Positive and Negative Effects of a Business Rescue Order After Liquidation

Two recent cases have thrown light on the interesting issue of how late in the day an application for business rescue can be brought and still succeed.

Section 131(6) of Act 71 of 2008 provides that if liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of section 131(1) (being the application for business rescue by way of court order), the application will suspend those liquidation proceedings until the court has adjudicated upon the business rescue application or the business rescue proceedings end, if the court makes the business rescue order applied for.

Section 131(7) says that a court can make an order in terms of section 131(4) or section 131(5) at any time during the course of any liquidation proceedings.

The issue is whether the term "at any time during the course of any liquidation proceedings" (section 131(7)) refers only to the time during which an application for the liquidation of the company is before the court, or does it refer to the collective proceedings of the actual winding-up of the company by the liquidator.

If the latter interpretation is followed, namely that liquidation proceedings mean the collective proceedings of the actual winding-up, then a company that is in the process of being wound up can still be placed under business rescue, thereby suspending the liquidation process. This means that the company can be placed under business rescue if compelling reasons are placed before the court, even though the administration by the liquidator is far advanced and has been ongoing for a number of years.

The commentary and opinion when Chapter 6 of Act 71 of 2008 was in the process of being developed, was that the correct interpretation would be that liquidation proceedings do not mean proceedings in a court up to the date of a final winding-up order, but mean an application for business rescue proceedings may be made at any time during the winding-up until the Master has confirmed the final liquidation and distribution account.

Some of the commentators considered it undesirable that a business rescue order is made after the winding-up of a company has commenced.

The courts have now decided the matter finally.

The case of Van Staden vs Angel Ozone Products CC 2012 JDR 1945 (GNP) was decided by the Honourable Legodi J and judgment was handed down on 12 October 2012.

The question Legodi J had to decide was whether the applicant was entitled to bring an application in terms of section 131(6) for a court order to begin business rescue proceedings), in light of the fact that Angel Ozone Products CC had been finally liquidated before the commencement of the Companies Act 71 of 2008 on 1 May 2011. The original application for liquidation of Angel Ozone had been launched during March 2010. The provisional liquidation order was granted on 15 August 2010 and the final liquidation order was granted on 23 February 2011.

The business of Angel Ozone was the development and marketing of ozone gel used in the medical and cosmetic industries. In the period of three years Angel Ozone contracted with 2500 manufacturers that rented approximately 8500 purifier machines. In 2009 Angel Ozone experienced cash flow problems resulting in the manufacturers dropping the production of ozone gel due to non-payment. At the date of liquidation the assets of Angel Ozone were 9000 purifier machines at a value of R18 million. The intervening parties were manufacturers and creditors.

Legodi J had to deal with the argument that liquidation proceedings should be distinguished from and not be confused with winding-up proceedings. The opposing argument was that liquidation proceedings came to an end when a final liquidation order was granted on 23 February 2011, and the contention was that the applicant cannot seek to undo what has already been finalised through judicial process.

Legodi J agreed that a distinction can be made between liquidation and winding-up proceedings. For example, liquidation proceedings are legal proceedings before a court of law, and winding-up proceedings are a process that is overseen by the liquidators and the Master of the High Court. However, he found that winding-up proceedings were a continuation of liquidation proceedings. Accordingly, Legodi J made the far-reaching decision that liquidation proceedings, in the context of Chapter 131, are processes that are concluded once there is a final liquidation and distribution account confirmed by the Master. In summary the Judge held that "winding-up proceedings are part and parcel of the liquidation proceedings".

The first and understandable reaction is that the proverbial scrambled egg is now to be unscrambled, meaning what has to be done with the work done by the liquidators and how this work is to be "undone".

I found it interesting that Legodi J noted that there was no affidavit filed on behalf of the liquidators to tell the court how far the liquidators had progressed with the winding-up process. The facts were that purifier machines could still be utilised to produce the ozonated gel and the court commented that the silence of the liquidator suggested that they were prepared to abide the decision of the court.

A further interesting decision was that of the Honourable Nyman AJ. This was decided in case 19599/2012 in the High Court of South Africa (Western Cape High Court, Cape Town). The applicant, Cardinet (Pty) Ltd, brought an application in terms of section 131(6) to have Wedgewood Golf & Country Estate (Pty) Ltd (in liquidation) placed into business rescue. On 9 February 2012 Wedgewood had been placed under final winding-up (after a number of failed business rescue applications by various parties).

On 30 January 2013, nearly a year later, Nyman AJ ordered that Wedgewood be placed into business rescue. The court appointed an interim business rescue practitioner and ordered the applicant to indemnify the joint liquidators in respect of their reasonable fees and expenses incurred by them in the winding-up of Wedgewood.

In the Wedgewood proceedings Nyman AJ went to great lengths to satisfy himself that the business rescue would result in a better return not only for Nedbank (the secured creditor that opposed the business rescue application) and for all its creditors and stakeholders, than would result from the immediate liquidation of Wedgewood.

Factually, the court found that the costs of completion of the development would be approximately R18 million and reference was made to various property reports. Nyman AJ concluded that the property opinions provided sound reasoning for revised valuation figures and concluded that there was credibility in the applicant's factual averment regarding the costs of completion. Nyman AJ also found that the applicant produced sustainable evidence that the third party finance had been secured and he accepted the evidence that favoured the marketability of Wedgewood.

Importantly, Nyman AJ exercised his discretion and gave due weight to the legislature's preference to come to the rescue of ailing companies.

Again, questions will be asked as to the effect of these judgments on what the liquidators have already done in the winding-up process.

In my view, both these judgments are correct. However, they certainly have both positive and negative effects. A huge positive is that a good business can be revived through a business rescue application and the subsequent involvement of a practitioner, even after that business has been effectively closed down and rendered incapable of development through the liquidation process.

A negative is obviously that applications for business rescue can theoretically be brought years after the liquidation resulting in tremendous difficulties for the liquidators and what they have done in the course of winding-up. Furthermore, the fact that merely launching the application suspends the liquidation, without any provision being made for interim management of the company, lends itself to abuse.

It is my view that the liquidators themselves should remain mindful of the fact that it may ultimately be in the long-term best interests of all the stakeholders for a business rescue application to be brought, if there is a true and inherent value in the business. This thinking and correct application of the thinking can possibly unlock the value and thereby benefit the various stakeholders.

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