I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
South African insolvency law regulates three main types of insolvency proceedings, namely the sequestration of personal estates, the winding up of companies and winding up of close corporations. Furthermore, the law regulates proceedings that are aimed at rescuing businesses in dire financial straits.
The insolvency regime in South Africa is primarily governed by three statutes, the application of which depends on the type of insolvency proceedings in issue. The sequestration of a natural person’s estate is governed by the Insolvency Act 24 of 1936 (the Insolvency Act), while the winding up of close corporations is regulated by the Close Corporations Act 69 of 1984 (the Close Corporations Act). The law regulating the winding up of companies (both public and private) is contained chiefly in the Companies Act 61 of 1973 (the Old Companies Act) (which, pursuant to the provisions of Item 9 of Schedule 5 of the Companies Act 71 of 2008 (the New Companies Act), remains in force under the new company law regime) as read with the laws relating to insolvency insofar as they are applicable. Only companies that are ‘insolvent’, however, may be wound up in terms of the provisions of the Old Companies Act, while ‘solvent’ companies must be wound up in terms of the provisions of the New Companies Act.
As part of the transition to the new company law regime, the New Companies Act stipulates that no new close corporations may be incorporated from the date of promulgation. All existing close corporations were afforded an opportunity to convert to a private company with minimal administrative or financial expense. The legislation is therefore a clear indication of South Africa’s desire to move away from the use of close corporations as juristic trading entities. It is for this reason that a discussion of the insolvency laws relating to close corporations has been omitted from this guide. It is worth noting, however, that the provisions in the Close Corporations Act relating to the winding up of close corporations effectively incorporate many of the provisions of the Old Companies Act and simply make these provisions applicable to close corporations.
In relation to the international aspects of restructuring and insolvency law in South Africa, the common law of cross-border insolvency is currently applicable insofar as the recognition of foreign representatives in South Africa in formal insolvency proceedings instituted overseas are concerned. This being said, the Cross-Border Insolvency Act 42 of 2000 (the Cross-Border Insolvency Act), once fully in operation, will govern much of the law relating to such recognition. The Cross-Border Insolvency Act came into force on 28 November 2003; however, it is currently ineffective because of the designation provision contained in Section 2(2)(a). It will, therefore, only come into full effect once the Minister of Justice has designated the foreign states in respect of which the Cross-Border Insolvency Act will apply. The Act provides effective mechanisms for dealing with cases of cross-border insolvency and regulates matters relating to the jurisdiction of the High Courts. The Cross-Border Insolvency Act also regulates: access of foreign representatives and creditors to courts in South Africa; the recognition of proceedings in courts in foreign states; cooperation with foreign courts and foreign representatives; and concurrent proceedings.
Prior to the enactment of the New Companies Act, the primary corporate rescue mechanism in South Africa was that of judicial management, as contained in the Old Companies Act. This was a largely unsuccessful mechanism and has been effectively replaced by a new corporate rescue procedure, business rescue, and is contained in Chapter 6 of the New Companies Act, which came into operation on 1 May 2011.
Although corporate rescue is categorised as an insolvency procedure, a policy decision was made to include it in the New Companies Act instead of in a unified insolvency statute. Accordingly, the provisions relating to business rescue are not applicable to other forms of business enterprise such as partnerships, business trusts and sole proprietorships.
The provisions in Chapter 6 of the New Companies Act are aimed at preventing the demise of viable companies by making provision for their possible rescue. If a plan cannot be devised to rescue the company, then a plan that would ensure a better return for the company’s creditors than would ensue pursuant to its winding up is the next objective. If this is not possible, then the company ought to be wound up.
In practice, it is observed that business rescue is not always a viable option to prevent the liquidation of a company as the success of the business rescue proceedings relies substantially on whether there is sufficient financing available and whether the problem that caused the financial straits can be extricated from the business. In some cases, even the nature of the business itself is a significant factor in the prospects of success.
iii Insolvency procedures
The commonplace understanding of the concept of insolvency is when a person or entity is unable to pay its debts; however, the legal test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed its assets, fairly valued. An inability to pay debts is therefore, at most, merely evidence of insolvency.
