Van Rensburg N.O. and Another v Cardio-Fitness Properties (Pty) Ltd and Others (46194/13) [2014] ZAGPJHC 40 (4 March 2014)

SAFLII Note: Certain personal/private details of parties or witnesses have been redacted from this document in compliance with the law and SAFLII Policy

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION

JOHANNESBURG

CASE NO: 46194/13

In the matter between:

ESAIS JOHANNES JANSEN VAN RENSBURG NO

First Applicant

MASHILO TUMISAND MOLEFE

Second Applicant

and

CARDIO-FITNESS PROPERTIES (PTY) LTD

First Respondent

(Registration Number 1984/000472/07

ALEXANDER FRANZ RICHTER

Second Respondent

ABSA BANK LIMITED

Third Respondent

GABRIELE FRANZISKA BURGMER

Fourth Respondent

MASTER OF THE HIGH COURT, SOUTH GAUTENG

Fifth Respondent

J U D G M E N T

N F KGOMO, J:

INTRODUCTION

[1] This is an application brought on an urgent basis in which the applicants, who are the jointly appointed provisional liquidators of the first respondent’s insolvent estate are asking this Court for orders –

1.1 authorising them in terms of section 387 of the Companies Act 71 of 2008 to institute these proceedings;

1.2 that leave be granted to the applicants to institute proceedings in terms of section 133(1)(b) of the Companies Act 71 of 2008;

1.3 that this Court issue a declarator that the joint provisionally appointed liquidators of the first respondent’s insolvent estate are to continue the trading activities of the first respondent in terms of section 386(4)(f) of the Companies Act 61 of 1973 read together with Schedule 9, item 5 of the Companies Act 71 of 2008 pending the outcome of the court’s decision whether or not to place the first respondent under the supervision of a business rescue practitioner;

1.4 that the applicants be placed in possession of the assets of the business of the respondent in their capacity as the jointly appointed

provisional liquidators from which position they have been despoiled by the second respondent;

1.5 that the costs hereof be paid by those of the respondents who oppose same,

alternatively

that the costs of the application be costs in the administration of the insolvent estate of the first respondent.

[2] After listening to argument in court I granted the following interim order:

2.1 Judgment is reserved;

2.2 The status quo ante wherein the two applicants are and will still act as the provisional liquidators of the first respondent to remain in force until judgment herein is handed down;

2.3 The respondents and/or whosoever of them involved are ordered and directed to co-operate with the applicants and respect of their

caretaker capacities until judgment herein is handed down.

[3] The centre-piece of this application relates to the fact that a final order of liquidation of the first respondent has already been granted and the applicants are the provisional liquidators appointed. Before further processes could take place, the fourth respondent launched an application for business rescue in respect of the liquidated first respondent in terms of the provisions of section 131 of the Companies Act 71 of 2008 (“the Companies Act”).

[4] The effect of the business rescue application when one considers the provisions of section 131(6) of the Companies Act is that the liquidation proceedings as commenced, stand to be suspended until the business rescue application is adjudicated upon, alternatively, until the business rescue proceedings come to an end due to the court granting the order sought by the fourth respondent.

[5] The trigger for this application is stated as the second respondent’s unilateral decision to spoliate the joint liquidators (the two applicants) of the hotel run or operated by or through the first respondent even before a business rescue practitioner is sanctioned and appointed by the court.

[6] Business rescue is a new kid of the company law block. Consequently there are still a lot of grey area and/or lacunae which courts are still to help settle down or close by interpreting the law.

[7] As matters currently stand, there is uncertainty in the law and procedures insofar as the liquidation proceedings are concerned: The first respondent has already been finally wound-up. The pending business rescue application complicates issues and according to the applicants, the second respondent has taken advantage of the uncertainty and fluidity and despoiled the applicants. In terms of the prevailing company laws, a business rescue process should normally suspend liquidation proceedings.[1] On the other hand, in terms of section 348 of the old Companies Act 61 of 1973, the erstwhile directors of the first respondent, in our case, especially the second respondent, are divested of control and cease to be directors functionally, officially and nominally. A liquidation order automatically terminates a director’s employment as such and/or operates to dismiss him. The effect would be that the directors involved would have no power to conduct proceedings on behalf of the company or to make valid calls on shareholders. Their acts have no binding effect insofar as the liquidated company is concerned.

