When is a business rescue application made?

In Lutchman N.O. and Others v African Global Holdings (Pty) Ltd and Others the Supreme Court of Appeal (“SCA”) had to determine when an application for business rescue was made for purposes of determining when liquidation proceedings are suspended by such business rescue application. The SCA was also called upon to interpret the effect of a court order that limited the powers of the provisional liquidators.

Background

Angelo Agrizzi’s testimony at the Commission of Enquiry into Allegations of State Capture prompted the bankers of African Global Operations (Pty) Ltd (“Operations”), a subsidiary of African Global Holdings (Pty) Ltd (“Holdings”) (formerly Bosasa), to indicate that they would be withdrawing Operations’ banking facilities and closing its bank accounts. This was catastrophic for Operations (which acted as treasurer and made and received payment on behalf of the group of companies).

After failing to find another bank to provide baking facilities, the directors of Holdings and Operations resolved to place Operations and its ten wholly-owned subsidiaries under a voluntary creditor’s winding up in terms of section 351 of the 1973 Companies Act.

When the joint provisional liquidators (“liquidators”) started to exercise their statutory powers, Holdings brought an extremely urgent application to the Johannesburg High Court on 13 March 2019.

Ameer AJ granted judgment, on 14 March 2019, in favour of Holdings and made the following orders:

·????????the special resolutions placing the companies in a creditor’s voluntary winding up had not been lawfully passed and were thus null and void ab initio and of no force and effect;

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·????????that, as a result, the appointments of the liquidators were not validly and lawfully made and were thus also null and void ab initio and of no force and effect;

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·????????the liquidators must deliver control of the companies and their assets to the directors; and

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·????????the liquidators are responsible for the costs of the proceedings in their personal capacities.

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(these orders are hereinafter referred to as the Ameer AJ order).

Ameer AJ granted the liquidators leave to appeal to the SCA.

Essence of dispute between liquidators and directors

The directors:

·????????did not accept that there had been a concursus creditorum in respect of any of the companies concerned;

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·????????did not accept that the liquidators held any rights or powers as ‘provisional liquidators’;

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·????????maintained that the suspension of Ameer AJ’s order, by virtue of the then-pending appeal, did not resolve the disputes, between them and the liquidators. These were whether the companies had been placed into liquidation and whether the liquidators had the powers of provisional liquidators to take control of the assets and affairs of the companies concerned.

In short, the directors’ views were that they retained control of the assets and affairs of the relevant companies and refused to relinquish control to the liquidators. The liquidators, on the other hand, maintained that their appeal suspended Ameer AJ’s order, pending the outcome of the appeal, and that the companies in question remained in liquidation and under their control.

As a result of this dispute, they agreed a mechanism through which they could, in consultation with one another, attend to the affairs of the relevant companies (by way of joint meetings discussing matters arising and taking joint decisions in connection with the businesses).

Extension of powers

The liquidators and directors then realised that the companies in question lost their substratum (because Cabinet had decided that all contracts between government departments and state-owned companies with the relevant companies are terminated and these companies’ assets were acquired to provide services in terms of such contracts) and there was a need to quickly dispose of such assets (due to security and insurance costs which would have to continue to be paid without the companies generating income).

The liquidators and directors also faced the following dilemma:

·????????in ordinary liquidation proceedings the Master of the High Court convenes the first meeting of creditors, members and contributories to, inter alia, enable creditors to prove their claims and vote on the final appointment of liquidators. Only the Master may convene such a meeting (it is beyond the power of provisional liquidators to do so);

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·????????when liquidators are finally appointed, they may convene a second meeting of creditors and at such meeting resolutions may be adopted authorising liquidators to act in their best interest (by, for example, selling assets);

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·????????in respect of the companies in question, the Master would only convene a first meeting once the appeal against the Ameer AJ order was finalised;

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·????????although the Master of the High Court was entitled to authorise sales of assets in such circumstances, the Master preferred not to take a decision itself and indicated that an approach to court was more appropriate;

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·????????the bank also would not allow the liquidators to transact on the account without a court order authorising the same.

