These are a few of the phrases sometimes echoed in the corridors of our superior courts, bold submissions made by counsel, probably borne from frustration, and often occurring when a creditor is on the verge of having a liquidation application heard in court, but the course of the application is interrupted by a last minute business rescue application, brought by an “affected person”, seeking to place the company into business rescue instead.
The courts are then called upon to interpret the much-debated section 131(6) of the Companies Act 71 of 2008 (“the Companies Act”).
Section 131(6) of the Act states that:
“If liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of subsection (1), [for business rescue] 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 possibility of suspending liquidation proceedings by way of a business rescue application has led to many an abuse of process, with the majority of these applications being launched merely to frustrate the inevitable winding-up of a company. This is exacerbated by the fact that a business rescue application may be brought at any time, which means that the application may be lodged until liquidation proceedings are almost completed, that is any time before the company is dissolved or deregistered. Although the affected persons applying for the business rescue of the company must still satisfy the requirements for business rescue, these business rescue applications have become a commonly used tool to ‘buy time’.
But what exactly is suspended? Must all progress towards obtaining a provisional or final order for liquidation cease? Or are parties merely prohibited from the physical winding-up of the company after a final liquidation order has been granted? The crux of the legal debate surrounding these questions turns on the interpretation of the words, “suspend those liquidation proceedings”. In other words, what is meant by liquidation proceedings?
In ABSA Bank Ltd v Summer Lodge (Pty) Ltd 2013 (5) SA 444 (GNP) the court held that “the meaning of the words liquidation proceedings in section 131(6) of the Companies Act 71 of 2008 is confined to the actual process of winding-up a company consequent upon an order of winding-up having been issued by a court, and is the actual process followed in winding-up and overseen by the liquidators and the masters. The words liquidation proceedings do not include the legal proceedings taken by a creditor for purposes of obtaining an order that a company be wound-up.”
Similar sentiments were expressed in the subsequent ABSA Bank Ltd v Summer Lodge (Pty) Ltd 2014 (3) SA 90 (GP) decision, where the court further held that an applicant in liquidation proceedings is not debarred from moving for the orders claimed in an application which it filed long before the application for business rescue proceedings was filed.
In Richter v Absa Bank Limited (20181/2014) 2015 ZASCA 100, the Supreme Court of Appeal stated that a proper interpretation of ‘liquidation proceedings’ in relation to s 131(6) of the Act must include any proceedings that occur after a winding-up order to liquidate the assets and account to creditors has been granted, up to the time that deregistration of a company occurs.
This dictum in Richter must be considered in the light of the explanation of ‘liquidation proceedings’ held in ABSA Bank Ltd v Summer Lodge (Pty) Ltd 2014 (3) SA 90 (GP) mentioned above. In this latter case the court explained that, in terms of s 348 of the pervious Companies Act 61 of 1973, a winding-up order by the court is, by way of a fiction (obviously for purposes of the proper administration of this order), deemed to commence at the time of the presentation to the court of the application for winding-up, but this deeming clause only comes into operation after it has been determined ex post facto that a winding-up order has been granted. If no such order has been granted, any liquidation proceedings cannot be deemed to have commenced.
It was recently confirmed in GCC Engineering (Pty) Ltd and Others v Maroos and Others 2019 (2) SA 379 (SCA) that, where a provisional liquidation order had already been granted, what is suspended is the process of continuing with the realisation of the assets of the company in liquidation, with the aim of ultimately distributing them to the various creditors. The Supreme Court of Appeal further added that the term 'liquidation proceeding' refers to those actions performed by a liquidator in dealing with the affairs of a company in liquidation in order to bring about its dissolution.
It would appear that what is suspended, is therefore the process of winding-up and not the legal consequences of a winding-up order. Applicants in liquidation proceedings are therefore not barred from obtaining such a winding-up order even though a business rescue application may have been instituted.
Presently, a number of matters are pending before various superior courts, including the SCA, challenging the interpretation of the term ‘liquidation proceeding.’ It would be interesting to see whether a different interpretation to the one above is offered, in time to come.
Section 7 of the Act provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. The only way to ensure that the rights and interests of all relevant stakeholders are balanced, including those stakeholders seeking the liquidation of the company, is by allowing liquidation applications to continue up until the granting of a final liquidation order, but thereafter suspending the actual winding-up of the company pending the evaluation of any bona fide business rescue application which has been made.
Although it seems apparent that business rescue applications will continue to be used and abused by affected persons to buy time when the liquidation of a company is looming, stakeholders in favour of liquidation can take some consolation in knowing that at least for now, a final liquidation order may still be obtained and it is only the winding-up of the company (the realisation of the assets of the company with the aim of ultimately distributing the proceeds to the various creditors) that becomes suspended when a business rescue application is instituted.