[8] The problem that arises is that before a business rescue practitioner is appointed formally, he has no power or any role to play in the running of the company.

[9] The second respondent by law remains barred from running the affairs of the first respondent. On the other hand, the first respondent as a going concern should continue to trade until the impasse of who should run daily routines for or on behalf of the first respondent is resolved. If the business rescue application fails, the applicants would continue with their liquidation process. Should it succeed, then the appointed rescue practitioner would take over as that decision would have confirmed, ex lege, the suspension of the joint liquidators from continuing with their liquidation process. The applicants herein, being provisional

liquidators are expected to remain in office until a final liquidator(s) is appointed by the Master of the High Court in question at a meeting called in terms of the Companies Act.[2]

[10] The applicants herein on the one hand and the second and fourth respondents on the other hand have conflicting contentions as to who presently should have actual control and possession of the business of the first respondent pending the finalisation of the business rescue application. The second and fourth respondents contend that the effect of section 131(6) of the Companies Act under these circumstances is to divest the applicants of their office as liquidator’s vis-à-vis the first respondent until a decision is made in the business rescue application. It was also contended on behalf of the second and fourth respondents that the second respondent remains the de facto controller of first respondent’s business, allowing him to conduct it “as he pleases” until such time as the business rescue application is finalised, and that as at this juncture the applicants have no further say whatsoever in the affairs of the first respondent.

[11] On the other hand the applicants contend that being the appointed provisional liquidators of the first respondent they have certain obligations and duties towards the creditors of the insolvent estate to take into their possession the assets and business of the first respondent, and to secure this business for the concursus creditorum, and pending either the final appointment of a liquidator(s) or the appointment of a business rescue practitioner, whereupon they would no longer be responsible for the business of the first respondent.

[12] The urgency of the matter was made up by the fact that the second and/or fourth respondents by their conduct have made it difficult for the applicants to pay employees of the first respondent from moneys held on behalf of the company without having to obtain prior approval from the bank(s) if the status quo persists. They also contend that while the second respondent has retaken physical control of the first respondent, he was

collecting all income but not paying the salaries of the employees, referring them to the applicants whenever remuneration or salaries

are to be paid or received. Several crucial staff members were allegedly threatening to resign en masse. Furthermore a person legally divested of possession and control of an insolvent estate is in charge thereof whereas those legally obliged to do so have been evicted or despoiled.

THE PARTIES

[13] The first applicant is an adult insolvency practitioner practising as such under the name and style of KIP Insolvency Practitioners at [………].

[14] The second applicant is an adult male insolvency practitioner practising as such under the name and style of L & M Insolvency Practitioners at [………].

[15] The first respondent, Cardio-Fitness Properties (Pty) Ltd (In Liquidation) is a limited liability company duly registered and

incorporated in terms of the company laws of the Republic of South Africa (“RSA”) with its registered address situated [………]. The first respondent is in liquidation and the two applicants have been appointed joint provisional liquidators by the Master of the High Court, South Gauteng.

[16] The second respondent, Alexander Franz Adrian Richter is an adult male business person and director of the first respondent resident at Remainder of [………]. He is cited herein in his capacity as director of the first respondent insofar as he may have an interest in the matter. He is represented by A J Oberlechner Attorneys of [………].

[17] The third respondent, Absa Bank Limited (“Absa Bank”) is a company duly registered and incorporated in terms of or under the company laws of the RSA as well as being a registered financial services provider in terms of the National Credit Act (“NCA”) 34 of 2005 with its registered situate at [………]. Absa Bank is cited insofar as it may have any interest in the matter. Absa Bank, initially represented by Tim du Toit Attorneys of [………], who has filed a notice to abide the decision of the court.

[18] The fourth respondent, Gabriele Franziska Burgmer is an adult female businesswoman resident at [………]. She is represented by Le Roux Vivier Attorneys of [………].

[19] The fifth respondent, The Master of the South Gauteng High Court is a state institution saddled with duties and responsibilities relative to deceased and insolvent estates among others. Its principal place of business is situate at [………].

