Business rescue proceedings in South Africa

This article considers the meaning of business rescue and provides some recent interesting cases on business rescue proceedings.

(Please note that you should refer to your Study Guide for the precise scope of the Corporate and Business Law syllabus on business rescue proceedings.)

The meaning of business rescue

Please see 'Related links' for an article dealing with the business rescue provisions (sections 128–154) brought about by the Companies Act 71 of 2008.

It was stated there that the idea behind business rescue proceedings is to restore a company to a profitable entity or, if that is not possible, to secure a better return for the creditors, and to avoid liquidation. Business rescue does not necessarily entail a complete recovery of a company in the sense that the company will have regained its solvency, its business restored and its creditors paid. Sometimes a business rescue process can result in a management buy-out or a takeover of the distressed company (see Cassim et al, p863).

‘Business rescue’ is defined in section 128(1)(b) of the Act as follows:

b) ‘business rescue’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

(i) the temporary supervision of the company, and of the management of its affairs, business and property

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and

(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

Since the enactment of the Companies Act, many cases have been heard on business rescue proceedings. This article will highlight a few significant ones, indicating the most important points made by the judges.These cases are categorised according to:

  • the commencement of business rescue proceedings and liquidation
  • moratorium and lawful possession, and
  • the business rescue practitioner.

Commencement of the proceedings and liquidation

Business rescue proceedings are commenced in one of two ways, voluntarily by way of a board resolution with a majority vote or an affected person may also apply to a court at any time for an order placing the company under business rescue proceedings. This is dealt with in section 131(1). This may even be possible if the company is under liquidation proceedings. Section 131(6) of the 2008 Companies Act provides as follows:

 (6) 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

In Knipe & another v Noordman NO & others 2015 (4) SA 338 (NCK) the court had to decide the ambit of section 131(6) of the 2008 Companies Act, referred to above. At issue was the definition of ‘liquidation proceedings’. The question was whether it relates to pending liquidation proceedings, or whether it actually includes the process of winding-up after a final liquidation order has been issued. The court followed the judgment in Richter v Bloempro CC & others 2014 (6) SA 38 (GP). Richter v Bloempro CC & others was, however, overturned on appeal in Richter v ABSA Bank Ltd 2015 (5) SA 57 (SCA), which would also have the effect that the judgment in Knipe v Noordman would not reflect the correct position. Van der Merwe & others v Zonnekus Mansion (Pty) Ltd (in liquidation) & others [2015] 3 All SA 659 (WCC) followed Richter v Absa Bank Ltd on the basis of the stare decicis doctrine (para [14]) but respectfully differed from that judgment (para [17]) and preferred the judgments in Molyneux & another v Patel & others (14618/2014) [2014] ZAWCHC 191 (27 November 2014) which was not referred to in Richter v Absa Bank Ltd, and the judgment of the court a quo in Richter v Bloempro CC & others 2014 (6) SA 38 (GP).

The current position, and which should be followed, is therefore the position as set out by the Supreme Court of Appeal in Richter v Absa Bank Ltd. This case dealt with whether or not it is possible to apply for business rescue under section 131 of the 2008 Companies Act, after a final liquidation order has been granted against the company in question. Section 131(1) and (6) are relevant. An affected person can apply to court for an order placing a company under supervision and commencing liquidation proceedings. Sub-section (6) provides for the suspension of liquidation proceedings where they have already commenced at the time of the business rescue proceedings (para [1]).

The Supreme Court of Appeal held that it is not clearly indicated in the Act that ‘liquidation proceedings’ refer solely to (legal) proceedings leading up to a final winding-up order (para [8]). It held that after a final liquidation order, a company is not ‘stripped of its original status’, but rather continues to exist with the control of its affairs being transferred from the directors to the liquidators (para [10]). Also, when one considers the actual purpose or aim of business rescue proceedings it is clear that they are intended to be a flexible process that should aim to extend the lifespan of a company. A company’s position can still improve radically after a final liquidation order has been granted – eg, it could be awarded a contract for which it earlier submitted a tender (para [15]). ‘Legal proceedings’ is therefore interpreted not only as the formal legal process (application etc), but also the process of liquidation after an order was granted.

