ABSA Bank Ltd v Rhebokskloof (Pty) Ltd and Others 1993 (4) SA 436 (CPD).

ABSA Bank Ltd v Rhebokskloof (Pty) Ltd and Others 1993 (4) SA 436 (CPD).

The case involves ABSA Bank Ltd (the applicant) seeking the final liquidation of Rhebokskloof (Pty) Ltd (the first respondent), the sequestration of the estates of the Key Family Trust (the second respondent), which owned all the shares in Rhebokskloof, and the sequestration of the estate of Mr. Mervyn Roderick Key (the third respondent), a trustee of the Trust and a director of Rhebokskloof.

Rhebokskloof owned a valuable farm, but it had an overdraft with ABSA Bank exceeding R3.5 million, which had been called up and remained unsatisfied. Additionally, Rhebokskloof owed other creditors approximately R1.5 million. Despite the value of the farm potentially being between R10 million and R35 million, it was not considered a liquid asset as it had been on the market for some time without a sale.

Mr. Key's personal financial situation was also precarious. He had a personal overdraft exceeding R300,000, a suretyship obligation for Rhebokskloof's overdraft, and other substantial debts, including a liability to Tollgate Holdings Ltd (in liquidation) and a suretyship obligation for Parmalat Investments (Pty) Ltd. His assets, when fairly valued, did not appear to cover these liabilities.

The Key Family Trust's primary asset was its 100% shareholding in Rhebokskloof. However, given Rhebokskloof's financial difficulties and the fact that the shares' value was tied to the company's uncertain future, the Trust's asset was not readily realizable to cover its suretyship obligations.

The court had to consider whether Rhebokskloof was commercially insolvent, whether Mr. Key and the Trust were actually insolvent, and whether the sequestration of their estates would be to the advantage of their creditors. The court also had to address various legal arguments, including the authority of directors after a provisional liquidation order, the validity of suretyship obligations, and the appropriateness of a "group" approach to insolvency given the interconnectedness of the respondents.

In this article I only discuss the insolvency of the company, and not the insolvency of Mr. Key and the trust. That is for another day! I also touch on the duties of the directors post a provisional winding-up of a company.

The court considered whether directors retain any powers after a provisional liquidation order. It was argued that directors become functus officio and cannot oppose a final winding-up order. The court referred to case law that distinguished between provisional and final liquidation orders, holding that directors retain some residuary powers after a provisional order, including the right to oppose the final order. The court found that this residuary power extends to the appointment of alternate directors for the specific purpose of opposing the final liquidation, rejecting the argument that such appointments were beyond the directors' authority.

 The court applied the test for commercial insolvency, which considers whether a company has liquid or readily realizable assets to meet its liabilities as they fall due in the ordinary course of business. Despite the high valuation of Rhebokskloof's farm, the court found that the asset was not liquid or readily realizable, as evidenced by its failure to sell for several months. The court concluded that Rhebokskloof was unable to pay its debts and was commercially insolvent, warranting final liquidation.

Ratio Decidendi:

Director's Authority Post-Provisional Liquidation:
 The court referred to the principle that directors retain certain residuary powers after a provisional liquidation order. This was supported by case law such as O'Connell Manthe & Partners Inc v Vryheid Minerale (Edms) Bpk 1979 (1) SA 553 (T); Ex parte G Pagan Enterprises (Pty) Ltd 1983 (2) SA 30 (W); and Wolhuter Steel (Welkom) (Pty) Ltd v Jatu Construction (Pty) Ltd (in Provisional Liquidation) 1983 (3) SA 815 (O), which contrasted with the earlier case of Attorney-General v Blumenthal 1961 (4) SA 313 (T).

Commercial Insolvency:
The court applied the test for commercial insolvency, which assesses whether a company can meet its liabilities as they fall due with liquid or readily realizable assets. The court cited Rosenbach & Co (Pty) Ltd v Singh's Bazaar (Pty) Ltd 1962 (4) SA 593 (D) at 597E-F, which discusses the discretion of the court when a company's assets exceed its liabilities, but it cannot pay its debts.