Business rescue will not “rescue” void dispositions

Background

The case involves an appeal against a judgment made on 21 August 2022, where the court ruled that payments made by the fourth respondent (Water Africa Systems (Pty) Ltd) (Water Africa) to the appellant (Macneil Plastics (Pty) Ltd) (Macneil Plastics) following a liquidation order, should be declared void and that the appellant should return the funds with interest and costs. On 28 October 2015, DIP Plastic (Pty) Ltd was granted an order for the final liquidation of Water Africa due to its inability to pay its debts. However, despite being placed under final liquidation, Water Africa made two payments totalling R407,010.30 to Macneil Plastics on 2 November 2015. This payment was for a credit facility that Macneil Plastics had granted to Water Africa for the provision of goods. Subsequently, on 9 December 2015, the court granted an order suspending the liquidation proceedings and placing Water Africa under supervision and in business rescue in terms of section 131(1) of the Companies Act 71 of 2008 (Companies Act).

During Water Africa’s business rescue, the business rescue practitioner paid out the creditors (excluding Macneil Plastics) a total of R25,483,536.00 before applying to court for the setting aside of the business rescue and reinstatement of the final liquidation order granted on 28 October 2015. The order reinstating the liquidation order was made on 12 April 2016. The court declared that the business rescue proceedings had ended and ordered for costs of the business rescue intervention to be included in the company’s winding-up. Thereafter, on 30 June 2016, the Master appointed the first, second and third respondents as the liquidators for Water Africa.

The dispute on appeal revolved around the impact of the order issued under section 131(6) on ongoing liquidation proceedings, and specifically whether these proceedings are merely suspended and then resumed if business rescue fails, or whether they are terminated and then restarted.

In the appeal, Macneil Plastics contended that the final liquidation order granted on 28 October 2015 was replaced by the order granted on 9 December 2015 in terms of which the liquidation proceedings were converted to business rescue proceedings. Accordingly, so they argued, the liquidation proceedings were brought to an end and the concursus creditorium formed thereby was undone. Thereafter, the business rescue proceedings were terminated and replaced by a fresh liquidation order on 28 October 2015, forming a new concursus creditorium. The previous liquidation order or previously formed concursus creditorium was not revived. Macneil Plastics submitted that there is a gap in section 131(6) of the Companies Act in that it does not speak to the effect of a court order placing the company in business rescue on a pre-existing liquidation order.

On the other hand, the liquidators argued that the effect of liquidation is to establish a concursus creditorium and after that nothing can be allowed to be done by any of the creditors to alter the rights of or prejudice the other creditors. It was further argued that the remedy of a liquidator who seeks repayment of an amount paid by or on behalf of a company placed under liquidation depends on the stage at which the payment was made. In the present case, the payment was made after a liquidation order had been granted but before the company was placed under business rescue, and thus at a stage where the concursus creditorium was formed. Accordingly, the payments were void and the fact that the company was later placed under business rescue could not undo this fact.

Looking at the wording of the court a quo orders, the appeal court found that these orders intended to suspend the liquidation proceedings upon commencement of the business rescue proceedings, without terminating them, and, when the business rescue proceedings were terminated, to reinstate the initial liquidation proceedings. With this in mind, the court turned to considering the legal position.

The status of dispositions made by or on behalf of a company which has already been placed in liquidation

In terms of section 341(1) of the Companies Act 61 of 1973 (old Companies Act), dispositions made after the commencement of liquidation proceedings are void. In a previous judgment the Supreme Court of Appeal had confirmed that once a court grants provisional or final liquidation, a concursus creditorium is established. Accordingly, any disposition made after liquidation proceedings have commenced is void and cannot be validated by the court. Thus, the court of appeal found that when the payments were made by Water Africa on 2 November 2015, the company had already been placed under final liquidation and therefore the payments were void.

The status of dispositions made after the granting of a final liquidation order, but before the company is placed under business rescue

After finding that dispositions made after liquidation is granted are void, the court considered what the effect of this disposition would be once the company is placed under business rescue thereafter. Section 131(6) of the Companies Act provides that where liquidation proceedings have already been commenced, the application for business rescue will suspend those proceedings until the court has adjudicated the application or until the business rescue proceedings end upon court order. In GCC Engineering v Maroos [2019] (2) SA 379 (SA) it was held that upon an application for business rescue, the liquidation proceedings are suspended, but the order which originally granted the liquidation is still in place. Thus, the ongoing process of liquidating the company’s assets for distribution to the different creditors has been put on hold. The order that granted the liquidation remains in place and the office of the liquidator is not terminated.

Accordingly, the appeal court concluded that the disposition made by Water Africa to Macneil Plastics was void, and placing the company under business rescue thereafter could not validate or undo the void disposition. The disposition should not have occurred as the concursus creditorium was already formed and the control of the assets had already vested with the Master and the liquidators had been appointed.

Furthermore, the order granted on 12 April 2016 had explicitly mentioned the reinstatement of the final liquidation order, which was suspended by the order granted on 9 December 2015 when business rescue was granted. The court held that it is incorrect to suggest that an order placing a company that is in business rescue, into liquidation, is initiating a new process, thus establishing a new concursus creditorium. The previous liquidation order and the concursus creditorium which was formed thereby are simply revived.

Following this straightforward judgment, there can be no doubt that a creditor who had received a disposition from a company in liquidation will have to repay the disposition to the liquidator, even if the company is subsequently placed under business rescue. The concursus creditorium will remain throughout, and the business rescue proceedings will not save the void disposition that was made.