With regard to insolvent companies, the law regulating the winding up of companies (both public and private) is contained mainly in the Old Companies Act, which, pursuant to the provisions of Item 9 of Schedule 5 of the New Companies Act, remains in force under the new company law regime, as read with the laws relating to insolvency insofar as they find application. It must be remembered, however, that only companies that are insolvent may be wound up in terms of the provisions of the Old Companies Act, while solvent companies must be wound up in terms of the New Companies Act.
In general terms, a company may be wound up in two ways: voluntarily or by the court. Furthermore, the Old Companies Act sets out the following eight grounds on which the court may wind up a company:
- a by special resolution: the court may wind up a company if it has passed a special resolution (i.e., 75 per cent of the general meeting of members) to be wound up by the court;
- b premature commencement of business: the court may wind up a company if it has commenced business before the Registrar has issued a certificate;
- c failure to commence or continue with business: the court may wind up a company if it has not commenced its business within a year of its incorporation or if the company has suspended its business for a whole year;
- d public company’s members less than seven: a public company is required to have at least seven members and may be wound up by a court if the number drops below seven;
- e loss of capital: the court may wind up a company if 75 per cent of its issued share capital has been lost or becomes useless for its business;
- f inability to pay debts: the court may wind up a company if it is unable to pay its debts. A company will be deemed to be unable to pay its debts in each of the following circumstances:
• if a creditor to whom the company is indebted in a sum not less than 100 rand has served a demand on the company demanding payment and the company has neglected to pay the sum for three weeks thereafter;
• if a warrant of execution (or other process) issued on a judgment against the company has been returned by the sheriff with an endorsement that he or she did not find disposable property sufficient to satisfy the judgment, or that the disposable property found and sold did not satisfy the process; or
• if it is proved to the satisfaction of the court that the company is unable to pay its debts;
- g dissolution of external company: the court may wind up an external company if it has been dissolved in the country in which it was incorporated, has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; and
- h just and equitable: in addition to the seven specific grounds for winding up listed above, the court may wind up a company if it appears that it is just and equitable that the company should be wound up. The courts do not consider these grounds to be a limitless, catch-all clause, and have only resorted to winding up companies on these grounds in instances where, for example, it is not possible to attain the main objectives for which the company was formed; where the company’s objectives are illegal or the company was formed to defraud the persons invited to subscribe for its shares; where the minority shareholders are oppressed by the controlling shareholders; and where there is a justifiable lack of confidence in the conduct and management of the company’s affairs.
iv Starting proceedings
With regard to voluntary winding up, a company (other than an external company) may be wound up voluntarily if it has adopted a special resolution and that resolution has been registered by the Registrar. The special resolution will state whether the winding up is a members’ voluntary winding up or a creditors’ voluntary winding up.
A members’ voluntary winding up may only be initiated if the company is able to pay its debts in full and is resorted to in circumstances where, for example, the purpose for which the company was formed has been fulfilled, or the members responsible for running the company are no longer on amicable terms. As the company is solvent, the provisions of the New Companies Act apply.
Conversely, a creditors’ voluntary winding up may be resorted to in circumstances where a company is unable to pay its debts. The procedure resembles that of a compulsory winding up in that meetings of creditors are held and the liquidator is subject to the directions of the creditors who have proved claims. The directors must prepare a statement of the company’s affairs and lay it before the meeting convened to pass the resolution.
A winding up by the court (sometimes called compulsory winding up) is initiated by an application to court, accompanied by an affidavit, usually brought by a creditor; however, the company itself, one or more of its members and the Master all have the requisite locus standi to bring such an application.
Prior to bringing the application, the applicant must give sufficient security for the payment of all fees and charges necessary for the prosecution of all winding-up proceedings and of all costs of administering the company in liquidation until a provisional liquidator has been appointed or, if none is appointed, of all fees and charges necessary for the discharge of the company from the winding up.
The applicant is also required to serve a copy of the application on the Master, who may report to the court any facts that may justify postponing or dismissing the application. Furthermore, the applicant must furnish a copy of the application to every registered trade union that represents any of the company’s employees; the employees themselves; the South African Revenue Service and the company itself (unless the application is made by the company or the court dispenses with the requirement in the interests of the company or creditors thereof).
