Partner: GCS
A few months ago, Cliffe Dekker Hofmeyr (CDH) began the discussion about the abuse of business rescue and the ramifications thereof. One of the biggest casualties when this abuse takes place is trust. The 2022 Deloitte Restructuring Survey paints a grim picture of how the business rescue profession is viewed. Trust is a diminishing commodity.
It always amazes me that there are still companies who want to abuse the business rescue process, especially when they are facing possible liquidation. But as CDH once again points out, case law shows that abusers never prosper.
Westline Aviation
CDH points out that, in the case of Westline Aviation, a director of the company launched an application in terms of section 131 of the Companies Act 71 of 2008 (Companies Act) to place Westline Aviation (Westline) into business rescue. The application was launched after First National Bank (FNB) issued an application seeking a money judgment against Westline alternatively, the winding-up of Westline. Two separate money judgments were granted against Westline in terms of settlement agreements reached between the parties. FNB accordingly opposed the business rescue application and launched a counter application for the winding-up of Westline on the basis that it was commercially insolvent. No further affidavits were filed by Westline opposing FNB’s counter application or in reply to FNB’s answering affidavit in the business rescue application.
The court considered all the well-known cases on business rescue proceedings and noted that while sentiments expressed in adopting business rescue to avoid liquidation may be noble, it should not lead to a situation where an extraordinary amount of time is taken in a futile attempt to achieve this result. In support of the business rescue application, it was submitted that Westline did not require post-commencement finance as Westline supposedly had all the tools to trade out of its financial distress. The court noted that Westline did exactly what is not required of affected persons and a company in financial distress, i.e. keeping creditors on a string instead of finalising the business rescue process as soon as possible. Rightly so, Westline abandoned its business rescue application and the court further found that on the uncontested evidence before it, presented by FNB, Westline was commercially insolvent and it would be just and equitable in the circumstances for it to be wound-up.
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Henria Beleggings
In the case of Henria Beleggings, CDH points out that the business rescue proceedings of Henria Beleggings commenced through the adoption of a board resolution in terms of section 129 of the Companies Act. Henria Beleggings instituted an application to rescind a default judgment granted against it in 2008 in favour of Changing Tides 17 (Pty) Ltd (Changing Tides). Changing Tides launched a separate application for, inter alia, setting aside the resolution commencing business rescue and placing Henria Beleggings in liquidation.
Prior to the commencement of the business rescue proceedings, Changing Tides sought to execute on its default judgment order and sell certain property subject to its security in terms of a special power of attorney provided by Henria Beleggings. However, four days before a further convened sale in execution, Henria Beleggings passed a resolution commencing business rescue. Changing Tides therefore contended that the sole purpose of the business rescue was to proceed with the rescission of the judgment. Henria Beleggings had no employees and no annual turnover and was simply a property holding company. In addition, the resolution commencing business rescue fell short of the procedural requirements set out in section 129 of the Companies Act.
CDH adds that rejecting the application for rescission, the court then considered whether the business rescue resolution should be set aside and Henria Beleggings placed into liquidation. In its founding affidavit to the rescission application, it was stated that the only reason why the company was placed into business rescue was to pursue the rescission of the default judgment. The court held that it must follow that if the rescission application fails, so too would the business rescue. On further analysis, the court found that despite Henria Beleggings’ contention that the business rescue could be successful, it was purely a property holding company with no business to restructure, it had no employees nor any “costs” which it could “shed”. As a property holding company, there were no interested parties beyond the major creditor who held almost all of the debt.
The business rescue proceedings were simply being instituted in order to delay the inevitable and to prevent Changing Tides from executing on the default judgment. Henria Beleggings was further commercially insolvent, and the business rescue process was merely a sham to avoid the repercussions of the default judgment. The plan stated that an unidentified investor would be sought in order to improve the property and continue its renting out. It made no provision for how – during this improvement and renting out process – the debts would be reduced, not did it identify who the mystery investor was. The institution of the business rescue proceedings was thus held to be an abuse of process, and it was subsequently set aside and the company was placed into final liquidation.
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Clear result
CDH points out that the result of these cases is clear, in both Westline Aviation and Henria Beleggings, the institution of business rescue proceedings was merely a last-ditch attempt to keep creditors at bay. Abuse of the business rescue proceedings in circumstances where there is no reasonable prospect of rescuing the company will always result in liquidation.
In Westline Aviation, the court quite clearly held that creditors are entitled to finality. Business rescue proceedings naturally frustrate a creditor’s right to finality, but the courts are more inclined now to come to the aid of creditors where it is clear that business rescue proceedings are simply a façade.
Where does this leave the profession?
Once again, we see clear evidence of abuse that, if left unpunished, will damage the reputation of the profession.
Some may point out that punishment has already been handed down in the courts. However, does this help the profession when the public is already asking string questions about the value of business rescue?
We need to talk about this, we need to see where and how the abuse occured, and we need to try and work together – as a profession – to make sure that these cases do not occur on a regular basis. This is the only way that we manage the abuse that can take place.
Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner.
