11 September 2020 by and Business Rescue, Restructuring & Insolvency Newsletter

The BOSASA saga continues – important legal considerations

Earlier this year, de Villiers AJ was faced with the mammoth task of hearing before him a matter involving various companies as part of the African Global Holdings group – formerly/commonly referred to as BOSASA group of companies. The matter comprised of a business rescue application of six companies in liquidation (the business rescue application); an application to set aside the sale of assets of the six companies (the auction application); and an application to vary a court order pertaining to the sale of an immovable property of one of the six companies (the rule 42 application).

This already mammoth task was taken on and heard by the Gauteng Local Division, Johannesburg (the court) via videoconference due to the constraints which were presented by COVID-19.

Due to the interrelatedness of the three above-mentioned applications (they all relate to the affairs of the BOSASA group of companies), all three of the applications were argued over two days as one hearing wherein Judge de Villiers sought to deal with the issues as presented by each application as a whole.

The three applications (and the relief sought) can be summarised as follows:

  1. In the business rescue application, the applicants, being the African Global Holdings (Pty) Ltd (African Global Holdings), Sun Worx (Pty) Ltd and Kgwerano Financial Services (Pty) Ltd (the latter two parties being creditors and interested parties) sought to place the six companies in liquidation (the six companies) under supervision and that business rescue proceedings be commenced in terms of section 131(1) of the Companies Act 71 of 2008 (the Act) and to appoint a business rescue practitioner accordingly;
  2. In the auction application, the applicants (same as the applicants in the business rescue application) sought to set aside the sale of the assets of the six companies by the provisional liquidators and to prohibit any auction of and any other sale of assets of the six companies; and
  3. Fidelity Security Services (Pty) Ltd (Fidelity), one of the purchasers of immovable property at the liquidation auction, brought a rule 42 application to vary the order granted in a previous hearing dated 28 October 2019 (Bhoola order) wherein Fidelity believed that Boohla J had mistakenly not included the extension of power to the provisional liquidators to sell immovable property it had purchased.

Judge de Villiers identified and dealt with various issues in determining the interrelated applications. The most important issues (from a business rescue and insolvency perspective) and the legal principles relating thereto are discussed hereunder.

Legal issues

Whether the business rescue application was in fact ‘made’

In terms of section 131(6) of the Act, if liquidation proceedings have already been commenced by or against the company at the time that a business rescue application is “made” in terms of section 131(1) of the Act, the business rescue application will suspend those liquidation proceedings.

The court had to consider whether or not the business rescue application had been properly “made” and if so, when this occurred.

The provisional liquidators took the point that the business rescue application could not be considered because it had not been “made” as contemplated in section 131 of the Act, and further that the auction in the liquidation proceedings could have continued as normal until the application was properly “made”. The provisional liquidators argued that an application for business rescue is not “made” until it is served and given notice of to all parties in the prescribed manner, including as prescribed by regulation 124 of the Companies Regulations 2011 (the Regulations).

After a contextual analysis of the relevant sections in the Act, the court found that the Act does not specify when an application is made. However, section 131(1) of the Act states that “an affected person may apply to a court at any time” for an order placing the company in business rescue. Section 132(1)(b) states that business rescue proceedings begin when “an affected person applies to the court for an order placing the company in business rescue”. The keywords in section 131(6) are “at the time an application is made in terms of subsection (1), the application will suspend …”. These words must be read with the words “business rescue proceedings begin when … an affected person applies to the court” in section 132(1)(b) and “apply to court” in section 131(1).

The court referred to the authoritative case of Blue Star Holdings (Pty) Ltd v West Coast Oyster Growers CC (2013) (6) SA 540 (WCC) (Blue Star Holdings) wherein the court held that, applying the functional approach to section 131(6), it is obvious that “the lodging of the application with the registrar for the issue thereof constituted the ‘making’ of the application and the commencement of proceedings to place the company under business rescue (as opposed to the commencement of business rescue per se).

The court agreed with this view and held that the finding is in accordance with the long-established principles in our law that an application is made when it is issued. Such interpretation further gives effect to the purpose of the Act as set out in section 7(k) which provides, inter alia, for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. The court held that the suspension of winding-up proceedings immediately upon issuing of the business rescue application gives effect to such purpose in 7(k) of the Act.

The court then considered certain case law that came to contrary findings to the one made in Blue Star Holdings. This contrary case law found that no application had been ‘made’, since the business rescue application had not been properly served and notification of the application had not been given to affected parties. This contrary case law also found that service of a copy of the application on the CIPC and notification to each affected person are not merely procedural steps but are rather substantive requirements, compliance with which is an integral part of the making of an application for an order in terms of section 131(1) of the Act. Judge de Villiers however respectfully disagreed with these findings. The judge indicated that there is a difference between when the business rescue application is “made” for it to suspend winding-up, and whether the application is properly before a court when the business rescue application is argued on its merits.

The court concluded that although there must be substantial compliance before a hearing of the application, this does not mean that no application has been made whilst such service and notice is being effected on all affected parties. Based on a contextual interpretation of the legislation, an application is “made” when it is issued. The court indicated that the wording of section 131(6) is clear and leaves no room for adding conditions thereto in an interpretative exercise. In addition, the date of issuing of an application is easily and objectively determinable; it is a line in the sand that has logic to it. It leaves no room for a provisional liquidator to refuse to comply with the application until proven to him/her that formal service has taken place and that he/she is has been satisfied that notice has been given to every affected party.

Although the court ultimately did not grant the business rescue application (on the grounds that there were no reasonable prospects of rescue for the businesses), the court held that the business rescue application had in fact been properly “made” on the date that it was issued.

