INTRODUCTION
In 2018, the legislature enacted the Insolvency Act [Chapter 6:07] (hereinafter the Act). One of the notable advancements in the Act is the introduction of the corporate rescue procedure to replace judicial management. The introduction of a corporate rescue regime in Part XXIII of the Insolvency Act has allowed Zimbabwe to be counted amongst nations with a rehabilitative rescue procedure for financially distressed companies.
Going through the Part XXIII provisions it is clear that the legislative drafter transplanted the provisions of Chapter 6 of the South African Companies Act 71 of 2008 (hereinafter the Companies Act). In light of the almost identical nature of the provisions, significant reliance shall be placed on South African authorities in this article.
The legislature has therefore transplanted the Chapter 6 business rescue regime with all its advantages and disadvantages see Loubser 2010 Journal of South African Law 501-514 and Loubser 2010 Tydskrifvir die Suid-Afrikaanse Reg 689.
One of the concerns is how our courts shall interpret section 124(6) of the Act which states that liquidation proceedings shall be suspended ex lege on the filing of an application for corporate rescue. In the absence of a definition in the Act on the meaning of ‘liquidation proceedings’ it is left to the courts to determine the meaning of the term ‘liquidation proceedings’. The quest to provide a meaning to the term ‘liquidation proceedings’ has received considerable attention in South Africa with conflicting decisions emanating from the courts see Phungula S P 2014 De Jure 329-338. .
In Absa Bank Limited v Summer Lodge (Pty) Ltd 2014 (3) SA 90 (GP) (hereinafter Summer Lodge) the court ruled that ‘liquidation proceedings’ related to the proceedings after an order for liquidation is granted. The court in Richter v Bloempro CC v Others 2014 (6) SA 38 (GP) decided that liquidation proceedings referred to the legal processes prior to the granting of an order for liquidation. The matter was finally settled by the South African Supreme Court of Appeal in Richter v Absa Bank Ltd 2015 (5) SA 57 (SCA) where the court ruled that liquidation proceedings referred to the entire process from the legal proceedings prior to an order for liquidation right until the deregistration of a company.
The conflicting decisions alluded to above in the interpretation of section 124(6) of the Act have consequences on the overall liquidation process. This article shall therefore endeavour to answer the question on the definition of ‘liquidation proceedings’ within the context of section 124(6) of the Act.
SECTION 124(6) OF THE ACT AND RELATED LEGISLATIVE PROVISIONS
For purposes of this article it is assumed that the reader is familiar with the corporate rescue provisions. For further reading refer to Rushworth J 2010 Acta Juridica 375-408. Sections 124(1), (6) and (7) of the Act read as follows:
“124 Court order to commence corporate rescue proceedings
(1) Unless a company has adopted a resolution contemplated in section 122, an affected person may apply to a Court at any time for an order placing the company under supervision and commencing corporate rescue proceedings.
…………..
(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
(b) the corporate rescue proceedings end, if the Court makes the order applied for.
(7) In addition to the powers of a Court on an application contemplated in this section, a Court may make an order contemplated in subsection (4), or (5) if applicable, at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company.
…………………….”
THE THREE SCHOOLS OF THOUGHT
First school of thought: suspension of winding up proceedings after an order for liquidation
In the Summer Lodge case [12] the court ruled that the term ‘liquidation proceedings’ related to the actual process of winding up and was exclusive of the legal processes prior to an order for liquidation. The court applied a literal interpretation to the words ‘liquidation’ and ‘proceedings’ and concluded that section 131(6) of the Companies Act (section 124(6) of the Act) is concerned with the actual process of winding-up followed by the liquidator and the Master.
The court found that the word ‘commenced’ in section 131(6) of the Companies Act had the same meaning as that in section 348 of the repealed Companies Act 61 of 1973. Section 348 of the Companies Act 61 of 1973 deems the winding up to have commenced from the time of filing the application. However, this deeming provision only takes effect after the granting of an order for winding up Summer Lodge case [14].
