10 August 2022 by and Business Rescue, Restructuring & Insolvency Newsletter

Kicking for touch: The unintended consequences of suspending winding-up proceedings pending business rescue

Kicking for touch” is a phrase known by many in the world of sports. It is used loosely by sports players on the rugby field to describe a move to play away from a team’s goal line to that of its opponent so as to gain a tactical advantage. It brings the game to life. In the context of insolvency, kicking for touch has become a misnomer used to describe a litigant seeking to use every trick in the book to delay the finalisation of court proceedings. In this context, section 131(6) of the Companies Act 71 of 2008 bears this out. The section makes provision for a fresh business rescue application to suspend the already ongoing winding-up of a company under financial distress, therefore delaying the inevitable liquidation of that company.

Essentially, section 131(6) provides that, if liquidation proceedings have already been started by or against a financially distressed company, a subsequent business rescue application will automatically suspend those liquidation proceedings. But that suspension will only be until the court has adjudicated on the business rescue application; or until a court grants an order ending the business rescue proceedings.

In the recent judgment of GCC Engineering (Pty) Ltd v Maroos [2019] (2) SA 379 (SCA), the Supreme Court of Appeal (SCA) gave clarity to section 131(6). The court stated that an application for business rescue under section 131(6) only suspends the process of realising assets of the company in liquidation, and does not terminate the winding-up, whose ultimate aim is to distribute the proceeds to the various creditors. That means the winding-up order remains in place. The clarity provided by the SCA does not solve the problem, however. More so in instances where a business rescue application has been instituted in order to delay or frustrate the process of realising the company’s assets for the benefit of creditors.

The intentions of business rescue are noble: it allows a company under financial distress some breathing space so as to enable it, amongst other things, to restructure its affairs in such a way that it can continue to trade on a solvent basis. However, section 131(6), which places business rescue right in the middle of a liquidation, causes the unintended consequence of delaying the inevitable liquidation of a company that is hopelessly insolvent.

In practice, this situation often arises when a creditor, who happens to be sympathetic to the insolvent company, colludes with its directors and institutes a business rescue application in the face of imminent winding-up proceedings, in order to proverbially “kick for touch”. Often, a business rescue application is brought in order to avoid the appointed liquidators initiating an enquiry to investigate the financial affairs of the company prior to its demise, in an attempt to hold the directors accountable for their actions.

Typically, in order to succeed with an application for business rescue, an applicant is required to allege in its founding affidavit that there is a reasonable prospect that the company can be saved or that placing it in business rescue would facilitate a better return for creditors. In most cases, these applications fail to meet either threshold. Section 131(6) fails to provide a mechanism to discourage this abuse, and in many ways incentivises it.

Cautions against abuse of business rescue proceedings

As an illustration, in the case of Absa Bank Ltd v Newcity Group (Pty) Ltd [2013] 3 All SA 146 (GSJ), Sutherland J considered a business rescue application instituted by the sole shareholder and director of Newcity. He concluded that the application was not genuine but simply a “ruse”. He held that the business rescue application must be branded an abuse and refused the order by Newcity.

In the case of Blue Star Holdings (Pty) Ltd v West Coast Oyster Growers CC [2013] (6) SA 540 (WCC), Gamble J cautioned against the abuse of business rescue proceedings which are used “by an obstructive debtor intent on avoiding the obviously inevitable as part of its ongoing strategy to hinder a creditor from pursuing its lawfully permissible goal”.

The rationale behind section 131(6) is sensible, which is to help financially-distressed companies with a genuine chance of rescue from the bleak prospect of liquidation. However, it would be prudent for the Legislature to impose a higher threshold on prospective business rescue applicants. This can be done by amending section 131(6) to replace the automatic suspension of the winding-up proceedings with a requirement that a case must first be made out in order to justify the suspension of the winding up. Such an amendment will mean that winding-up proceedings can only be suspended by an application for business rescue under section 131(6) with the express leave of the court.

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