Instituting proceedings against a company under supervision

October 28th, 2015
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By Bouwer van Niekerk and Werner Hattingh

Section 133(1)(b) of the Companies Act 71 of 2008 (the Act) provides that:

‘(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) …

(b) with the leave of the court and in accordance with any terms the court considers suitable; …’ (our italics).

Does this mean that a prospective litigant must bring a separate application in which it exclusively asks leave from the court to institute legal proceedings, before it in fact institutes the envisaged legal proceedings? This was the question that was posed and answered in the case under discussion. This article is confined to the rationale applied by the court in answering that question.

In this case, the applicant sought an order for the production of certain documents from a joint venture it concluded with the first and second respondents. At the time of launching the application, both the first and second respondents were in business rescue as contemplated by s 128 of the Act. Subsequent to launching the application, the business rescue proceedings in respect of the first respondent ended. The second respondent remained in business rescue at the time of hearing of the application. In argument, the applicant confined the relief that it sought to the first respondent.

Before deciding on the merits of the matter, the court found that it needed to consider the general moratorium imposed on legal proceedings against a company during business rescue proceedings. On the facts, the applicant did not obtain leave to launch the application before it was so launched; it incorporated an application for such leave in the main application before court, arguing that there was no reason why such leave could not be sought in the same application. The respondents disagreed; they argued that such leave should have been obtained before launching the main application. The court found that the answer lied in a proper interpretation on s 133(1)(b).

After considering the concept of business rescue proceedings in the context of the moratorium, coupled with the interpretation of the Act as envisaged in s 7(k) read with s 5(1), it proceeded with its interpretation of s 133(1)(b). The court found the language to be unambiguous; ‘[d]uring business rescue proceedings no legal proceeding may be commenced or proceeded with except with the leave of the court and in accordance with any terms the court considers suitable’ (at para 9). This, according to the court, meant that the issuing of an application by the registrar (or service on the respondent) may not have been done without the leave of the court.

In considering whether such leave may be sought as part of the relief sought in the main application, the court found that such a construction would be inconsistent with the wording of the section. ‘It will also defeat one of the purposes of the moratorium, which is to give the company and the business rescue practitioner space and time to deal with the rescue of the company without having to deal with litigation by creditors. The practitioner will in each such proceeding have to deal not only with the application for the court’s leave in terms of s 133(1)(b), but also with the merits of the claim, because it is all part of one application,’ (at para 11).

The court also found that there are other indications that do not support the applicant’s construction of the section. ‘Firstly, it will result in the court being asked, when the matter is argued, for leave for the proceeding to be commenced with, at a time when it had already commenced. Secondly, the leave of the court is also required to proceed with a legal proceeding against a company during business rescue proceedings … [proceedings that] may only proceed with the leave of the court … Thirdly, it is significant that in granting leave for the legal proceeding to be commenced or proceeded with the court may impose such terms as it considers suitable. This suggests to me that the court’s leave must be obtained before the proceeding is commenced or proceeded with, as that will be the time to impose the terms contemplated in the section,’ (at para 12).

Although the court’s reasoning may be logically sound, we submit that it is not the only feasible construction, and is far from being pragmatic in the swift execution of justice. Surely the purpose of a moratorium is to limit the amount of litigation that a business rescue practitioner should be involved in, not increase it? Does the effect of ordering that issues that could easily be dealt with in a single application be dealt with in multiple applications not defeat the purpose of giving ‘the company and the business rescue practitioner space and time to deal with the rescue of the company without having to deal with litigation by creditors’, thereby necessarily prolonging the business rescue proceedings?

For purposes of our argument, we assume that the applicant requested leave from the business rescue practitioner to launch its application, and that this leave was refused. (The judgment is silent on this issue.) Faced with this refusal, the applicant approached the court to obtain the requisite leave required. On the court’s construction of s 133(1)(b) in the case under discussion, the applicant must first bring an application for leave to launch an application for the (ultimate) relief it requests. It is here that our difficulty with the court’s reasoning lies.

In bringing its (initial) application, the applicant will by necessity have to explain what application it (eventually) wants to bring. By necessity, it will have to set forth the facts and questions of law that it will rely on in the (eventual) application. Having regard to the doctrine of audi alteram partem, the applicant will necessarily have to give notice to the business rescue practitioner of the application, and likewise necessarily afford the business rescue practitioner to answer to its founding papers. This will necessarily place the business rescue practitioner in the position where he or she will have to, in answering, deal with the merits of the applicant’s case. The applicant will then necessarily have the opportunity to reply to the business rescue practitioner’s submissions. The court, in turn, will necessarily have to consider the merits of the matter in order to rule on this (initial) application. It is, therefore, we submit, far more pragmatic to deal with these issues in a singular application, in which (such as the case under discussion) the first prayer asks for leave of the court to launch the application. Should the court then wish to impose such terms as it considers suitable pertaining to the main relief sought, it may do so by way of instructing the parties to file additional affidavits pertaining to such terms.

Such a construction will, in our opinion, alleviate the parties’ burden from dealing with the facts of the matter in separate applications (thereby causing the business rescue practitioner to deal with the facts just once, leaving him or her with more time to tend to the affairs of the company under supervision), which will in turn curtail legal costs (thereby possibly securing a greater dividend to creditors of the distressed company, as opposed to spending the company’s money on legal costs), which will in turn result in a more expedient conclusion to the litigation (thereby providing for the efficient recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders as contemplated in s 7(k) read with s 5(1) of the Act).

Bouwer van Niekerk BA (Law) LLB (SU) Post Grad Dip Labour Law (UJ) Cert Business Rescue Practice (Unisa & LEAD) is an attorney and Werner Hattingh BCom (Law) LLB (NWU) is a candidate attorney at Smit Sewgoolam Inc.

This article was first published in De Rebus in 2015 (Nov) DR 32.