The court may grant or dismiss any application for winding up, or adjourn the hearing, conditionally or unconditionally, or make any interim order or any other order it may deem just. In practice, the court usually makes a provisional winding-up order (provided the applicant has made out a prima facie case), and issues a rule nisi calling on all interested parties to show cause on the return date why the court should not make the order final.
v Control of insolvency proceedings
Consequences of winding up
Winding up establishes a concursus creditorum that is aimed at ensuring that the company’s property is collected and distributed among creditors in the prescribed order of preference. The company does not lose its corporate identity or title to its assets, but from the commencement of the winding up, the powers of the directors cease and the directors become functus officio (in a voluntary winding up, however, the liquidator, creditors or members may sanction a continuance of directors’ powers).
Once a winding-up order is granted, the company’s property is deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed and assumes office; and the company may not continue with its business, except insofar as it may be necessary for its beneficial winding up.
In amplification of the above, after the winding up of a company has commenced, any transfer of shares of the company without the liquidator’s permission is void, and if the company is unable to pay its debts, every disposition of its property (including rights of action) not sanctioned by the court is similarly void. No set-off of claims can take place unless mutuality of the respective claims existed at the time of the winding up.
Furthermore, all civil proceedings, including judgments, by or against the company are suspended from the time the winding-up order is made, or a special resolution for the voluntary winding up is registered, until the appointment of a liquidator.
Classes of creditors
In general terms, there are three types of creditors, whose claims rank differently depending on a number of factors.
A secured creditor is in the strongest position in a liquidation as a secured claim is one in respect of which the creditor holds security (i.e., has a ‘preferent’ right over property of the insolvent estate by virtue of a landlord’s legal hypothec, a pledge, a right of retention or a special mortgage. In this context, a preferent right to payment means a right to payment ‘out of’ the property in preference to other claims. Accordingly, the creditor has a right to be paid first out of the proceeds of the realisation of the secured property).
If, in terms of the Insolvency Act, a right to payment out of the property of the estate is enforceable before other creditors’ rights, but is not secured, it is regarded as a preferent claim. The preferent creditor’s claim ranks for payment out of the free residue before the claims of the concurrent creditors. For example, the bondholder under a general notarial bond holds a preferent claim but is not a secured creditor.
Finally, a concurrent claim is one that is neither secured nor preferent in terms of the Insolvency Act, and ranks behind both secured and preferent claims.
Meetings and proof of claims
Creditors’ meetings are held in a winding up by the court and in a creditors’ voluntary winding up. At least two meetings must be held. The purpose of the meetings are to allow creditors to consider the company’s statement of affairs, prove claims and, in the case of the first meeting, nominate a liquidator. The directors and officers of the company are obliged to attend the meetings.
A members’ meeting must be held in a winding up by the court and in a creditors’ voluntary winding up. The purpose of this meeting is to allow the members to consider the company’s statement of affairs and nominate a liquidator; however, if these issues were dealt with at the time the resolution commencing winding up was taken, this meeting may be dispensed with.
Liquidation and distribution account and distribution of assets
The liquidator’s primary duty is to take possession of all the moveable and immoveable property of the company, realise this property in the prescribed manner, to apply the proceeds towards payment of the costs of the winding up and the claims of creditors, and to distribute the balance among the members. The liquidator stands in a fiduciary relationship to the company, to the body of its members as a whole, and to the body of its creditors as a whole.
Within six months of being appointed, a liquidator must prepare and lodge with the Master, a liquidation and distribution account or, if necessary, a liquidation and contribution account that details all assets of and claims against the company. Once the account has been confirmed, the liquidator must distribute the estate or collect contributions in accordance with the account. Any assets remaining after payment of costs and creditors must be distributed among the members according to their rights and interests in the company.
Clawback and recovery
In addition to being vested with the property of the company, the liquidator has the means of recovering certain property alienated by the company before its winding up. The liquidator may ask the court to set aside certain dispositions made by the company before the winding up.
