Subject index outline

Held – An application for leave to intervene is not a prerequisite to a party being heard in opposition to an application for rehabilitation.

In terms of section 127A of the Act an insolvent is entitled to rehabilitation through effluxion of time after the lapse of a period of 10 years. In such circumstances, no application to court is required. Section 124 of the Act, on the other hand, provides for an application for rehabilitation which may be brought within various stipulated time-frames varying between three and five years depending on the circumstances. Of importance for an application under section 124(2) is that a period of four years must have lapsed post sequestration, “except upon the recommendation of the Master”. In the present case that four-year period had lapsed and, under section 124(2)(a), the requisite twelve-month period after the confirmation by the Master of the first trustees’ account in the estate had also lapsed. In the circumstances, the applicant had brought himself within the parameters of the Act, as far as the lapsing of time was concerned.

The applicant’s reason for seeking rehabilitation was to become commercially active in order to provide for himself and his wife in their old age.

Fairhaven’s seeking an enquiry in terms of section 152(2) was found to have an ulterior and impermissible purpose. The intention was to exert pressure on the applicant to achieve an improper end. The court has a duty to prevent such abuse. The Court expressed its condemnation of the campaign of coercion against the applicant. Fairhaven’s application to intervene in the rehabilitation application was without merit, not bona fide and an abuse of the process of the court, and was dismissed.

In the application for rehabilitation, the applicant had to satisfy the Court that he was a fit and proper person to be permitted to trade with the public on the same basis as any other honest business person. Finding the test to be satisfied, the Court granted the application for rehabilitation.

Diener NO v Minister of Justice (30123/2015) [2016] GP

Liquidation costs-business rescue is superseded by a liquidation order- remuneration of the business rescue practitioner -paid from the free residue after the costs of sequestration set out in section 97 have been paid and cannot be paid from the proceeds of the secured asset.

Prior to the appointment of the business rescue practitioner (BRP), but after the business rescue proceedings commenced, the existing management of the close corporation instructed attorneys to urgently approach the court to obtain an order staying the sale in execution of an immovable property belonging to the close corporation ("the urgent application”). The sale in execution was held at the instance of First Rand Bank Limited in whose favour a mortgage bond was registered. The court granted the order but did not make any pronouncements as to the issue of costs.

Approximately two months after the business rescue proceedings commenced, the BRP determined that the close corporation could not be rescued and approached new attorneys to launch an application in terms of section 141(2)(a) of the Companies Act 71 2008 ("the New Companies Act") to terminate the business rescue proceedings and to place the close corporation under liquidation ("liquidation application"). The court ordered that the business rescue proceedings be terminated and that costs of the application be costs in the liquidation of the close corporation.

The relief the BRP seeks is that his claim for his remuneration and the expenses incurred in the employment of the attorneys be paid before any dividend is awarded to the secured creditor First National Bank. First National Bank has a direct and substantial interest in the outcome of the application and ought to be joined as a respondent in the proceedings. Because of the view that the costs cannot be paid before the claim of First National Bank the issue of joinder is of no consequence.

Section 66(1A) of the Close Corporations Act 69 of 1984 makes the provisions relating to business rescue proceedings in the new Companies Act applicable to close corporations and section 66(2) renders the provisions of the Insolvency Act applicable to close corporations.

Section 135(4) provides that if business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of section 135 will remain in force, except to the extent of any claims arising out of the costs of liquidation. Henochsberg on the new Companies Act, 2008 at page 478(22) is of the view that this preference is retained if business rescue proceedings are superseded by a winding up order, but ranks behind the costs of liquidation.

The remuneration and expenses of the BRP are not payable from the proceeds of a secured asset in terms of section 89(1) of the Insolvency Act or as cost of liquidation in terms of section 97 of the Act.

Section 135(4) of the New Companies Act must be read with section 97 of the Insolvency Act. That being the case, the remuneration of the BRP and the expenses incurred during business rescue proceedings, to the extent that it has not been paid during business proceedings and during liquidation, can only be paid after the costs set out in section 97 have been paid. (Par [60])

The court did not express a clear view on the question whether the cost of the liquidation application was payable from the free residue. The free residue account reflects that the attorney's claim for the liquidation application should be paid from this account. The liquidator’s account was not set aside by the court and it is submitted that it is correct to reflect the cost of the liquidation application as payable from the free residue account. In terms of section 97(3) the taxed costs of sequestration as defined in subsection (4) – “costs as taxed by the registrar of the court incurred in connection with the petition of ... a creditor for the sequestration of the debtor's estate” - is payable from the free residue as costs of sequestration before any creditors are paid. Section 342 of the old Companies Act 61 of 1973 provides that in every winding-up of a company the assets shall be applied in payment of the costs, charges and expenses incurred in the winding-up as nearly as possible as they would be applied in payment of the costs of sequestration under the law relating to insolvency. When the court ordered that the business rescue proceedings be terminated it ordered that the costs of the application be costs in the liquidation of the close corporation.