Consequently, the liquidators launched an application extending their powers. In response Holdings and the directors’ attorneys made certain proposals which, as a matter of practicality, were accepted by the liquidators.

On 2 April 2019 the High Court, per Tsoka J, granted an interim order incorporating such proposals and extending the powers of the liquidators by authorising them to transact on the banking accounts, conduct the businesses, engage in legal proceedings, and reach reasonable settlements with debtors.?

Once the interim order was made Holdings and the directors intervened in the application to extend the liquidators' powers.

The directors’ reasons for intervening were as follows:

·????????the liquidators were seeking court-sanctioned powers beyond those which vest in provisional liquidators in the ordinary course;

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·????????if their appeal, against Ameer AJ’s order, was unsuccessful the resolutions placing the companies in voluntary creditors winding up, would be declared void and the liquidators ordered to hand control of the companies back to the directors with all of their assets;

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·????????they alleged that the liquidators’ intention was to give them sole control with extensive powers without the need to consult them;

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·????????they were concerned that the final grant of the orders may result in the winding up of the companies being a fait accompli before the appeal, against Ameer AJ’s order, was finalised.

The directors and liquidators then agreed on inserting the following additional orders into the final order (granted by Mudau J on 14 May 2019):

·????????the above powers shall be exercised in consultation with the board(s) of the directors of the specific company or companies involved in the transaction(s) and the liquidators shall be obliged to give the directors in question reasonable notice of the meeting at which it is sought to consult and of the subject matter;

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·????????this order shall lapse and be of no further force and effect immediately upon the grant of an order by the SCA that the appeal, against the Ameer AJ order, has been successful. If the appeal is successful the order above (in the immediately preceding bullet) also lapses and is of no force and effect.

Thereafter a second draft application to extend the powers of the liquidators was furnished to the attorneys of Holdings (and the directors of the companies in question). In response their attorneys advised that by virtue of the liquidators agreeing not to exercise their powers other than in consultation with their clients and without their consent the directors consented to the further relief to be claimed in the second extension of powers application.

Bhoola AJ granted the consent order and extended the liquidators powers to sell all the moveable assets of the six companies by public auction, public tender or private contract and to sell the immoveable property of the property company by similar means. Bhoola AJ’s order then provided that these assets be sold in consultation with and with the consent of the Boards of Holdings, Operations and relevant companies.

Auction sales

Pursuant to the Bhoola AJ consent order:

·????????the liquidators instructed an auctioneer to sell the majority of the assets on 26 and 27 November 2019. These dates were then changed to 4-6 December 2019;

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·????????on 20 November 2019 Holdings objected to the sales on the basis that they had not consented thereto as required in terms of the Bhoola AJ order;

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·????????the liquidators’ appeal, against the Ameer AJ order, was upheld by the SCA on 22 November 2019 i.e., Operations and its ten subsidiaries remained in a voluntary creditors winding up.

Holdings nevertheless demanded that the liquidators not proceed with the sale of assets by auction because it required consent. The liquidators refused to accept this demand.

Business rescue application and auction application

On 3 December 2019 Holdings caused to be issued an application for an order placing six of the eleven companies under the supervision and commencing business rescue proceedings in terms of section 131(1) of the 2008 Companies Act (“business rescue application”).

Between 4 and 6 December 2019 the liquidators caused most of the assets of the six companies to be sold by public auction. Holdings responded by launching a further application (“auction application”) seeking the following orders against the liquidators:

·????????interdicting them from selling any further assets owned by the six companies, before the final adjudication of the business rescue application and/or before the second meeting of creditors, without the written consent of Holdings;

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·????????a declaration that the sale of assets, before the final adjudication of the business rescue application and or before the second meeting of creditors, without the written consent of Holdings, was null and void; and

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·????????interdicting them from delivering the moveable assets to, and causing the transfer and registration of ownership of the immovable assets into the names of purchasers, before the final adjudication of the business rescue application and/or the second meeting of creditors, without the written consent of Holdings.

The business rescue application and auction application were consolidated in one hearing before De Villiers AJ. De Villiers AJ:

·????????dismissed the business rescue application; and

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·????????granted the relief sought in the auction application.