As set out earlier, the laws of personal insolvency are to be applied mutatis mutandis in the winding up of a company unable to pay its debts, insofar as they are applicable, in respect of any matter not specifically provided for in the Old Companies Act. In furtherance of this provision, the Old Companies Act provides that if a disposition is made by a company of its property that, if made by an individual, could be set aside in the event of his or her insolvency, may be set aside in the event of the company being wound up and unable to pay all its debts. The circumstances in which a disposition may be set aside are therefore contained in the Insolvency Act or common law, as the case may be, and will each be discussed in turn.
Dispositions made not for value
In terms of Section 26(1) of the Insolvency Act, as read with the Old Companies Act, to set aside a disposition made not for value, the liquidator must prove that:
- a the company made the disposition;
- b the disposition was made no more than two years prior to liquidation;
- c at the time of or immediately after the disposition was made, the company’s assets exceeded its liabilities; and
- d no value was received for the disposition.
It is not necessary to establish whether or not the company intended to prejudice creditors by making the disposition as the object of this provision is simply to prevent a company on the brink of liquidation from impoverishing its estate by giving away assets without receiving any appreciable advantage in return.
Disposition that prefers one creditor above another: voidable preference
Section 29(1) of the Insolvency Act, as read with the Old Companies Act, provides that a court may set aside a disposition made by the company:
- a not more than six months before the liquidation proceedings commenced;
- b if the disposition had the effect of preferring one of the company’s creditors above another; and
- c immediately after the disposition was made, the liabilities of the company exceeded the value of its assets.
The policy consideration behind this provision is evidently that a company ought not to select certain of its creditors for full payment and disregard the rest. The disposition does not have to be made directly to the creditor as it is required that payment must merely have had the effect of preferring the creditor; for example, a payment made to a creditor of a creditor. The test for whether or not a creditor has been preferred is whether the proper distribution of assets as envisaged by the Act has been compromised and a creditor has benefited more or been paid earlier than would have been the case if that creditor had been paid a dividend in due course. It must be noted that there is a proviso in Section 29(1) that the court cannot set aside a disposition if the person in whose favour it was made proves that it was made in the ordinary course of business and that it was not intended to prefer one creditor above another. A thorough exposition of the proviso in Section 29(1) is not relevant for present purposes save to say that a disposition in the ordinary course of business requires an objective enquiry regarding whether the disposition was one that would normally be entered into between solvent business persons. A company will not be held to have intended to prefer if it is established that, when the disposition was made, liquidation was not contemplated or expected.
Disposition intended to prefer one creditor: undue preference
Section 30 of the Insolvency Act, as read with the Old Companies Act provides that a court may set aside a disposition that was made:
- a by the company at any time before the liquidation;
- b with the intention of preferring one creditor above the others; and
- c when the disposition was made, the company’s liabilities exceeded its assets.
This is a powerful provision and there is no defence available to the person benefited by the disposition. The test for determining whether the company had the intention to prefer is whether the primary intention in making the disposition was to disturb the proper distribution of the company’s assets on insolvency.
Personal liability of directors and officers
Chapter XIV of the Old Companies Act, and in particular Section 425 thereof as read with the Insolvency Act provides for a number of criminal sanctions to be placed on non-compliant directors and officers. In light of the repeal of certain provisions of the Old Companies Act, the personal liability of directors is governed by the Old Companies Act, the New Companies Act and the Insolvency Act.
Failure to make or lodge a statement of affairs
Section 363(8) of the Old Companies Act provides that a failure to make or lodge a statement of affairs is an offence, carrying the sanction of a fine or imprisonment for a period not exceeding 12 months, or both.
Making a false statement in a statement of affairs
Section 214(1)(a) of the New Companies Act provides that a person who, with a fraudulent purpose, knowingly provides false or misleading information in any circumstances in which the New Companies Act requires a person to provide information or give notice to another person commits an offence. The penalty for such an offence is a fine or imprisonment for a period not exceeding 10 years, or both.
Giving false evidence under interrogation
A person who wilfully makes a false statement while being interrogated on oath at a meeting of creditors commits an offence carrying the penalty provided by law for the crime of perjury, if such a statement is relative to the subject on which he or she is interrogated and he or she knows of the falsity of the statement or does not know or believe it to be true (Section 139(2) of the Insolvency Act).
