Ju­rispru­den­tial teething un­der new act

It will take the Supreme Court of Ap­peal de­ci­sion to set­tle busi­ness res­cue is­sues un­der new Com­pa­nies Act

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - YANIV KLEITMAN

THREE im­por­tant ar­eas of le­gal de­bate have emerged from the cases de­cided by var­i­ous di­vi­sions of the high court un­der the Com­pa­nies Act 2008 since its com­mence­ment on May 1 last year.

These re­late to the grounds which are suf­fi­cient to get a court or­der com­menc­ing busi­ness res­cue pro­ceed­ings un­der chap­ter six of the Com­pa­nies Act, what the con­se­quences and im­pli­ca­tions are when a dereg­is­tered com­pany or close cor­po­ra­tion is rereg­is­tered by the Com­pa­nies and In­tel­lec­tual Prop­erty Com­mis­sion (CIPC), and whether an in­abil­ity to pay debts is still a stand-alone ground for the wind­ing up of com­pa­nies and close cor­po­ra­tions.

All of these ques­tions have ma­jor prac­ti­cal im­pli­ca­tions in prac­tice.

The ques­tion per­tain­ing to grounds for busi­ness res­cue re­lates to whether an ap­pli­cant for busi­ness res­cue can be suc­cess­ful if he can merely show that a wind­ing down of the com­pany un­der busi­ness res­cue will yield a bet­ter div­i­dend for cred­i­tors and share­hold­ers than would a liq­ui­da­tion of the com­pany.

An in­ter­pre­ta­tional dif­fi­culty arises here be­cause if one looks at the def­i­ni­tion of “busi­ness res­cue” in sec­tion 128(1)(b) of the Com­pa­nies Act, there is a sug­ges­tion that the al­ter­na­tive ob­ject — a bet­ter re­turn for cred­i­tors and share­hold­ers — than a liq­ui­da­tion is suf­fi­cient for a busi­ness res­cue or­der.

But when look­ing at the ac­tual op­er­a­tive sec­tion, which pro­vides for busi­ness res­cue pur­suant to court ap­pli­ca­tions by “af­fected per­sons” (cred­i­tors, share­hold­ers, trade unions, em­ploy­ees), it ap­pears that one nec­es­sar­ily has to sat­isfy the court that there is a rea­son­able prospect for res­cu­ing the com­pany — that is, a “bet­ter re­turn” in it­self is not enough — you have to show that you can keep the com­pany go­ing.

Most judg­ments handed down since the com­mence­ment of the new Act seem to ac­cept that the al­ter­na­tive ob­ject suf­fices (see for ex­am­ple Swart v Bea­gles Run In­vest­ments, Koen v Wedge­wood Vil­lage Golf & Coun­try Es­tate, al­though it must be said that this is a de­bat­able view.

The case of AG Pet­ze­takis In­ter­na­tional Hold­ings v Pet­ze­takis Africa ques­tioned this ap­proach, and rea­soned that the leg­is­la­ture’s in­ten­tion is prob­a­bly as fol­lows: To get a busi­ness res­cue or­der from the court, one has to prove a rea­son­able prospect for res­cu­ing the com­pany, but once the busi­ness res­cue prac­ti­tioner steps in and in­ves­ti­gates the af­fairs of the com­pany, and hap­pens to come to the con­clu­sion that the com­pany can­not ac­tu­ally be res­cued, his busi­ness res­cue plan can in­stead be geared to­wards achiev­ing the al­ter­na­tive ob­ject.

Again, even that is de­bat­able hav­ing re­gard to the fact that if the prac­ti­tioner comes to the con­clu­sion that the com­pany can­not be res­cued, he must (not may) un­der sec­tion 141(2) ap­ply to court to dis­con­tinue busi­ness res­cue and place the com­pany in liq­ui­da­tion.

The ques­tion be­comes ever more rel­e­vant as di­rec­tors and of­fi­cers of fi­nan­cially dis­tressed com­pa­nies try to con­vince the court to grant busi­ness res­cue or­ders, thereby shield­ing them from the pry­ing eyes of a liq­uida­tor and the po­ten­tial per­sonal li­a­bil­ity for the debts of the com­pany if there was reck­less trad­ing (sec­tion 424 of the pre­vi­ous Com­pa­nies Act, which is still ap­pli­ca­ble to liq­ui­da­tions).

