A creditor who’s claim against a company has not been paid on due date is, as a matter of law, entitled to apply for the liquidation of the company. If the court is satisfied that the company is unable to pay the debt, a liquidation order will normally be granted, with the often distressing consequence that jobs are lost, assets are sold at far below their value and a business which, if given a respite, would have regained its financial health, ceases to exist.
The new Companies Act, No 71 of 2008, has introduced the concept of business rescue, which is intended to assist financially distressed companies in restructuring their business in a manner that maximises the likelihood of the company continuing in existence on a solvent basis. Business rescue certainly has its place in the South African economic environment, and its growth and wider application should be encouraged. There are, however, a number of drawbacks. The business rescue practitioner has to be paid, and his fee is frequently substantial. Furthermore, the business rescue plan has to be approved by 75% of the creditors voting interests, and by 50% of the independent creditors (i.e. creditors who are not directors, shareholders or members of the same company group). If the business rescue plan is not approved, liquidation of the company will be the almost inevitable result.
Item 9 of Schedule 5 to the 2008 Companies Act provides that the liquidation of companies continues to be governed by the applicable provisions of the previous Companies Act, No 61 of 1973 (“the 1973 Companies Act”). Which brings me to Section 347(1) of the 1973 Companies Act, dealing with the powers of the court hearing a liquidation application. It provides as follows: “The court may grant or dismiss any application under s 346, or adjourn the hearing thereof, conditionally or unconditionally, or make any interim order or other order it may deem just …”.
The power which the court has to adjourn the application, or make “any other order it may deem just” is a power infrequently exercised and one which has received insufficient attention by the courts. That power should, for example, be exercised in conjunction with the power granted a court in terms of Section 354(1) of the 1973 Companies Act, which states that the court may at any time after commencement of a winding up, on the application of a liquidator, creditor or member “and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed or set aside, make an order staying or setting aside the proceedings …”.
In Klass v Contract Interiors 2010 (5) SA 40 (W), the court held that the power vested in the court by Section 354 is an unfettered discretionary power. The court may, in deciding whether a winding up is to stayed, have regard to the wishes of the majority of creditors, and to considerations of commercial morality. This approach echoes the reasoning adopted in Calgary & Edmonton Land Co Ltd (1975) 1 All ER 1046 (CH). It is also consistent with a line of cases which state that, in liquidation and sequestration applications, a court may postpone the granting of a liquidation or sequestration order to enable a debtor to pay the claim of the applicant creditor, where it appears that the debtor has realistic prospects of doing so (Rosenbach & Co (Pty) Ltd v Singh’s Bazaars (Pty) Ltd 1962 (4) SA 593 (D); Payslip Investment Holdings CC v Y2K Tech Ltd 2001 (4) SA 781 (C) at 787-789).
A company faced with a liquidation application may therefore, if it is able to show that it will be able to pay the debt within a realistic time, succeed in averting the liquidation application. A couple of self-evident and practical points need to be made, in this regard. Firstly, a company running into cash flow problems must keep its creditors fully informed. If it becomes clear that debts are not going to be paid on due date, the company should timeously ask the creditors for extensions of time, make realistic proposals as to the payment of any arrear amounts and, most importantly, ensure that it treats all its creditors equally, as regards payments of debts. A creditor that finds out that its claim has been unpaid, while those of other creditors met, is likely to speedily resort to liquidation or other litigation proceedings.
By managing its creditors in this manner, a company will, if in due course one of the creditors loses patience and brings liquidation proceedings, be able to successfully resist liquidation by invoking Section 354 and the proviso to Section 347(1).
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.