Cutting the lifeline – The termination of business rescue proceedings

December 1st, 2013
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By Jakomien van Staden

Business rescue proceedings (BRPs) were introduced into South African law by ch 6 of the Companies Act 71 of 2008 (the Act), which commenced on 1 May 2011. These provisions have provided ample opportunity for businesses in financial distress to remedy the situation and effectively work to avoid an otherwise imminent liquidation.

The full extent of the right of affected parties still needs to be determined as the Act provides for participation in the initial process but is not clear on the termination thereof. Section 132(2) of the Act regulates the termination of BRPs and creates the following five distinctive options to terminate BRPs.

Where the court sets aside the resolution or order that began the BRPs

This is regulated by s 130 that states that, subject to subs (2), at any time after the adoption of a resolution in terms of s 129, until the adoption of a business rescue plan in terms of s 152, an affected person may apply to a court for an order setting aside the resolution, on the grounds that –

  • there is no reasonable basis for believing that the company is financially distressed;
  • there is no reasonable prospect for rescuing the company; or
  • the company has failed to satisfy the procedural requirements set out in s 129.

Subsection (2) states that an affected person who, as a director of the company, voted in favour of a resolution contemplated in s 129 may not apply to a court in terms of subs (1)(a) to set aside that resolution unless that person satisfies the court that the person, in supporting the resolution, acted in good faith on the basis of information that has subsequently been found to be false or misleading.

The court, when considering an application made in terms of s 130 of the Act may either set aside the resolution, or, if having regard to all of the evidence, the court considers that it is otherwise just and equitable to do so, afford the practitioner sufficient time to form an opinion whether or not the company appears to be financially distressed, or there is a reasonable prospect of rescuing the company. After receiving a report from the practitioner, the court may then set aside the company’s resolution if the court concludes that the company is not financially distressed, or there is no reasonable prospect of rescuing the company.

The court may, with an order setting aside the order or resolution that began the BRPs, make any further necessary and appropriate order, including an order placing the company under liquidation. If the court has found that there were no reasonable grounds for believing that the company would be likely to pay all of its debts as they became due and payable, an order of costs may be made against any director who voted in favour of the resolution to commence BRPs, unless the court is satisfied that the director acted in good faith and on the basis of information that the director was entitled to rely on in terms of s 76(4) and (5).

Directors must therefore beware of premature or unnecessary resolutions for business rescue if there is no real financial distress to the company as this could lead to a costs order against the directors.

An order to set aside a resolution may be brought on an urgent basis, as is the case in Climax Concrete Products CC t/a Climax Concrete Products CC v Evening Flame Trading 449 (Pty) Ltd and Others (ECP) (unreported case no 812/2012, 21-6-2012) (Beshe J), where the court stated that: ‘In my view, the fact that [the] applicant seeks to have a resolution to commence [BRPs] set aside, on its own entitles the applicant to be heard on an urgent basis. This is so because, if the first and second respondents were to successfully commence [BRPs], that would provide a “temporary moratorium” on the rights of claimants against the company/companies or in respect of property in its possession’ (at para 16).

Where the court has converted the BRPs into liquidation proceedings

This can occur only in the instances where, in terms of s 141(2)(a), the practitioner at any time during the BRPs concludes that there is no reasonable prospect for the company to be rescued. The practitioner must so inform the court, the company, and all affected persons in the prescribed manner, and apply to the court for an order discontinuing the BRPs and placing the company into liquidation.

It is interesting to note that the legislature used the word ‘discontinuing’ in this section as opposed to ‘terminating’, suggesting that the proceedings do not end as in the other cases, but is rather converted, as stated in s 132, into liquidation proceedings. The Oxford dictionary defines ‘convert’ as: ‘[To] change the form, character, or function of something’ (S Wehmeier (ed) The Oxford Advanced Learner’s Dictionary International Student’s Edition 7ed (Oxford University Press 2010) at 321). Therefore, BRPs do not end per se, but is transformed into liquidation proceedings.

The practitioner has filed a notice of the termination of BRPs with the commission

In s 132(2)(c), the Act states that BRPs end when the practitioner has filed a notice of termination of BRPs.

Such notice may be filed in terms of s 141, where the practitioner has investigated the company’s affairs, business, property, and financial situation, and after having done so, considered whether there is any reasonable prospect of the company being rescued. Section 141(2)(b) further stipulates that if, at any time during BRPs, the practitioner concludes that there are no longer reasonable grounds to believe that the company is financially distressed, the practitioner must so inform the court, the company, and all affected persons in the prescribed manner. If the business rescue process was confirmed by a court order in terms of s 130 or initiated by an application to the court in terms of s 131 the practitioner must then apply to the court for an order terminating the BRP or otherwise file a notice of termination of the BRP.