The Standard Bank of South Africa Limited v Gas 2 Liquids (Pty) Limited

(45543/2012) [2016] GJ (10 March 2016)

Business rescue-liquidation proceedings are suspended in terms of section 131(6) of the Companies Act 71 of 2008, there must be-service of an application for business rescue in terms of section 131 of the Companies Act 71 of 2008 on the company (provisional liquidator if appointed) and on the Companies and Intellectual Property Commission; and notification of each affected person in the prescribed manner.

Section 131 (6) of the Companies Act provides that if liquidation proceedings have already been commenced by or against the company at the time an application is made to court for business rescue in terms of subsection (1), the application will suspend those proceedings until the court has adjudicated upon the business rescue application or the proceedings end.

Respondent relies upon the provisions of section 131 (6) to argue that the mere issue out of court of the notice of motion in the business rescue application constitutes that which is required in terms of section 131 (6) and accordingly these liquidation proceedings are immediately suspended. Applicant argues that, for such application to have been properly 'made', service has to have been effected upon both the company and the Commission and all reasonable steps have been taken to identify affected persons and their addresses and to deliver the application to them. (Par [11])

Blue Star Holdings (Pty) Ltd v West Coast Oyster Growers CC 2013 (6) SA 540 WCC found that the operative phrase for consideration in section 131 (6) was "at the time an application is made" and that the word 'made' must be given its ordinary meaning in the context in which it appears in the statutory setting - "the lodging of the [business rescue] application with the registrar for the issue thereof constituted the 'making' the application and the commencement of proceedings to place the company under business rescue (as opposed to the commencement of business rescue per se)" (at para 29). (Par [13]) However, in Blue Star supra no application for provisional liquidation had been heard, no provisional order granted and no provisional liquidator appointed, which the court regarded as an important distinction from the matter before the court. (Par [14])

In Taboo Trading 232 (Pty) Ltd v Pro Wreck Scrap Metal CC and Others 2013 ( 6) SA 141 KZP the question was directly on point - when can an application be said to have been made for purposes of section 131(6) of the Act. The court had regard to the decisions in Investec Bank Ltd v Bruyns 2012 (5) SA 430 WCC and Engen Petrolium Limited v Multi Waste (Pty) Ltd and others 2012 (5) SA 596 GSJ. The court held that a business-rescue application is only to be regarded as having been made once the application has been lodged with the registrar, has been duly issued, a copy thereof served on the Commission and each affected person has been properly notified of the application. The court based its finding on the consequences which ensue upon commencement of liquidation proceedings which is when the winding-up is deemed to commence, the significant consequences of suspension of liquidation proceedings, and the need for reasonable notification to be given to affected persons which were held to be substantive requirements. (Par [15])

Where there is no service upon the provisional liquidator of the application for business rescue, the provisional liquidator may have absolutely no knowledge of that business rescue application. In fact, knowledge alone would be insufficient. The provisional liquidator is entitled to service in terms of section 131 of the Act. Absent such service, the provisional liquidator does not officially know that he or she is 'suspended' in his or her duties and powers if such suspension of the liquidation proceedings were to eventuate solely by reason of lodgement of papers at court and issue of a case number. (Par [23])

It cannot be that mere lodgement of papers and issue of a case number is sufficient to trigger a suspension of liquidation proceedings. If that were the case, a provisional liquidator may be acting without authority (and perhaps unlawfully) in a multiplicity of respects. That cannot have been the intention of the legislature. The question would then also arise as to when and where and why and by whom these unauthorised actions of a provisional liquidator are to be undone and with what consequences to third parties or to the company whose liquidation is suspended but which is not yet (and may never be) in business rescue. (Par [25])

In line with the decisions in Summer Lodge and Taboo Trading the court decided that there must be service and notification as required in terms of section 131 of the Act before it can be said that the business rescue application has been 'made' and that the liquidation proceedings have been suspended.

CA Focus CC v Village Freezer t/a Ashmel Spar [2016] JOL 33583 (SCA)

Close corporations – Restoration of registration after deregistration – Close Corporations Act 69 of 1984, section 26(7) – Effect of – Retrospectively validates legal proceedings instituted during the period of deregistration, and interrupts prescription –

Statutes and interpretation – Statutory interpretation is an objective process by which the words of the statute are given a meaning by having regard to their language, the context in which they are used and the purpose to which they are directed – Subjective views of the parties, their state of mind, or the facts of a particular case have no bearing on such analysis –

A de-registered close corporation (“CC”) may, in terms of the Close Corporations Act 69 of 1984, have its registration restored. In terms of section 26(7), the CC shall then be deemed to have continued in existence as from the date of registration as if it had not been de-registered.