BACKGROUND AND BRIEF FACTUAL MATRIX

[20] The first respondent’s principal business is the trading of hotel activities in the rural parts of Krugersdorp. The third respondent applied for the first respondent’s liquidation or winding-up due to the latter’s inability to pay its debts as and when they became due. A provisional winding-up order was granted in this Court on 5 August 2013. The two applicants were appointed its provisional liquidators and after receiving their Certificates of Appointment on 6 September 2013 they started with their work, which culminated with them submitting a report to court stating that the first respondent was trading at a loss.

[21] After several postponements during which the rule nisi was extended, final arguments were made in court in these liquidation proceedings on 28 November 2013.

[22] In the meantime, on 31 October 2013 the fourth respondent launched an application in this Court for the first respondent to be placed under business rescue. This application is opposed by the third respondent. It was still pending as on the date this application was argued before me on 13 December 2013.

[23] When Beltramo AJ heard argument for the granting of the final winding-up order on 28 November 2013, facts relative to this

application for business rescue were placed before him. After due consideration of issues in issue thereat Beltramo AJ granted the following order (only material aspects quoted):

“20.1 The respondent is finally wound up.

20.2 The costs of the winding up application are to be costs in the liquidation.

20.3 The liquidation proceedings remain suspended until the court has adjudicated upon the business rescue application or the business

rescue proceedings end, if the court makes the order applied for;

20.4 The costs of the argument on the issue of whether I am precluded from granting a final winding up order are to be paid by the applicant in the business rescue application.”

QUESTIONS TO BE DECIDED

[24] What this Court was called upon to decide was whether the second and/or fourth respondents, especially the second respondent was by law allowed to re-take possession of the insolvent estate divested from him on the basis that a business rescue plan application has been launched even though a decision thereon have not been made. Furthermore, the question whether in the absence of an appointed

business rescue practitioner the applicants should remain in control of the insolvent estate, more so that no permanent or final

liquidator had not yet been appointed.

ANALYSIS

[25] It is not in dispute that the first respondent is a company under financial distress. Liquidation proceedings were already under way when the business rescue application was made or launched.

[26] It is also so that the commencement of business rescue has the effect of triggering the setting in of a moratorium against the institution of legal proceedings against the insolvent company or company in financial distress as well as the continuation of any legal proceedings that may already have started,[3] subject of cause to specified exceptions set out under section 133(1)(c) to (f) of the Companies Act.

[27] The applicants argued and submitted that strictly speaking, the liquidation process under way have not yet assumed proportions of being termed “legal proceedings” as defined in the applicable sections of the Companies Act. The respondents argued to the contrary.

[28] It should also be stressed that at this stage, the court had not yet appointed a business rescue practitioner, as the application is opposed.

[29] The parties’ cases revolved around the interpretation of liquidation proceedings.

[30] Makgoba J dealt with the interpretation of the expression, “legal proceedings” in Absa Bank v Summer Lodge (Pty) Ltd.[4] After dealing with the dictionary meanings of the expressions “liquidate” and “proceedings”, the honourable judge stated the following:

“10. Thus, in my view, the grammatical meaning of the word, ‘liquidator’ is a process of liquidating or being liquidated which is again to determine the liabilities and apportion the assets towards discharging the indebtedness of the debtor. This clearly suggests that the words ‘liquidation proceedings’ in section 131(6) of the Act is concerned with the actual process of winding-up followed by the liquidator and the Master after the winding-up order has been granted. It therefore excludes the legal action and/or process taken in order to obtain such a state of affairs …

12. … Consequently, I agree with the submission made by Mr Meintjies, counsel for the applicant, that the words ‘liquidation proceedings’ refer to a process that consists of the collection of the assets, realising and reducing them to money, dealing with proof of creditors by admitting or rejecting them, and distributing the net proceeds after providing for costs and expenses by the liquidator to the persons entitled thereto. Thus the words ‘liquidation proceedings’ have to do with the process that is overseen by the liquidator and the Master in the winding-up and not in the legal proceedings before a court of law in order to obtain such an order.”

