Hogan Lovells Publications | 01 March 2014

Section 133 of the Companies Act 71 of 2008 and interruption of execution

Consider the following commonly encountered scenario: A creditor had instituted litigation proceedings against Company X and obtained a default judgment against it. Pursuant to the judgment the creditor issued a writ of execution, but is now faced with the situation where an affected person has brought an application in terms of section 131(1) of the Companies Act 71 of 2008 (the Act) to place Company X under supervision and to commence business rescue proceedings. What is the effect on the creditor?
 
The answer turns on the question of when the moratorium in terms of section 133 of the Act begins, thus providing protection to the company under business rescue. If protection is provided, the possibility arises that the section could be utilised by the debtor company to avoid existing litigation or an attachment in terms of a writ of execution on its property.
 
Section 133 of the Act states: "During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum…." The section makes it clear that the moratorium created only applies "during business rescue proceedings", meaning from the moment business rescue proceedings commence to the moment they end. The pivotal question that now arises is, when do business rescue proceedings commence?
 
Section 132 of the Act deals with the duration of business rescue proceedings and states:
 
"(1) Business rescue proceedings begin when –
 
(a) the company -
(i) files a resolution to place itself under supervision in terms of section
129(3); or
(ii) applies to the court for consent to file a resolution in terms of section
129(5)(b);
(b) an affected person applies to the court for an order placing the company under
supervision in terms of section 131(1); or …"
 
The first instance of when business rescue proceedings begin is fairly straightforward, they begin when the company, which voluntarily would like to place itself under supervision and into business rescue, files a resolution by its board of directors in terms of section 129(3) to do so.
 
The second instance, as set out in section 132(1)(b), is the section that causes one to stop and reflect. This subsection deals with the circumstance where an affected person (which includes a shareholder of the company) is of the view that the company should be placed under business rescue and brings an application for this relief to court.
 
The subsection specifically uses the word "applies", that is "Business rescue proceedings begin when an affected person applies to court…". The plain meaning of the term "applies" appears to refer to the date on which the application is launched. Similarly, in a liquidation, should an application for a company's liquidation be brought and the court thereafter orders that the company be placed under final winding-up, the deemed date of liquidation is the date on which the application papers were originally issued at the court and NOT the date on which the court granted the order.
 
The question is whether the apparent intention of section 132(1)(b) really reflects the intention of the legislature or whether if the subsection is read in context, is capable of a different intention.
 
To my mind the word "applies" should be interpreted in such a way to mean that the application needs not only to have been issued at the court, but also that an order must thereafter have been obtained for business rescue to have commenced.   At a purposive level, it is clear from section 130(3)(b) that the legislature intended that notice of the application must be given to all affected persons. Should the business rescue proceedings have commenced before the affected persons receive notice of the application, the purpose of giving notice would be defeated. From this perspective it would be necessary for business rescue to commence only when the court adjudicates the application.
 
At the level of statutory interpretation, the answer is simple, when you interpret section 132(1)(b) in context. This section calls for the affected person to bring the application "in terms of section 131(1)", which states: "…an affected person may apply to court at any time for an order placing the company under supervision and commencing business rescue proceedings." (Emphasis added)
 
The imperative part of this section has been emphasised and it clearly states that it is up to the court to "order" that the company is placed under supervision and that business rescue has commenced. It is the "order" itself by the court that places the company under supervision and commences business rescue. Implicitly the company cannot be in business rescue prior to the court's order – indeed there would be no point in the court granting an order of business rescue, if business rescue proceedings had already commenced. So the mere fact that the word "applies" is used in section 132(1)(b) is in my view qualified by the reference to section 131(1) to bear a
different and more sensible interpretation.
 
The notion that business rescue proceedings can only commence when the court grants an order to this effect is supported and complemented by the Act's determination of when business rescue ends. Section 132(2)(a)(i) states:
 
"Business rescue proceedings end when-
(a) the court-
(i) sets aside the resolution or order that began those proceedings…"
(Emphasis added)
 
Section 132(2)(a)(i) confirms that it is the court order and not the mere application for business rescue that commences the business rescue of an entity.
 
There remains a chance that a shareholder who has an interest in a company could try to utilise the protection provided by section 133 to create a moratorium to avoid existing ongoing litigation or a writ of execution being executed by a sheriff after a judgment against the company has been taken.
 
The opportunity for abuse is lessened as my interpretation means that business rescue proceedings will only commence on the court granting the order and not merely upon the shareholder or other affected persons' mere application for the order. An interpretation that the moratorium applies as soon as the application is launched could never be correct, as it is very unlikely that the legislature would create a section that could lead to such vast abuse and cause prejudice to creditors without the purpose of business rescue (to rescue the company for the greater good of all employees, creditors etc) even needing to be met.
 
It is of course possible that the application for business rescue is brought in good faith and ought to be granted, but it could be undermined by an unreasonable creditor insisting on selling the company's assets in execution. In such an instance the applicant would be advised to apply to court urgently to stay the execution pending determination of the business rescue application.
 
So the answer to the question is simply that the moratorium created by section 133 and its subsequent protection will only begin applying from the moment when business rescue proceedings commence. If my interpretation of section 132(1) is correct, this moment will only occur when the company itself files a resolution in accordance with the requirements of section 129(3), the court grants an order placing a company under supervision and into business rescue after an affected person has applied for same in terms of section 131(1), or the court orders that a company is placed under supervision during the course of liquidation proceedings or proceedings to enforce a security interest.