8 September 2020 by Dispute Resolution Alert

The debate on the meaning of section 129’s “initiated” continues

Section 129(2)(a) of the Companies Act 71 of 2008 (Companies Act) prohibits a company from voluntarily placing itself under business rescue supervision if liquidation proceedings have already been “initiated by or against the company”. There has been some controversy over the meaning of “initiated”.

Pan African Shopfitters (Pty) Limited v Edcon Limited and Others (10652/2020) [2020] ZAGPJHC 158 (10 July 2020) is the most recent judgment contributing to the ongoing debate.

The facts of the Pan African case

On 26 March 2020 Edcon Limited informed its suppliers that it only had sufficient liquidity to pay salaries, and could not otherwise honour its operating costs. After receiving this news, Pan African Shopfitters (Pty) Limited – a long-time supplier to Edcon – sought to launch liquidation proceedings. Due to the impending Level 5 lockdown beginning at midnight of 26 March 2020, Pan African was unable to launch the application until 4 May 2020. It did, however, adopt a resolution on 27 March 2020 resolving to apply for the liquidation of Edcon “as soon as practically possible”.   

On 28 April 2020, the Edcon board, unaware of Pan African’s intentions, passed a resolution in terms of section 129(1) to place Edcon under business rescue supervision. Having lodged with resolution with CIPC, Edcon was accordingly placed in business rescue on 29 April 2020, and rescue practitioners were duly appointed.

Consequently, in addition to its liquidation application, Pan African launched an urgent application on 18 May 2020, seeking a declaratory order invalidating the Edcon resolution and setting-aside the business rescue proceedings.

The crux of the debate

Pan African argued that, by passing the resolution to liquidate Edcon, it had already initiated liquidation proceedings on 27 March 2020. Edcon’s board was thus, according to Pan African, prohibited from passing its business rescue resolution on 28 April 2020.

The court had to decide whether Pan African’s actions, in passing the resolution of 27 March 2020, fulfilled the section 129(2)(a) requirement of “initiated”. In arriving at its decision, the court analysed two previous High Court cases dealing with the issue, discussed below, and stressed longstanding principles of statutory interpretation, being "…an objective unitary process where consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production…”.

The Mouton judgment

On 21 June 2019, the Western Cape High Court delivered its judgment in Mouton v Park 2000 Development 11 (Pty) Ltd and others 2019 (6) SA 105 (WCC).

The Mouton judgment supported Pan African’s contention that a mere resolution to launch liquidation proceedings could meet the section 129(2)(a) requirement of “initiated”

In Mouton, Sher J found that “it cannot be a linguistic accident that the legislature chose to use the word ‘initiated’ rather than either the word ‘commenced’”, the latter of which is used in section 131(6), and found that, “’initiated’ in section 129(2)(a) is…intended to refer to a preceding act or conduct by which liquidation proceedings are set in motion and is not intended to signify the moment in time when the proceedings are deemed to have formally ‘commenced’”.

Tjeka judgment

A little over a month later, on 23 July 2019, the Gauteng High Court took the opposite view in Tjeka Training Matters (Pty) Ltd v KPPM Construction (Pty) Ltd and others 2019 (6) SA 185 (GJ).

In Tjeka, a creditor issued a liquidation application, but only served it on the company after its directors, unaware of the liquidation application, filed a resolution to begin business rescue proceedings. In other words, although the liquidation application was issued before the passing of the section 129(2) resolution, it was only served on the company after the resolution was passed. The question then became whether the issuing of the application constituted the “initiation” of liquidation.

In reaching his conclusion Sutherland J emphasised that “a word can never be interpreted on its own, because it exists only as part of a greater whole … it is the work that the phrase or sentence performs in the context of the whole that must be examined.” One therefore needed to contextualise the meaning of the word “initiated” within the framework of Chapter 6 of the Companies Act – dedicated solely to business recue – as well as within section 129 itself. In applying this, Sutherland J concluded that the company needed to be aware of the application before the section 129(2) prohibition could be applied. In this instance, the application had to be served on the company, “not merely issued “.

Returning to the Pan African case

Meyer J, in the Pan African case, confirmed the conclusion reached in the Tjeka case: “The liquidation proceedings contemplated in s 129(2)(a) must be issued and served on the company to meet the requirements of the section”. He affirmed that to understand the true meaning of the word, section 129(2)(a) “must be read as a whole”.

The prohibition of section 129(2)(a) is meant to stop a board from resolving to voluntarily begin business rescue proceedings when liquidation proceedings have been initiated. This implies there must be an awareness by the board of the liquidation proceedings. With that in mind, Meyer J found that it would be absurd to interpret section 129(2)(2) to mean that company A, in adopting a resolution to liquidate company B, prohibited company B from adopting a resolution to begin business rescue proceedings, especially when the board of company B was not aware of the liquidation resolution – “[s]uch meaning militates against logic, leads to an insensible or unbusinesslike result, and undermines the purpose of the section”.   

Meyer J therefore dismissed the Pan African’s urgent declarator application, as well as its liquidation application.

Comment

This is unlikely to be the end of the debate. The final word will no doubt have to come from the Supreme Court of Appeal, if not the Constitutional Court. With that in mind, until a final decision is made by our higher courts, third parties seeking to liquidate a company should ensure that their application is issued and served as a matter of urgency. 

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