Same but different: The two ways to initiate business rescue proceedings

November 1st, 2021
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Mango Pilots Association and Others v Mango Airlines SOC Limited (GJ) (unreported 21/35958, 10-8-2021) (Antonie AJ)

The most often necessary step of placing the company under supervision and commencing business rescue proceedings has profound effects on the company and all the affected persons. More so when there is some resistance to the taking of such a step. What was peculiar in the Mango Pilots Association matter, was that both parties agreed with the need for the commencement of the business rescue proceedings and the High Court was only called on to adjudicate, which mechanism ought to have been used on the particular circumstances of the case.

The facts of the case

On 16 April 2021, the board of Mango Airlines SOC limited (the respondent) took a resolution in terms of s 129(1) of the Companies Act 71 of 2008 (the Act) to place the company under business rescue. Thereafter, and in accordance with the Public Finance Management Act 1 of 1999 (PFMA) the respondent sought and eventually obtained the Minister of Public Enterprise’s (the Minister’s) approval on 22 July 2021. On 28 July 2021, the resolution was filed with the Companies and Intellectual Property Commission (CIPC). The CIPC rejected the resolution on the ground that it was adopted more than five days from the date on which it was filed.

On 28 April 2021 after the respondent had adopted the resolution but before it was filed with the CIPC two entities called Aergen Aircraft Four Limited and Aergen Aircraft Five Limited (collectively, Aergen) launched a liquidation application against the respondent.

Thereafter, Mango Pilots Association and two others (the applicants), launched an urgent court application for an order placing the respondent in business rescue. The respondent opposed the relief sought by the applicants on the ground that when the application was launched the respondent had already adopted and filed a resolution to commence business rescue with the CIPC, which it asserts became effective from 28 July 2021.

The respondent also issued a third-party notice joining CIPC on the proceeding. The CIPC did not oppose such a joinder but also did not take part in the proceedings and opted to abide by the court’s decision.

Legal issues

As a point of departure, it is important to note that both the applicants and the respondent agreed that the matter was urgent, that the respondent is financially distressed and, that there is a reasonable prospect of rescuing the respondent.

The principal dispute between the applicants and the respondent was which mechanism must govern the business rescue proceedings in the circumstances. The applicants’ argument was that the respondent failed to comply with the provisions of s 129 and thus the resolution adopted on 16 April 2021 was a nullity, hence, the present application.

The respondent argued that the resolution they adopted was filed and became effective on 28 July 2021 and thus the present application was legally incompetent.

The applicants argued that because of ss 129(2)(a) and (b), which provides that a resolution may not be adopted if liquidation proceedings have been initiated by or against the company and that the resolution has no force or effect until it has been filed, respectively, the resolution by the respondent was null and void for two reasons –

  • first, that the resolution could not be adopted because liquidation proceedings had been initiated by Aergen; and
  • secondly, the resolution was of no force effect, had lapsed, and was a nullity because Mango had not filed the same within five days of having adopted it.

What the applicants were arguing is that Mango adopted a resolution and failed to file it within five days, therefore, such a resolution became a nullity, hence, Aergen were within their rights to initiate liquidation proceedings against the respondent, which once done prohibited the respondent from beginning business rescue proceedings through the resolution of the board. The only competent mechanism to institute business rescue proceedings in those circumstances should have been an application to the court.

While accepting the need to adopt and file the resolution as expeditiously as possible the court found neither textual nor contextual support in the Act for the proposition that the resolution must be adopted and filed within five days.

Contextually the court argued that the proposition ignores the fact that state-owned institutions could never be able to comply because once a resolution is adopted there are additional requirements to be met in terms of the PFMA, which cannot be realistically met within five days before filing the resolution.

The court held that the five-day period does not govern the time between adoption and filing. Properly understood it governs what must happen within five days after the filing of the resolution. The court argued that there are numerous indications in the Act (which were quoted and analysed) supporting this conclusion.

Further, the court rejected the argument that the respondents were barred from adopting a resolution by the liquidation proceedings instituted by Aergen. The court held that liquidation proceedings commence the day they are lodged with the registrar of the court and since the respondent’s resolution predates Aergen’s liquidation application s 129(2) is inapplicable and thus cannot justify the applicant’s argument.

Further, the applicants argued that the Minister’s subsequent approval of the resolution already adopted by the respondent was legally irrelevant since it was tantamount to ratification rather than approval. The applicants argued that the respondent ought to have submitted a draft resolution to the Minister and get the necessary prior approval before passing the resolution that would also have enabled them to adopt and file the resolution within five days, as per their reading of the Act.

The court held that the applicants were at all material times alive to the fact that they need the Minister’s approval hence the delay in filing the resolution, and there was no reason to believe that the Minister ratified as opposed to approve the resolution. Further, in the circumstances of the case, it was unnecessary to obtain the Minister’s approval before adopting a resolution.

The respondent argued that when the applicants launched the application to court, they were aware of its resolution adopted and filed with the CIPC to begin business rescue and considering s 131(1), which prohibits launching of the business rescue application if the company has adopted the s 129 resolution, the application is legally incompetent.

The court upheld this argument and stated that it was not open to the applicants to simply conclude that the resolution was of no force and effect and then launched their application. The applicants ought to have approached the court to set aside the resolution in terms of s 130 if it believed it had grounds to do so, if and when they are granted such order then launch their application, and the failure to do so rendered their application legally incompetent.

Conclusion

The business rescue proceedings can either be initiated by the resolution of the board or by an application to court. Although the goal is the same, namely rescue an ailing company, these two mechanisms have different procedures and consequences, therefore, it is of utmost importance to properly appreciate their salient features because failing to meet the requisite requirements can have far reaching consequences for all involved.

Mdumseni Gambushe LLB (UKZN)is a candidate legal practitioner at Venns Attorneys in Pietermaritzburg.  

This article was first published in De Rebus in 2021 (Nov) DR 38.

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