Is always sad when the liquidation decision gets taken out of our hands

By now, we should all be aware of the circumstances that lead to financial distress and in some cases liquidation.

Most of the time, the cause of this distress and outcome is because of poor leadership, gross mismanagement and/or financial irregularities. BRPs are then presented with the decision on whether any value can be salvaged from a company that has been run into the ground. We rely on our training and skills and present shareholders with a plan on whether the company can be saved or not.

While not playing down the gravity of the decision to liquidate or not, the equation is simple… pending certain interventions, can X+Y=Z. If it doesn’t, liquidate. As one BRP recently put it, this is a commonsense industry at the end of the day.

I recently read an article published by legal firm Cliffe Dekker Hofmeyr (CDH) where it was pointed out that a perfectly solvent company can be liquidated on the basis that there is a toxic relationship between the company’s shareholders.

This throws a complete spanner into the works. The test for value is easy when it comes to physical assets or the impact of an event such as Covid-19 or the July Civil Unrest. The test for salvaging value when the company is run into the ground but is owned by external stakeholders is also relatively easy.

When it comes to the breakdown in relationships when it is a family run business, the decisions get tough.

Grounds for liquidation
According to CDH, the grounds on which a court may liquidate a solvent company include (but are not limited to):

• where the directors are deadlocked in the management of the company and the shareholders are unable to break the impasse, resulting in irreparable harm to the company;-
• where shareholders are deadlocked in voting power, and have failed in at least two consecutive annual general meetings to elect successors to directors who’s terms have expired; and
• where it is just and equitable for the company to be liquidated.

Recently, in Barbaglia N.O and Others v Noble Land (Pty) Ltd and Others (A5041/2020) [2021] ZAGPJHC 85 (24 June 2021), CDH pointed out that the court placed Noble Land in liquidation on the basis that it was just and equitable to do so.

This is a reminder of how a family company, with humble begins, can be caught in the middle of a family feud which leads to the company’s tragic liquidation demise.

Bulls locking hornes
CDH points out that Noble Land is a solvent family business, owned by two brothers through their respective trusts. Their parents are no longer involved in the affairs of the company. However, both brothers are involved in a family feud which appears to have affected their roles as shareholders of Noble Land.

Settlement and mediation attempts to resolve their dispute were not successful, thus the relationship between the two brothers is toxic and dysfunctional on a professional and personal level. Eventually, one of the brothers brought an application to liquidate Noble Land.

The gavel comes down
CDH points out that the court laid down the following principles in relation to the liquidation of a company on the basis that it is just and equitable to do so:

• the court has an overall discretion to liquidate a solvent company where there is a general breakdown of the relationship between shareholders;
• the court exercises this discretion after applying the law, justice and equity to the facts of the company in question;
• even in an instance where there is a failure of the relationship between shareholders to a point where shareholders have been unable to elect successors to directors in one AGM, a court may exercise its discretion and liquidate the company;
• there exists between shareholders a particular personal relationship of confidence and trust similar to that which exists between partners in a partnership. If one of the shareholders destroys that relationship, the other shareholder is entitled to claim that it is just and equitable for the company to be liquidated; and
• it is not necessary that the shareholder seeking the liquidation should have the proverbial “clean hands” in the feud between the shareholders. In many instances, both shareholders would, to some extent, have contributed to the breakdown in their relationship.

CDH points out that the court found there was a complete breakdown in the brothers’ relationship, which made Noble Land unable to function. There was no reasonable hope of tiding over the period of conflict and of Noble Land emerging as a functioning company. The brothers were hopelessly at loggerheads with each other. Noble Land was in a state which could not have been contemplated when it was formed, and the way forward appears to be more and more litigation between the brothers. Hence the disputes between the brothers have reached a level where it would be just and equitable to liquidate Noble Land.

Tough decision
The CDH article points out that it is reasonably acceptable for shareholders to debate and disagree on commercial aspects of a company. However, if their relationship breaks down to a point where it is toxic, then that may be a basis for a court to liquidate an otherwise solvent company.

From a BRPs perspective, it is hard to come to terms with decisions such as these. The decision to liquidate a company is never taken lightly as there is much more at stake than salvaging value out of a distressed company for shareholders, the preservation of jobs in any business rescue/liquidation weighs heavily on the mind of the BRP. This is why we fight so hard for rescue over liquidation.

While these brothers continue their battle, their staff suffers and will be impacted by the courts decision to liquidate the company. This is yet another strong case for business rescue and why it is so important in todays economy where disruption can liquidate a perfectly viable business.

Robin Nicholson is a Director at Corporate-911 and is a Senior Business Rescue Practitioner