Beware the double edged sword in litigating with a company in business rescue

January 27th, 2016
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Chetty v Hart (SCA) (unreported case no 20323/2014, 4-9-2015) (Cachalia JA)

By Bouwer van Niekerk and Amy Parker

 

‘Caesar:

Danger knows full well,

That Caesar is more dangerous than he.

We are two lions litter’d in one day,

And I the elder and more terrible.’

The Plays of William Shakespeare

(Philidelphia: C and A Conrad & Co, 1809)

 

Two parties were involved in a dispute, each having a claim against the other. The one is an individual, the other a company. The parties elected to settle their dispute by way of arbitration proceedings. After evidence was led on both the claim and the counterclaim, but before hearing argument, the company was placed under business rescue. Thereafter, and unaware of the company’s new status, the arbitrator heard argument, and subsequently made his award.

Both parties were successful with their respective claims. However, the company’s claim was substantially more than that of the individual. During this time, the individual was also not made aware of the fact that the company was under supervision, nor informed thereof by the business rescue practitioner (BRP). When this fact was eventually brought to the individual’s attention, she launched an application to the High Court seeking that the arbitration award be reviewed and set aside. When launching the application, the company was no longer in business rescue; it was in liquidation. This application was unsuccessful. Dissatisfied with the outcome, the individual was granted leave to appeal the matter to the Supreme Court of Appeal (SCA).

These were the salient facts that appear from the judgment of Chetty v Hart (SAC) (unreported case no 20323/2014, 4-9-2015) (Cachalia JA). In this article, we will focus on three questions posed and answered by the SCA in this case and we will conclude by making some observational remarks on the rationale employed in the judgment in answering one of the questions posed.

1. How should the term ‘legal proceedings’ as used in s 133(1) of the Companies Act of 71 of 2008 (the Act) be interpreted?

In interpreting the term ‘legal proceedings’, the court, among others, took into consideration the language of the provision at issue, the language and design of the statute as a whole, as well as its statutory purpose. The court utilised the ordinary rules of grammar and syntax in order to interpret and give effect to the language employed in the provision. Where more than one meaning was attributable to a certain word, the court found that the more sensible and business-like meaning is to be preferred over the one with the contrary effect.

The court then contemplated the various definitions of legal proceedings provided for in legal dictionaries, international arbitration law and the Internet. The court found that, contextually dependent, the phrase ‘legal proceedings’ may be afforded a broad enough interpretation to include arbitration tribunals as provided for by the three aforementioned sources.

The court goes on to consider ‘legal proceedings’ in a wider context, by analysing other provisions of the Act, including ss 142(3)(b), 5(1), 7(k), 128(1)(b) and 133(1). But for ss 5(1) and 7(k) of the Act, which deals with the interpretation and application of the Act, the aforementioned sections all define and/or regulate business rescue proceedings, including the general moratorium placed on legal proceedings during business rescue and the relevant duties of the directors. According to s 142(3)(b), a director of a company in business rescue is obligated to assist the business rescue practitioner by providing details of –

‘any court, arbitration or administrative proceedings, including pending enforcement proceedings, involving the company’.

The court emphasised that one requires an understanding of the purpose of the provisions as they apply to business rescue proceedings. In doing so, the court observed that s 5(1) should be read with s 7(k). Section 5(1) of the Act directs that its interpretation and application must give effect to the purposes as stated in s 7. Section 7(k) in turn provides that one of the purposes of the Act is to ‘provide for the efficient rescue and recovery of financially distressed companies, in a manner that balance the rights and interest of all relevant stakeholders’.

