11 October 2017 by and Dispute Resolution Alert

Who calls the shots?

In Ex Parte Nell and Others NO 2014 (6) SA 545 (GP) (28 July 2014), the board of a company passed a resolution placing it in business rescue in accordance with s129 of the Companies Act, No 71 of 2008 (Companies Act). In terms of this section, a financially distressed company may, without any prior judicial oversight or consultation with its creditors, achieve a general moratorium against legal proceedings.

The moratorium is a legitimate limitation on the rights of creditors to have access to courts as envisaged in s34 of the Constitution of the Republic of South Africa, 1996. A business rescue launched by the passing of a resolution vests the power to control the company in an individual duly appointed by the company – namely a business rescue practitioner. In the Nell matter, the company appointed the first applicant as the business rescue practitioner (Practitioner) in the resolution placing the company under business rescue. Soon afterwards, two creditors of the company (ie affected persons) instituted urgent proceedings for an order nullifying the resolution in terms of which the business rescue proceedings had commenced and placing the company under final liquidation. The creditors based their application on the following grounds: the company was neither financially distressed nor was there a reasonable prospect of rescuing the company’s business, in accordance with s130(1) read with s130(5) of the Companies Act.

The Practitioner opposed the application and also brought an application seeking an order for an extension of time within which to publish a business rescue plan. The applications were both heard before Thlapi J, who dismissed the Practitioner’s application for an extension of time, set aside the resolution in terms of which the business rescue proceedings had been launched and, finally, made an order placing the company under final liquidation. It is common cause that the Practitioner sought to appeal against the orders.

In seeking a declaratory order regulating control of the company pending the appeal, the Practitioner argued that in terms of s18(1) of the Superior Courts Act, No 10 of 2013 (Superior Courts Act), the notice of application for leave to appeal suspended the operation of the orders made by Thlapi J. Whereas, the creditors contended that control ought to vest in the Master until the appointment of a provisional liquidator, pending the appeal process. Importantly, s18(1) provides for the immediate suspension of the operation and execution of all court decisions upon the lodging of an application for leave to appeal.

As a starting point, the court noted that s150 of the Insolvency Act, No 24 of 1936 (Insolvency Act) was enacted to regulate appeals against sequestration orders. Section 150(3) provides that the provisions of the Insolvency Act shall nevertheless apply despite the noting of an appeal. Reference was also made to the matter of Choice Holdings Ltd v Yabeng Investment Holding Co Ltd and Others 2001 SA 2 SA 768 W, where the court held that the provisions of s339 of the Companies Act, No 61 of 1973 (old Companies Act), rendered the provisions of s150(3) of the Insolvency Act applicable to winding-up proceedings. 

On the question of the control of the company in the interim period, the court followed the reasoning in Visser v Coetzer; GTR Investments and Others v Coetzer 1982 (4) SA 805 (W), where the court considered s20(1)(a) of the Insolvency Act, under which a sequestrated estate vests in the Master and thereafter the trustee, and held that the insolvent was immediately divested of his assets despite the noting of an appeal. Similarly, and in the case of a company, a liquidation order divests the management or directors of the control of the insolvent entity and vests same in the hands of the Master until a liquidator has been appointed. The action of divesting and vesting is of particular importance in this context. 

In this light, the court found that the process initiated pursuant to the s129(1) resolution takes only the interests of the company into account – a standpoint that is blatantly incompatible with the principle of audi alteram partem. Moreover, the court found that if the purpose of s18(1) of the Superior Courts Act had been to oust existing orders, the legislature could have been expected to put in place suitable measures to guard against any mischief or abuse thereof. The court also considered the inherent urgency of insolvency proceedings and found that the provisions of the Insolvency Act prevailed over s18(1) of the Superior Courts Act.

Furthermore, the court considered the likelihood of the Practitioner’s susceptibility to the influence of the company’s management and whether it was conceivable that the Practitioner could achieve objectivity in the circumstances. Thereafter, the court considered the legal position of liquidators as officers of the court and as notably independent persons who act primarily on creditors’ instructions. The court held that it was safer to vest control of the company in the liquidators, and found, ultimately, that the notice of appeal did not suspend the operation of the orders.

There are some important considerations to take from this judgment. Delays caused by finalisation of appeal processes may result in hardship for the general body of creditors of a financially distressed company. As the court correctly pointed out, insolvency proceedings are inherently urgent. Another important point of interest is the effect of s18 of the Supreme Court Act as articulated in the judgment. One may argue that a liquidation order, which ultimately alters the status of a company, should be regarded as an exceptional circumstance viewed against the effects of s18 of the Supreme Court Act. 

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