A relevant ruling in the Steinhoff case gives welcome clarity on the status of insolvent external companies in South Africa

The recognition and incorporation of external companies is provided for in South African legislation.  External companies were recognized in the Companies Act 61 of 1973 (the 1973 Act) and this recognition was continued in the Companies Act 71 of 2008 (the 2008 Act).  The question whether a South African court has the necessary jurisdiction to bring about the winding-up of an external company has important consequences for foreign-registered entities, especially large multinational corporations operating in our jurisdiction. 

The question recently came to the fore in the Western Cape Division of the High Court in the case of AJVH Holdings and Others v Steinhoff Int Holdings and Other (the Steinhoff case). 

Although this was partly addressed in the Supreme Court of Appeal (SCA) judgment of Sackstein NO v Proudfoot SA (Pty) Ltd, which dealt with the position in terms of the 1973 Act, in the recent Steinhoff case Slingers J was called upon to consider a similar question, following the coming into force of the 2008 Act.  The Court was, inter alia, asked to determine whether an external company can be considered as a "company" in terms of the applicable definition found in the 2008 Act, read with the remaining provisions of the 1973 Act. It is worth noting here that, despite its repeal, certain transitional arrangements pertaining to winding-up and liquidation found in the 1973 Act still apply to insolvent companies by virtue of Schedule 5, Item 9 of the 2008 Act. 

Summary of facts

In the Steinhoff case, certain contingent creditors (the Applicants) of Steinhoff International Holdings N.V (the Respondent or Steinhoff) brought an application for its provisional winding up. This application was opposed by Steinhoff, and various Financial Creditors (FC) and the Dutch Administrators (DA) (the Intervening Parties) intervened and opposed it. In the intervention and opposition application, the court's jurisdictional competence to wind up Steinhoff as an external company was challenged - the only aspect of the judgment discussed here. 

The Companies Acts of 2008 and 1973

To decide whether it had jurisdiction, the Court had to determine whether the applicable definition of "company" would be made with reference to either section 1 of the 2008 Act or section 337 of the 1973 Act.

In terms of section 337 of the 1973 Act, a "company" was defined to include "…a company, external company and any other body corporate…" (our emphasis), while section 1 of the 2008 Act did not provide for an external company in its definition of a "company".

From a plain reading of these definitions, it is clear that the 1973 Act considers a "company" to include an external company, but the 2008 Act does not. This explains why the court in the Sackstein case dealt with the definition of a "company" in the manner it did in 2003. Since the 2008 Act came into force on 1 May 2011, the question would need to be revisited, given that the 2008 Act departed from the definition used by its antecedent legislation.

Slingers J essentially had to interpret the transitional arrangements found in Schedule 5, Item 9 and what impact, if any, they would have on determining which definition of "company" would apply under the 2008 Act when it came to the question of the winding-up of an insolvent external company. (The Court accepted that, for the purposes of presenting argument on the question of jurisdiction, it would be accepted that Steinhoff was commercially insolvent).

Interpretations of the Applicable Companies Act

The arguments advanced by Steinhoff and the Intervening Parties challenging the Court's jurisdiction were that the remaining provisions of Chapter 14 of the 1973 Act only applied to companies as defined in the 2008 Act, and which are insolvent. They argued that the provisions of section 337 could not be used to change the definition of a company as it exists in the 2008 Act and that, if the Applicants failed to show that Steinhoff was a company in terms of the 2008 Act, then the Court had no jurisdiction to wind it up. They essentially chose to read Item 9(1) of schedule 5 as follows:

"Despite the repeal of the 1973 Act, until the date determined in terms of sub-item (4), Chapter 14 of the 1973 Act continues to apply with respect to winding-up and liquidations of companies duly defined in terms of the 2008 Act, as if the 1973 Act had not been repealed subject to sub-items (2) and (3)."

The Applicant's counter-argument was that Chapter 14 of the 1973 Act had to be applied in its entirety, including its definitions. They submitted that Item 9(1) of schedule 5 could also be read as follows:

"Despite the repeal of the 1973 Act, until the date determined in terms of sub-item (4), Chapter 14 of the 1974 Act continues to apply under the 2008 Act with respect to the winding-up and liquidations of companies, as if the 1973 Act had not been repealed subject to sub-items (2) and (3)"

The Court's Findings

In making its determination, the Court applied certain trite interpretation principles detailed by the SCA, namely that when embarking upon an interpretative exercise the reader must apply an objective approach, considering the language of the provision, reading it in context, and having regard to its purpose and the background to its preparation and production. The interpretation must be one of ordinary grammatical meaning unless that would result in an absurdity.

The Court favoured the Applicant's argument and believed it was consistent with the mandate to properly contextualise the statutory provisions when they are applied. After applying the principles provided by the SCA, the Court held that the definition under section 337 of the 1973 Act was applicable, because favouring the 2008 Act definition would render section 337 of the 1974 Act unnecessary. It would have the result of repealing section 337 of the 1973 Act, which was not the legislature's intention. The Court found that, if it were the legislature's intention, the intention would have been stated clearly and unequivocally when settling on the contents of Schedule 5.

Accordingly, it was found that a South African court does have jurisdiction to wind up an external company.

Conclusion

Although the judgment of the Western Cape High Court might not be binding on other divisions of the High Court, we believe that the correct interpretation was given to the applicable legislation and it is unlikely that a court in a different jurisdiction, when faced with similar facts, would come to a different decision.  From a practical perspective, the judgment makes the most commercial sense, especially where external companies hold significant assets in South Africa and face hard times.  It is in the interests of creditors of an insolvent company (whether local or external) that a liquidator familiar with the rights of creditors in this jurisdiction, as well as the South African insolvency law framework, is empowered to take immediate control of the assets and ensure equitable treatment for all stakeholders. 

The judgment is helpful in giving more clarity on the status of insolvent external companies in South Africa. It gives the shareholders and boards of these companies added reason to consider the impact of our insolvency legislation when it comes to the operation of such companies in South Africa.

A point of interest noted in Steinhoff's and the Intervening Parties' arguments discussed above is their reliance on the case of Cooperativa Muratori & Cementitsi and Other v Companies and Intellectual Property Commission and Other (the CMC Case), which held that it was not possible to place an external company under business rescue, as it was not included in the definition of company in the 2008 Act. Their argument was possibly misplaced, because there is no ambiguity when it comes to business rescue, a regime which did not exist prior to the 2008 Act.  As such, the question of the impact of surviving transitional arrangements from Chapter 14 of the 1973 Act did not have to be answered by the SCA in the CMC Case. 

Curiously, this effectively means the legislature has allowed insolvent external companies to be wound up by South African courts, yet the same does not apply to placing an external company in business rescue. This is especially surprising as an external company could be placed under judicial management, the rarely utilized precursor to business rescue under the 1973 Act.  In addition, the Companies Amendment Bill 2021 does not amend the 2008 Act to include an external company in the definition of a company. Possibly we can assume that it is not the legislature's intention to make business rescue available as a relief to external companies under financial distress.  This might result in an inequitable treatment of external companies, and by extension their various stakeholders, in the South Africa context.  Would a financially distressed external company be refused an opportunity to restructure its affairs and then be forced to enter liquidation, to the detriment of various parties?  As matters stand, this appears to be the case.

Written By Nomfundo Nkosi, Associate, Phylicia Naidoo, Partner & Paul Crosland, Partner at Webber Wentzel