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By Graeme Fraser and Veldra Fraser
It has been suggested that the modern approach to new legislation is for legislation to provide the framework or skeleton of our legal system and case law provides the detail or the flesh!
The cases dealing with issues related to the interpretation or application of the business rescue process introduced by ch 6 of the Companies Act 71 of 2008 serves as an excellent illustration of that general principle.
This article provides some thought-provoking examples.
‘Business rescue’ is defined in s 128 as being ‘proceedings to facilitate the rehabilitation of a company that is financially distressed … .’
In one of the earliest cases on business rescue Welman v Marcelle Props 193 CC and Another (GJ) (unreported case no 33958/2011, 24-2-2012) (Tsoka J), Tsoka J made this telling observation, namely:
‘In my view, business rescue proceedings are not for the terminally ill … . Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.’
The judgments handed down since Welman contain ample examples of cases where the patient company was pronounced ‘dead on arrival’, such as in Cronje NO v B and S Material Handling (Pty) Ltd and Others, Standard Bank of South Africa v B and S Material Handling Proprietary Limited and Others (GP) (unreported case no 84122/2017, 57449/18, 25-6-2019) (Thompson AJ) where Thompson AJ declared:
‘The company has died a natural death … . There is no reasonable prospect that any life can be forced back into the company that would enable its resuscitation. The time has come for finality to be reached. In my view the time has come to issue the final death certificate of the company, in order for the necessary funeral to be held by way of the final winding up of the company.’
Section 131(4) envisages that a court may make an order placing a company under supervision and commencing business rescue proceedings if the court is, inter alia, satisfied that ‘there is a reasonable prospect for rescuing the company’.
While the Act does indicate that ‘rescuing the company’ means achieving the goals set out in the definition of ‘business rescue’ there is no further clarification as to what the legislature meant by the term ‘a reasonable prospect’. The courts have, however, not shrunk from the challenge of doing so.
Accordingly, in Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA); [2013] 3 All SA 303 (SCA) (which incidentally was the first business rescue case to reach the Supreme Court of Appeal (SCA)), Brand JA stated that ‘a reasonable prospect’ in respect of business rescue proceedings:
‘… is a lesser requirement than the “reasonable probability” which was the yardstick for placing a company under judicial management … . On the other hand, I believe it requires more than a mere prima facie case or an arguable possibility. Of even greater significance, I think, is that it must be a reasonable prospect – with the emphasis on “reasonable” – which means that it must be a prospect based on reasonable grounds. A mere speculative suggestion is not enough.’
Although since that judgment there have been many cases where the courts have found that an entity has failed to meet what some have called the low bar set by Oakdene, there have been just as many where the courts have been inclined to accept that the entity did have a reasonable prospect of being rescued. One of the most surprising instances in which a court granted an application to place a company into business rescue has to be Ziegler South Africa (Pty) Ltd v South African Express SOC Ltd and Others 2020 (4) SA 626 (GJ) even though the company itself opposed the application! Unfortunately, subsequent history proved the company correct as the attempted rescue failed and the airline was finally liquidated.
Within the parameters described above can be found numerous cases leaning to either end of the continuum.
One of the important features of the business rescue process is the concept of a moratorium provided by s 133 which places limitations on claims against an entity undergoing the business rescue process. Not only have the courts had to grapple with the exact nature and extent of the moratorium but also whether a party who wishes to apply to court for permission to bring an action against a company in business rescue, has to lodge a separate substantive application for such permission. After different decisions either way, the court finally confirmed that a separate application would not be necessary.
In many cases the courts have been alive to the opportunity for the directors of an insolvent company to be tempted to use the protection afforded by a moratorium, solely for the purpose of delaying the inevitable demise of the company or for other purposes (such as avoiding an examination by the liquidator in terms of s 417 of the Companies Act 61 of 1973 which remains in force). In this regard it suffices to refer to the decision of Wallis JA in Van Staden NO and Others v Pro-Wiz Group (Pty) Ltd 2019 (4) SA 532 (SCA) where the judge pointed to various actions by the respondent shareholders and directors, as conveying an impression of an absence of any bona fide belief in the merits of the case and a lack of intention to genuinely pursue it. This led the court to conclude that the application to place the respondent company in business rescue was solely to provide a reason for avoiding interrogation by the liquidators while they were ‘squirrelling away … assets’.
The role of the business rescue practitioner, in guiding the entity through the business rescue process, and who is ultimately responsible for proposing a business rescue plan, which will be acceptable to the majority of creditors, and for the implementation of such plan once it has been accepted by the ‘affected parties’ (as defined) has also come under scrutiny in cases such as:
Section 153 of the Act makes provision for an application to be made to court for an order setting aside the vote of a creditor against the proposed business rescue plan as being ‘inappropriate’ and where it is just and equitable in the circumstances to do so. Once again there was no attempt by the legislature to define the term ‘inappropriate’ and the courts, through decisions in support of and against the recalcitrant creditor, have provided valuable guidance as to the boundaries of the term.
In Collard v Jatara Connect (Pty) Ltd and Others 2018 (5) SA 238 (WCC) for example, the court sided with the employees of the company in setting aside the vote of Edcon against the proposed business rescue plan because the court found there was an irresistible inference that the sole intention of Edcon voting against the plan, was to frustrate the arbitration proceedings, which the company had instituted against Edcon, based an alleged breach by Edcon of its contractual obligations to the company. (See also FirstRand Bank Ltd v KJ Foods CC (in business rescue) [2017] 3 All SA 1 (SCA) where the SCA held that it was inappropriate for the bank to oppose the business rescue plan where the security it held for its claim meant that there was no likelihood that the bank would suffer any loss in the process – only that the timing of payments it received would be in accordance with the contract it had originally concluded with the company).
By contrast the court in Ex parte: Target Shelf 284 CC; Commissioner, South African Revenue Service and Another v Cawood NO and Others (GP) (unreported case no 21955/14; 34775/14, 13-10-2015) (Kubushi J) held that it was not inappropriate for a creditor to vote against a proposed business rescue plan which did not address reservations and concerns which the creditor had expressed to the business rescue practitioner.
And finally (for the purposes of this article only) the liability of parties who have provided suretyships to secure credit facilities from creditors of entities subsequently placed into business rescue, has also received significant attention. Cases such as –
The above is just a soupçon of the cases studied since the introduction of ch 6 in 2011 and readers will no doubt concur that these examples fully justify the hypothesis that the courts have contributed in no small measure to the development of a robust and healthy business rescue process as set out in the framework provided by ch 6 of the Companies Act 71 of 2008.
Graeme Fraser BA LLB LLM HDip Tax (Wits) and Veldra Fraser are co-owners of Company Law Today in Gqeberha.
This article was first published in De Rebus in 2024 (December) DR 31.
