WHO IS IN CONTROL WHEN A LIQUIDATION APPLICATION IS SUSPENDED PENDING THE OUTCOME OF A BUSINESS RESCUE HEARING? by Colin Strime

WHO IS IN CONTROL WHEN A LIQUIDATION APPLICATION IS SUSPENDED PENDING THE OUTCOME OF A BUSINESS RESCUE HEARING? by Colin Strime

(Section 131(6) Of The Companies Act 71 Of 2008) (“The Act”)

  1. The latest judgment deals with the lacuna in Chapter 6 of the Act.

 

  1. The lacuna arises when determining who is in control of a business of a company which is in liquidation at the time that an application is launched to place it in rescue in terms of Section 131(1) (i.e an application to court which could be launched at any time to place a company under supervision and to commence business rescue proceedings).

 

  1. Section 131(6) reads as follows:

 

“131(6)     if liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of sub-section (1), the application will suspend those liquidation proceedings until –

 

  • the court has adjudicated upon the application; or

 

  • the business rescue proceedings end, if the court makes the order applied for.”

 

  1. If liquidation proceedings are suspended, and the Court has not yet made an order placing a company under rescue, who then is in control of the company or its business or its assets? What happens if the period of suspension runs into a number of weeks or even worse (as is normal with opposed applications), a number of months?

 

  1. The Act is silent on this.

 

  1. This issue was raised and argued in the North Gauteng Division of the High Court before Fabricius J. in the unreported matter of Lawrence Maroos & 50 Others v GCC Engineering (Pty) Ltd & Others (handed down on 15 June 2017). After considering some earlier decisions in this regard Fabricius J. came to the following view:

 

  • with regard to liquidation he referred to Section 361(2) of the 1973 Act which reads as follows:

 

“in any winding up of any company, at all times while the office of liquidator is vacant or he is unable to perform his duties, the property of the company shall be deemed to be in the custody and under the control of the Master”

 

  • the object of business rescue is to facilitate the continued existence of a company in a state of solvency and one of the objects of the Act is to rescue distressed companies;

 

  • that the learned Judges views in Janse Van Rensburg N.O & Another v Cardio Fitness Properties (Pty) Ltd & Others [2014] JOL 31979 (GSJ) (a judgment of Kgomo J.) and Knipe & Another v Noordman N.O & Others 2015 (4) SA 338 (NCK) were wrong. These are to the effect that the powers and duties of a provisional liquidator are not rendered nugatory over this period and are not suspended pending the outcome of the application for business rescue. In fact, as contended the provisional liquidator is under a continued obligation to secure and preserve assets pending the outcome of the business rescue application;

 

  • that “…. these decisions [i.e those referred to above] were wrongly decided and ought not to be followed. They do not achieve the purpose of the Act. Also if there is a lacuna in an Act it must be interpreted so as to achieve its stated purpose and certainly not restrictively”;

 

  • that directors in these circumstances were, in his opinion, again re-vested with control to manage the company but he (as recommended by the Applicant) proceeded to appoint an “independent manager” to manage the company over this period “with the powers and capacity of a director … to manage its business affairs from date hereof until finalisation of the business rescue application for the business rescue of first respondent currently pending”;

 

  1. Fabricius J. also referred to two earlier decisions of Richter v Absa Bank Limited [2015] ZA SCA 100 and PMG Motors Kyalami v First Rand Bank [2015] (2) SA 634 SCA which held that “liquidation proceedings” include court proceedings, and the complete process of winding-up or liquidation of a company is suspended by a relevant application in terms of Section 131(6) which according to these authorities means the powers of liquidators are suspended and the control of assets fall under the Master of the High Court in accordance with the provisions of Section 131(2) and further that if the particular company trades the powers of liquidators are suspended but the Master cannot assume the powers and obligations of the previous directors and the powers in this context are revested with the particular directors to control and manage the company pending the determination of the pending business rescue application, this to promote the objects of the Act with all attended social benefits. He appeared to agree with these views.

 

  1. Fabricius then ordered that the new manager:

 

  • provide security to the satisfaction of the Master of the High Court for the proper performance of his duties (this more than likely will prove impossible to achieve as for a number of reasons the insurers who provide these guarantees will refuse to provide such a guarantee);

 

  • may not dispose of any assets of the company without the written consent of the Master or the consent of the court; and

 

  • to provide the court hearing the business rescue application with a full report of his management of the company and with specific detail as to the possibility of the first respondent being rescued as a result of business rescue proceedings (this essentially being one of the important functions and duties reserved for business rescue practitioners). (This opinion / report is essentially one of the most important functions reserved strictly for business rescue practitioners. In effect by way of this court order this function has been usurped or delegated to a manager. The term nor office of Manager is defined in the Act. Certainly the Act does not permit for a delegation of this responsibility as such.)

 

  1. Although prima facie the judgment appeared to create a practical solution to the lacuna, it will be subject to criticism and will probably go on appeal. It has also created new practical problems (as dealt with in the bracketed comments above).

 

  1. Unfortunately neither the applicant nor the respondent’s counsel referred Fabricius J. to an earlier decision of Tuchten J. in the same High Court in the matter of Ex Parte Application of George Nel N.O & Others handed down on the 28th of July 2014. It dealt with the effects of an application for leave to appeal against the judgment of Thlapi J. dismissing a business rescue practitioner’s application for an extension of time, setting aside the resolution to which the business rescue process had commenced and placing the company under final liquidation.

 

  1. The application for leave to appeal created what Tuchten described as “a dispute” and a problem as to “who has the power to control the company until the final determination of the litigation as it makes it way through the courts”. In a lengthy and well reasoned judgment Tuchten states as follows:

 

“52   Another highly undesirable consequence of the approach proposed by counsel for the practitioner is that during the appeal process, the vesting of control over the company could swing from the practitioner to the liquidators and back again. ….. On the first applicant’s approach, control of the company then passes again to the practitioner upon the lodging of an application for leave to appeal – again, by a mere stroke of the company pen.”

 

“53   Balancing these considerations, I think that the submissions of counsel for the liquidators must prevail. …. Over more than a hundred years a legal policy has been developed and operated n relation to the processes created by the Insolvency Act and the previous Companies Act for the administration of sequestrated estates and companies wound up for inability to pay their debts. Pursuant to that policy, these processes fall to be administered immediately by trustees and liquidators despite pending appeals. If the purpose of s 18 had been to undo all that, one would have expected that measures would have been put in place to deal with or mitigate such consequences and that s 339 of the previous Companies Act would either have been expressly repealed or amended. None of that was done. Furthermore, the process initiated pursuant to the s 129(1) resolution takes only the interests of the company into account. A s 130 order setting aside the resolution is made after a hearing in court in which the interests of all parties who wished to advance their views have been considered.”

 

“54   For practical reasons, always subject ideally to the facts, I think that it is safer to vest control of a company in the circumstance I have described in the liquidators rather than the practitioner. I have described the position of the practitioner above. A liquidator, on the other hand, acts on creditors’ instructions and is quite independent of the board of the company and the pre-liquidation managers of its business, if any. There is, in general, under a liquidator less potential for disposing of or dissipating company property and concealing evidence than under a practitioner. Furthermore, to vest control in a liquidator would be consistent with a practice that has, as I have said, operated over many years and been developed and refined by the courts.”

 

  1. If Fabricius’ judgment goes on appeal – it will be interesting to find which way the courts will go, i.e in favour of the appointment of a manager or per Tuchten and his reasoning, i.e the re-vesting of the estate in the liquidators pending the outcome of the business rescue application.

 

  1. Watch this space.