Business rescue – where will it end?

The commercial landscape in South Africa was forever changed when business rescue was introduced by Chapter 6 of the Companies Act, No 71 of 2008 (Act).

The proverbial "blind leading the blind" comes to mind when one recalls the great uncertainty which existed, and to an extent still exists, in the minds of business owners, creditors, employees and even business rescue practitioners as to the meaning of certain of the provisions of Chapter 6 of the Act.

With each new judgment delivered, our courts are providing clarity on Chapter 6, making it easier for business owners, creditors and business rescue practitioners to navigate their way through this ever-changing landscape.The Supreme Court of Appeal (SCA) was recently tasked with determining whether it is competent for an affected person to apply for a company to be placed in business rescue after a final liquidation order has been granted against a company. The SCA delivered the judgment in Richter v Absa Bank Limited (20181/2014) [2015] ZASCA 100 on 1 June 2015.

In 2013, Mr Dawid Richter (Richter), an employee of Bloempro CC (Bloempro), brought an application to place Bloempro under business rescue after it was placed under final liquidation. A shareholder, creditor, employee and registered trade union representing employees are all defined as "affected persons" in the Act. The application was dismissed, but taken on appeal at the SCA.

Sections 131(1) and (6) provide:

"(1)   Unless a company has adopted a resolution contemplated in s129, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings.

(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."

The crux of the issue before the SCA was the interpretation of the phrase "liquidation proceedings" within the context of s131(6) of the Act. The SCA had to decide whether the phrase refers only to a pending liquidation application or whether it includes the process of winding up a company after being place under final liquidation.

The SCA overturned the court a quo's decision and confirmed that upon the final liquidation order being granted, a company continues to exist, but control of its affairs is transferred from the directors to the liquidator. Only once the affairs of the company have been finally wound up by the liquidator and a Master’s certificate to that effect is published in the Government Gazette, is the company dissolved.

This judgment has far reaching implications for businesses and creditors as it allows any affected person to apply for a company to be placed under business rescue even after a final order of liquidation has been granted, and conceivably after a liquidator has liquidated certain of the company's assets.

The SCA considered the concerns raised by Absa which included that a liberal interpretation of s131(1) may have negative results for the liquidation process. Absa argued these negative results would include repetitive disruptions and uncertainty that may result from various affected persons making applications for business rescue at different times during the winding up process and handing back business control to the same directors who may have been the cause of the company's financial distress.

It seems that, in reaching its decision, the SCA was guided and persuaded by the purpose of business rescue as stated in the Act being: "to provide for efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders."

This judgment is a significant victory for employees but not so much for creditors.

The SCA sent a definite message to creditors when stating that: "A necessary consequence thereof is limitation, to some extent, on the power of creditors to single-handedly curtail the life of a company".

The full impact of this judgment on the rights of creditors will soon become apparent.