Section 133 of the Companies Act 71 of 2008 provides for a general moratorium on legal proceedings against a company in business rescue.
I wrote an article published in the June issue of Without Prejudice in which this question was considered. I criticised the then binding judgment of Chetty t/a Nationwide Electrical v Hart NO and Another (12559/2012) [20141 ZAKZDHC 9 (25 March 2014), as it was held in that case that arbitration proceedings do not constitute legal proceedings for purposes of section 133 of the Act.
The lower court judgment was recently overturned by a unanimous judgment of the Supreme Court of Appeal in Chetty t/a Nationwide Electrical v Han NO and Another (20323/14)  ZASCA 112 (4 September 2015). Reversing the lower court judgment, the SCA concluded that the moratorium on legal proceedings set out in sl33( 1) of the Act includes arbitration.
The SCA Chetty judgment
The court held that it would be incongruous not to construe proceedings in which legal disputes are resolved privately through arbitration as legal proceedings simply because they take place outside the court system.
The court referred to Cloete Murray & another NNO v Firstrand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA) where it was observed that a "forum", as the term is used in the section, usually refers to a court or a tribunal (emphasis added). The court found that, in light of the Cloete Murray judgment, the word "forum" clearly does not bear a single meaning, that is, it refers not only to formal court proceedings but also public and private tribunals. Had the aim of the drafters been to confine the proceedings to court proceedings, it would simply have used the word "court" instead of "forum".
The court found that a contextual analysis of Chapter 6 of the Act is required. A relevant section to consider for this purpose is section 142(3)(b), which obliges directors of a company in business rescue to assist the business rescue practitioner (BRP) by providing details of "any court, arbitration or administrative proceedings, including pending enforcement proceedings, involving the company." The specific mention of arbitration proceedings in the section, instead of the general reference to legal proceedings in section 133(1), indicates that the latter is intended to encompass all those proceedings and not simply court proceed¬ings. Section 133(1), therefore, refers to the legal proceedings in general terms, and section 142(3)(b) particularises the proceedings of which the BRP must be apprised. This is fortified by the use of the words "in any forum" as it appears in section 133(1), which is broad enough to cover courts, arbitration and administrative tribunals. There can be no reason why section 142(3)(b) obliges the company to provide details of arbitrations to the BRP other than because they are also legal proceedings that may have a bearing on its financial viability and of which the BRP must be cognisant.
The court stated that the purpose of placing a company under business rescue is to give it breathing space so that its affairs may be assessed and restructured in a manner that allows its return to financial viability. The requirement for the BRP's consent to he obtained is to give him the opportunity to consider the nature and validity of any existing or pending claim and how it is to be dealt with. In particular, the BRP's concern is directed at assessing how the claim will impact on the well-being of the company and its ability to regain its financial health. A general moratorium on creditors enforcing their rights against the company is, therefore, crucial to achieving this objective.
The court held that the purpose of section 133, which is to give breathing space to the BRP to get the company's financial affairs in order, requires that it be construed widely. Arbitrations, like court proceedings, involve diversion of resources - both time and money - that may hinder the effectiveness of business rescue proceedings. To construe it narrowly, as the court a quo did, would be at odds with its language, defeat its purpose and lead to insensible and impractical consequences.
Section 5(1) states that it must be interpreted and applied in a manner that gives effect to the purposes set out in section 7. One of the purposes of the Act, as contained in section 7(k), is for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. At a purposive level, the exclusion of arbitration proceedings from the moratorium will lead to the business rescue process not being an efficient procedure as envisaged by section 7(k). This is mainly because a company in business rescue could be subject to the substantial costs and demands on management time of arbitration proceedings without the consent of the BRP or leave of the court. This burden could force a company in business rescue into liquidation, defeating the purpose and objective of section 133. Furthermore, an adverse arbitration award made against a company in business rescue could doom the company to failure.
The moratorium granted by section 133 is designed to provide the company with breathing space to enable it to find a solution to its financial problems and for the BRP to design and implement a business rescue plan to achieve this. Business rescue proceedings are instituted to allow a company's affairs to be restructured in such a way as to allow it to continue operating as a profitable concern. Controls need to be put in place to achieve this and the moratorium protects a company in business rescue by ensuring that a third party goes through the BRP or court to enforce its rights. The efficiency of Chapter 6 would be highly compromised if a third party could subject the company in business rescue to arbitration proceedings without restriction.
Henochsberg is also of the opinion that it is clear that the intention of section 133 is to cast the net as wide as possible in order to include any conceivable type of action against the company in the business rescue.
I am of the view that the SCA Chetty judgment is correct. Arbitration proceedings indeed constitute legal proceedings as prevented by section 133. Therefore no arbitration proceeding may be launched against a company in business rescue. Should a company already be a party to an ongoing arbitration at the time that it commences with business rescue, those arbitration proceedings are automatically suspended until the termination of the business rescue proceedings (whether because the business rescue proceedings are terminated by court order, because the company is liquidated or because a business rescue plan is successfully implemented). This is consistent with both the policy of the Act and the spirit of Chapter 6.
As published in Without Prejudice in December 2015.