[31] At the end of the day Makgoba J issued a declarator to the following effect:

“18.1 …

The meaning of words ‘liquidation proceedings’ in section 131(6) of the Companies Act No 71 of 2008, is confined to the actual process of winding-up a company consequent upon an order of winding-up having been issued by a court and is the actual process followed in winding-up and overseen by the liquidators and the Masters. The words ‘liquidation proceedings’ do not include the legal proceedings taken by a creditor for purposes of obtaining an order that a company can be wound-up.”

[32] That remains the legal position to date until overruled by a competent court.

[33] It is a fact that provisional liquidators of a company have the task of taking physical control of the company and its assets.

Theirs is just to superintend or act as good shepherds over the affairs and assets of the insolvent company until a final or permanent liquidator is appointed. Only a permanent liquidator (not a provisional one) performs the actual processes and chores of liquidation.[5] Normally, the powers of a provisional liquidator are restricted by the Master.[6] However, it remains the prerogative of the Master or the court for that matter, to relax any restrictions that may be there or extend powers granted.[7]

[34] The practice of applying for business rescue in the face of an existing liquidation process or proceedings may be susceptible to abuse as was pointed out by Sutherland J in Absa Bank Ltd v New City Group (Proprietary) Limited[8] where the learned justice warned against ostensible time-buying or time-wasting litigation.

[35] This aspect is also criticised or referred to in inglorious terms in an article by Keith Braatveldt[9] dated 7 March 2013 where the following was stated:

“… In my view, both these judgments are correct. However, they certainly have both positive and negative effects. A huge position is that a good business can be revived through a business rescue application and the subsequent involvement of a practitioner, even after that business has been effectively closed down and rendered incapable of development through the liquidation process.

A negative is obviously that the applications for business rescue can theoretically be brought years after the liquidation resulting in tremendous difficulties for the liquidators and what they have done in the course of the winding-up. Furthermore, the fact that merely launching the application, without any provisions being made for interim management of the company, lends itself to abuse.”

[37] Another problem in situations such as this is that despite the promulgation of the new Companies Act of 2008 which came up with the new kid-on-the-block “business rescue”, proceedings for winding-up are still regulated by the provisions of the old Companies Act of 1973.[10]

[38] Mutually destructive situations often arise when a business rescue application is made while liquidation proceedings are under way. I am however of the view that it will depend at the stage the liquidation process is at. The stage towards the appointment of a business rescue practitioner or whether permanent liquidator has already started with actual winding-up processes would also or ought to be a help towards deciding who should be in charge of the insolvent estate.

[39] As the law stands, the mere launching of a business rescue application brings into effect the stay of liquidation proceedings.[11] On the other hand, the second respondent’s control and/or management of the affairs of the insolvent estate has been divested through the granting of the liquidation orders, be they provisional or permanent. As already stated, the fourth respondent is opposing the business rescue application. Consequently it is uncertain as to when this process would start progressing to a stage where a business rescue practitioner would be appointed.

[40] The second respondent has jumped into the lacuna created by the whole saga. Despite the fact that he has been divested of control by the liquidation process, he wrested control of the insolvent estate from the provisional liquidators.

[41] I agree with the applicants’ contention that the intention of the legislature here is clearly to stop the actual liquidation process, i.e. the liquidation of assets with a view to sorting out debtors and creditors and settling the liabilities of the insolvent company, not the interim processes supervised by provisional liquidation.

[42] The question then is: was the stay on liquidation proceedings intended to affect the functions, powers and responsibilities of the appointed provisional liquidators under the circumstances prevailing in this case?

[43] The responsibilities of the provisional liquidators is essentially to take physical control of and to superintend the administration of the insolvent company’s property and affairs pending the appointment of a permanent liquidator.

[44] We have a situation here, where –

44.1 the directors of the first respondent are still divested of their responsibilities, duties and functions relating to the insolvent

company;

44.2 A final liquidator has not yet been appointed;

44.3 A business rescue practitioner has not yet been appointed.

[45] There is in my view, an unhealthy lacuna here. The applicants are asking for specific orders, including ex post facto authorisation by this Court of their instituting these proceedings and/or defending or re-institution others, should the need so arise.

[46 There is evidence that after “hi-jacking” the insolvent company from the applicants, instead of doing all that the applicants were by law ordered and empowered to do, some of the respondents, especially the second and to some extend the fourth respondent, clearly shirked those responsibilities. They collected money generated by or at the business of the first respondent but did not want to pay the salaries of the employees,

instead referring the employees to the applicants for salary payment.

