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Non-adherence to the statutory time limits for appointing a business rescue practitioner renders the process void

Business rescue in terms of the Companies Act of 2008 – the consequences of non-adherence to statutory time limits

Disputes concerning the business rescue provisions of the new Companies Act of 2008 continue to come before the courts and the steadily increasing volume of reported judicial decision is providing greater clarity on the interpretation of those provisions and on the attitude of the courts, generally, toward the statutory business rescue regime.

Striking a balance

The business rescue regime attempts to strike a fair balance between the interests of creditors of a financially distressed company in securing payment of what is owed to them, the interests of the company itself in returning to profitability, and the interests of the national economy and society in general in preserving an enterprise that can provide jobs and contribute to economic growth.

The most egregious manner in which the business rescue provisions of the Act intrude on the rights of creditors is that it creates a moratorium in terms of s 133 of the Act, during the subsistence of which creditors are barred from instituting or continuing legal proceedings against the company to enforce their rights. Such a moratorium may of course create severe cash flow problems for a creditor who is unable to enforce payment of a debt that is owing to him.

The strict timetable for the business rescue process

An important counterbalance to the negative way in which the business rescue provisions impact on creditors is the strict time limits laid down in the Act for the various steps that are required to be taken in business rescue proceedings. The time limits laid down by the Act in this regard are very tight indeed, and, if they are not adhered to, the distressed company may forfeit its protected status.

Such tight time constraints are vital, for the board of directors of the distressed company can easily initiate business rescue proceedings in terms of section 129(1) of the Act, without – at this stage – having to seek the approval of creditors or of the court. In the absence of subsequent time constraints, the board of directors could commence business rescue proceedings and then drag the process out interminably and thereby extend the duration of the moratorium.

Significantly, creditors are not without a voice, even at this early stage in the process, for they can apply to court in terms of section 130(1) for an order setting aside the business rescue proceedings on the grounds that there is no reasonable prospect of rescuing the company in question.

The courts rule on the consequences of non-adherence to business rescue time limits

A judgment of the North Gauteng High Court on 15 August 2012 in the case of Mododza (Pty) Ltd (in business rescue) v Absa Bank (case 38906/2012, not yet reported) has provided clarity on what is to transpire where a company initiates business rescue proceedings and then does not adhere to the time-line for the appointment of a business rescue practitioner.

In this case, Absa Bank had secured court orders for the repossession from the company of certain motor vehicles that it was financing, the repayments for which had fallen into arrears. The company was now seeking an interdict to prevent those vehicles from being repossessed.

Subsequently to the granting of those court orders in favour of Absa Bank, the company’s board of directors had resolved to put the company into business rescue in terms of the Companies Act. A business rescue plan was devised and a business rescue practitioner was appointed – but the latter step did not take place within the applicable five day deadline, as prescribed by the Act – and he took control of the company's assets and financial affairs. A business rescue plan, and thereafter a revised plan, was laid before the company's creditors, who rejected the revised plan.

The company then applied to court in terms of section 153(1)(a)(ii) of the Act to set aside the rejection of the plan. At the time that the judgment that is the subject of this note was given, that application had not been adjudicated.

A vital procedural step had not been taken timeously

In short, therefore, what had transpired was that business rescue proceedings had been commenced, as envisaged by the Act by way of a resolution passed by the company's board of directors, but the company had then failed to take the essential further step of appointing a business rescue practitioner within the five day deadline imposed by section 129(3) of the Act.

In the interim, Absa Bank, a creditor of the company had, through the sheriff and as sanctioned by the court orders it had secured before the business rescue proceedings commenced, attempted to repossess certain of the company’s vehicles that it was financing. These vehicles were essential to the functioning of the company's business and their confiscation would, it seems, make it impossible for the company to continue its business.

In the present proceedings, the company was seeking an urgent interdict to prevent the sheriff from repossessing the motor vehicles, arguing that the statutory moratorium that was part of the business rescue proceedings barred creditors from taking possession of the company's property. In its turn, Absa Bank was opposing the granting of an interdict on the basis, inter alia, that the company had not appointed a business rescue practitioner within the time frame prescribed by the Act, and that the business rescue proceedings had therefore lapsed.

The company argued that, even if there had been an irregularity of this kind, the business rescue process, with its in-built moratorium, remained in place until set aside by court order.

The court took a strict view

The court took a strict view of the consequences of the non-appointment of a business rescue practitioner within the statutorily prescribed five days, citing the unambiguous provisions of section 129(5) which reads –

"If a company fails to comply with any provision of subsection ... (4) [the appointment of a business rescue practitioner within five days of the company’s resolving to commence business rescue proceedings]-

(a) its resolution to begin business rescue proceedings and place the company under supervision lapses and is a nullity;

The court quoted from the earlier judgment in Advanced Technologies and Engineering Company (Pty) Ltd (In Business Rescue) (not yet reported) where Fabricius J had said –

"The purpose of s 129(5) is very plain and blunt There can be no argument that substantial compliance can ever be sufficient in the given context. If there is non-compliance with s 129(3) or (4) the relevant resolution lapses and is a nullity. There is no other way out, and no question of any condonation or argument pertaining to "substantial compliance". The requirements contained in the relevant sub-sections were either complied with or they were not."

Consequently, the failure of the company in question to appoint a business rescue practitioner within the statutory five day period was held to have the result that - without the need for a confirmatory court order – the company's resolution to commence business rescue proceedings lapsed and was a nullity, that is to say, it was devoid of all legal effect.

It followed that the moratorium on the institution or enforcement of legal proceedings against the company by its creditors automatically fell away – without the need for any court order to this effect – and, in the circumstances of this case, Absa Bank had the right to instruct the Sheriff to give effect to the court orders it had obtained before the business rescue proceedings commenced, and to repossess the vehicles which it was financing.



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