Provisional liquidators’ powers

The court had to determine whether the provisional liquidators had the power to continue to sell the assets of the six companies in light of section 131(6) of the Act (i.e. after the business rescue application had already been made) and further whether they ever had the power to sell the assets in light of the conditions in the Bhoola order.

The court found that the provisional liquidators had no authority to continue with the sale of the assets of the six companies from the day that the business rescue application was made, by operation of law. This appears from section 131(6) of the Act which provides that once the business rescue application is made, the liquidation proceedings are suspended.

The court then considered the powers of the provisional liquidators in terms of the Bhoola order also generally.

The court highlighted the case of GCC Engineering (Pty) Ltd and Others v Maroos and Others 2019 (2) SA 379 (SCA), which stated that a provisional liquidator’s duty was that of a holding, preservation function, and that provisional liquidators do not have the power or the responsibility of a final liquidator to wind up the company (the court remarked that provisional liquidators have an interim role only). Therefore, any powers they may receive over and above a holding function must be seen in terms of a court order.

This was seen in terms of the Bhoola order, however, the provisional liquidators’ powers were qualified by conditions, one of which being that consent had to be obtained by the boards of African Global Holdings and African Global Operations (Pty) Ltd to sell the assets of the companies in liquidation. This consent was not obtained and the assets were realised by the provisional liquidators regardless of the Bhoola order requiring the consent. The court held that the provisional liquidators breached the obligation to seek consent and that they were therefore in contempt of the court order.

Furthermore, in considering the fact that a business rescue application suspends the process of continuing with the realisation of the assets of the company in liquidation (from the moment the application is made/issued), the provisional liquidators actions in realising such assets were further in contempt.

The court concluded that on both grounds, the first being the effect of a business rescue application having been made on liquidation proceedings (in terms of section 131(6)), and the second being the interpretation of the Bhoola order, the provisional liquidators had no authority to proceed with the sale of assets at the respective auctions.

Effect of the unauthorised auction

As a result of this finding, the court then had to determine the effect of the unauthorised auction.

Fidelity requested the court to use its powers under section 388 of the Companies Act 61 of 1973 (the 1973 Act) to order that, despite the provisional liquidators’ lack of authority to sell the assets bought by Fidelity, to validate the sales on the basis that it would be “just and beneficial” to do so. The court found that it cannot do so as the provisional liquidators ignored the impact of section 131(6) of the Act and deliberately contravened the Bhoola order. The court stated that section 388 of the 1973 Act “is inapplicable where the provisional liquidators deliberately acted unlawfully.

The court however appreciated the “huge” impracticalities of setting aside the sale of assets, especially considering that delivery of most of the assets had already taken place and the purchase price paid.

The practical considerations of the principles in law is that the rei vindicatio of the owner trumps other later rights of bona fide possessors (ubi rem meam invenio ibi vindico), and that no one could transfer more rights than what she or he has (nemo dat quod non habet).

Fidelity also tried to rely on section 82(8) of the Insolvency Act 24 of 1936 (Insolvency Act) to demand transfer by arguing that Fidelity is a bona fide purchaser protected by this section.

The court stated that the purpose of section 82(8) is to protect bona fide purchasers of assets against harsh consequences of invalidity in terms of the Common Law. Winding-up sales, unlike sales in execution, are special types of sales, where there is room to consider the position of the innocent purchaser. The court also found that section 82(8) of the Insolvency Act applies to a sale by a provisional liquidator where such a power is sought to be exercised in terms of a court order, and the provisional liquidator fails to adhere to the terms of the court order, or fails to give effect to the effect of the business rescue application on the winding-up process.

However, the court held that where transfer has not yet taken place, a purchaser cannot contend that she/he/it “has purchased” the property and is thus entitled to protection under section 82(8), since “has purchased” in section 82(8) can be interpreted to mean that delivery also taken place. The court held that Fidelity is no longer a bona fide purchaser and has no cause of action to demand transfer with regard to purchased, but not transferred, immovable property.

The court set aside the sale of the assets and ordered that any further sale is prohibited.

Bad faith/abusive applications

The court dealt with the averments made by the provisional liquidators that the business rescue and auction applications before the court were brought in bad faith and as an abuse of proceedings. Judge de Villiers indicated that he was unpersuaded that the applications brought before him were an abuse. Although the business rescue application was dismissed, the court found that the application was arguable in accordance with the test to be applied.

The court remarked that had the business rescue application been brought in bad faith, it would have been dismissed. The court stated that the SCA has previously ruled what the remedy is of a business rescue application that is brought in bad faith, which is that the court must dismiss the application without merit. The court referred to the case of Richter v Absa Bank Limited 2015 (5) S 57 (SCA) which held that a court can dismiss any application for business rescue that is not genuine and bona fide or which does not establish that the benefits of a successful business rescue will be achieved.

Merits of the business rescue application

It was common cause that all six companies were financially distressed.

The court held that the six companies are not viable companies in respect of which a case has been made out that there is a reasonable prospect for rescuing them.

Conclusion

The judgment deals with and ventilates important legal principles that relate to business rescue and insolvency law.

Importantly, the judgment highlights that an application is “made” on the date of issuing the application. On this date, any liquidation proceedings are automatically suspended in terms of section 131(6) of the Act.  Furthermore, once liquidation proceedings are suspended, any sales of assets of the company must also be suspended, pending the adjudication of the business rescue application.

Section 131(6) of the Act opens the door to an abuse of process and may result in opportunistic business rescue applications that are brought merely to have the effect of the section 131(6) suspension triggered, with the ulterior motive to stagnate liquidation proceedings. However, a court has the power to dismiss any business rescue application that is not genuine and bona fide or which does not establish that the benefits of a successful business rescue will be achieved.

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