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Richter v ABSA Bank Limited 2015 (5) SA 57 (SCA) – Why it is competent to apply for business rescue proceedings after an order of final liquidation and the effects thereof

15 April 2021

The Companies Act, No 71 of 2008 (“the Act”) brought about a new dawn for Insolvency Law in South Africa. The Act now provides for business rescue proceedings with the hope of giving effect to one of the purposes of the Act, namely to “provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders”. Great uncertainty however still exists regarding the meaning of certain provisions of Chapter 6 of the Act and the impact of the introduction of business rescue proceedings into our law system.

Systematically our courts are providing clarity to the meaning of the provisions of Chapter 6. An example of where our courts have given some clarity was in the case of Richter v ABSA Bank Limited1. In this case the Supreme Court of Appeal (“SCA”) had to determine whether it was possible for an affected person to apply for a company to be placed under business rescue after an order for the final liquidation of that company has been made. The “affected person” the Act refers to is defined as any registered trade union representing employees of that company, any employee who is not represented by a registered trade union, as well as any shareholder or creditor of the company.

Section 131(1) & (6) of the Act states the following:

“(1) Unless a company has adopted a resolution contemplated in s129, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business 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 business rescue proceedings end, if the court makes the order applied for.”

In the past there have been conflicting judgements regarding what the phrase “liquidation proceedings” referred to in section 131(6) entails. In Richter v ABSA Bank Limited the SCA stated in their judgment that the crux of the matter was whether the interpretation of “liquidation proceedings” within the context of section 131(6) referred only to a pending application for liquidation, or that it meant to include the process of winding-up of a company after an order of final liquidation has been granted. In the end they concluded that section 131(6) has the effect of suspending the liquidation proceedings after an order of final liquidation has been granted. It was therefore confirmed by the SCA that it is indeed competent for an affected person to apply for business rescue proceedings after an order of final liquidation has been granted.

The fact that an affected person can apply for business rescue proceedings does not however mean that the application for business rescue proceedings cannot be opposed by the liquidators of the company in question. In Van Staden NO and Others v Pro-Wiz Group (Pty) Ltd2 (“the Van Staden NO case”) the SCA determined that the liquidators of a company, whether provisional or final, are entitled and have the necessary locus standi to oppose an application for business rescue if they do not believe that the business rescue proceedings are in the best interest of the company and its creditors.

The SCA in the Van Standen NO case also held that business rescue proceedings exist for the sake of rehabilitating companies that had fallen on hard times but were

capable of being restored to profitability or, if that was impossible, to be employed where it would lead to creditors receiving an enhanced dividend. The World Bank states, in regard to business rescue, that “the rescue of a business preserves jobs, provides creditors with a greater return based on higher going concern values of the enterprise, potentially produces a return for owners and obtains for the country the fruits of the rehabilitated enterprise”3.

The potential advantages of business rescue proceedings, whether the business rescue is successful or not, is therefore greater than that of liquidation, but it is inevitable that our courts are going to be confronted with cases where the purpose behind the business rescue applications was not to achieve either of these goals, and had a mala fide intention, like to delay the liquidations proceedings. The SCA in the Van Staden NO case held that in such an instance a punitive cost order is appropriate against the applicants for the business rescue application which should hopefully deter any mala fide business rescue applications.

With more and more companies struggling financially in this economic climate the judgement handed down in Richter v Absa Bank Limited will give affected persons viable options to consider, which they did not previously possess, with possible advantages for all stakeholders in that company as well as the South African economy