14 September 2022 Business Rescue, Restructuring & Insolvency Newsletter

Opportunists beware: Abusing business rescue will not save you from liquidation

It is commonly known that while business rescue can be used as a statutory mechanism to assist financially distressed companies by allowing them to restructure their affairs, often, this mechanism is abused in order to frustrate the rights of creditors and avoid liquidation. Two recent High Court judgments considered the abuse of business rescue proceedings and the impact on creditors’ rights. These cases are: Marias v Westline Aviation (Pty) Ltd and Others (1993/2021) [2022] ZAFSHC 102 (30 May 2022) and Henria Beleggings CC v Changing Tides 17 (Pty) Ltd NO; Changing Tides 17 (Pty) Ltd v CIPC and Others (5412/2008; 43912/2016) [2022] ZAGPPHC 378 (1 June 2022).

Westline Aviation

In the case of Westline Aviation, a director of the company launched an application in terms of section 131 of the Companies Act 71 of 2008 (Companies Act) to place Westline Aviation (Westline) into business rescue. The application was launched after First National Bank (FNB) issued an application seeking a money judgment against Westline alternatively, the winding-up of Westline. Two separate money judgments were granted against Westline in terms of settlement agreements reached between the parties. FNB accordingly opposed the business rescue application and launched a counter application for the winding-up of Westline on the basis that it was commercially insolvent. No further affidavits were filed by Westline opposing FNB’s counter application or in reply to FNB’s answering affidavit in the business rescue application. 

The court considered all the well-known cases on business rescue proceedings and noted that while sentiments expressed in adopting business rescue to avoid liquidation may be noble, it should not lead to a situation where an extraordinary amount of time is taken in a futile attempt to achieve this result. In support of the business rescue application, it was submitted that Westline did not require post-commencement finance as Westline supposedly had all the tools to trade out of its financial distress. The court noted that Westline did exactly what is not required of affected persons and a company in financial distress, i.e. keeping creditors on a string instead of finalising the business rescue process as soon as possible. Rightly so, Westline abandoned its business rescue application and the court further found that on the uncontested evidence before it, presented by FNB, Westline was commercially insolvent and it would be just and equitable in the circumstances for it to be wound-up. 

Henria Beleggings

In the case of Henria Beleggings, business rescue proceedings of Henria Beleggings commenced through the adoption of a board resolution in terms of section 129 of the Companies Act. Henria Beleggings instituted an application to rescind a default judgment granted against it in 2008 in favour of Changing Tides 17 (Pty) Ltd (Changing Tides). Changing Tides launched a separate application for, inter alia, setting aside the resolution commencing business rescue and placing Henria Beleggings in liquidation.

Prior to the commencement of the business rescue proceedings, Changing Tides sought to execute on its default judgment order and sell certain property subject to its security in terms of a special power of attorney provided by Henria Beleggings. However, four days before a further convened sale in execution, Henria Beleggings passed a resolution commencing business rescue. Changing Tides therefore contended that the sole purpose of the business rescue was to proceed with the rescission of the judgment. Henria Beleggings had no employees and no annual turnover and was simply a property holding company. In addition, the resolution commencing business rescue fell short of the procedural requirements set out in section 129 of the Companies Act.

Rejecting the application for rescission, the court then considered whether the business rescue resolution should be set aside and Henria Beleggings placed into liquidation. In its founding affidavit to the rescission application, it was stated that the only reason why the company was placed into business rescue was to pursue the rescission of the default judgment. The court held that it must follow that if the rescission application fails, so too would the business rescue. On further analysis, the court found that despite Henria Beleggings’ contention that the business rescue could be successful, it was purely a property holding company with no business to restructure, it had no employees nor any “costs” which it could “shed”. As a property holding company, there were no interested parties beyond the major creditor who held almost all of the debt.

The business rescue proceedings were simply being instituted in order to delay the inevitable and to prevent Changing Tides from executing on the default judgment. Henria Beleggings was further commercially insolvent, and the business rescue process was merely a sham to avoid the repercussions of the default judgment. The plan stated that an unidentified investor would be sought in order to improve the property and continue its renting out. It made no provision for how – during this improvement and renting out process – the debts would be reduced, not did it identify who the mystery investor was. The institution of the business rescue proceedings was thus held to be an abuse of process, and it was subsequently set aside and the company was placed into final liquidation.

Conclusion

The result of these cases is clear, in both Westline Aviation and Henria Beleggings, the institution of business rescue proceedings was merely a last-ditch attempt to keep creditors at bay. Abuse of the business rescue proceedings in circumstances where there is no reasonable prospect of rescuing the company will always result in liquidation.

In Westline Aviation, the court quite clearly held that creditors are entitled to finality. Business rescue proceedings naturally frustrate a creditor’s right to finality, but the courts are more inclined now to come to the aid of creditors where it is clear that business rescue proceedings are simply a façade.

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