A business plan has been proposed and rejected in terms of part D of this chapter, and no affected person has acted to extend the proceedings in any matter contemplated in s 153

Section 153 sets out the necessary steps to be implemented to draft a business rescue plan and adopt the business rescue plan. The section also provides for the situation where the business plan is rejected. The practitioner can do two things –

  • seek a vote of approval from the holders of voting interests to prepare and publish a revised plan; or
  • advise the meeting that the company will apply to court to set aside the result of the vote on the grounds that it was inappropriate.

Where the practitioner does not take any action, an affected person at the meeting may elect to do either of the practitioner’s choices or make a binding offer to purchase the voting interests of one or more persons who opposed the adoption of the business rescue plan, at a value independently and expertly determined, on the request of the practitioner, to be a fair and reasonable estimate of the return of that person or those persons if the company were to be liquidated.

If no person takes any action as contemplated in subs (1), the practitioner must promptly file a notice of the termination of the BRPs.

A business plan has been adopted in terms of part D of this chapter, and the practitioner has subsequently filed a notice of substantial implementation of that plan

Participation by creditors, holders of company’s securities and trade unions of employees: An ‘affected person’ in terms of the Act is defined in s 128 as a shareholder or creditor of the company, any registered trade union representing employees of the company and, if any of the employees are not represented by a registered trade union, each of those employees or their respective representatives.

In terms of ss 145(1), 146, and 144(3) respectively, creditors, holders of the company’s securities and trade unions of employees are entitled to notification of any court proceedings and are further entitled to participate in any court proceedings arising during the BRPs.

The Act also repeatedly makes provision for any affected person to participate in any hearing of any application provided for in the relevant sections.

Two distinct circumstances arise out of BRPs and the participation of affected persons. First, during the process of placing the company under business rescue and when such resolution was filed or a court order granted, and before adoption of the business rescue plan, and secondly, after the adoption of the business rescue plan.

Section 152(4) states that where a business rescue plan has been adopted, it is binding on the company and on each of the creditors of the company and on every holder of the company’s securities, whether or not such a person was present at the meeting, voted in favour of adoption of the plan or, in the case of creditors, had proven their claims against the company.

Furthermore, s 133 places a moratorium on legal proceedings against the company while under business rescue, with certain exceptions. No person can therefore institute any action against the company during the BRPs.

In terms of s 152(4), and because no provision to that extent is granted in the Act, it is safe to assume that from the instance that a business rescue plan is accepted, affected persons have less of a say regarding the termination of the BRPs. It is further safe to assume that in the case of the conversion of the BRPs to liquidation proceedings, affected persons my intervene those proceedings but may not institute an application for conversion into liquidation of those proceedings.

In Cape Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd and Another (Advantage Project Managers (Pty) Ltd intervening) 2011 (5) SA 600 (WCC) Rodgers AJ held that: ‘I do not think that the legislature contemplated that an affected party would have to apply for leave to intervene in the proceedings. If the person is an “affected person” such person has a right to participate in the hearing. If the person wishes to file affidavits, the court will obviously need to regulate the procedure to be followed to ensure fairness to all concerned’ (at para 21).

This approach was also adopted in Engen Petroleum Ltd v Multi Waste (Pty) Ltd and Others 2012 (5) SA 596 (GSJ) where Boruchowitz J stated: ‘Engen, as an affected person, has a right to participate in the hearing of an application in terms of s 131(1) of the Act. It would not require leave of the court to intervene. Such leave may, however, be necessary as a procedural requirement’ (at para 30).

An affected person can therefore, by deduction, oppose any such application for conversion of BRPs to liquidation that the practitioner may bring. The question now arises as to how much weight the court will grant the assessment done by the practitioner to come to the conclusion that there is no reasonable prospect of rescuing the company.

If any regard may be given to the case of Newcity Group (Pty) Ltd v Pellow NO and Others, China Construction Bank Corporation Johannesburg Branch v Crystal Lagoon Investments 53 (Pty) Ltd and Others (GSJ) (unreported case no 12/45437, 16566/12, 28-3-2013) (Van Eeden J), the judge made the statement that he ‘might perhaps have been persuaded that there was reasonable prospect for rescuing the company by obtaining third party funding. … But the company was in business rescue … for more than a year and no viable offer was received’ (at para 23).

Also to be noted, is the decision in Commissioner, South African Revenue Service v Beginsel NO and Others 2013 (1) SA 307 (WCC) where the court granted leave to continue BRPs even though it was evident that the business could not be rescued because the continuation would result in better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

It is clear that there is definitely a place for the role of affected persons in the termination of BRPs. However, the full extent of this role still needs to be defined by our courts.

Jakomien van Staden BCom LLB (NWU) is an attorney at Morné Coetzee Attorneys in Pretoria. She was a candidate attorney at the time of writing this article.

This article was first published in De Rebus in 2013 (Dec) DR 14.