Holdings was granted leave to appeal the high court order dismissing the business rescue application and the liquidators, and the South African Revenue Service, were granted leave to appeal the granting of the orders in the auction application (in both cases to the SCA).

Auction application bases

Holdings and two other parties brought the auction application on the following two grounds:

·????????the liquidators were statutorily prohibited from proceeding with the auction, and any subsequent sales of the assets, of the six companies due to a statutory suspension of the liquidation proceedings, in terms of section 131(6) of the Companies Act, because the application for business rescue was made on 3 December 2019 (prior to commencement of the auction on 4 December 2019); and

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·????????the liquidators did not possess the requisite authority to sell the assets on auction, at the time the auction was held or thereafter, because they were provisional liquidators, the directors had not consented, and the second meeting had not yet been held.

As mentioned earlier the High Court upheld Holdings’ submissions in the auction application.

SCA appeals

The SCA had to consider Holdings’ appeal against the dismissal of its business rescue application and auction application.

The SCA noted the following provisions in section 131 of the 2008 Companies Act:

·????????an affected person[1] may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings;[2]

·????????an applicant must:

o??serve a copy of the application on the company and Companies and Intellectual Property Commission (“CIPC”); and

o??notify each affected person of the application in the prescribed manner;[3] and

·????????each affected person has a right to participate in the hearing of an application.[4]

The SCA also noted that:

·????????section 131(6) of the 2008 Companies Act provides as follows:

“(6)???????If liquidation proceedings have already been commenced by or against the 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

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(b)???the business rescue proceedings end if the court makes the order applied for.”

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·????????section 132(1)(b) of the 2008 Companies Act provides that business rescue proceedings begin when an affected person applies to the court for an order placing the company under supervision in terms of section 131(1) of the Companies Act.

The SCA noted further that there were conflicting high court judgments on when a business rescue application is made.

Certain high courts held that a business rescue application is made when the application has been issued, there has been service, and the prescribed notification has been effected. Others held that a business rescue application is made when the application is lodged with the registrar of the high court and issued.

The SCA held that the relevant provisions must be interpreted in accordance with the well-known principles of interpretation (summarised as follows in Commissioner for SARS v United Manganese of Kalahari (Pty) Ltd):

“It is 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…

In the first instance, there is the injunction in section 39(2) of the Constitution of the Republic of South Africa, 1996 … that statutes should be interpreted in accordance with the spirit, purport and objects of the Bill of Rights. Second, there is the context provided by the entire enactment. Third, where legislation flows from a commission of enquiry, or the establishment of a specialised drafting committee, reference to their reports is permissible and may provide helpful context. Fourth, the legislative history may provide useful background in resolving interpretational uncertainty. Finally, the general factual background to the statute, such as the nature of its concerns, the social purpose to which it is directed and, in the case of statutes dealing with specific areas of public life or the economy, the nature of the areas to which the statute relates, provides the context for the legislation.”

The SCA reasoned as follows:

·????????‘made’ is the past participle of ‘make’. The dictionary meaning of make includes ‘bring about or perform; cause’;

·????????most words can bear several different meanings or shades of meaning - to try to ascertain their meaning in the abstract, divorced from the broad context of their use, is an unhelpful exercise;

·????????this is also true of the words ‘application is made’ in section 131(6), ‘apply’ in section 131(1) and ‘applies’ in section 132(1)(b);

·????????when the word ‘made’ is properly interpreted in isolation, in the context of section 131 as a whole (especially subsections 131(1)-(3)), in the context of the Companies Act as a whole (especially the nature and purpose of business rescue proceedings vis a vis those of winding up proceedings, as well as section 132(1)(b)), and the apparent purpose to which section 131(6) is directed, its meaning becomes clear;

·????????liquidation proceedings are strictly proceedings to constitute a concursus creditorum. The liquidation process continues until the company’s affairs have been finally wound up and the company is dissolved;

·????????business rescue is a process aimed at avoiding the liquidation of a company if it is feasible. Business rescue may be embarked upon by way of a board resolution or by way of a court order (the section 131 route);

·????????the purpose to which section 131(6) is directed is to suspend liquidation proceedings until the court has adjudicated upon the application (or the end of the proceedings);

