In order to aid the rescue of a financially distressed company, business rescue affords a debtor company various procedural and substantive protections and advantages during the business rescue process. The purpose of business rescue is twofold: first, to restructure the affairs of the company in an attempt to ensure that it continues to operate on a solvent basis; and second, if it is not possible for the company to continue in existence, for the business rescue to result in a better return for its creditors and shareholders than would ordinarily result from the immediate liquidation of the company.
To this end, the Companies Act 71 of 2008 (Companies Act) provides that an application for business rescue will serve to suspend liquidation proceedings that are already pending before the court. Section 131(6), a provision that is not a model for clarity, provides that:
“If liquidation proceedings have already been commenced by or against a company at the time an application is made in terms of subsection (1), the application will suspend those liquidation proceedings until:
(a) the court has adjudicated upon the application; or
(b) the business rescue proceedings end, if the court makes the order applied for”.
Following conflicting High Court judgments on the provision, it arose sharply in the recent matter of Lutchman N.O. and Others v African Global Holdings (Pty) Ltd and Others; African Global Holdings (Pty) Ltd and Others v Lutchman N.O. and Others (1088/2020;1135/2020)  ZASCA 66 (10 May 2022). The issues confronting the court were when a business rescue application is considered to have been “made” and whether the business rescue application in the case was indeed “made” within the meaning of section 131(6), triggering the suspension of existing liquidation proceedings.
Winding up Bosasa companies
The facts leading up to the case are eventful and for the most part in the public domain. In 2019, the directors of Bosasa – now known as African Global Holdings (Pty) Ltd (Holdings) – and the directors of African Global Operations (Pty) Ltd (Operations) resolved to place Operations and its 10 wholly-owned subsidiaries (Bosasa companies) under voluntary winding-up in terms of section 351 of the Companies Act 61 of 1973 (Companies Act of 1973). When the duly appointed joint provisional liquidators began to exercise their statutory powers, which included an extension of their powers in terms of section 386(5) of the Companies Act of 1973, Holdings applied for and obtained an order declaring the resolutions placing the companies under voluntary winding-up null and void, and the appointment of the liquidators null and void and of no force and effect. The liquidators were granted leave to appeal against the order.
In the interim, the liquidators maintained that in terms of section 18 of the Superior Courts Act 10 of 2013, the declaratory order was suspended pending the outcome of the appeal. After a back-and-forth skirmish between the liquidators, directors and Holdings regarding the extension of the liquidators’ powers, on 28 October 2019, a consent order was granted in terms of the Companies Act of 1973 for the extension of the liquidators’ powers, inter alia, authorising them to sell all of the assets belonging to the Bosasa companies, in consultation with and with the consent of the board of Holdings, Operations and the respective boards of the subsidiaries. Notwithstanding the consent order, Holdings and the directors objected to the sale of some of the assets by public auction. Despite this, the liquidators proceeded with the advertisement and sale of the assets.
Ultimately, the liquidators’ appeal against the declaratory order was successful, and on 22 November 2019, the application was dismissed with costs with the result that the Bosasa companies remained in a creditor’s voluntary winding-up.
Properly serving a business rescue application
In an attempt to suspend the liquidation proceedings, including the impending public auction, Holdings issued an application for an order placing six of the 11 Bosasa companies under supervision and business rescue in terms of section 131(1) of the Companies Act on 3 December 2019. This date is important in the context of this case. Contrary to the peremptory provisions of the Companies Act, Holdings failed to serve the application properly resulting in a fatal flaw. As an example, only one of the liquidators was served and only 29 of the 50 employees received notification of the business rescue application.
During the period between 4 and 6 December 2019, the liquidators caused most of the assets of the six Bosasa companies to be sold by public auction. In response to this, Holdings launched a further application seeking an order against the liquidators interdicting them from selling any further assets owned by the six Bosasa companies, and delivering the movable assets, causing transfer and registration of ownership of the immovable assets into the names of anyone who purchased the assets before the final hearing of the business rescue application and/or before the second meeting of the creditors, without the written consent of Holdings, and declaring that the sale of assets before the final adjudication of the business rescue application and/or before the second meeting of the creditors, without the consent of Holdings, to be null and void.
The auction and business rescue applications were consolidated and argued before the High Court. The relief sought in the auction application was granted, however, the business rescue application was dismissed. The liquidators and the South African Revenue Service were granted leave to appeal the auction application to the Supreme Court of Appeal (SCA). Similarly, the applicants in the business rescue application were granted leave to appeal the business rescue application order to the SCA.
Supreme Court of Appeal finding
The SCA noted that there were conflicting High Court judgments on when a business rescue application is “made” within the meaning of section 131(6) of the Companies Act. Some considered the “making” of a business rescue application to mean the issue, service and giving notice thereof in the prescribed manner, and others the mere lodging of the business rescue application with the registrar and the allocation of a case number.
The SCA utilised the well-entrenched tools of interpretation to hold that “made” within the context of section 131(6) means the business rescue application must be issued, served on the company and the Companies and Intellectual Property Commission (Commission), and all reasonable steps must have been taken by the applicant to identify affected persons and their addresses and to deliver the application to them, to meet the substantive requirements of section 131(6) in order to trigger the suspension of the liquidation proceedings.
The court stated that both the application in respect of the action and the business rescue application should have been served on each of the joint liquidators of each of the six Bosasa companies. Mere knowledge of the business rescue application was insufficient. There is also a statutory obligation on any applicant to cause a business rescue application to be served on the Commission. Additionally, each affected person, being a shareholder or creditor of the company, any registered trade union representing employees of the company, or each of the individual employees is entitled to oppose or support the application and should therefore have been notified in the prescribed manner.
In this case, the court held that there was no substantial compliance with the service and notification prescripts set out in the Companies Act. The business rescue application should have been served by the sheriff on each joint liquidator or each of the six Bosasa companies as provided for in the Uniform Rules of Court, but this was not done, as it was only served on one of the many joint liquidators via the sheriff, and on one other liquidator by hand, with delivery effected by a candidate attorney. Further, only 29 of 50 remaining employees of the Bosasa companies were notified by electronic means, and it was not stated what steps, if any, were taken to identify any affected persons and their addresses to ensure that there was substantive compliance in respect of delivery of the business rescue application.
Due to the failure by the applicants to properly serve the business rescue application on all the affected persons as required in terms of section 131(6) of the Companies Act, the suspension of the liquidation proceedings, including the public auction and any subsequent sales, was not triggered.
Lutchman finally provides the much-awaited clarification on the interpretation of section 131(6) of the Companies Act. More importantly, the debate about the meaning of the word “made” is now resolved. The SCA has made it abundantly clear that a business rescue commences when the application has not only been presented to and issued by the registrar i.e. a case number allocated, but that it must have been served on the company and the Commission and every affected person must have received notice of the application in the prescribed manner to meet the requirements of section 131(6) in order to trigger the suspension of liquidation proceedings that have already commenced.