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Court blocks business rescue abuse - delay tactics will not be tolerated
Ulterior motives disguised as good faith business rescue proceedings have become a growing concern in South African insolvency law. The introduction of the Companies Act, 2008 (2008 Act) was a significant shift, promoting business rescue as a preferred alternative to liquidation. However, courts have increasingly encountered cases where business rescue applications are used as a delay tactic, raising concerns about abuse.
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This article examines the key legal principles and implications from the recent reportable judgment in Globustarr Trading Co L.L.C. v Mayana Properties (Pty) Ltd handed down on 18 March 2025. The Johannesburg High Court in this case addressed abusive business rescue applications used to obstruct liquidation proceedings and clarified the interpretation of 'liquidation proceedings' under section 131(6) of the 2008 Act.
The applicant creditor approached the court in December 2021, seeking a final winding-up order against the respondent under section 346 of the Companies Act, 1973 (1973 Act) because the respondent could not pay its debts. Multiple delays prevented the timely hearing of the liquidation application. The court commented on one of these delays, the respondent’s significantly late answering of the affidavit, as "cynically designed to delay the adjudication of the liquidation application".
Less than a week before the liquidation application was set down to be heard, the respondent filed an interlocutory adjournment application, enclosing a separate business rescue application. The respondent sought to use the business rescue application to suspend the liquidation proceedings under section 347 of the 1973 Act or, alternatively, section 131(6) of the 2008 Act.
The court considered two key statutory provisions
Section 347(1) of the 1973 Act: provides that: "The Court may grant or dismiss any application under section 346, or adjourn the hearing thereof, conditionally or unconditionally, or make any interim order or any other order it may deem just…".
Section 131(6) of the 2008 Act states:
"If liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of subsection (1), the application will suspend those liquidation proceedings until-
(a) the court has adjudicated upon the application; or
(b) the business rescue proceedings end, if the court makes the order applied for."
The court had to determine whether the business rescue application was an abuse of process and, if so, whether the liquidation proceedings could continue despite section 131(6) of the 2008 Act.
Business rescue as an abuse of process
The court relied on the recent Supreme Court of Appeal (SCA) judgment in PFC Properties (Pty) Ltd v Commissioner, South African Revenue Service and Others 2024. In this case, the SCA held that if a party utilises the business rescue process for an ulterior purpose, such as to thwart winding-up proceedings, this stratagem subverts fundamental values of the rule of law, and a court thus has the power to non-suit the relevant party.
The SCA further clarified that since “the business rescue application was not 'made', as envisaged in section 131(6), the moratorium did not come into operation and did not suspend the winding-up proceedings. That being so, there was no impediment to the winding-up proceedings".
The High Court, after examining the substance (or lack thereof) of the business rescue application, and the respondent’s previous conduct, held that:
"(a) there is no defence to the liquidation application; (b) the business rescue application was brought cynically at such a time so as to have the maximum disruptive effect on the adjudication of the liquidation application; and (c) there is no merit in the business rescue application. The business rescue application is therefore an abuse, brought in the face of a sound liquidation application."
Having found that the business rescue application was an abuse, the court confirmed that section 131(6) did not apply and dismissed the adjournment application.
The interpretation of liquidation proceedings in section 131(6)
The court also clarified long-standing ambiguity regarding the meaning of 'liquidation proceedings' in section 131(6) of the 2008 Act. By referencing the PFC Properties, the court confirmed that 'liquidation proceedings' include both the post-order winding-up process and the liquidation application itself.
The court reasoned that when a business rescue application is found to be an abuse of process, it is deemed not to have been 'made' under section 131(6). As a result, the liquidation application remains unaffected and may proceed. The court specifically held that:
"If section 131(6) did not apply to a liquidation application, then the question as to whether an abusive application for business rescue suspends a liquidation application does not arise. In my view, PFC Properties is therefore binding authority for the proposition that 'liquidation proceedings' in section 131(6) includes an application for liquidation."
Liquidation procedure: Can a solvent external company be wound up in SA?
Julian Jones, Joon Chong, Caellyn Eedes and Rohan Baijnath 19 Nov 2021
This clarification is significant because it confirms that a bona fide business rescue application suspends a pending liquidation application under section 131(6). Litigants and courts must now carefully assess whether a business rescue application is being used for an ulterior purpose to delay a bona fide liquidation application.
The judgment sends a clear message to litigants seeking to misuse business rescue applications as a delay tactic. It reinforces the principle that courts will scrutinise the intent behind the business rescue applications and reject those brought in bad faith.
To deter future abuse, the court ordered de bonis propriis costs against the applicant in the business rescue application, meaning that the individual responsible for the application, not just the company, was personally liable for legal costs.
The Globustarr case judgment strengthens the integrity of business rescue proceedings while ensuring they are not exploited to stall liquidation. It clarifies the interpretation of section 131(6) and confirms that courts have the power to reject abusive business rescue applications.
For businesses, creditors, and legal practitioners, this ruling sets a clear precedent and reinforces the court’s role in safeguarding South Africa’s insolvency framework.
About Julian Jones, Caellyn Eedes & Liso Potwana
Julian Jones, Partner, Caellyn Eedes, Senior Associate & Liso Potwana, Candidate Attorney at Webber WentzelRelated
