The SCA in the matter of PFC Properties (Pty) Ltd v Commissioner for the South African Revenue Services (Case no 543/21) and Brita De Robillard NO v PFC properties (Pty) Ltd (Case No 409/22) [2023] ZASCA 111, recently held that a meritless business rescue application launched solely to delay inevitable liquidation, enquiries into the stewardship of a company by those who operated it, and payment of various tax liabilities to SARS, does not suspend winding-up proceedings instituted against the company.
A worrisome practice has emerged since the introduction of the concept of business rescue into our law. This practice often involves the use of unmeritorious business rescue applications to frustrate attempts by creditors to recover amounts due to them through liquidation proceedings.
Bearing this practice in mind, the consolidated matter of PFC Properties (Pty) Ltd v Commissioner for the South African Revenue Services (Case no 543/21) and Brita De Robillard NO v PFC Properties (Pty) Ltd (Case No 409/22) [2023] ZASCA 111, provides reassurance that our courts will robustly protect creditor interests in cases where business rescue proceedings are used as a stratagem to thwart creditors.
Abuse of the business rescue process
A company in financial distress is entitled to apply to the High Court for an order placing the company under business rescue; a process aimed at rehabilitating or “rescuing” a company in financial turmoil.
In terms of Section 131 of the Companies Act, 71 of 2008 (the “Act”), the court may make an order placing the company under supervision and commencing business rescue proceedings if satisfied that:
- the company is financially distressed (i.e., likely to be insolvent or unable to pay all of its debts in the next six months), or
- the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment-related matters, or
- it is otherwise just or equitable to do so for financial reasons.
In all instances, the party applying for business rescue must satisfy the court that there is a reasonable prospect of rescuing the company. The company must establish reasonable grounds on which it bases the assertion that it is capable of restructuring its affairs so that it may continue to exist on a solvent basis, or, at the very least, detail the enhanced dividends creditors would receive if the company was to undergo business rescue as opposed to an immediate liquidation.
Section 131(6) of the Act provides that if liquidation proceedings have already been commenced by or against the company at the time of a business rescue application, the application will suspend those liquidation proceedings until the court has adjudicated upon the application, or the business rescue proceedings end, if the court makes the order applied for.
The PFC matter
The PFC matter arose from a series of disputes involving a property and asset-owning company, PFC Properties (Pty) Ltd (“PFC”), SARS, and the trustees of the De Robillard Family Trust (“DRFT”), the sole shareholder of PFC. Mr Paul De Robillard was a director of PFC until February 28, 2011, and Mrs Britta De Robillard was a director from March 1, 2012, until November 24, 2020. In addition to her role as a director of PFC, Mrs Robillard was also a trustee of DRFT.
SARS had conducted an audit on PFC for various tax periods, resulting in revised assessments totalling over R 52 million for VAT and over R 5 million for income tax. SARS later suspended the payment of these amounts at the request of PFC.
The audit also uncovered that a residential home owned by PFC had been falsely declared to SARS as a property development, leading to a dispute over input tax claims. SARS also held Mr De Robillard personally liable for customs and excise-related debts incurred by another company, in the amount of over R 89 million, leading to prolonged litigation with SARS between 2012 and July 2020, when Mr De Robillard withdrew the action.
Pursuant to the withdrawal of the action by Mr. De Robillard, SARS demanded payment of R 148 381 928.26. When it was not forthcoming SARS applied to sequestrate Mr De Robillard, and a final sequestration order was granted in May 2021.
Two individuals, (the late) Mr Murray and Ms Noel, were then appointed as joint trustees in the insolvent estate of Mr De Robillard (“the trustees”) and following their investigations, uncovered that PFC, acting through Mr De Robillard, had embarked upon a campaign to strip itself of all its assets against which a creditor could levy execution, by selling three immoveable properties which it had previously undertaken not to dispose of, for a fraction of their market value, as well as two yachts cumulatively valued at over R 57 million. The fraudulent conduct was reported to SARS, who then withdrew the suspension of payment of PFC’s VAT and income tax.