Second school of thought: Suspension of the legal processes prior to an order for winding up
In the Bloempro case [18] the court expressed doubt on the correctness of Summer Lodge. The court highlighted that corporate rescue was a proceeding to facilitate the rehabilitation of a company that is ‘financially distressed’ Bloempro case [18]. A financially distressed company is defined as a company that is unlikely to pay all its debts, or is reasonably likely to become insolvent in the ensuing six month period (section 128 (b) and (f) of the Companies Act. Read also section 121(b) and (f) of the Act). This would mean that corporate rescue would not be possible after an order for a final liquidation order because the company has already been adjudged to be insolvent in a court of law Bloempro case [18].
The court noted that section 132(2)(a)(ii) of the Companies Act (section 125(a)(ii) of the Act) only provided for the conversion of corporate rescue proceedings to liquidation proceedings and not vice versa suggesting that the legislature never intended for that to occur. Another argument was that the corporate rescue application would empower the company to dispose of property in terms of section 134 of the Companies Act (section 127 of the Act) Bloempro case [18].
The court mentions other considerations and the reader is referred to the full judgement of the Bloempro case.
Third school of thought: Suspension of liquidation proceedings both prior to and after an order for liquidation is granted
In Richter [16] the Supreme Court of Appeal of South Africa overturned the Bloempro case. The court ruled that ‘liquidation proceedings’ referred to the legal processes prior to an order for liquidation together with the winding-up process that occurred after an order for liquidation was granted by a court. In line with the principle of stare decisis the decision in the Richter case is the prevailing law in relation to section 131(6) of the Companies Act (section 124(6) of the Act).
THE INTERPRETATION OF THE TERM ‘LIQUIDATION PROCEEDINGS’
In light of the recent enactment of the Act there is need for careful reflection in the interpretation of section 124(6). The following considerations should be made in giving meaning to the term ‘liquidation proceedings’ in section 124(6) of the Act:
i. The Richter case has been the subject of both judicial and academic criticism see Van Der Merwe and Others v Zonnekus Mansion (Pty) Ltd and Others [2015] 3 All SA 659 (WCC) [17] (hereinafter Van Der Merwe) and Motsai T Richter Judgement: An analysis of section 131(6) of the Companies Act (LLM thesis University of Johannesburg 2016). One of the criticisms levelled against the decision is that the Supreme Court of Appeal neglected to carry out an analysis of conflicting decisions delivered prior to its ruling see Van Der Merwe [17].
ii. It is submitted that the court in the Richter case applied a different test for a ‘reasonable prospect of rescue’ than that previously applied by the same court in Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA) [30] (hereinafter the Oakdene case).
The test in the Oakdene case [29] requires that a reasonable prospect must be based on reasonable grounds. The reasonable prospect threshold is a lesser requirement than the reasonable probability test that prevailed for judicial management under the Companies Act 61 of 1973, see the Oakdene case [29] and sections 300 and 305 of the repealed Companies Act [Chapter 24:03]. Judicial discretion must be applied in each case without applying any prescriptive requirements.
The Oakdene case overruled Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 (Pt) Ltd 2012 (2) SA 423 (WCC) [24] which had ruled that a reasonable prospect of rescue required a substantial amount of detail on the proposed corporate rescue plan. This approach may be criticised because affected persons such as employees or shareholders may not have sufficient access to information to meet the prescriptive requirements see the Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations Limited and Another, In Re; AFGRI Operations Limited v Solar Spectrum Trading 83 (Pty) Ltd [2012] ZAGPPHC 359 [17] (hereinafter Solar Spectrum case). Another argument advanced in the Solar Spectrum case [18] was that it is the function of the corporate rescue practitioner, immediately after his or her appointment, to investigate whether there is a reasonable prospect of rescuing the company.
