Possible consequences of the ‘failure’ of an adopted business rescue plan

October 1st, 2017

By Zolani Buba

The new Companies Act 71 of 2008 (the Companies Act) has introduced a regulatory regime aimed at providing an opportunity for companies struggling financially to obtain a reprieve necessary for possible resuscitation. Literature on the purpose of business rescue and what the regime sets out to achieve has grown tremendously since the enactment of the Companies Act. (The purpose of business rescue is captured in s 128(1)(b) of the Companies Act. For an outline of the literature and case law, see – Redpath Mining South Africa (Pty) Ltd v Marsden NO and Others (GSJ) (unreported case no 18486/2013, 14-6-203) (Kgomo J) at para 42-44; Merchant West Working Capital Solutions (Pty) Ltd v Advanced Technologies and Engineering Company (Pty) Ltd and Another (GSJ) (unreported case no 13/12406, 10-5-2013) (Kgomo J); Koen and Another v Wedgewood Village Golf and Country Estate (Pty) Ltd and Others 2012 (2) SA 378 (WCC) at paras 14-15; Van Niekerk v Seriso 321 CC and Another (WCC) (unreported case no 952/11, 23929/11, 20-3-2012) (Gangen AJ); and African Banking Corporation of Botswana v Kariba Furniture Manufacturers (Pty) Ltd and Others 2015 (5) SA 192 (SCA) at para 42.) Further, the new regime has been viewed by the legislature as a critical policy objective necessary to facilitate a thriving economy, as well as the achievement of socio-economic imperatives. (Department of Trade and Industry ‘South African company law for the 21st century: Guidelines for corporate law reform’ (GenN1183 GG26493/23-6-2004). See also s 7 of the Companies Act.)

It is in the light of the above that this article sets about to discuss briefly the manner in which the current legislative framework not only limits a creditor’s ability to have recourse against a company that has availed itself of the protective mechanisms of business rescue, but to further highlight uncertainty surrounding applicable legal consequences where an adopted rescue plan has failed (whether in part or in full) in terms of its implementation. This is particularly relevant where an appointed rescue practitioner, notwithstanding the above mentioned circumstance, continues (perhaps unreasonably) to believe that the company continues to have a reasonable prospect of being rescued and, therefore, does not file for termination and liquidation of the company. In light of the business rescue regime’s ability to effect a discharge of debt (effectively a ‘write-off’ or a ‘permanent suspension on enforcement’ as articulated by our courts), the effect of this uncertainty for creditors is one worth exploring.

The business rescue provisions of the Companies Act envisage what may for our purposes be broadly described as a three-phased process, which begins with the commencement of proceedings (either in terms of a director resolution, termed the
s 129 process or through recourse to court in terms of s 131), appointment of a nominated business rescue practitioner who is responsible for drafting a proposed business rescue plan (the purpose of such a plan would be the achievement of any of the primary or secondary purposes highlighted in s 128(1)(b)), as well as provisions that outline the procedure and applicable thresholds to proposed plan adoption by creditors.

Prior to convening a meeting of creditors for the purpose of voting on the proposed plan, the practitioner must comply with certain procedural requirements. He or she is required to convene a meeting to consider the proposed business rescue plan within ten business days of having published it (s 151(1)). Affected persons must, at minimum, be given five business-days’ notice setting out, among others, the date, venue and time of the proposed meeting (s 151(2)).

The provisions of ss 151 and 152 are to be viewed in light of the discharge of debt and claim provision in s 154, which stipulates that provided certain conditions in relation to the adopted plan have been met; a creditor is barred from enforcing its claim against the debtor company. While this may not result in a significant concern where the plan is adopted and implemented in accordance with its terms and conditions, practical challenges often arise within the context of plans that have been adopted but are not implemented in full.

Due to a moratorium coming into force and significantly limiting the ability of creditors to enforce their claims, the absence of full plan implementation presents a unique set of challenges for an unpaid creditor (or perhaps one not having received full payment) seeking recourse (excluding instances highlighted in s 133 of the Companies Act). First, the creditor is unable to apply to court for the purpose of setting the resolution commencing proceedings aside. Second, while an affected person may apply to court to compel a practitioner to implement an adopted plan as per the terms and conditions of implementation, neither the provisions relating to termination of proceedings nor discharge provisions in s 154 specifically refer to ‘full implementation’ as a basis for terminating proceedings or discharging pre-commencement debt.

Where does this leave the creditor? In this regard two scenarios may be posited. The first is that due to ch 6 providing for proceedings to end on the basis of ‘substantial implementation’ – which is a subjective test that considers the practitioner’s discretion to be sufficient – and the discharge provision referring broadly to a plan being ‘implemented in accordance with this Chapter…’, it may be argued that s 154 finds application once a notice of substantial implementation has been filed, notwithstanding the fact that all creditors may not have been paid in full as envisaged in the adopted plan. I submit that this would be a fragmented and rather contrived approach to interpreting ch 6.

A contrary, and perhaps more sensible alternative to the first, is to read the discharge provision consistently with the wording finding application within that section. It is to be observed that
s 154(1) contains an implicit condition that an adopted plan be implemented in accordance with its terms and conditions in order for a discharge of debt to take place. Section 154(2) further amplifies this position by requiring a plan to be ‘approved and implemented in accordance with this Chapter…’, which is to be understood as a reference to provisions referring to plan implementation within the context of ch 6. Section 152, therefore, becomes particularly relevant to understanding the possible context within which discharge provisions are to be understood.

Section 152(5) requires the practitioner to not only take all necessary steps to attempt to satisfy conditions on which the adopted plan is contingent but also to implement the plan as adopted. This may be understood to mean that should the practitioner fail to ensure that a creditor is paid according to the provisions of the adopted plan, the plan would not have been implemented as required by s 154 and in the light thereof, a creditor should be able to enforce the balance of its claim even where a notice of substantial implementation has been filed. This approach is further consistent with observations made by the Supreme Court of Appeal in New Port Finance Company (Pty) Ltd and Audler v Nedbank Limited; Mostert and Another v Nedbank Limited [2015] 2 All SA 1 (SCA) (albeit within the context of sureties) to the effect that plan adoption does not affect a sterilization of a creditor’s claim but merely suspends that creditor’s right to enforce on its claim.

In conclusion, I submit that an adopted plan is a necessary but not a sufficient condition for the application of the discharge provision in s 154. In the light of the wording of ch 6 provisions read together, it is further necessary for the adopted plan to be implemented in accordance with its terms and conditions in order for a permanent suspension of a creditor’s right to enforce on its pre-commencement claim, to take effect. While the premature filing of substantial implementation may be perceived as a proverbial nail in the coffin for creditors (and their ability to enforce on unpaid or partially paid compromised amount), it may in fact present a unique opportunity for enforcement without the legal hurdles attendant on the existence of a moratorium, which by virtue of the filing, no longer has effect. In such instance, and for the sake of practicality, the ordinary principles of the law of contract may provide recourse.

Zolani Buba BSocSci LLB LLM (Tax) (UCT) is a business rescue specialist in Pretoria. Mr Buba writes in his personal capacity.

This article was first published in De Rebus in 2017 (Oct) DR 20.