Absa expressed concern that a liberal interpretation of section 131(1) may have negative results for the liquidation process, for example, repetitive disruptions and uncertainty. Although these concerns are valid, the court held that they do not justify a restrictive approach as the court can still dismiss any business rescue application that is not in good faith or genuine (para [16]). It therefore appears that bona fides is now an additional ground that the court may consider under section 131(4), when hearing an application to commence business rescue proceedings.

The court concluded that there is no sensible justification for drawing a definite line between pre-, post-, and final liquidation proceedings where there is a prospect of a successful business rescue (para [17]). The reference to bona fides is, however, unclear as neither against what criteria it will be measured, nor its exact scope are clear. The appeal was accordingly upheld.

Moratorium cases

The first important consequence of business rescue proceedings is the general moratorium which entails a freeze or stay on any legal proceedings (s 133(1)) or executions against the company. There is also a moratorium on the disposal of a company’s property (s 134). A company may only dispose of property if it is in the ordinary course of business or it is a bona fide transaction at arms’ length for fair value, approved in advance and in writing by the business rescue practitioner or it is a transaction that is part of an approved business rescue plan.

  • JVJ Logistics (Pty) Ltd v Standard Bank of South Africa Ltd and others 2016 (6) SA 448 (KZD) dealt with the moratorium on legal proceedings provided for in section 133, referred to above. Section 133(1) provides, specifically, that ‘During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum….’

    In this case the question was whether the requirement of ‘lawfully in possession’, as provided for in section 133, was satisfied. The appellant bought a vehicle in terms of an instalment agreement from the first respondent. It fell into arrears with payment of the instalments and the first respondent cancelled the agreement and got an order for immediate return of the vehicle. The appellant was subsequently placed under business rescue. The appellant needed the vehicle for his business and brought this application restraining the first respondent from recovering the vehicle from it. The appellant based its claim on the moratorium in section 133 saying it justifies an order for an interdict against enforcement of the order of return. In terms of the moratorium the court held that the possession must also be lawful in the ‘civil’ sense. The moratorium will thus not apply as the contract was cancelled, and with it therefore the right of the company to use it. The applicant was therefore not entitled to an order preventing enforcement of the order to return the vehicle (para [51]).

  • In Kythera Court v Le Rendez-vous Cafe CC and another 2016 (6) SA 63 (GJ) an order of eviction was sought on the ground that the lease agreement between the parties had been cancelled and the lease had thus expired. The applicant was a partnership trading as a property rental firm and the first respondent was a café in Bedfordview, which close corporation was placed under business rescue on 2 December 2015. The applicant cancelled the lease agreement on 7 March 2016 but the first respondent refused to vacate the premises. The court held that the ambit of the moratorium was a matter of interpretation rather than an absolute bar on instituting legal proceedings against a company in business rescue. The phrase ‘in relation to property belonging to the company, or lawfully in its possession’ limited the reach of the moratorium and rendered it inapplicable to legal proceedings or enforcement action in relation to property belonging to entities or persons other than the company in business rescue or in relation to property that is unlawfully possessed by the company. Proceedings for repossession or attachment of property in the unlawful possession of a company in business rescue should thus be permissible (para [9]). An order for leave sought by the applicant was thus not necessary as the general moratorium does not extend to legal proceedings for ejectment where a lease has been validly cancelled and the company in business rescue is an unlawful occupier (para [16]).

  • In Southern Value Consortium v Tresso Trading 102 (Pty) Ltd and others 2016 (6) SA 501 (WCC) a company failed to pay rent for the premises it occupied causing the owner-landlord to cancel the lease and begin proceedings for ejectment. The company was subsequently put into business rescue and the practitioner raised the defence that the proceedings were barred by the moratorium in s 133(1). The court held that the owner’s cancellation of the lease meant that the property was no longer in the lawful possession of the company and this is a requirement of the operation of the moratorium in s 133(1). The owner was thus not barred from proceeding and the ejectment was ordered.

