Business rescue and the moratorium on legal proceedings

June 1st, 2012
x
Bookmark

By Hendrik Beukes

This article considers the meaning and effect of the moratorium placed on legal proceedings when a company has launched business rescue proceedings in terms of the new Companies Act 71 of 2008 (the Act). In doing so, it will consider recent case law on how courts are treating the moratorium. The moratorium is of importance to creditors (and attorneys acting on their behalf) as it places a temporary hold on the enforcement of a creditor’s rights against the debtor company.

The business rescue mechanism

The legislature indicated in s 7(k) of the Act that one of the Act’s purposes is to ‘provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders’. The Act creates a mechanism for a company in financial difficulty to be rescued and reorganised and thereby avoid it going into liquidation. The idea behind business rescue is that a company in financial difficulty is worth more as a going concern than if it is liquidated and its assets sold. The concept of ‘rescue’ means a reorganisation of the company to restore profitability and avoid liquidation (see FHI Cassim, MF Cassim, R Cassim, R Jooste, J Shev and JL Yeats Contemporary Company Law 2ed (Cape Town: Juta 2012) at 861).

‘Business rescue’ is defined in s 128(1)(b) in chapter 6 of the Act as ‘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’.

One of the most important effects of business rescue proceedings is that it provides for a temporary moratorium on the rights of creditors against the company.

The moratorium on legal proceedings

The legislature provided for a moratorium on legal proceedings in s 133 of the Act, titled ‘General moratorium on legal proceedings against company’. This section provides:

‘133(1) 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, except –

(a) with the written consent of the practitioner;

(b) with the leave of the court and in accordance with any terms the court considers suitable;

(c) as a set-off against any claim made by the company in any legal proceedings, irrespective of whether those proceedings commenced before or after the business rescue proceedings began;

(d) criminal proceedings against the company or any of its directors or officers;

(e) proceedings concerning any property or right over which the company exercises the powers of a trustee; or

(f) proceedings by a regulatory authority in the execution of its duties after written notification to the business rescue practitioner.

(2) During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.

(3) If any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time must be suspended during the company’s business rescue proceedings.’

This provision clearly has implications for creditors who wish to enforce claims against a debtor company or for a company in financial distress that launched business rescue proceedings in order to obtain relief from the enforcement of creditors’ rights against it. The following discussion on case law relating to the application of the moratorium may be of assistance.

Case law and the moratorium on legal proceedings

The moratorium contained in s 133 of the Act applies when business rescue proceedings begin. Despite s 132 of the Act, titled ‘Duration of business rescue proceedings’, which sets out when business rescue proceedings begin, the courts seem to find it difficult to determine this point. In the matter of Investec Bank Ltd v Bruyns (WCC) (unreported case no 19449/11, 14-11-2011) (Rogers AJ) Rogers AJ stated, at para 12:

‘The answer to this question is not free from difficulty. It is an important one that will no doubt have to be decided in due course by our courts. When that question arises for decision it will also need to be considered whether – if business rescue proceedings are indeed found to commence at the date of the launching of the application – the said result ensues forthwith on the launching of the application or only retrospectively after the making of a court order. In the present case, and for reasons that will become apparent, it is unnecessary for me to decide these questions. I am willing to assume in the defendant’s favour that business rescue proceedings in respect of [the two companies in liquidation] have indeed commenced as contemplated in s 132(1)(b).’

Although Rogers AJ was not prepared to decide the point regarding the commencement of business rescue proceedings, I submit that, in light of s 132, his assumption was the correct one.

Rogers AJ thereafter had regard to the moratorium aspect and specifically to s 133(2), which deals with guarantees and sureties given to creditors by the financially distressed company. The judge distinguished between s 133(1) and (2). According to Rogers AJ, at para 16: ‘Section 133(2) is so explicit that it is impossible to avoid its plain meaning. It refers to a surety (ie, a contract of suretyship) “by the company” and to its enforcement by another person “against the company”. In any event, there is in truth no tautology. Section 133(1) is a general provision and affords the company protection against legal action on claims in general except inter alia with the written consent of the business rescue practitioner or (presumably failing such consent) with the leave of the court. Section 133(2) is a special provision dealing specifically with the enforcement of claims against the company based on guarantees and suretyships, and stipulates that in such cases the claims against the company may be enforced only with the leave of the court.’

