The Supreme Court Of Appeal Rescues Business Rescue

“….. a stratagem involving a wholly undesirable exploitation of legal technicalities for their own advantage” (Court’s comment on the conduct of the directors in the case below)

Business rescue was one of the new features of the 2008 Companies Act (“the Act”). It is designed to give ailing companies time and space to get back on their feet and resume trading. Business rescue replaced Judicial Management which was widely considered a failure in the previous Companies Act. It is more flexible than Judicial Management – for example, a director’s resolution can institute business rescue proceedings whereas a court order was required for Judicial Management.

The problem - technicalities

Although business rescue got off to a promising start, it suffered some setbacks in various High Court decisions, based around procedural aspects of business rescue, which threatened to undermine the whole process.

SCA to the rescue

A recent case that ended up in the Supreme Court of Appeal (SCA) has however come to the rescue.

A company, whose major asset was a property, was R3.3 million behind in its mortgage payments. The bank holding the mortgage obtained a judgment against the company. The directors of the company put the company into business rescue to prevent the judgment being executed and to attempt to find other funding sources for the company.

Business rescue was instituted but the business rescue practitioner’s attempts to raise money failed and in terms of the rescue plan the next step was to sell the property.

The directors of the company (who did not want the property to be transferred to the purchaser) then approached the courts to nullify the whole process on the technicality that certain procedural requirements had not been complied with.

The High Court on that basis held that the resolution to commence business rescue had lapsed and was a nullity, despite expressing its frustration at the conduct of the directors, it being undisputed that the sole purpose behind the application was to prevent the sale of the property and to prolong the directors’ occupation of their home. Clearly if Business Rescue can be undermined in this way by loopholes, its functioning as an effective mechanism is threatened.

At this stage, an appeal was heard by the SCA.

What did the SCA say?

The Court found it difficult to reconcile the laudable intentions of the Act of giving struggling companies the space to recover against the fact that the Act’s aims could seemingly be effectively torpedoed by “trivial” non-compliance with administrative procedures.

The Court held that only a court can terminate business rescue proceedings. Therefore, whilst “trivial” non-compliance could open the way for a court application to nullify the resolution to enter business rescue, it did not automatically terminate business rescue.

Instead, held the SCA, “the court needs to be satisfied that in the light of all the facts it is just and equitable to set the resolution aside and terminate the business rescue”.

In the circumstances, the appeal was allowed and the business rescue continues.

This important new judgment effectively precludes parties using loopholes to their advantage and thereby undermining the business rescue provisions of the Companies Act.

Disclaimer The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.