Concealment or destruction of books or other documents
Section 132(a) of the Insolvency Act, read with Section 339 of the Old Companies Act, makes it an offence for a person to conceal or destroy books or assets or allow another person to do so. The sanction if found guilty of such conduct is three years’ imprisonment if it is found that he or she had no intention to defraud. Furthermore, if a person is a party to the falsification of any accounting records of a company, irrespective of the intention of such a person, the penalty is a fine or imprisonment for a period of 10 years, or both a fine and imprisonment.
Failure to notify a change of address
A director or secretary of a company who changes his or her residential or postal address after the commencement of the winding up of the company, but before the liquidator’s final account, and does not notify the liquidator of the new address within 14 days, is liable for a fine or imprisonment for a period not exceeding six months or both a fine and imprisonment.
Offences in relation to examinations in terms of Section 417 of the Old Companies Act
If a person is summoned, by a commissioner who is not a magistrate, to attend a commission of enquiry, failure to do so without sufficient cause is an offence. Where a person is summoned by the Master, in addition to the above, each of the following acts also constitutes an offence: failure to remain in attendance without sufficient cause; refusal to be sworn or to affirm as a witness; failure to answer, without sufficient cause, fully and satisfactorily any question lawfully put to him or her; and failure, without sufficient cause, to produce books or papers in his or her custody or under his or her control that he or she was required to produce. The penalty for these offences is a fine or imprisonment for a period not exceeding 12 months, or both.
Participation in reckless or fraudulent conduct of a company’s business
Section 424(1) of the Old Companies Act provides that any person who was knowingly a party to the carrying on of business of the company prior to liquidation recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct. Such an offence carries a sanction of a fine or imprisonment for a period not exceeding 12 months, or both. For the sake of completeness, Section 22 of the New Companies Act also contains a general prohibition against the carrying on of a business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose. In this regard, Section 77 of the New Companies Act provides further that a director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a prohibited manner.
vi Special regimes
While there are no general exclusions from the insolvency regime, some entities such as banks, pension or provident funds, long and short-term insurance providers and companies in which the government is the sole shareholder, are subject to specific rules and to the supervision of the body regulating the industry.
vii Cross-border issues
Cross-border insolvency deals with a sequestration or a winding-up insolvency of property or debts in a jurisdiction other than the one in which the relevant court order is granted. Therefore, in a cross-border insolvency the law of insolvency and winding up intersects with the conflict of laws (private international law).
The main problems presented by cross-border insolvency include the globalisation of international business, limitations on state power, lack of international instruments for dealing with cross-border insolvency law and the conflict between the universalist and territorialist approaches to cross-border insolvency law. Solutions to deal with these problems, among others, are outlined in the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (1997); however, this Model Law is not a treaty but simply a template that individual states are free to adopt and adapt. While South African cross-border insolvency law is governed primarily by common law principles, the legislature has passed a South African version of the Model Law called the Cross-Border Insolvency Act, which will come into full effect once the Minister of Justice has designated the foreign countries to which it will apply.
South African common law of cross-border insolvency
Whether a foreign liquidator may deal with South African assets is a question to be determined by a division of types of property and classification of persons. Moveable property is governed by the law of the natural person’s domicile (lex domicilii). For example, if a juristic entity registered outside South Africa is declared insolvent by the court of its registration, it is automatically divested of its moveable property throughout the world and the liquidator of the company is obliged to seek recognition from the South African courts before dealing with the local assets. On the other hand, immoveable property is governed by the law of the place where the immoveable property is situated (lex situs), regardless of whether the person is an individual or juristic person.
The South African courts apply the principles of comity, convenience and equity in exercising their discretion to recognise the liquidator (foreign representative), as recognition allows the liquidator to rely on domestic South African law in carrying out his or her duties.
An external company registered as such in South Africa may be wound up as though independent of its related foreign company and vice versa. It is therefore possible that the company may be subject to simultaneous, concurrent winding-up processes; however, the discontinuation of foreign winding-up proceedings does not in itself affect the South African process as the respective liquidators deal independently with the assets and liabilities of the company in the various countries.