On the re-reg­is­tra­tion is­sue, in Penin­sula Eye Clinic (Pty) Ltd v New­lands Sur­gi­cal Clinic (Pty) Ltd and Her­man v Set-Mak Civils, the courts iden­ti­fied a po­ten­tially mas­sive gap and prac­ti­cal prob­lem in the Com­pa­nies Act re­lat­ing to the re-reg­is­tra­tion of com­pa­nies and close cor­po­ra­tions that were de-reg­is­tered by the CIPC (or the old CIPRO) due to, for in­stance, fail­ure to lodge an­nual re­turns.

Un­der the pre­vi­ous Com­pa­nies Act and the Close Cor­po­ra­tions Act (prior to its amend­ment by the new Com­pa­nies Act) there were spe­cific statu­tory pro­vi­sions which stated that when a com­pany or close cor­po­ra­tion was re-reg­is­tered, there was ret­ro­spec­tive val­i­da­tion and re­in­state­ment to the date of dereg­is­tra­tion — it was as if the com­pany or close cor­po­ra­tion was never de-reg­is­tered.

Sec­tion 73(6)(a) used to say that “[t]he Court may, on ap­pli­ca­tion by any in­ter­ested per­son or the reg­is­trar, if it is sat­is­fied that a com­pany was at the time of its dereg­is­tra­tion car­ry­ing on busi­ness or was in op­er­a­tion, or oth­er­wise that it is just that the reg­is­tra­tion of the com­pany be re­stored, make an or­der that the said reg­is­tra­tion be re­stored ac­cord­ingly, and there­upon the com­pany shall be deemed to have con­tin­ued in ex­is­tence as if it had not been dereg­is­tered.”

Sec­tion 73(6A) used to say that “…the Reg­is­trar may, if a com­pany has been dereg­is­tered due to its fail­ure to lodge an an­nual re­turn in terms of sec­tion 173, on ap­pli­ca­tion by the com­pany con­cerned and on pay­ment of the pre­scribed fee, re­store the reg­is­tra­tion of the com­pany, and there­upon the com­pany shall be deemed to have con­tin­ued in ex­is­tence as if it had not been dereg­is­tered”.

These sec­tions were by no means su­per­flu­ous — they served a very im­por­tant pur­pose — but the new Com­pa­nies Act does not have an equiv­a­lent pro­vi­sion, and it also amended the Close Cor­po­ra­tions Act to cross re­fer to the dereg­is­tra­tion and re-reg­is­tra­tion regime in the new Act, so close cor­po­ra­tions have the same prob­lem.

In No­bel Crest CC v Kadoma Trad­ing 15 (Pty) Ltd (WCC) (12 April 2012), the court glossed over the prob­lem. The more in-depth and rea­soned judg­ment in Penin­sula sug­gests that this is a far big­ger deal than per­haps some would like to think.

What about as­sets of the com­pany that be­come state prop­erty upon dereg­is­tra­tion?

Penin­sula was a case where an ar­bi­tra­tion award was granted against a com­pany, it was sub­se­quently dis­cov­ered that the com­pany was dereg­is­tered at the time the award was granted against it, and the court ex­pressed se­ri­ous (and alarm­ing) reser­va­tions around whether a re-reg­is­tra­tion (by duly fil­ing the out­stand­ing an­nual re­turns) would in fact re­vive the (null and void) award. The court did not have to de­cide the point, though, be­cause on the facts the court was not con­vinced that the com­pany was re-reg­is­tered in any event.

Then there is the brew­ing is­sue of wind­ing up com­pa­nies and close cor­po­ra­tions un­able to pay their debts, which has be­come a very in­volved and com­plex one with the ad­vent of the new Com­pa­nies Act.

The dis­tinc­tion un­der the old Com­pa­nies Act in re­la­tion to liq­ui­da­tion was, tech­ni­cally, never “sol­vent” v “in­sol­vent” com­pa­nies, but rather “com­pa­nies able to pay their debts” v “com­pa­nies un­able to pay their debts”, with fac­tual in­sol­vency merely be­ing a fac­tor to be taken into ac­count in de­ter­min­ing these ques­tions.

It will prob­a­bly take a de­ci­sion from the Supreme Court of Ap­peal to set­tle these is­sues. Un­til then, prac­ti­tion­ers must be par­tic­u­larly wary of the var­i­ous di­ver­gent views out there on these very ma­te­rial is­sues, and will have to be care­ful to ad­dress and dis­tin­guish any case law which is not sup­port­ive of their clients' cases.

Pic­ture: THINKSTOCK

BUSI­NESS RES­CUE

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