Hot off the business rescue press
The recent unanimous judgment handed down by the Supreme Court Appeal in Panamo Properties (Pty) Ltd v Nel and Another NNO (35/2014) 2015 ZASCA 76 (27 May 2015) is one of the most significant and groundbreaking judgments handed down on business rescue to date.
The SCA has clarified certain controversial provisions of Chapter 6 of the Companies Act 71 of 2008 dealing with business rescue proceedings with which our courts have been grappling since its inception. This judgment is likely to have profound positive implications for the business rescue industry. The court adopted a purposive approach and clarified and guided the way in which chapter 6 of the Act must be interpreted in the future.
In a number of cases heard in the various divisions of the High Court, it has been held that, where a company is placed in business rescue pursuant to a resolution of its board of directors but thereafter fails to comply with the procedural requirements of sections 129, the effect is to cause the business rescue proceedings to terminate. The reason for this was said to flow from the provisions of section 129(5), which provide that non-compliance with procedural formality in terms of sections 129(3) and (4) results in the resolution placing the company under business rescue lapsing and becoming a nullity.
Panamo Property’s sole shareholder was a trust, the trustees of which were Mr and Mrs Nel. They were also the directors of the company who took the resolution to commence business rescue. This was intended to avoid the company’s property being sold pursuant to a judgment against it by a financial institution. The Nels co-operated with the process of business rescue as they hoped to find alternative sources of finance to discharge the company’s debt. A business rescue plan was duly approved, but no further funds were forthcoming and the business rescue practitioner sold the property in accordance with the business rescue plan. When transfer to the purchaser was imminent, the present proceedings were brought by the trust, represented by the Nels. It alleged that the company had not complied with the procedural requirements laid down in section 129 and, as a result, the entire business rescue process was a nullity. That argument was upheld in the High Court.
It is quite significant and also fitting that the SCA, at the outset, referred to one of the purposes section 7 of the Act, which provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. The crux of the issue to be decided by the SCA was the meaning of section 129(5) and how it is to be interpreted within the context of business rescue. The court found that the commendable goals of business rescue are, unfortunately, being hampered because the statutory provisions governing business rescue are not always clearly drafted. This provides for ample scope for parties to exploit inconsistencies and advance technical arguments aimed at exploiting and stultifying the business rescue process or securing advantages not contemplated by its broad purpose.
Non-compliance with sections 129(3) and (4) does not automatically result in void proceedings
Section 130(1) provides for three grounds upon which an application to set aside a business rescue resolution may be brought. The third ground, set out in section 130(1)(a)(iii), provides for setting aside the resolution because company has failed to satisfy the procedural requirements set out in section 129. The Trust argued that it was not obliged to follow the route of an application to court under section 130(1), because such a challenge was unnecessary in the light of section 129(5)(a).
The SCA referred to some High Court decisions dealing with the interpretation of section 129(5). In Advanced Technologies and Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquées SAS (GNP, Case no 72522/2011) Fabricius J concluded that non-compliance with section 129(3) or (4) results in the resolution lapsing and becoming a nullity. Although he did not say so expressly, the judge appears to have been of the view that an inevitable consequence of the resolution having lapsed would be that the business rescue process would terminate. A majority of judges have thereafter also followed this reasoning. It has not, however, been universally accepted. For example, in Ex Parte Van den Steen NO (Credit Suisse Group AG Intervening) 2014 (6) SA 29 (GJ), Rautenbach AJ held that Fabricius J was dealing only with non-compliance with time limits in regard to the appointment of a business rescue practitioner, and not to other aspects of sections 129(3) and (4). He accordingly held that, where there had been substantial compliance with those provisions, section 129(5) did not operate to nullify the resolution. In ABSA Bank Ltd v Caine NO  ZAFSHC 46, Daffue J pointed out that Fabricius J had not given consideration to the provisions of section 130 and that his construction led to anomalies between section 129 and section 130.
The SCA found that the observation by Daffue J is undoubtedly correct. It also referred to Henochsberg where the author points out that the problematic consequence of a resolution that lapses and is a nullity is that a company may pass a resolution in order to gain the protection of Chapter 6 for a brief period of time, only to exit the procedure due to the resolution lapsing and becoming a nullity at a later date. This could also have unintended consequences where non-compliance with the notice and publication requirements have been minor and unintentional. The SCA held that the approach of Fabricius J appears to leave no room for the operation of section 130(1)(a)(iii). There is no point in bringing an application to set aside a resolution on the grounds of non-compliance with the procedural requirements of section 129 if that resolution has already lapsed and been rendered a nullity and the process of business rescue has, as a result, come to an end. This is also because the expression "procedural requirements" in section 130(1)(a)(iii) refers to the procedural requirements in sections 129(3) and (4).
The SCA further pointed out that the termination of business rescue proceedings is specifically dealt with in section 132(2) of the Act. That provision does not provide that the lapsing of the initiating resolution will cause the business rescue to terminate. Section 132(2)(a)(i) provides that business rescue proceedings terminate when the court sets aside the resolution that started those proceedings. In other words, when a court grants an order in terms of section 130(5)(a) of the Act, the effect of that order is not merely to set the resolution aside, but to terminate the business rescue proceedings. It follows that, until that has occurred, even if the business rescue resolution has lapsed and become a nullity in terms of section 129(5)(a), the business rescue commenced by that resolution has not terminated. Business rescue will only be terminated when the court sets the resolution aside.
The court may only set aside the resolution if it finds that it is just and equitable to do so
In terms of section 130(5), a court will only set aside a resolution if it is just and equitable to do so. The SCA, however, found that this is not an additional ground. To give the word "or" in between subsections 130(5)(a)(i) and (ii) a disjunctive meaning would lead to inconsistency between these subsections and it should therefore be read conjunctively as if it were an "and". Over and above establishing one or more of the grounds set out in section 130(1)(a), the court will only set aside the business rescue resolution and terminate the business rescue if it is satisfied that, in the light of all the facts, it is just and equitable to do so. Procedural deficiencies will not constitute sufficient grounds on their own to set aside the resolution and it must be just and equitable to do so. This approach precludes litigants, whether shareholders and directors of the company or creditors, from exploiting technical issues in order to subvert the business rescue process or turn it to their own advantage.
Time frame for setting aside a resolution is limited
The time frame for bringing an application to set aside the resolution is clearly restricted by section 130(1). An application may be brought at any time after the date of adoption of the resolution, but once a business rescue plan has been adopted, the time for challenging a resolution is past.
Implications of the judgment
This judgment is good news for the business rescue industry. The court in essence reconciled section 129(5)(a) with sections 130(1)(a)(iii) and 132(2)(a)(i) and adopted an interpretation of these provisions that will avoid anomalies and the stultifying of business rescue. This judgment will hopefully encourage the adoption of a purposive approach towards all of the poorly drafted sections in Chapter 6 not merely section 129(5).
Hogan Lovells acted for the successful appellants