The present appeal addressed the question of whether section 26(7) has the effect of retrospectively validating an invalid summons issued by a CC after de-registration so as to interrupt the running of prescription.

The appellant CC had a claim against the respondent for payment in respect of services rendered. The debt became due and payable in September 2006 and the CC was de-registered in November 2007. Four months after its de-registration, the CC issued summons against the respondent. If the summons did not interrupt prescription, the debt would have prescribed at the end of September 2009. The appellant applied for re-registration to the registrar of close corporations, who restored the appellant’s registration on 11 March 2011.

Because the appellant had not been registered when it commenced litigation, the summons was a nullity and had no legal effect. In its special plea, the respondent therefore pleaded that since the debt was due in September 2006 and that the issue of summons in March 2008 had had no legal effect, the summons did not interrupt prescription. So the claim became prescribed in September 2009. The special plea was dismissed by the magistrate but the high court upheld the respondent’s appeal.

On appeal, the appellant submitted that the language of the deeming provision in section 26(7) is unambiguous, which means that there is no room to interpret it so as not to affect the existing rights of third parties, as the high court had found. The provision therefore had to be given a literal meaning.

Held that the respondent’s contention was that the consequence of re-registration was to restore assets and liabilities so that the entity could continue as before, but it did not validate acts performed after de-registration.

In interpreting section 26(7), the Court stated that statutory interpretation is an objective process by which the words of the statute are given a meaning by having regard to their language, the context in which they are used and the purpose to which they are directed. The subjective views of the parties, their state of mind, or the facts of a particular case have no bearing on this analysis. The Court agreed with the appellant that in the absence of any ambiguity, there is no room to give the provision a meaning that does not accord with its plain language.

Casey and another v FirstRand Bank Ltd [2016] JOL 33584 (SCA)

Interest – In duplum rule – Where interest is capitalised and interest is charged on interest, capitalised interest does not lose its character as interest and does not become part of the capital amount for the purposes of the in duplum rule –

The first appellant was a customer of the Bank of America. He arranged with his bank for a standby letter of credit to be issued as security for a loan facility sought by the second appellant from the respondent. The standby letter of credit was payable by the Bank of America upon demand by the respondent. When the second appellant defaulted on repayment, the respondent demanded payment from the Bank of America, which paid the amount claimed as per the letter of credit and then debited the first appellant account with that amount. The appellants contended that the respondent was not entitled to claim payment on the letter of credit as its claim against the second appellant had prescribed, and the amount of interest claimed by the respondent on the capital advanced to the second appellant was in excess of that permitted in terms of the in duplum rule. They approached the high court for an order declaring that a debt owed by the second appellant to the respondent which was secured by a standby letter of credit, issued by Casey’s bankers, the Bank of America, had prescribed. However, the court a quo dismissed the application.

Leave to appeal to the present Court was granted.

Held that the appellants’ argument regarding the letter of credit was that it sought to equate the legal standing of a letter of credit with a suretyship. A letter of credit is wholly independent of the underlying contract between the customer of the bank and the beneficiary. It establishes a contractual obligation on the part of the issuing bank to pay the beneficiary in accordance with its terms. An irrevocable letter of credit is not accessory to the underlying contract and is distinguishable in law from a suretyship which is accessory to the principal obligation. It was therefore irrelevant whether the respondent’s claim had prescribed because when the respondent demanded payment, the validity of the letter of credit was beyond dispute.

The appellants achieved partial success on appeal, solely in respect of the point regarding interest. The majority held that where interest is capitalised and interest is charged on interest, capitalised interest does not lose its character as interest and does not become part of the capital amount for the purposes of the in duplum rule. The respondent conceded that it should not have claimed more than the capital amount.

Cowan v Hathorn NO and others [2016] JOL 33589 (SCA)

[NOTE: This case is in JOL February 2016, but judgment was given 25 November 2013]

Litigation by liquidators of company – Section 32(1) of the Insolvency Act 24 of 1936 – A creditor may take proceedings in terms of section 32(1)(b) only if the trustee has failed to do so, and only upon the creditor indemnifying the trustee against all the costs of the proceedings – Effect of indemnity being furnished after institution of proceedings instead of before – Object of section fulfilled in circumstances of present case

In terms of rule 30 of the Uniform Rules of Court, the appellant had sought the setting aside of an action instituted against him by the first and third respondents in terms of section (1)(b) of the Insolvency Act 24 of 1936. The first and third respondents were the liquidators of a company. The main relief sought against the appellant were orders in terms of sections 26, 29, 30 and 31 of the Insolvency Act read with sections 339 and 340 of the Companies Act 61 of 1973 and Schedule 9 of the Companies Act 71 of 2008, setting aside certain notarial general covering bonds registered by the appellant in his favour, over the movable property of the company in liquidation. It was alleged that the passing of the bonds constituted prohibited dispositions by the company in liquidation of its property within the meaning of the applicable sections in the Insolvency Act.

