Failure to comply with the prescribed procedures after filing of a board resolution to commence business rescue proceedings: Is Panamo Properties (Pty) Ltd v Nel the (correct) answer?

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Abstract

Section 129(5) of the Companies Act 71 of 2008 provides in clear and unambiguous terms that a board resolution to commence business rescue proceedings and place the company under supervision "lapses and is a nullity“ if the company fails to comply with any provision of section 129(3) and (4). These two subsections set out the procedural requirements that must be followed after a company’s business rescue proceedings have commenced through the filing of the relevant board resolution with the Companies and Intellectual Property Commission.

The procedural requirements entail the appointment of a business rescue practitioner within five business days after filing of the resolution and notifying affected persons (i.e. the company’s creditors and shareholders, as well as registered trade unions representing employees or unrepresented employees themselves) of the commencement of the business rescue proceedings. Shortly thereafter the commission and then the affected persons must be notified of the appointment of the practitioner. These two subsections place quite an onerous duty on the company, particularly because of the short periods within which the company must comply and the severe consequences should the company fail to do so. As a result, the provisions have been widely criticised, but as explained in the article, there are very good reasons for these strict requirements.

However, section 130(1)(a)(iii) appears to contradict section 129(5) because it provides for the setting aside of a board resolution to commence business rescue by a court if, among other things, the procedural requirements have not been met. Since a void resolution cannot be set aside as well, this has led to conflicting high court judgments where some, at least initially, ignored section 130(1)(a)(iii) and confirmed that the resolution was void and of no effect in instances of non-compliance, while others issued an order setting aside the (void) resolution. In several judgments the courts also drew attention to the contradictory contents of the two sections.

When the supreme court of appeal at last had the opportunity to clarify the situation in Panamo Properties (Pty) Ltd v Nel 2015 5 SA 63 (SCA) the exact opposite occurred. The court in fact sowed further confusion by holding that although the board resolution had lapsed if the company had not complied with the prescribed procedures, the business rescue proceedings had not ended as a result thereof: the business rescue could be terminated only by an order of court in terms of section 130(5) on the grounds of the non-compliance and if, in addition, it could be shown that it would be just and equitable for the business rescue proceedings to end.

To reach this conclusion the court changed the wording of section 130(5)(a) by replacing the “or” before subsection (5)(a)(ii) with “and”. By so doing, the court removed a separate and potentially very useful ground for setting aside an otherwise valid board resolution to commence business rescue proceedings and deprived affected persons of a powerful weapon to fight the widespread abuse of business rescue proceedings. It also made it even more difficult for affected persons to obtain an order setting aside a valid board resolution to commence business rescue proceedings. Apart from having to prove that the company is not financially distressed or that there is no reasonable prospect of rescue, they now also have to prove that it would be otherwise just and equitable to set aside the resolution.

According to the court this was the only way to reconcile the conflicting provisions of section 129(5) and section 130(1)(a)(iii). As further authority for its decision the court referred to section 132(2) which sets out the circumstances in which business rescue proceedings will end and which include the setting aside of the resolution that began the proceedings. According to the judgment this indicated that an order of court was necessary to end the proceedings. It seems that the supreme court of appeal – unlike the court a quo – did not realise that if the board resolution to commence business rescue proceedings was void and a nullity, there were no proceedings to terminate because they are regarded as never having existed. Section 132(2) instead provides for a valid resolution that commenced lawful and valid business rescue proceedings but which is subsequently set aside on application by an affected person because the company no longer meets the requirements for business rescue proceedings, usually because there no longer is a reasonable prospect of rescue.

As regards the dichotomy between sections 129(5) and 130(1)(a)(iii) the article explains that it is almost certainly the result of overhasty and last-minute amendments to the Companies Act of 2008 a mere ten days before it came into effect. Section 130(1)(a)(iii) should in fact have been deleted as part of these amendments and those judgments that ignored this subsection were therefore correct.

The article points out several uncertainties and problems resulting from this judgment and shows that although the court was strongly influenced by its desire to prevent the abuse of business rescue proceedings in this particular case, the judgment has in fact now opened the doors for more and even worse instances of abuse. The uncertainty over the exact status and future of a company after the business rescue resolution has lapsed because of failure to comply with the procedural requirements but a court has not yet set it aside, can only be described as extremely unfortunate.

The article concludes by indicating that in spite of its own warnings against courts themselves legislating instead of interpreting the legislation, this is exactly what the supreme court of appeal has done in this case. Although there may possibly be grounds for advocating amendments to section 129 to lessen the procedural burden and risks of non-compliance for companies, this is the task of the legislature and not of the courts.

Keywords: business rescue; business rescue procedure; business rescue proceedings; business rescue resolution; commencement of business rescue proceedings; Companies Act 71 of 2008; filing of business rescue resolution; moratorium; setting aside business rescue resolution; termination of business rescue; void business rescue resolution; voluntary business rescue

 

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