Thus, on ‘lawful possession’ in the context of section 133(1):

  • JVJ Logistics (Pty) Ltd v Standard Bank of South Africa Ltd and others 2016 (6) SA 448 (KZD): the moratorium will not apply if the company is not in ‘lawful possession’. This includes ‘civil possession’.

  • Kythera Court v Le Rendez-vous Cafe CC and another 2016 (6) SA 63 (GJ): the general moratorium does not extend to legal proceedings for ejectment where a lease has been validly cancelled and the company in business rescue is an unlawful occupier.

  • Southern Value Consortium v Tresso Trading 102 (Pty) Ltd and others 2016 (6) SA 501 (WCC): the moratorium will not apply if the company is not in ‘lawful possession’.

The business rescue practitioner

The business rescue practitioner supervises and advises management and has complete control of the company in the place of the board of directors (s 140(1)(a)). The practitioner may be appointed by the board of directors, if commencement happened by way of a board resolution. If proceedings commenced by way of a court order, then the court will appoint a practitioner on an interim basis. This is then subject to ratification by the holders of the majority of the independent creditors’ voting interests at the first meeting of creditors (s 131(5) and 147(1)).

The practitioner needs to have the relevant professional and practical experience. The relevant qualifications are dealt with in section 138(1)(a)-(f).

The practitioner can only be removed from office by way of a court order based on any one of the six grounds set out in section 139(2)(a)-(f). Grounds of removal include: incompetence or failure to perform duties, failure to exercise a proper degree of care and engaging in illegal acts.

The practitioner’s remuneration can be determined by way of an agreement between the practitioner and the company or it can be determined by way of a resolution of creditors or in terms of a tariff laid down in statute (s 143(1)). A practitioner may also negotiate an additional contingency fee.

Murgatroyd v Van Den Heever & others NNO 2015 (2) SA 512 (GJ) was an application by the business rescue practitioner for declaratory relief confirming his entitlement to the reimbursements of expenses incurred and disbursements made to service providers whom he engaged to assist during the business rescue proceedings (para [1]). The point at issue was whether certain reimbursements qualified as expenses under regulation 128(3). The liquidators argued that the practitioner must perform their functions personally, and has no authority to delegate these functions to other outside or professional people (para [11]). This case is important as it confirmed that the practitioner takes over full management control of the company from the board and pre-existing management (para [16]). The control of the business rescue practitioner would therefore seem to be more than supervision, as described in the definition of ‘business rescue’ in section 128(1) (see Henochsberg below under ‘further reading’ on this issue).This case also confirmed the wide powers expressly given to a practitioner in terms of the Act, but also those by implication if one has regard to the nature of his or her powers and broad functions and duties. Lastly, it confirmed that no provision is made for the taxation of the practitioner’s fees (para [4]). Henochsberg states that considering the rather liberal hourly and maximum daily tariff to which the practitioner is entitled, it seems unwise not to provide for the amounts claimed to be scrutinised by an independent party in order to ensure that there is no abuse in the form of practitioners claiming excessive fees.

In African Banking Corporation of Botswana Ltd v Kariba Furniture manufacturers (Pty) Ltd & others 2015 (5) SA 192 (SCA) the court also commented briefly on the duty of a practitioner. A practitioner must comply with high professional and ethical standards. As officers of the court, they have the same duties and liabilities as directors as set out in s 140(3) of the 2008 Companies Act. It is the duty of the practitioner to conduct a careful assessment of the affairs of the company and to prepare a plan that adequately reflects its prospects (para [35]). A practitioner must act objectively and impartially in the conduct of business rescue proceedings (para [38]).

After reading this article you must make sure that you are able to:

  • explain business rescue proceedings in general, and 
  • have a general idea of recent business rescue cases.

Further recommended reading for those who wish to develop their knowledge of this area includes:

  • Delport, PA et al Henochsberg on the Companies Act 71 of 2008 (Lexis Nexis), the commentary on sections 128–154.
  • Delport PA The New Companies Act Manual (2011) (Lexis Nexis)
  • Cassim FHI et al Contemporary Company Law (2012) (Juta)
  • Delport & Esser ‘Corporate Law’ in Annual Survey of South African Law (2015 and 2016) (Juta)

Written by a member of the Corporate and Business Law examining team