The Cross-Border Insolvency Act
The Cross-Border Insolvency Act includes chapters on fundamental principles, access of foreign representatives and creditors to South African courts, recognition of foreign proceedings and relief, cooperation with foreign courts and foreign representatives and concurrent proceedings. The purpose of the Cross-Border Insolvency Act is to facilitate cooperation between South African courts and foreign courts in cross-border insolvency matters. This in turn improves legal certainty for trade and investment, promotes good administration to protect creditors and other interested persons, including the debtor, protects the assets and maximises their value, protects investment and saves jobs.
The Cross-Border Insolvency Act applies where a foreign court or representative asks a South African court for assistance in foreign proceedings and, conversely, where such help is requested in a foreign court in proceedings under South African law. It also applies where foreign proceedings and South African proceedings run concurrently as regards the same debtor, or where creditors or other interested foreigners ask to begin or take part in South African insolvency proceedings. The Cross-Border Insolvency Act, however, is limited in its operation to certain designated states.
When it comes into force in the international system for cooperation intended by the Model Law, the Cross-Border Insolvency Act will provide a mechanism for foreign representatives to gain access to South African proceedings and vice versa. Despite the limitation by designation requirements, the Cross-Border Insolvency Act does enable South African courts and practitioners to play a positive role in cooperating with their foreign counterparts. Once the foreign representatives have gained access to the South African legal system through the utilisation of the Cross-Border Insolvency Act, they will then have to abide by the relevant South African rules, both substantively and procedurally.
II INSOLVENCY METRICS
The South African economy has a marked dichotomy, with a sophisticated financial and industrial economy that has grown alongside an underdeveloped informal economy. It is this ‘second economy’ that presents both opportunities and developmental challenges.
Ranked by the World Bank as an ‘upper middle-income country’, South Africa is one of the largest economies in Africa and it remains rich with promise. As a major emerging national economy, in 2010, South Africa joined Brazil, Russia, India and China as a member nation of the BRICS association.
While the economy continues to grow (growth largely attributable to domestic consumption), a decrease in the rate of GDP growth is indicative of relatively slow development with many challenges presently unresolved.
Unemployment remains one of South Africa’s most pressing social challenges. The decline in official employment followed by an increase in inactivity rather than in unemployment has resulted in a decline in the unemployment rate from 2015, to a rate of 26.6 per cent. Youth unemployment remains high with 37.5 per cent of those between the ages of 15 and 34 out of work.2
South Africa’s historical and current growth performance is attributable to its diverse structure of the economy. The manufacturing sector continues to occupy a significant share of the South African economy, despite its relative importance declining. In line with structural changes in many economies, it not surprising to observe that the finance, real estate and business services sector has increased. Labour unrest continues to affect performance in the manufacturing, mining and agricultural sectors, with the manufacturing and mining industries being worst hit. Similarly recent political uncertainty and the lack of policy stability has made investors wary, which has in turn had a negative impact on the South African economy.
On a positive note, statutory regulation of commerce, labour and maritime issues is particularly strong, and laws on competition policy, copyright, patents, trademarks and disputes conform to international norms and standards.
III PLENARY INSOLVENCY PROCEEDINGS
In Van Der Merwe and Others v. Zonnekus Mansion (Pty) Ltd and Others3 the court had to decide whether it was competent to commence business rescue proceedings when a company is in final liquidation. The court held that it is competent to commence business rescue proceedings in terms of the New Companies Act when a company is in final liquidation, there being no justification for differentiating between a pre- and post-final liquidation in circumstances where the prospects of success of a business rescue exist.
In deciding from what date the suspension of an employment contract takes effect in the case of a company in liquidation, the court in Ngwato and Another v. Van Der Merwe N.O. and Others4 held that the contracts of service of employees whose employer, being a company, has been liquidated, are suspended with effect from the date of granting of a provisional order or final order, if no provisional order was granted.
In Stratford and others v. Investec Bank Limited and others5 it was held that the requirement to notify employees of the debtor of the sequestration proceedings included domestic employees by extending the definition of the word ‘employee’ in Section 9(4A)(a) of the Insolvency Act. The court held that its interpretation of the word ‘employee’ best promoted the spirit, purport and objects of the Bill of Rights of South Africa.
In Auby v. Pellow NO and another: In re: Pellow NO and Another v. Auby6 it was held that the existence of the liquidator’s authority to institute proceedings is not something that the other party to the proceedings is able to competently challenge. However, the question of the liquidator’s authority is relevant only in relation to liability between the liquidator and the company for the costs of the proceedings.
