The question that recently came before the Supreme Court of Appeal (SCA) in Southern Sky Hotel and Leisure (Pty) Ltd and Others v Southern Sky Food Enterprises (Pty) Ltd (617/2021) [2022] ZASCA 134 (13 October 2022) was whether, in such circumstances, the contract is invalid due to the application of section 131(6) of the Companies Act 61 of 2008 (Act).

Section 131(6) effectively states that the launching of a business rescue application suspends liquidation proceedings that have already commenced by or against a company until (i) the court has decided on the business rescue application; or (ii) if the business rescue application is successful, such proceedings have come to an end.

Background facts

In 1967, the Phalaborwa Mining Company established the Hans Merensky golf course. The golf course and surrounding land were later purchased by the Hans Merensky Country Club (Pty) Ltd, which developed it into a golf estate. The first appellant, Southern Sky Hotel and Leisure (Pty) Ltd (the company), in turn bought the estate and developed it into the Hans Merensky Hotel and Spa. Between 2003 and 2007 investors bought immovable property from the club and developed it into furnished bush lodges. The investors then entered into rental pool agreements with the club in terms of which the club had the right to lease out the bush lodges to the public. The company later took over the management of the rental pool agreements and assumed liability thereunder.

The first sign of trouble appeared when occupancy in the hotel dropped dramatically after the 2010 FIFA World Cup. By 2013, the company was in financial distress and unable to honour its obligations under the rental pool agreements.

Liquidation

From 2013, multiple attempts were made by the investors and other creditors to place the company in liquidation, but none succeeded until January 2020 (partially due to the filing and/or failure of numerous business rescue applications and proceedings). In January 2022 the Limpopo Division of the High Court finally placed the company under final liquidation due to its inability to pay its debts and its factual and commercial insolvency as envisaged in section 344(f), read with section 345(1)(c), of the Companies Act 61 of 1973.

Liquidators were appointed in February 2020, and in September 2020 their powers were extended to allow them to, among other things, dispose of the company’s movable and immovable property by public auction.

In November 2020, the liquidators resolved to put the company’s immovable property on auction, which was advertised to take place on 23 and 24 February 2021. On 1 December 2020 one of the company’s creditors launched another business rescue application, triggering the application of section 131(6) of the Act. This application was only enrolled for hearing on 11 March 2021, which was after the liquidator-driven auction was to take place. Southern Sky Food Enterprises (Pty) Ltd (Sky Food), applied for and was granted leave to intervene with this business rescue application.

Despite the pending business rescue application, the liquidators proceeded with the online auction for the sale of the company’s immovable property and the sale of its business as a going concern on 23 and 24 February 2021. Sky Food was represented at the auction, was the highest bidder, and concluded a sale agreement with the liquidators.

Later, however, Sky Food raised a concern over the validity of the auction and the sale agreement. The concern centred around the fact that both the auction and sale agreement had been concluded after the launching of the last business rescue application, which effectively suspended the liquidation proceedings. It thus launched an urgent application out of the Gauteng Local Division of the High Court, Johannesburg (High Court). The High Court declared the agreement invalid and set it aside. The decision was taken on appeal to the SCA.

Before the SCA

The question before the SCA was two-fold: first, whether there had been a valid business rescue application in terms of section 131(6) of the Act, and second, whether the agreement was invalid by virtue of section 131(6)’s provisions.

The court assumed, without deciding, that the business rescue application was properly made.

It held that although section 131(6) suspends the liquidation proceedings it does not suspend the legal consequences of a winding-up order. It is the latter which allows for the continuation of the realisation of the assets of the company in liquidation. The SCA therefore found that there was no indication in section 131(6)’s text, context or purpose which resulted in an intention to nullify agreements of sale concluded by the liquidator, pending business rescue proceedings. Section 131(6), said the court, does not suspend the appointment, office or powers of a liquidator; it only suspends the process of liquidation. Since the agreement in this case provided that the disposal would only take effect upon resolution of the business rescue application proceedings, there was no reason why the liquidators could not exercise their powers and conclude the sale agreement. However, because of section 131(6), the execution of the agreement was suspended pending the resolution or ending of the business rescue application or any subsequent business rescue.

The court thus concluded that the agreement had been valid, but its execution was suspended only until the suspension of the liquidation proceedings fell away.