·????????at the stage of lodgement and issue of a case number the only people who may be aware of the suspension would be the applicant, messenger of court, and individual clerk;

·????????while papers have been lodged and issued, service may take quite a while during which period the provisional liquidator may continue to perform his duties and exercise his powers. Taking into account the wide powers conferred on provisional liquidators (such as making/receiving payment, remunerating employees, concluding contracts, engaging in litigation and generally carrying out the duties of directors of the company in liquidation), a provisional liquidator may have absolutely no knowledge of a business rescue application if it is not served on him (and knowledge alone would be insufficient). All this should not be permitted or implemented by a suspended provisional liquidator (as a result of the liquidation proceedings having been suspended without the ‘suspending business rescue application’ having been served on him;

·????????the provisional liquidator is entitled to service in order to be informed that he is suspended in his duties and powers and, in the absence of service, would not know that;

·????????the purpose of a summons or a notice of motion is to involve a respondent in a lawsuit. Only when a provisional liquidator and CIPC are served with a business rescue application, and affected persons notified, will they be involved in, or drawn into, the business rescue application proceedings (until then they remain unaffected);

·????????the purpose of section 131(6) is given effect to only where the business rescue application has been publicly and formally made (by its issue, service on the company, service on CIPC, and notified to each affected person);

·????????an interpretation that the word ‘made’ in section 131(6) denotes the mere issuing of the business rescue proceedings, triggering the suspension of the liquidation proceedings, results in absurdity, militates against logic, and leads to insensible and unbusinesslike results, and undermines the purpose of the section;

·????????it has been held, employing similar reasoning, that a resolution to begin business rescue proceedings, and place a company under supervision, may not be adopted if liquidation proceedings have been initiated by or against the company. Initiated, in this context, meant, based on earlier case law, that liquidation proceedings must have been served on the company and not merely issued in order to meet the requirements of the section (the SCA also referred to other cases where similar conclusions were reached regarding applications that had to be made (requiring both issue and service);

·????????an application for business rescue must be served on the company concerned. Where it is already being wound up, whether provisionally or finally, the persons on whom the application must be served, as representing it, are its liquidators (this followed from the fact that upon the compulsory winding up of a company its directors are deprived of their control of the company -which is then deemed to be in the custody or control of the Master until the appointment of liquidators and thereafter in the custody or control of the liquidators);

·????????it is apparent from section 131 of the 2008 Companies Act that the company that is the subject of the business rescue application is entitled to oppose it. In relation to a company under provisional or final winding up its affairs will be in the hands of liquidators. On ordinary principles the liquidators, faced with such an application, should be entitled to support or oppose it based on their assessment of the interests of the company and its creditors; and

·????????when a party is cited in legal proceedings it is entitled without more to participate therein and the fact that it was cited gives it that right.

The SCA, therefore, found as follows:

·????????the auction and business rescue applications should have been served on each joint liquidator of each of the companies in question as they represented the companies in liquidation;

·????????each of them was cited as respondents in the business rescue application and auction application;

·????????the CIPC, as a regulatory body, has a direct and substantial interest in any order the court may make and therefore there was a statutory obligation to cause the application to be served on it;

·????????each affected person (a shareholder or creditor of the company in liquidation, any registered trade union representing employees or each individual employee) is entitled to oppose or support the business rescue application; flowing from the right afforded to them to participate in the hearing of the application. Each should therefore have been notified of the business rescue application in the prescribed manner;

·????????service and notification requirements are not merely procedural steps but rather are substantive requirements, compliance with which is an integral part of making an application for a section 131 business rescue order. Strict compliance is required because business rescue proceedings can be abused;

·????????it could not be said that there had been compliance, or substantial compliance, with the service and notification requirements;

·????????the application was a substantive application rather than an ancillary/interlocutory application (which may be served on an attorney representing a party in proceedings already instituted);

·????????service was not affected on each of the joint liquidators of the companies in question;

·????????Holdings did not make the case that service on two of the joint liquidators was service on them as agents in their own capacities and on behalf of the other joint liquidators;

·????????only 29 of 50 employees were notified of the business rescue application by electronic means;

·????????Holdings did not allege that all the employees had been notified; nor was any explanation proffered as to why the full staff compliment was not notified, and no explanation was given as to what steps were taken to identify affected employees and their addresses and to deliver such application on them in order for the high court to have considered whether all reasonable steps had been taken to comply.