[47] The above in my view is the height of hypocrisy and arrogance.

[48] It is so that once the court makes a ruling and approves the business rescue process, with the accompanying appointment of the business rescue practitioner, everything would become academic: The liquidation process would remain suspended, and ex lege for that matter. By the above I am not disregarding or contradicting the provisions of section 131(6) of the Companies Act, 2008. For clarity’s sake, this subsection 6 of section 131 reads as follows:

“If liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of sub-section (1), the application will suspend those liquidation proceedings until:

(a) The court has adjudicated upon the application –

(b) The business rescue proceedings end, if the court makes the court applied for.”

[49] As seen from the judgment of Makgoba J and Van der Bijl AJ who dealt with the same matter at the moment of the granting of the provisional winding-up order thereat, the applicants are not strictly speaking dealing with the liquidation of the insolvent company. They are night watchmen looking after the assets and affairs of the insolvent company. The directors of this company have ceased to be directors functionally, officially and nominally when the provisional winding-up order was granted, and they have been deprived of the company’s property. The winding-up order automatically terminated their employment as directors and have operated to dismiss them. They are the people who brought the company where it is today. They have no power to conduct proceedings on behalf of the company or to make valid calls on shareholders. Their acts have no binding effect insofar as the company is concerned.

[50] I repeat: The intention of the legislature with regards a provisional liquidator seem to be that it is the function of a provisional liquidator to take physical control and to superintend the administration of the property and the affairs of the estate pending the appointment of a final liquidator. It is not the provisional liquidator’s function to wind-up the estate. Furthermore, it is not part of the ordinary process of the administration of a winding-up to continue the trading activities of a company placed under provisional winding-up, as the first respondent is here.

[51] As clearly set out in the Summer Lodge case or judgment, liquidation proceedings pre-suppose the conversion of assets into money and the distribution of those funds to creditors in the proportions that they are entitled to. These functions are not those of a provisional liquidator. Only a final liquidator can do those. The Master has a discretion to add or reduce powers of course.

[52] When the above is anything to go by, I tend to agree with the applicants that the suspension of the liquidation proceedings do not suspend the appointment of the joint liquidators herein. Section 131(6) of the Companies Act, 2008 is silent as to whether their powers are affected. It is my view that had the legislature intended that provisional liquidators are relieved of control before a business rescue practitioner is appointed, it would have said so clearly and unambiguously.

[53] The actions or conduct of the second respondent also creates practical problems. On 28 November 2013 the applicants as joint

liquidators received an e-mail, which records the second respondent as having issued the following instructions:

“Nobody of the liquidators’ offices is allowed there.

The managers should not allow the representative of the liquidators to take any cash from the safe. Maureen should go ahead with the Daddy voucher deals which would be go [sic] alive tomorrow.

The managers are not to sign off on the payment requisition that was send [sic] for the VAT payment that is due.[12]

[54] These so-said instructions have not been gain-said by the respondents to any effect. Consequently, I find them to represent what the second respondent’s modus operandi would be hence, which I find difficult to justify.

[55] The authorisation of the liquidators to continue the trading activities of the first respondent was obtained in terms of section 386(4)(f) of the Companies Act. In the course of the trading, the liquidators incurred liabilities, including salaries, trade creditors, VAT and other expenses. It is my finding that until the business rescue application is finalised or a final liquidator is appointed, the two applicants are liable for everything. As such, it should only be prudent that they remain in charge until the court pronounces on the business rescue application. If it succeeds, a practitioner would be appointed and he would take over the affairs of this company in financial distress. If it fails, a final liquidator(s) would be appointed and the suspension of winding-up lifted.

[56] It is my finding also that it was not the intention of the legislature that the first respondent at any stage be a rudderless

ship or ship without captain. If the respondent’s contentions are anything to go by, the suspension of the liquidation

proceedings means the forthwith departure of the applicants. As no business rescue practitioner has not yet been appointed (as at date of argument hereof) then the first respondent would remain without anybody to control and protect its assets and safeguard its takings. As he has already done, the second respondent has stepped in, not to help run the business of the first respondent correctly, but to take its daily takings while abdicating the duty of paying staff salaries of the applicants, whom he in the same breath says should not come within a proverbial mile of the business. Surely that cannot be correct.