In the case of Fourie v. Edkins7 the court had occasion to consider the circumstances under which it may exercise its discretion for or against the stay of execution. In this matter, the sheriff of the High Court sold certain immoveable property in execution of a judgment to a purchaser prior to the debtor publishing the request notice of intention to apply for sequestration, and prior to the registration of the transfer. The question was whether the purchaser of the immoveable property was entitled to take transfer of the property.
The Supreme Court held that the sequestration of a debtor’s estate stays the execution of a judgment given against him or her before the sequestration of the estate. The stay automatically occurs unless the court directs otherwise. The stay is effected as soon as the sheriff whose duty it is to execute the judgment becomes aware of the sequestration. This provision applies irrespective of the stage that the execution process has reached, unless it has been completed.
If the sale in execution has been completed before sequestration, but the delivery of the relevant property to the purchaser has not yet occurred, the court held that the following applies: the sequestration results in the property under attachment in the hands of the deputy-sheriff or messenger and the proceeds of the sale in execution of such property in his or her hands to vest in the Master, and, upon his or her appointment, in the trustee. So for the purchaser’s right to delivery to be enforced, and for delivery to ensue, the court must in its discretion lift the automatic stay, thereby allowing delivery to ensue.
The case of Chiliza v. Govender8 concerned an application for rescission of a final sequestration order by the debtor on the basis that when the final order was granted, the provisional order had not by then been served on the South African Revenue Services (SARS), as required by the Insolvency Act. It was common cause that when the final order was granted, the provisional order had not by then been served on SARS. As a result, the disputed issue was whether that fact served as an absolute bar to the granting of the final order. The High Court and later on, the full bench held that the failure to serve the provisional order upon SARS was not fatal and did not preclude the court from granting the order finally sequestrating the debtor’s estate.
The Supreme Court of Appeal (SCA), however, held that both the High Court and the full bench decisions disregarded the clear language used in the Insolvency Act. On the SCA’s interpretation, the provisions of the Insolvency Act make it clear that service of a provisional order of sequestration on SARS is peremptory. The court held that the purpose of bringing the provisional sequestration of a debtor’s estate to the attention of the SARS is to give the institution an opportunity to intervene and bring relevant information to the court’s attention, or to ensure that a final order does in fact eventuate.
The SCA held that in granting a final order of sequestration, one of the factors to consider is whether such an order will be to the advantage of the creditors. Whether a provisional order was served on SARS, which is a preferential creditor in terms of the Insolvency Act, must be one of those factors. This must be so because any tax for which the insolvent was liable under any Act of Parliament or Ordinance of a Provincial Council in respect of any period prior to the date of sequestration of the estate is due. The SCA held that if a provisional order of an impending sequestration is not served on SARS, there is a risk that any amounts due to the public purse would remain uncollected. As a result, the court ruled that service of the provisional order on SARS was peremptory and failure to do so was fatal and precluded the court from granting an order finally sequestrating the debtor’s estate.
Lastly, in van Zyl v. The Master, Western Cape High Court9 the applicants were the liquidators of a company seeking to review a decision of the Master of the High Court to refuse to expunge the proven claim of a creditor registered in Mauritius.
What had to be resolved by the court was the tension between, on the one hand, the principle that, once a concursus creditorum is established, no creditor in a liquidated estate can take steps to improve its position to the prejudice of other estate creditors; and, on the other, the principle that temporary non-compliance with the provisions of the Exchange Control Regulations, which require, inter alia, treasury approval of any transaction involving the export of capital, does not present a bar to the validity or enforceability of a claim based on such a transaction.
The court found that a claim by a creditor against an insolvent estate cannot be rejected for the sole reason that it is based upon a transaction requiring treasury approval that has at the relevant time been neither obtained nor refused. The court ruled that to hold otherwise would lead to ‘greater inconveniences and impropriety’ and deliver a windfall advantage to competing creditors in the estate.
