Payments During Business Rescue can still be Clawed Back

By Dhahini Naidu | Director

When a company enters business rescue, creditors often focus on the immediate commercial question. Can the company keep trading and can payments still be accepted?

A Western Cape High Court judgment, now left undisturbed after the Supreme Court of Appeal dismissed the application for leave to appeal, gives creditors a clear warning. Business rescue does not necessarily protect payments made after a winding-up application has already been presented.

In Van den Heever N.O. and Another v Merchant Commercial Finance 1 (Pty) Ltd t/a Merchant Factors, the liquidators of JP Kruger Rand Deals sought to recover payments made by the company after a creditor had launched proceedings to set aside its business rescue resolution and place it in liquidation.

The question was whether sections 348 and 341(2) of the Companies Act 61 of 1973 still applied where liquidation followed failed business rescue proceedings under the Companies Act 71 of 2008. The Court confirmed that they do.

Section 348 deems the winding-up of a company to commence when the winding-up application is presented to Court. Section 341(2) provides that dispositions of company property made after the commencement of winding-up are void, unless a Court orders otherwise.

That meant the relevant date was not the later date on which the business rescue resolution was set aside or the winding-up order granted. The critical date was when the winding-up application was presented.

Merchant Factors argued that the provisions should not apply or that they should only apply from the date business rescue formally ended. The Court rejected that argument. It also refused to validate the payments on the basis that they were made in the ordinary course of business or in good faith.

The fact that Merchant Factors was aware of the winding-up proceedings counted against it. The payments were also not post-commencement finance and did not benefit the body of creditors as a whole.

The result was significant. Payments of more than R22 million were declared void and had to be repaid to the liquidators, with interest. The counterapplication to validate the payments was dismissed.

Practical Implications

For creditors, financiers and businesses dealing with distressed companies, the lesson is now clearer. Once a winding-up application has been presented, payments received from the company may later be challenged by liquidators, even if the company is still trading or remains in business rescue at the time.

Creditors should not assume that business rescue creates a safe zone for payment. They should check whether any liquidation or winding-up proceedings have been launched, understand the basis on which payment is being made, and obtain advice before accepting significant payments from a financially distressed company.

For liquidators, the judgment confirms a strong recovery route where payments were made after the winding-up process had effectively begun.

The decision also reinforces the purpose of these provisions. They protect the collective body of creditors and prevent one creditor from receiving an unfair advantage after liquidation proceedings are already in motion.

In ‘distressed company’ matters, timing is not a technicality. It may determine whether a payment can be kept, or whether it must be paid back.