[57] I agree with the applicants that the beneficial interpretation of section 131(6) of the Companies Act, 2008 should be the creation of a situation where in effect the provisional liquidators are temporarily restrained from disposing of any assets of the insolvent company or doing anything or performing any act of continuing with the winding-up of the insolvent estate until the business rescue application is finalised. The above is in step with what is provided for in section 386(1) of the Companies Act, 1973, which deals among others with interim powers granted to provisional liquidators.

[58] I find that in the peculiar circumstances of this matter, section 131(6) of the Act does not affect the appointment of provisional

liquidators here. If they do not conduct those duties imposed on them by section 386(1) of the Companies Act, 1973, they may be penalised. If the second applicant, who in any event had failed to run the first respondent’s business profitably or properly, is allowed to unilaterally step in and re-run or control it again, it would be a travesty of justice.

[59] After listening to argument and considering this matter it is my finding that this matter was correctly heard as a matter of urgency. The applicants have also persuaded this Court that it is just and equitable that the applicants succeed with their application.

ORDER

[60] The following order is made:

60.1 The applicants are granted leave, ex post facto, in their capacities as joint provisional liquidators of the insolvent estate of the first respondent, to institute proceedings on an urgent basis;

60.2 The applicants are granted leave to institute these proceedings in accordance with section 133(1)(b) of the Companies Act, 71 of 2008;

60.3 A declarator is hereby issued that the two applicants, as the joint provisional liquidators of the first respondent, are to continue the trading activities of the first respondent in terms of section 386(4)(f) of the Companies Act, Act 61 of 1973 read together with Schedule 9, Item 5 of the Companies Act, Act 71 of 2008, pending the outcome of the court’s decision whether or not to place the first respondent under the supervision of a business rescue practitioner;

60.4 The applicants to be placed, forthwith, in possession of the assets and business of the first respondent in their capacities as the jointly appointed provisional liquidators, from which they have been spoliated by the second respondent;

60.5 The second and fourth respondents are ordered to pay the costs of this application jointly and severally, the one paying, the other being absolved.

_____________________________

N F KGOMO

JUDGE OF THE HIGH COURT OF

SOUTH AFRICA

GAUTENG LOCAL DIVISION

FOR THE APPLICANTS

ADV J HERSHENSOHN

INSTRUCTED BY

CROUSE INCORPORATED

MAROELANA, PRETORIA

TEL NO: 012 346 5942

FOR THE FIRST AND SECOND

RESPONDENTS

MR M HENNIG

INSTRUCTED BY

MARTIN HENNIG ATTORNEYS

c/o A J OBERLECHNER ATTORNEYS

ROODEPOORT

TEL NO: 011 706 8035 (HENNIG)

TEL NO: 011 764 4890 (OBERLECHNER)

DATE OF HEARING

DATE OF JUDGMENT

[1] Section 131(6) of the Companies Act 71 of 2008.

[2] See also section 364 read with section 386(1) of Companies Act 61 of 1973.

[3] Section 133(1) of Companies Act.

[4] 2013 (5) SA 444 (NGHC).

[5] Ex Parte Klopper NO : In Re: Sogervim SA (Pty) Ltd (In Liq) (Sogervim SA Intervening) 1971 (3) SA 791 (T) at 796-7.

[6] Section 386(6) of Companies Act 61 of 1973.

[7] Ex Parte Provisional Liquidators, Pharmacy Holdings Ltd 1862 (2) SA 12 (W) at 14-15.

[8] Unreported case No 45670/11 delivered on 12 August 2013.

[9] The Positive and Negative Effects of a Business Rescue Order After Liquidation.

[10] Section 344 of Companies Act 61 of 1973. See also Ex Parte Muller NO : In Re: P L Myburgh (Edms) Bpk 1979 (2) SA 339 (N) at 340D; SAA Distributors (Pty) Ltd v Sport en Spel (Edms) Bpk 1973 (3) SA 371 (C) at 373C.

[11] Section 131(6) of Companies Act, 2008.

[12] Founding Affidavit, folio 20, para 9.1.