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