When a company enters liquidation, the old 1973 Companies Act imposes strict limitations on what it may do with its assets. However, do these rules still apply when the liquidation is interrupted due to it being converted into a business rescue process? And, are creditors who have been paid during this period at risk of having those payments set aside and reclaimed if the business rescue is ultimately unsuccessful?
The case of Macneil Plastics (Pty) Ltd v Van den Heever NO and Others (906/2023) [2024] ZASCA 181 addresses these questions and offers important guidance for anyone engaging with financially distressed companies.
After liquidation proceedings were instituted against a company, it made a payment to one of its creditors, Macneil Plastics. Shortly afterwards, business rescue proceedings were launched in terms of section 131(6) of the new 2008 Companies Act, suspending the liquidation process. Business rescue ultimately failed and the liquidation proceedings recommenced, which led to the final liquidation of the company. The liquidators then sought to recover the payment made to Macneil Plastics, relying on section 341(2) of the 1973 Companies Act. This section provides that any disposal of assets after a company begins liquidation is void. The purpose of this is to protect the body of creditors, who in a liquidation are paid in accordance with a strict order of preference. This is known as the concursus creditorum, and once established, it would be unlawful to pay any creditor out of this order.
Macneil Plastics, when asked to pay back the amount to the company, argued that business rescue proceedings brought the liquidation to an end and thus terminated the concursus creditorum. Once liquidation resumed, it created a new concursus creditorum, which validated the payment made to them.
The Supreme Court of Appeal rejected this argument on a number of grounds and ruled that the payments were indeed made contrary to section 341(2) of the 1973 Companies Act and that Macneil Plastics had to “pay back the money” to quote a (in)famous politician.
This outcome, whilst sensible and correct, raises a further question regarding payments made by business rescue practitioners (BRPs) during the suspension of liquidation. Do they face the same consequences? In Mazars Recovery & Restructuring (Pty) Ltd and Others v Montic Dairy (Pty) Ltd (in liquidation) and Others (526/2021) [2023] (1) SA 398 (SCA), the court held that they do. It confirmed that section 341(2) of the 1973 Companies Act applies strictly, even to BRPs. Exempting BRPs from this rule would allow their actions to go unchecked. The court further held that not only can liquidators claim back payments made after the commencement of liquidation, but they are duty bound to do so in order to restore the company’s assets. Importantly, where a BRP disposes of assets outside of their scope of powers, they may also face personal liability under section 77 of the Companies Act for any resulting loss.
This leaves us with a few key takeaways. Business rescue does not bring liquidation to an end; the legal rules that apply to liquidation remain fully in force. BRPs must exercise their powers carefully and in line with their legal duties. Failure to do so can result in serious consequences, including personal liability. For anyone dealing with a financially distressed company, it is essential to ensure that any payment received is properly authorised and made in line with the order of creditor preference. Otherwise, there is a risk that the payment may have to be repaid to the company.
This article was prepared by Wildu du Plessis and Kiara Davey.