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Unscrambling the liquidation egg

01 April 2013

Routledge Modise

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. s131(6) of the Companies Act (71 of 2008) provides that if liquidation proceedings have already commenced by or against the company at the time an application is made in terms of ss131(l), the application (being the application for business rescue by way of Court Order) will temporarily suspend those liquidation proceedings. The process will then wait until the court has adjudicated on the business rescue application or the business rescue proceedings and, if the court makes the business rescue application applied for. s131(7) says that a court can make an order in terms of s131(4) or s131(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" (s131(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 means the collective proceedings of the actual winding up, then a company in the process of being wound up can still be placed under business rescue thereby suspending the liquidation process. This means the company can be placed under business rescue if compelling reasons are put 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 the Act 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 hut 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 Legodi J and judgement 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 s131(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 August 15 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 2 500 manufacturers who rented approximately 8 500 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 9 000 purifier machines at a value of R18m. 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 could seek to undo what had 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 is a process overseen by 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 hugely 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.  In other words what is to be done with the work done by the liquidators and how is it to be "undone"?

I found it interesting that Legodi J noted there was no affidavit filed on behalf of the liquidators to tell the court how far they 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 liquidators' silence suggested they were prepared to abide by the decision of the court.

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