Do arbitration proceedings fall within the general moratorium on legal proceedings against a company under business rescue?

October 28th, 2015

By Rudie Kok

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

Chapter 6 of the Companies Act 71 of 2008, on business rescue proceedings (BRP), has undergone considerable refinement in 2015. The case was the same with the Supreme Court of Appeal (SCA) judgment that was delivered on 4 September, in which the court was called on to interpret s 133(1). The question before the court was whether arbitration proceedings falls within the general moratorium on legal proceedings against a company under business rescue in s 133(1). The phrase ‘legal proceedings’ is not defined in the Act and courts are required to evolve its interpretation.

The facts briefly stated are that Ms Chetty (the appellant), trading as Nationwide Electrical and TBP Building and Civils (Pty) Ltd agreed to refer their contractual dispute to arbitration. Arbitration proceedings started before the company placed itself under BRP, and when the arbitration award was made, the company had already placed itself under business rescue. The appellant did not know that the company was under business rescue and therefore did not seek the business rescue practitioner’s consent to pursue the suit against TBP. The appellant was dissatisfied with the entirety of the award made in terms of arbitration and sought to invalidate the award in the KwaZulu-Natal Local Division, Durban. When litigation commenced, TBP was no longer in business rescue but in liquidation. In liquidation, the liquidators stepped into the shoes of TBP to oppose the relief sought by the appellant. Effectively, the High Court had to decide whether the phrase ‘legal proceedings’ was capable of including arbitration proceedings. The court held that arbitration proceedings should not be included in the interpretation of ‘legal proceedings’. The SCA was called on to give finality on this point.

The appellant argued for the interpretation to include arbitration proceedings, but it was the respondents’ submissions that the court was interested in.

The respondents, in support of their submissions that ‘legal proceedings’ relates to formal proceedings, and thus excluding private tribunals such as arbitration, cited Cloete Murray and Another NNO v Firstrand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA). The court rejected the respondents’ submissions because the Cloete Murray matter did not deal with the term ‘legal proceeding’ but with whether the cancellation of a contract by a creditor was enforcement action, having its origin in legal proceedings. The respondents also cited Van Zyl v Euodia Trust (Edms) Bpk 1983 (3) SA 394 (T) and Lister Garment Corporation (Pty) Ltd v Wallace NO 1992 (2) SA 772 (D) where the courts held that ‘legal proceeding’ is ‘not … susceptible to any other meaning than (its) ordinary every-day literal one’. The court rejected this line as well, because these cases dealt with access to courts principles in relation to security for costs.

Furthermore, the respondents contended that the reference to forum means public forum. The court rejected this by utilising Cloete Murray wherein it was held that ‘forum’ usually refers to a court or a tribunal and thus does not bear a single meaning, namely, formal court proceeding. If the drafters had aimed at confining proceedings to court proceedings, they would have used the word ‘court’ instead of ‘forum’.

The court’s reasons so far dealt with the examination of ‘legal proceedings’ in its immediate context in s 133(1). In the wider context, the court examined
s 142(3)(b), which is relevant as the section obliges directors of a company to assist the business rescue practitioner with ‘any court, arbitration or administrative proceedings … involving the company’. The court was curious as to why the lawmaker would want a company to provide details of all proceedings, including arbitration proceedings, but exclude arbitration from the ambit of s 133(1). To answer this question, one must look at the purpose of BRP and its consequences. Section 7(k) stipulates 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 balances the rights and interests of all relevant stakeholders. Having regard to this provision, together with the definition of business rescue in s 128(1)(b), the purpose of business rescue becomes apparent. Business rescue is to provide for breathing space so that the affairs of the company may be assessed and restructured in a manner that allows its return to financial viability. The practitioner has to evaluate how claims will impact on the well-being of a company, and then decide whether the claim should be settled or continue to litigation, hence the general moratorium to achieve this purpose. Excluding arbitration from the moratorium on legal proceedings would significantly hinder this purpose. It is only then when arbitration is included in the interpretation of s 133(1) that it can be read harmoniously with s 142(3)(b). This is in line with statutory construction, which is that where two can be made compatible, not contradictory, that interpretation should be followed. There can thus be no reason why details of arbitration proceedings should be provided to the practitioner other than because they are legal proceedings, as contemplated in s 133(1), which may have a bearing on the company’s financial viability.

The court further had regard to s 5 of the Arbitration Act 42 of 1965, which treats arbitration proceedings as legal proceedings for purposes of sequestration, liquidation and judicial management. This was rejected because the Arbitration Act has a different statutory purpose.

To conclude, the court was in favour of a broader interpretation of s 133(1) to include proceedings before other tribunals, including arbitral tribunals. The language is suggestive of this interpretation, as well as contextual indications in s 142(3)(b). It is also in line with providing breathing space to the practitioner to get the company’s affairs in order. Arbitration, like court proceedings, also involve time and money resources that may hinder the effectiveness of BRP. Including arbitration proceedings is also in line with Black’s Law Dictionary (Bryan A Garner Black’s Law Dictionary 9ed (West 2009)) and International Arbitration Law (Mauro Rubino-Sommartano International Arbitration Law and Practice 3ed (New York: Juris Publishing, Inc 2014) at 42) definitions where they include arbitration proceedings in the definition of legal proceedings.

The appellant was, however, unsuccessful in her appeal on other grounds and the appeal was dismissed with costs.

Rudie Kok LLM (UJ) is a candidate attorney at Pule Inc in Johannesburg.

This article was first published in De Rebus in 2015 (Nov) DR 43.