In the Richter case the court had the following to say in relation to the test for a reasonable prospect:
“Accordingly, in the scheme of things, where, during liquidation, evidence becomes available that business rescue proceedings will yield a better return…..”
And at para 16:
“The simple answer is that a court can dismiss any application for business rescue that is not genuine and bona fide or which does not establish that the benefits of a successful business rescue will be achieved.” (emphasis is mine)
The word ‘will’ has many definitions, it is trite that the word ‘will’ in the context within which the court in the Richter case used it, is defined as an expression of an ‘inevitable future event’ see Merriam Webstar https://www.merriam-webster.com/dictionary/will (Date of use: 18 April 2020). The court then proceeded to outline examples justifying the conversion of liquidation proceedings to corporate rescue proceedings: the awarding of a contract earlier tendered; securing funding for projects; the subordination by a major creditor of its claim; and that the company would become profitable if allowed to trade see the Richter case [15].
In the entire Richter case, the court made no reference to the test in the Oakdene case. Applying the ejusdem generis principle it is argued that these examples denote an evidential burden far higher than that espoused in the Oakdene case. This is so, given the finality of these examples. For instance, the awarding of a contract earlier tendered would require production in court by the applicant of the contract concerned. In a similar vein, securing funding for projects would require production of evidence that the funding is available and shall be availed to the company.
The examples provided by the court in the Richter case taken together with the court’s summation of the factors entitling an applicant to an award for corporate rescue may, to an extent, be said to require an applicant to provide evidence mirroring a corporate rescue report. This is the function of the corporate rescue practitioner who is appointed after an order for corporate rescue is granted, see the Solar Spectrum case [18].
iii. In its analysis the court neglected to distinguish between sections 131(6) and 131(7) of the Companies Act, see Stoop 2014 De Jure 334. In terms of section 131(6) of the Companies Act (section 124(6) of the Act) liquidation proceedings are ‘by or against the company’. This would infer that the liquidation proceedings are legal proceedings by or against a company prior to an order for liquidation by a court see Stoop 2014 De Jure 334. It is necessary to contrast this with section 131(7) of the Companies Act (section 124(7) of the Act) where an order for liquidation can be made by a court, ‘at any time during the course of any liquidation proceedings’ see Delport et al Henochsberg at 482(25)-(26).
Therefore, any provision in the Act suggesting the possibility of a conversion of liquidation to corporate rescue such as section 136(4) of the Companies Act must be read in conjunction with section 131(7). It is argued that the same argument and logic would apply to sections 124(7) and 129(5) of the Insolvency Act.
iv) The decision in the Richter case has led to repetitive disruptions and uncertainty in liquidation processes see Van der Merwe NO and Others v Moodliar NO and Another; Van der Merwe NO and Others v Moodliar NO and Another; Nkhoma NO and Others v Moodliar NO and Others [2020] 1 All SA 558 (WCC) [8-14] (hereinafter the Moodliar case). In the Moodliar case [8-14] four different applications for business rescue had been launched after the order for liquidation. The solution of the court in the Richter case [16] did not answer the legal concern of disruption to winding up proceedings. It is insufficient for a court to state that it would protect the interests of creditors and stakeholders in the liquidation process by dismissing the application for corporate rescue. Furthermore, the prospect of a punitive order for costs has failed to deter errant applicants who seek to abuse the corporate rescue proceedings.
v. Concursus Creditorum
The approach in the Richter case poses a threat to the long-established Roman Dutch Law principle of concursus creditorum which is the crystallisation or freezing of the estate of the company in liquidation with the intention of safeguarding the rights of the body of creditors with the ultimate aim of settling creditors obligations in their order of preference see Walker v Syfret 1911 AD 141 at 166.