The court ignored the fact that the underlying transaction was not void for want of treasury approval and that treasury approval could still be sought. Furthermore, it was ruled that to hold that a claim by a creditor based on a transaction in respect of which treasury approval has not been obtained is irrevocably unenforceable because a concursus creditorum in the insolvent estate intervened before such approval was sought, would produce an arbitrary and inequitable result not intended by the Exchange Control Regulations.
i Insolvency activity trends
According to its most recent statistical release as at the date of writing, Statistics South Africa has noted a 10.6 per cent decreased in liquidations in the second quarter of 2016 compared with the second quarter of 2015. For the same period, voluntary liquidations decreased by 17 cases, while compulsory liquidations decreased by 19 cases. Accumulatively, the total number of liquidations decreased by 22.8 per cent year-on-year in June 2016.10
With regard to alternative mechanisms, the Companies and Intellectual Property Commission (CIPC) has released a report regarding the status of business rescue proceedings over the past four years. According to this report, approximately 2,148 business rescue proceedings have commenced since 1 May 2011, with 1,129 business rescue proceedings still active as at March 2016.11 The majority of business rescue proceedings recorded by the CIPC were in respect of privately owned companies, with only 14.4 per cent of the total number of business rescue proceedings being terminated following the substantial implementation of a business rescue plan. The average period for the filing of a notice of substantial implementation on commenced business rescue proceedings is recorded as being 12.31 months.12
It is worth noting that business rescue seems to now be the first port of call for many financially distressed companies in South Africa, as opposed to liquidation. One of the most compelling reasons for this tendency is the general moratorium on legal proceedings during the business rescue process, as embodied in Section 133 of the New Companies Act, coupled with the South African courts favouring business rescue to liquidation as a first port of call for distressed companies.
The moratorium applies to any enforcement action, against a company, or any property belonging to a company or lawfully in its possession, while the company is subject to business rescue proceedings. The purpose of the moratorium is to grant the business rescue practitioner some breathing space while he or she attempts to rescue the company through the design and implementation of a business rescue plan, and is accordingly a very attractive mechanism for companies to restructure their affairs.
As business rescue is a relatively new creature in South African Law, many of the provisions of Chapter 6 of the New Companies Act (Chapter 6) have not yet been tested by our courts and uncertainty still exists regarding many of the provisions contained therein. Due to the process being fraught with uncertainty there has been a vast amount of litigation on the interpretation of the provisions of Chapter 6. Some of the core areas of uncertainty, which form the subject matter of present litigation before South African courts, are in respect of the ranking of creditors and the powers afforded to business rescue practitioners.
The South African insolvency and business rescue industry is maturing and developing at a rapid rate and in time will, no doubt, be aligned to standards applicable in international jurisdictions.
ii Policy on the appointments of insolvency practitioners
At present, the appointment of insolvency practitioners to administer insolvent estates occurs through a requisition system whereby creditors of the insolvent estate submit a form to the Master of the High Court nominating the appointment of a specific insolvency practitioner as a liquidator of the insolvent estate. While the actual appointment of an insolvency practitioner remains in the sole and absolute discretion of the Master, this system effectively gives creditors an opportunity to recommend, motivate and endorse the appointment of a specific person.
1 Gerhard Rudolph and John Bell are partners and Viren Raja is an associate at Baker & McKenzie LLP.
2 Statistics South Africa, ‘Quarterly Labour Force Survey 2016’ (accessible at www.statssa.gov.za/publications/P0211/P02112ndQuarter2016.pdf).
3 2015 (3) All SA 659 (WCC).
4 2016 ZAGPJHC (6 May 2016).
5 2015 (3) BCLR 358 (CC).
6 2013 ZAGPJHC 211 (6 March 2013).
7 2013 ZASCA 117 (19 September 2013).
8 2016 (4) SA 397 (SCA).
9 2013 ZAWCHC 56 (5 April 2013).
10 Statistics South Africa, ‘Statistical release: Statistics of liquidations and insolvencies (Preliminary)’ (June 2016) (accessible at www.statssa.gov.za/publications/P0043/P0043June2016.pdf).
11 Companies and Intellectual Property Commission, ‘Status of Business Rescue Proceedings in South Africa March 2016’ (March 2015) (accessible at www.cipc.co.za/files/9614/6857/6141/Status_of_Business_Rescue_Proceedings_in_South_AFrica_March_2016.pdf).