Business Rescue vs Liquidation

By Dhahini Naidu | Director

Does a rescue filing stop a provisional winding-up order?

What happens where a business rescue application is filed after a liquidation application has already been argued, but before judgment in the liquidation matter is delivered?

A KwaZulu-Natal High Court matter in Skema Holdings (Pty) Ltd (in provisional liquidation) and Others v Worner and Another, heard together with the related Inkwazi Trust matter, had to evaluate whether a provisional liquidation order granted on 30 May 2025 was valid or whether it was a nullity because a business rescue application had been delivered on 31 March 2025, after the liquidation hearing but before judgment. The court ultimately held that the provisional liquidation order was valid, that it was not a nullity for want of jurisdiction and that the provisional liquidators were entitled to seek relief to perform their duties.

Section 131(6) of the Companies Act

The dispute turned on section 131(6) of the Companies Act 71 of 2008 which provides that if liquidation proceedings have already begun by or against a company when a business rescue application is made, the business rescue application suspends those liquidation proceedings until the court has adjudicated the rescue application, or until the rescue proceedings end if business rescue is granted.

The real fight in this case was over what “liquidation proceedings” means in that section. The directors and shareholders argued for a broad interpretation. On that approach, once the business rescue application was filed, all liquidation steps were suspended, including the court’s later delivery of the provisional liquidation judgment. They argued that the order granted after that point was therefore void and that the provisional liquidators had no lawful standing.

The provisional liquidators argued for a narrower, but practically important, interpretation. They contended that section 131(6) suspends the winding-up process in the sense of realising and distributing assets but does not nullify the winding-up order itself. In their view, the company remains in provisional liquidation, the provisional liquidators remain appointed unless and until set aside and their duty to preserve and secure assets remains in place while the business rescue application is dealt with.

The court agreed with the provisional liquidators. Referring to authorities including Richter, GCC Engineering and Southern Sky, the court accepted that “liquidation proceedings” in section 131(6) refer to the winding-up process after a winding-up order, including the realisation of assets and payment of creditors, rather than the pre-order court process leading up to judgment. In other words, the section suspends continuation of the winding-up process but it does not automatically invalidate the order placing the company in liquidation.

The court also rejected the argument that jurisdiction had disappeared merely because the business rescue application had been filed before judgment was delivered. It held that jurisdiction is generally determined when proceedings are instituted and, once established, continues to the end of the case. At most, the directors’ complaint was really that the court had erred in handing down judgment after being notified of the rescue application. If that was their complaint, the proper route was rescission or appeal, not simply treating the order as if it did not exist.

First things first

That part of the judgment is particularly important in practice. Parties sometimes assume that once a business rescue application is launched, everything in the liquidation process freezes in a way that allows directors or others to carry on as before. This judgment is a reminder that this is dangerous territory. A court order is binding until it is properly set aside, and provisional liquidators appointed by the Master are not lightly ignored.

The court went further and confirmed that the Master’s appointment of the provisional liquidators stood until set aside. It found that they had locus standi to bring the application before court and to seek relief preventing interference with their statutory duties to recover and preserve the company’s assets, books and records. The directors were interdicted from obstructing them, and the related application seeking to have the provisional liquidation order declared invalid was dismissed with costs.

Practical implications

For companies and trusts dealing with financial distress, the judgment is a useful warning against over-reading section 131(6). Filing a business rescue application may suspend aspects of the winding-up process, but it does not necessarily erase what has already happened in the liquidation proceedings, and it does not entitle stakeholders to disregard a provisional winding-up order or the authority of provisional liquidators.

For directors, shareholders and creditors, the practical lesson is that timing, procedure and forum matter. If there is a serious concern that a liquidation order should not stand because of a pending business rescue application, that concern must usually be addressed through the proper procedural mechanisms, rather than by assuming the order is automatically void.

For liquidators and those advising them, the judgment offers support for the proposition that the office of provisional liquidator remains effective unless and until a court says otherwise, and that the duty to preserve assets remains central even while the business rescue process plays out.