Section 129(2)(a) of the Companies Act stipulates that a company may not adopt a resolution to commence business rescue if liquidation proceedings have been “initiated” against the company. This raises the question: When exactly are liquidation proceedings considered to have been initiated?
This question was addressed by the Honourable Sutherland J in the matter of Tjeka Training Matters v KPMM Construction [2019].
On 18 April 2019, Tjeka Training Matters issued a liquidation application against KPMM Construction, but the application was only served on KPMM by the sheriff on 28 May 2019. KPMM had, however, passed and filed a resolution to begin business rescue on 15 May 2019, and business rescue practitioners (BRPs) were appointed.
The legal issue in this case was whether KPMM’s resolution to initiate business rescue took precedence over the liquidation application, which had been issued prior to the resolution, even though it had not yet been served. In other words, does the mere issuance of a liquidation application constitute the “initiation of liquidation proceedings”?
Tjeka argued that the term “initiate” should be understood in its ordinary sense—simply to begin or start. Additionally, Tjeka referred to section 348 of the 1973 Companies Act, which specifies that the winding-up of a company is deemed to commence when the application is presented to the court, i.e., when the application is issued.
However, the court concluded that the remainder of the sentence in Section 129(2)(a), which refers to liquidation proceedings being “initiated by or against the company,” must be considered in its entirety. The court ruled that an application, although issued, is not considered initiated against the company until it is formally served. The court further explained that the purpose of Section 348 of the 1973 Companies Act differs from that of Section 129(2)(a).
The court’s final conclusion was that a party remains legally unaffected until they are formally notified of proceedings against them. Consequently, KPMM was acting within its legal rights when it passed the resolution to initiate business rescue proceedings.
Disclaimer: The information provided above is general in nature and should not be considered as legal advice.