Rogers AJ refers to the moratorium and specifically to the question whether a defendant as surety can raise as a defence the statutory moratorium in favour of the distressed company against enforcement by a creditor against the surety. He states in para 18: ‘In my view, the statutory moratorium in favour of a company that is undergoing business rescue proceedings is a defence in personam. It is a personal privilege or benefit in favour of the company. As was stated in the [Standard Bank SA Ltd v SA Fire Equipment (Pty) Ltd and Another 1984 (2) SA 691] case (at 310E-F) the essence of a defence in rem is that the defence attaches to the claim itself in the sense that the defence (if upheld) shows that the claim against the principal debtor is invalid or has been extinguished or discharged. A defence in personam, by contrast, arises from a personal immunity of the debtor in respect of an otherwise valid and existing obligation. Clearly the moratorium afforded by s 133(1) falls into the latter class. The obligations of the company as principal debtor are not extinguished nor discharged and their validity is in no way impaired. … I thus conclude that the statutory moratorium in favour of [the two companies in liquidation] does not avail the defendant.’

The following observations may be made with reference to Rogers AJ’s remarks and findings –

  • business rescue proceedings can be raised by the financially distressed company itself as a defence against the enforcement of its creditors’ rights, but
  • a surety for such a financially distressed company who launched business rescue proceedings cannot use such business rescue proceedings as a defence against a claimant’s claim.

In addition, I submit that the moratorium on legal proceedings against a financially distressed company applies from the launch of business rescue proceedings and not from the date of the court order. The reason being that such a situation (if it only applies from the date of court order) would not be in accordance with the Act and this would also not be the position in the event that business rescue proceedings are launched by means of s 132(1)(a), where the company files a resolution with the Companies and Intellectual Property Commission to place itself under supervision in terms of s 129(3), as the legislature indicates that business rescue proceedings begin on the filing of a resolution.

Furthermore, not only may execution proceedings or enforcement action by creditors against the financially distressed company not be initiated, but even if such action had been initiated prior to the launch of the business rescue proceedings, it may not be commenced with and is ‘frozen’ (see Cassim et al (op cit) at 880) until written consent by the rescue practitioner or the court has been obtained. The same principle applies to owners of property whose property is in lawful possession of the financially distressed company (such as property in terms of lease agreements or property where a notarial bond has been given to a bondholder).

Conclusion

The business rescue mechanism as it appears in the Companies Act is a new addition to South African company legislation and the purpose behind it is also novel in that it offers an alternative route to the traditional one of liquidation. The moratorium on legal proceedings by creditors is a vitally important aspect in this mechanism as it allows the court to hear the business rescue application and it allows the business rescue practitioner to function effectively. Ultimately, it is up to the court to keep the purpose of business rescue proceedings in mind, as well as to give effect to the moratorium on legal proceedings to enable the business rescue application to be heard and the business rescue practitioner to function properly.

Hendrik Beukes BA (Stell) LLB (NWU) is an advocate and a member of the Cape Bar.

 

  • Last year the Law Society of South Africa (LSSA) made inquiries with the Companies and Intellectual Property Commission regarding a blanket application for the attorneys’ profession for its members to be accredited as business rescue practitioners in terms of s 138(1) of the 2008 Companies Act. The commission subsequently advised that it would not accept blanket accreditation for any specific profession at this stage.
  • The LSSA’s Legal and Development (LEAD) division launched a six-month advanced course in business rescue practice in 2012 as a joint initiative with Unisa. The course is aimed at professional people, including lawyers, legal advisers, auditors and financial advisers. Over 250 students registered for the first intake and registration for the second intake closes on 29 June 2012. For more information on this course, consult the LEAD website (www.LSSALEAD.org.za) or contact Bettie Lubbe at bettie@LSSALEAD.org.za or tel: (012) 441 4670.


This article was first published in De Rebus in 2012 (June) DR 34.