In Phibion Gwatidzo N.O (In His Capacity as Liquidator of Renaissance Securities (Pvt) Ltd (In Liquidation) v First Transfer Secretaries (Private) Limited & Ors HH 165-14 at 5 the court cited with approval the following statement in the case of Walker v Syfret:
“The effect of a winding up order is to establish a concursus creditorium, and nothing can thereafter be allowed to done by any of the creditors to alter the right of other creditors.”
FURTHER CONSIDERATIONS
When the interpretation of section 124(6) of the Act is contested before a court in Zimbabwe the court may either choose to adopt the approach in Richter or Bloempro. For reasons outlined in the previous section it is recommended for the court to adopt the interpretation as decided in the Bloempro case.
Further to the reasons outlined above there are further considerations which our courts must be cognisant of before considering the meaning of ‘liquidation proceedings’ in section 124(6) of the Act. The considerations are as follows:
i. The Companies Act of South Africa has an express purposive provision requiring the courts to interpret the provisions of the Act in a wide manner so as to achieve the purposes of the Act, see sections 5, 7(k) and 158 of the Companies Act. The Richter case [13] clearly made reference to that wide purposive requirement in the interpretation of section 131(6) of the Companies Act.
Unfortunately, the Act does not contain similar purposive provisions which would suggest that our courts are limited to the text and context of the Act. It would therefore be jurisprudentially corrupt to import a purpose into the Act which is alien to its provisions.
In Ex Parte: ZIMASCO (Pvt) Ltd (For a Provisional Order placing it under judicial management and for the appointment of a Provisional Judicial Manager) HH 53-16 at 11 where the respondent sought to draw an analogy between the South African Companies Act 46 of 1926 and the repealed Companies Act [Chapter 24:03] of Zimbabwe, the court stated as follows:
“It is important that when counsel seeks to rely on decisions from other jurisdictions, they should satisfy themselves and the court that the authorities would properly relate to the subject matter before the court.”
ii. Section 183 of the Act is the appropriate provision to achieve the mischief which sought to be remedied by the Richter case. Section 183 of the Act is arguably broader in extent than its South African equivalent which is section 354 of the Companies Act 61 of 1973. That notwithstanding, in the unreported South African case of Molyneux and Another v Patel and Others [2014] ZAWCHC 191 [32] the court argued that the interpretation as stated in the Richter case was unnecessary. This was so because an applicant seeking to resile an order for winding-up could do so in terms of section 354 of the Companies Act and simultaneously apply for corporate rescue.
An alternative point might be for an applicant in terms of section 183(1) of the Insolvency Act to request the court to exercise its inherent jurisdiction to convert liquidation to corporate rescue proceedings in terms of section 124(7) of the Insolvency Act.
CONCLUSION AND RECOMMENDATIONS
Commenting on section 131(6) of the Companies Act, Loubser A Some Comparative Aspects of Corporate Rescue in Southern African Company Law (LLD thesis University of South Africa 2010) at 350 suggests the following amendments, which apply with equal force and measure to section 124(6) of the Insolvency Act:
“Therefore, I suggest that section 131(6) should be amended as follows:
(6) If an application for winding up of the company has already been presented to the court but not yet disposed of at the time an application is made in terms of subsection (1), the application will suspend those liquidation proceedings until the application for winding up will be –
(a) suspended until the court has adjudicated upon the application for business rescue proceedings; and
(b) dismissed if the court makes the order applied for business rescue proceedings.”
Further section 131(1) of the Companies Act (section 124(1) of the Act) should be amended to read as follows:
“ (1) Unless a company has adopted and filed a resolution contemplated in section 129, or a court has issued a final order of winding up in respect of the company or the voluntary winding up of the company has commenced, an affected person may apply to a court at any time for an order ...”
It is urged and recommended that the legislature consider effecting the above amendments to the Act. In light of the discussion above, it is submitted that the correct position is that section 124(6) of the Act suspends the legal processes to obtain an order for liquidation upon the filing of an application for corporate rescue. Section 124(6) should not be read to suspend winding-up processes after an order for liquidation has been issued by a court.
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