed the application for rescission and found that although Richter was an affected person as envisaged in the Act, as a final liquidation order had been granted against Bloempro, it was not open to any affected person to apply for business rescue proceedings, as would otherwise be the case in terms of section 131(1) of the Act.  This decision was taken upon appeal.

Sections 131(1) and (6) provide:-

“(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.

The crux of the issue before the SCA was the interpretation of the phrase “liquidation proceedings” within the context of s 131(6).  The SCA had to decide whether the phrase refers only to a pending application for a liquidation order or whether the phrase includes the process of winding up of a company after a final liquidation order has been granted.

The SCA confirmed the position that upon the final liquidation order being granted a company continues to exist, but control of its affairs is transferred from the directors to the liquidator.  Only once the affairs of the company have been finally wound up by the liquidator and a Master’s certificate to that effect is published in the Government Gazette, is a company dissolved.

The SCA found that the phrase ‘liquidation proceedings’ in no way alters the significance of what is meant by liquidation and that a proper interpretation of ‘liquidation proceedings’ in relation to s 131(6) of the Act must include proceedings that occur after a winding up order to liquidate the assets and account to creditors has been granted up to deregistration of a company.

This judgment has far reaching implications for business and creditors as it allows any affected person to apply for a company to be placed under business rescue even after a final order of liquidation has been granted, and conceivably after a liquidator has liquidated certain assets of the company.

The SCA considered the concerns raised by ABSA which included that a liberal interpretation of s 131(1) may have negative results for the liquidation process.  ABSA argued these negative results to include repetitive disruptions and uncertainty that may result from various affected persons making applications for business rescue at different times during the winding up process and handing back business control to the same directors who may have been the cause of the financial distress experienced by the company.

In reaching its decision the SCA was guided and persuaded it seems by the purpose of business rescue as stated in the Act being:  “to provide for efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.

This judgment is a significant victory for employees but not so much for creditors.

The SCA sent a definite message to creditors when stating that:

A necessary consequence thereof is limitation, to some extent, on the power of creditors to singlehandedly curtail the life of a company“.

The full impact of this judgment on the rights of creditors will soon become apparent.