The SCA, therefore, concluded that the business rescue application was not made as contemplated in section 131(6) of the Companies Act. The result was that the liquidation proceedings of the six companies in question were not suspended (including the public auction and subsequent sales). The SCA concluded that the high court should not have dismissed the business rescue application as it was not made (the high court ought instead to have struck it from the roll).

These findings also disposed of Holdings’ first contention (that the liquidators were suspended statutorily and prohibited from effecting the sales by public auction and implementing them).

With regard to the second contention, that the liquidators did not have the consent of the directors, or were not clothed with the requisite power or authority, to sell the assets of the companies in question when the auction was held or any time thereafter, the SCA stated that this had to be determined by having regard to the Bhoola AJ order.

The SCA reaffirmed the following principles relating to the interpretation of court orders:

·????????the starting point is to determine the manifest purpose of the order;

·????????in interpreting a court order, a court’s intention is to be ascertained primarily from the language of the order in accordance with the usual well-known rules relating to the interpretation of documents;

·????????as in the case of a document, the order and the court’s reasons for giving it must be read as a whole in order to ascertain its intention; and

·????????the manifest purpose of the order is to be determined by also having regard to the relevant background facts which culminated in the order being made.

Applying these principles leads to the conclusion that, although the italicised portion of the Bhoola AJ order (see above) did not expressly state that it would lapse and be of no further force and effect upon the granting of an order by the SCA in the liquidators’ appeal against the Ameer AJ order, the intention of the high court in granting the Bhoola AJ order by consent (between the liquidators and the directors) was to extend the powers of the liquidators by authorising them to sell assets subject to consultation with and the consent of the directors pending the outcome of the appeal.

The SCA acknowledged that the order and the high court’s reasons for giving it could not be read as a whole to ascertain its intention because it was a consent order. Nevertheless, its manifest purpose became clear when the order was placed in proper perspective and the context in which it was made was considered.

The SCA highlighted that taking into account:

·????????the dispute between the directors and the liquidators, and the interim arrangement agreed upon as a result thereof, pending the finalisation of the appeal;

·????????Tsoka J’s interim order in the first application to extend the liquidators’ powers;

·????????Mudau J’s final order in the first application to extend the liquidators’ powers;

·????????the consensus that the assets of the companies in question should be sold expeditiously and that the sales could not await the final appointment of liquidators and second meeting of creditors should the liquidators’ appeal be successful;

·????????the liquidators’ unsuccessful approach to the Master to extend their powers and sell assets pending the appeal;

·????????the liquidators subsequent approach to the directors for their consent to such an order being obtained from the high court and the directors’ consent thereto;

·????????the liquidators assertions in the affidavit in support of the second application to extend their powers, heard by Bhoola AJ, and which were approved of by the directors; and

·????????the letter from the attorneys of Holdings setting out the purpose and intention of the order;

it was manifestly clear that the italicised portion of the Bhoola AJ order was intended to lapse when the SCA gave judgment upholding the liquidators’ appeal against the Ameer AJ order.

The SCA, therefore, concluded that it could never have been the intention of the high court, as the directors would have it, to have ordered the liquidators never to sell assets of the companies in question without consultation with and without obtaining the directors consent’ should the liquidators have been successful in their appeal.

The SCA held that such a result would be absurd as it would ignore the extended powers granted to the liquidators and the statutory prescripts applicable to the liquidation process that ultimately results in the demise of the companies.

The SCA therefore upheld the liquidators appeal against the orders made in the auction application.

[1] The affected person is defined in the 2008 Companies Act as follows:

“in relation to a company, means –

(i)??????????????????a shareholder or creditor of the company;

(ii)????????????????any registered trade union representing employees of the company; and

(iii)???????????????if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives;”

[2] Section 131(1) of the 2008 Companies Act

[3] Section 131(2) of the 2008 Companies Act

[4] Section 131(3) of the 2008 Companies Act