SARS then launched a winding-up application against PFC in the Pretoria High Court, which was ultimately granted. After the launching of the winding-up application, however, the trustees of DRFT brought an application in the Pietermaritzburg High Court to place PFC into business rescue (the “business rescue application”). The DRFT trustees subsequently applied for a postponement of the business rescue application (on the basis that an appeal was pending against the winding-up order), which was refused. The business rescue application was thereafter dismissed.
The appeal before the SCA was against both orders (the orders of the Pretoria and Pietermaritzburg High Courts).
The SCA, per Weiner JA, dismissed the appeal with costs. The Court held that it was clear that PFC was unable to pay its debts and was commercially and factually insolvent. Its assets had been siphoned off and dissipated, and “it had lost its substratum”, as it was not conducting any business activities.
The SCA’s point of departure was whether the business rescue application was an abuse of process and, more specifically, whether the DRFT trustees should be non-suited if it is found that the business rescue application was launched solely to delay or disrupt the winding-up proceedings; and consequently, whether it could have the effect of suspending those proceedings in terms of s 131(6) of the Act.
The Court held that it was just and equitable that PFC be wound up. PFC had not at any stage answered to the facts stated by SARS in the winding-up application, electing instead to argue that in terms of Section 131(6) of the Act, the business rescue application in the Pietermaritzburg High Court suspended the liquidation (winding-up) application, because business rescue proceedings only begin once the court makes an order to that effect in terms of s 131(1) of the Act, and thus the liquidation application could not proceed in accordance with s 133 of the Act.
The SCA found further that the business rescue process itself was a stratagem employed solely to delay the imminent liquidation of PFC. In its view, the DRFT trustees failed to make out a case that it was just and equitable to place PFC under supervision, and there was simply no prospect of rescuing PFC, which had disposed of all its assets. The abusive stratagem was further evidenced by the fact that instead of enrolling the application for hearing, the DRFT trustees applied for a postponement. When that was refused , they launched an appeal based purely on technical argument. The SCA concluded that this conduct was clearly employed as a dilatory tactic and was not bona fide.
The SCA also upheld the Pietermaritzburg High Court’s finding that the pending appeal of the winding-up order did not preclude it from determining the business rescue application. The High Court was held to have correctly refused PFC’s application for a postponement, taking into account the inconspicuous and concerning timing of the business rescue application, the failure of PFC to respond to the allegations of SARS and the trustees, the prejudice that PFC’s creditors would suffer on account of a delay, and the business rescue application’s poor prospects of success.
The SCA held further that the DRFT trustees clearly sought to use the legal process provided for companies that may legitimately be rescued, for an ulterior purpose – to thwart the winding-up proceedings and the consequences for the De Robillards that may arise therefrom.
In the circumstances, the SCA held that “the conduct of the DRFT trustees and PFC is so tainted with impropriety that this Court must use the power it has to ‘safeguard the integrity of its process” and as such the use of the power of the SCA to non-suit the DRFT trustees was warranted. The SCA further stated that the “ill-fated application should not have been entertained by reason of its use in a scheme of abuse.”
In conclusion, the Court held that because the DRFT trustees were non-suited, the doomed business rescue application was not ‘made’ as envisaged in s 131(6). The moratorium therefore did not come into operation and as such, there was no impediment to the winding-up proceedings.
On the basis of the above analysis, the SCA held that (1) the DRFT trustees were non-suited in bringing a business rescue application; and (2) the Pretoria High Court’s decision to grant a final order of liquidation was unassailable.
Accordingly, where the business rescue process is, through a disingenuous application, abused or manipulated by a company as a means of procuring immunity from its liability to creditors, a court is empowered to exercise its discretion to non-suit the litigant.
In other words, our courts will refuse to entertain the application at all where the process is used to delay inevitable liquidation (or winding-up) or to otherwise protect those behind the operations of the company from accounting to their creditors. The abusive litigant will therefore not be permitted to vindicate their right to utilise the business rescue process in a court of law.
The judgment reinforces the role of our courts in upholding the integrity and fairness of the winding-up process, by declining to entertain business rescue applications tainted with impropriety and launched solely to delay a winding-up application, enquiries into the stewardship of the company by those who operated it, and payment of the company’s tax liabilities.
This is bound to bring a measure of certainty (and relief) to beleaguered creditors that have had to navigate similar improper business rescue applications whilst attempting to enforce their rights
and recover sums due to them.