20 March 2019 by and Dispute Resolution Alert

Business rescue and the “costs” of an ulterior motive

It is trite that the purpose of business rescue proceedings is to rehabilitate companies that have fallen on hard times, with a hope of either rescuing them or to provide a better return to creditors than what they would receive on a liquidation. This was reiterated in the recent Supreme Court of Appeal (SCA) judgment of Van Staden and Others NNO v Pro-Wiz (Pty) Ltd (412/2018) [2019] ZASCA 7 (8 March 2019).

Oljaco CC (Oljaco) was placed under final liquidation in May 2015 and the appellants were appointed as its liquidators. During April 2016 Pro-Wiz Group (Pty) Ltd (Pro-Wiz) instituted an application for Oljaco to be placed under business rescue in terms of s131(1) of the Companies Act, No 71 of 2008 (the Act). The liquidators opposed the application on several grounds, principally that the application was an abuse of process and that it was a ploy to enable the sole member of Oljaco to avoid interrogation in an enquiry under s418 of the Companies Act, No 61 of 1973, and that he was trying to strip Oljaco of assets and conceal them from creditors.

SARS, being the principal creditor of Oljaco, intervened and opposed the application. Two days before the hearing of the matter, Pro-Wiz delivered a notice of withdrawal of the application and tendered to pay SARS’s costs. Pro-Wiz did not however, tender to pay the legal costs incurred by the liquidators. As a result, the liquidators sought an order in terms of Rule 41(1)(c) of the Uniform Rules of Court, ordering Pro-Wiz to pay their costs. It was at this point that Pro-Wiz challenged the application on the basis that the liquidators lacked locus standi, founded on an interpretation of s131(6) of the Act which disentitles them from opposing an application to have the company placed into business rescue. The liquidator’s application was dismissed in the Pretoria High Court and the liquidators appealed to the SCA.

Section 131 of the Act deals with court applications to commence business rescue proceedings, and subsection (6) states that if the liquidation process has already begun at the time that an application is made to place a company into business rescue, the application will suspend those liquidation proceedings.

In respect of the issue regarding the liquidator’s locus standi, the SCA held that in terms of s131(2)(a) of the Act, an application for business rescue must be served on the liquidators of a company, where it is under liquidation. This is due to the fact that upon liquidation, the directors are no longer in control of the company.

The SCA went on to hold inter alia that:

“It is apparent from the provisions of s131 that the company that is the subject of the business rescue application is entitled to oppose it. At the time the application is made in relation to a company under provisional or final winding up, its affairs will be in the hands of the liquidators. On ordinary principles it seems obvious that liquidators, whether provisional or final, faced with such an application should be entitled either to support or oppose the application depending upon their judgment as to the interests of the company and its creditors.”

In summary, the SCA found that Pro-Wiz’s challenge to the liquidator’s locus standi was based on an incorrect construction of s131(6) of the Act. This section does not divest liquidators of their right to oppose a business rescue application. The appeal succeeded and the liquidators were granted their costs in the High Court. Insofar as the computation of the costs, the SCA awarded a punitive costs order against Pro-Wiz on the basis that the application for business rescue was brought for reasons ulterior to any belief that Oljaco would benefit from being placed under business rescue.

This judgment is important in two respects. Firstly, it clarifies that s131(6) of the Act does not divest liquidators of their right to oppose business rescue applications. Secondly, it stands as a cautionary tale as to the potential cost implications that may be imposed by a court when it is clearly evident that business rescue proceedings are being abused.

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