The Uneasy Relationship Between Business Rescue Proceedings and Liquidation Proceedings
25 July 2013Routledge Modise
A recent judgment has shed light on the question as to precisely when a business rescue application has been made for the purposes of suspending liquidation proceedings.
Section 131(1) of the Companies Act 71 of 2008 (the Act) provides, inter alia, that an affected person may apply at any time for an order placing a company under supervision and commencing business rescue proceedings. One of the effects of bringing an application in terms of section 131(1) is set out in section 131(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."
It is therefore clear that an application for business rescue will suspend any liquidation proceedings that are pending against the company in question. The question that has arisen and which has now been decided by the courts is when can a business rescue application be considered to have been made or when can it validly be said that such application has suspended the liquidation proceedings that have already been commenced by or against the company.
The recent case of Charles Theodorus Joubert v Pro Wreck Scrap Metal CC, case 7159/2013 in the High Court of South Africa (KwaZulu-Natal High Court, Pietermaritzburg), was decided by the Honourable Hartzenberg AJ and judgment was handed down on 10 July 2013.
Briefly, the facts of this case were that on 26 June 2013 Mr Joubert lodged and issued an application under case number 7159/2012 to place Pro Wreck Scrap Metal CC under business rescue at the KwaZulu-Natal High Court, Pietermaritzburg. The business rescue application was set down and was to be heard on 27 June 2013. A separate application for the winding up of Pro Wreck, which was instituted on 6 June 2013 under case number 6366/2012, was also to be heard on 27 June 2013. On 27 June 2013, Hartzenberg AJ directed that the business rescue application and the liquidation application be heard together and one of the main issues that was to be decided by the court was whether the lodging and the issuing of the business rescue application had the effect of suspending the liquidation proceedings as envisaged in section 131(6).
In opposing the business rescue application it was argued that the mere lodgement and issuing of the business rescue application did not in itself trigger the suspension of the liquidation application in terms of section 131(6) and the contention was that "both the lodging and issuing of the business rescue application as well as due compliance with the service and notification requirements of Sections 131(2)(a) and (b) of the Companies Act, are required for the suspension of the liquidation to take effect". The applicants in the business rescue application had not produced any evidence that there had been compliance, or even substantial compliance, with the service and notification requirements of sections 131(2)(a) and (b).
In resolving the above issue Hartzenberg AJ relied on the reasoning of the courts in the judgements in cases involving applications in terms of the legislation governing claims for damages arising from personal injuries caused by motor vehicle accidents, where the courts have held that such applications are required to have been filed with the Registrar of the Court and served, in order for the applications to have been made within the prescribed time periods. The Judge noted that the courts consider it not too onerous to require that an application not only be issued and filed with the Registrar, but also that it be served within the prescribed time period.
The conclusion was therefore that service is regarded as a minimum requirement for the "making of an application". According to the Judge a further reason relied on by the courts as to why service should be regarded as a minimum requirement for the "making of an application" is that from that stage onwards it is within the power of the respondent concerned to prevent any undue delays. Hartzenberg AJ found this reason to be both relevant and apposite to a consideration of the interpretation of the words "apply", "application is made" and "applies" in sections 131(1), 131(6) and 131(2)(b), with reference to when a business rescue application may be considered to be made or had been made. It is only when a business rescue application is considered to have been made that it will have the effect of suspending any liquidation application that is pending.
In concluding that a business rescue application is only to be regarded as having been made once the application has been lodged with the Registrar, duly issued, a copy thereof served on the Commission, and each affected person has been properly notified of application, the court reasoned that service upon the Commission and notification of each affected person are not just procedural requirements, but are also substantive requirements in that they facilitate participation, in terms of section 131(3), by affected persons in the hearing of the business rescue application. Therefore, according to the Judge, compliance with these requirements is an integral part of the making of an application for an order in terms of section 131(1). While the courts may condone substantial compliance with the notification requirements in section 131(2)(b), Hartzenberg AJ makes it clear that short notice, which renders participation by affected parties in the hearing impossible, cannot be regarded as due compliance with this section.
We believe the judgment is correct. The effect of the judgement is that an application for business rescue will only be considered to have been made, therefore having the effect of suspending any pending liquidation proceedings as contemplated in section 131(6), once the application has been lodged with the Registrar, duly issued, served on the Commission and each of the affected person has been notified in terms of the Act. The courts are alert to the fact that the business rescue process is open to abuse, for instance in cases where the application is brought merely for the purpose of invoking the provisions of section 131(6) and thus delaying liquidation proceedings. Hartzenberg AJ's interpretation of the provisions of section 131 is therefore aimed at preventing any undue delays of the hearing of a pending liquidation application and ensuring that the requirements of the Act are complied with before any consequences of a business rescue process can flow.
In must be noted, however, that an application for business rescue may be brought at any time even, depending on the circumstances of each case, after the granting of an order finally winding up the company in question. In every case, where a business application is properly brought before the court, the effect will be that any pending liquidation application or the winding up of the company will be suspended until the business rescue application has been duly disposed of. Mr Joubert is therefore entitled to come back to court with a fresh business rescue application, so the liquidation order may not be permanent.