The dismissal of appellant’s application resulted in the present appeal. The appellant contended that the liquidators had failed to take any proceedings to set aside the notarial bonds in question and that a creditor of the company in liquidation therefore wished to institute proceedings against the appellant in terms of section 32(1)(b) of the Insolvency Act to achieve that objective. The basis upon which the appellant sought to set the summons aside in terms of rule 30 was that the failure by Olampa to furnish the liquidators with an indemnity against all costs to be incurred in the action in terms of section 32(1)(b) of the Insolvency Act, before the action was instituted, had the result that the summons was invalid, or a nullity. The issue of the summons was accordingly contended to be an irregular step in terms of rule 30. The court below held that the purpose of section 32(1)(b) was satisfied by the provision of an indemnity after the institution of the proceedings, because the liquidators and general body of creditors had not been prejudiced. The present appeal was against the conclusion that the purpose of the section was to protect the liquidators and general body of creditors against any adverse order of costs in the litigation had been achieved.

Held that the question on appeal was whether the court below was correct in dismissing the appellant’s application to declare the issue of the summons an irregular step in terms of rule 30.

Resolution of the issue required a consideration of section 32(1)(a) and (b) of the Insolvency Act. In terms thereof, a creditor may take proceedings in terms of section 32(1)(b) only if the trustee has failed to do so. In addition, the creditor may take those proceedings upon the creditor indemnifying the trustee against all the costs of the proceedings. The plain meaning of the section is that the furnishing of the indemnity must occur at the time of the institution of the proceedings by the creditor. The object of section 32(1)(b) is that an indemnity has to be furnished to ensure that the liquidators will not be liable for any adverse costs order which the creditors may incur while litigating in the name of the liquidators at a time when the proceedings have effectively become those of the creditors and the liquidators no longer have any control over the way in which they are conducted or on the expenditure involved. The section is aimed at preventing the assets of the company in liquidation being dissipated in litigation.

The Court found that in casu, section 32(1)(b) had in substance been complied with.

The appeal was dismissed with costs.

Hlumisa Investment Holdings (RF) Limited and another v Van der Merwe NO and others [2016] JOL 34326 (GP)

Business rescue plan – Failure to consult with shareholders – Interim interdict

The Court provided reasons for its order in this matter.

The applicants had approached the Court for the postponement or interdicting of a scheduled meeting pending delivery of certain documents and information, and the outcome of an application for the setting aside of business rescue proceedings and the placing of the third respondent under final liquidation. Although they were shareholders in the third respondent, the applicants alleged that they were not consulted before preparation of the business plan. The first and second respondents, as the business rescue practitioners opposed the application on the grounds, inter alia, of non-joinder, non-compliance with section 133(a) or (b) of the Companies Act 71 of 2008, and that a case for an interdict had not been established.

Held that rule 6(12) of the Uniform Rules of Court requires applicants to state the grounds on which urgency is based and why they contend that they would not be afforded substantial redress in due course.

The Court held that the joinder of the identified parties was not necessary, thereby dispensing with the first point.

Section 133 places a general moratorium on legal proceedings against a company during business rescue proceedings. Consent of the business rescue practitioner is needed. The Court found that the fact that the applicants were not consulted on the business rescue plan, and had no voting rights at a meeting to determine the future of the company meant that they stood to be prejudiced. An interim interdict was thus granted.

Pinfold and others v Edge to Edge Global Investments Limited [2016] JOL 35152 (KZD)

Winding-up application by shareholders – Fraudulent conduct by company directors – Section 81(1)(e), Companies Act 71 of 2008

As shareholders in the respondent, the applicants claimed that R60 million to R70 million had been invested in the respondent on the strength of representations that were made to them. Investigations by the shareholders led them to believe that the directors had either misapplied or wasted the money belonging to the company. Most importantly the applicants contended, which was not disputed, that the respondent had failed to issue financial statements in respect of the years ending February 2012 and February 2013.

In terms of section 81(1)(e) of the Companies Act 71 of 2008, the applicants sought leave for the winding up of the respondent. Having granted the order sought, the Court furnished its reasons.