The court continued its purposive interpretation by considering s 128(1)(b) of the Act. In terms thereof, the Act defines business rescue as proceedings, which facilitate the rehabilitation of a financially distressed company by providing for the temporary supervision and moratorium on the rights of claimants, and the development and implementation of a plan to rescue the company. The BRP must assess the adverse financial effects of a claim against a company. As such, a general moratorium on the rights of creditors is essential in order to achieve financial stability. Taking into consideration the ubiquitous use of arbitrations to resolve commercial disputes, the court found that it would be erroneous to exclude them from the ambit of s 133(1). It became apparent that an interpretation that included arbitrations within the meaning of ‘legal proceedings’ enabled s 133(1) to be read harmoniously with s 142(3)(b).

The court accordingly found that the phrase legal proceeding may, depending on the context within which it is used, be interpreted restrictively to mean court proceedings, or more broadly to include proceedings before other tribunals, including arbitral tribunals. The language employed by s 133(1) suggested that a broader interpretation be adopted, which is supported by the contextual indications in s 142(3)(b).

2. Is the failure by the individual to seek and obtain the BRP’s consent before continuing with the arbitration fatal to the outcome of the arbitration, and should it for this reason be invalidated?

The court answered this in the negative. It reasoned that the arbitrator derived his or her jurisdiction from the arbitration agreement, not the provisions of the Act. The provisions of the Act merely placed a statutory moratorium or procedural bar on a party (not the company) to institute or proceed with legal proceedings. It did not invalidate the proceedings. Put differently, s 133 of the Act did not affect the arbitrator’s jurisdiction to adjudicate a claim wherein one of the parties (the company) was in business rescue.

The rationale applied in coming to this conclusion stemmed from a proper interpretation of the relevant section of the Act. We surmise it thus:

  • Section 133(b) of the Act allows a creditor to seek leave of the court to institute legal proceedings against a company under supervision with or without first obtaining the consent of the BRP.
  • The fact that a creditor can seek such leave without first attempting to obtain the BRP’s consent shows that such consent cannot be an absolute bar instituting or proceeding with legal proceedings against a company in business rescue.
  • The section itself does not make provision for the lack of consent (or the lack of leave of the court, or any of the other exceptions mentioned in s 133) to cause the legal proceedings to be a nullity, as it does for example in s 129(5).
  • Moreover, it appears as if s 133(1) was enacted solely for the benefit of the company and the BRP. This is a defence in personam; a creditor has no locus standi to rely thereon. It is only the BRP that may waive compliance therewith.

3. Can the company continue with legal proceedings against an individual or legal entity while being under business rescue, while disallowing (through the BRP) the individual/legal entity to continue with his/her/its legal proceedings against the company?

Given what is surmised in bullet four above, yes, it can.

However, this does not mean that the creditor is proverbially and euphemistically left to navigate insalubrious waters without any manner of propulsion. In such circumstances, the creditor may still approach the court for the requisite leave to continue with the legal proceedings. ‘The creditor is also entitled, under s 133(1)(c) to set off a claim by the company in legal proceedings commenced before or during the moratorium.’ Section 133(3) furthermore suspends the period within which proceedings against the company is to be instituted. ‘The exercise of a creditor’s rights are therefore suspended during the moratorium, but this is balanced by the other protections afforded in the section itself’ (see para 45).

Observational remarks

As far as we can ascertain, our courts have not delivered a judgment wherein it had considered the circumstances under which a creditor will be allowed to institute or continue with legal proceedings against a company in business rescue where the BRP refused to consent thereto. It will be interesting to see how such a test is formulated. We submit, that in circumstances where the company is also pursuing a claim against the creditor in the same legal proceedings, such circumstances should persuade the court to allow the continuation of those legal proceedings. Should it not, it would offend the rules of natural justice and the audi alteram partem doctrine.

Bouwer van Niekerk BA (Law) LLB (Stell) Post Grad Dip Labour Law (UJ) Cert Business Rescue Practice (Unisa & LEAD) is an attorney and Amy Parker BCom (Law) LLB (Stell) is a candidate attorney at Smit Sewgoolam Inc in Johannesburg.

This article was first published in De Rebus in 2016 (Jan/Feb) DR 36.