The restructuring of financially distressed companies is on the increase globally. In line with this international trend is Chapter 6 of the Companies Act, No 71 of 2008 (Act) which introduced business rescue into the South African corporate landscape.

Although business rescue has brought a much needed and long overdue alternative to liquidation for businesses in distress, it is also responsible for many points of contention. The most pertinent of these is currently the general moratorium found in s133 of the Act.

Section 133 of the Act provides that no legal proceedings or enforcement action may commence or continue against a company undergoing business rescue, save (among other exceptions to the rule) where consent is granted by the court or obtained from the business rescue practitioner. This moratorium offers critical breathing space to business rescue practitioners, allowing them to investigate the affairs of a distressed company and to develop an adequate business rescue plan.

The debate currently before the South African courts is what constitutes a ‘legal proceeding’ in terms of s133? Applying legislative interpretation to this rather underdeveloped area of law, the courts are often charged with determining whether proceedings relating to employment disputes, suretyship agreements and arbitrations, to name a few, fall within the ambit of precluded proceedings envisaged in s133.

Employment Disputes

In the matter of National Union of Metalworkers of South Africa obo Members v Motheo Steel Engineering CC [2014] JOL 32257 (LC), four employees were dismissed by a company which was undergoing business rescue. The company contended that the unfair dismissal application brought by the Trade Union was precluded by the s133 moratorium. The LC disagreed with the company’s contention finding that s133 of the Act did not apply to legal proceedings brought in respect of the provisions contained in the Labour Relations Act, No 66 of 1995 (LRA).

The LC, relying on the provisions of s210(1) of the LRA which states that the provisions of the LRA (including claims of unfair dismissal) prevail in the event of any conflict with other law save for the Constitution or any act expressly amending the LRA, rejected the company’s contention. On this premise, the LC decided that s133 of the Act did not expressly amend the LRA. While this judgment can be regarded as positive for employees, it highlights another exception to the application of the moratorium: proceedings brought in respect of the provisions of the LRA.

Suretyships

Similarly, the courts have been asked to determine whether a creditor’s claim against sureties is extinguished when a business rescue plan provides for a compromise in full and final settlement of a debt. The cases of New Port Finance Company (Pty) Ltd v Nedbank Ltd [2014] ZASCA 210 and Tuning Fork (Pty) Ltd t/a Balanced Audio v Greeff and Another 2014 (4) SA 521 (WCC) addressed this lacuna in business rescue and reached interestingly conclusions.

In the Tuning Fork case, the financially distressed principal-debtor adopted a business rescue plan which stipulated that the creditor would receive, among other things, a dividend in full and final settlement of its claims. The creditor attempted to claim the balance of the outstanding debt from the debtor’s sureties who, in turn, argued that the compromise contained in the adopted plan released them from their obligations as sureties.

The court turned to the common law, in the absence of statutory clarity on the matter; where it held that the obligations of sureties were accessory in nature. Therefore, the extinction of the principal-debtor’s obligation under business rescue would consequently extinguish the sureties’ liability, unless the deed of surety contractually preserved the creditor’s rights (which was not the position in this case).

In the New Port Finance case, the argument was again advanced by the sureties contending that because the principal-debtor’s obligation was altered by the adopted business rescue plan, the sureties’ respective liabilities were also altered, so as to render their liability extinguished by compromise or settlement reached under the business rescue plan.

Wallis J did not comment on the correctness of the judgment in the Tuning Fork case because in the New Port Finance case, the suretyship agreement contained clauses that entitled the creditor to recover the full amount of debt from the sureties irrespective of the release of the principal-debtor, in whole or in part, from its liability to the creditor. On the strength of these clauses contained in the deed of surety, the court found that the creditor’s rights were preserved and therefore entitled it to recover the balance of the outstanding debt from the sureties, notwithstanding the compromise reached in the adopted business rescue plan.

This area of business rescue is yet to be settled in our law and there will, no doubt, be further developments on the issue. These decisions do, however, serve as a useful caution to creditors to pay particular attention to the specific wording used in drafting their security documents, including deeds of suretyships or guarantees.

Arbitration Proceedings

In the matter of Chetty t/a Nationwide Electrical v Hart and Another 2015 (6) SA 424 (SCA) the question was whether an arbitration award made while the company was under business rescue was invalidated or voided by the general moratorium on legal proceedings in terms of s133 of the Act.

In this matter an arbitration award was made in favour of Ms Chetty (Appellent) who was unaware of the ongoing business rescue proceedings. Due to the Appellant’s dissatisfaction with the quantum of the arbitration award, the Appellant sought to have the arbitration invalidated in its entirety arguing that the arbitration hearing fell within the ambit of ‘legal proceedings’ precluded in terms of s133. The court considered the definitions attributed to ‘legal proceedings’ and held that:

“the phrase ‘legal proceedings’ may, depending on the context within which it is used, be interpreted restrictively, to mean court proceedings or, more broadly, to include proceedings before other tribunals, including arbitral tribunals. The language employed in s133(1) itself suggests that a broader interpretation commends itself, an approach with which academic commentators concur.”

Therefore, arbitration proceedings are likely to be considered legal proceedings going forward and will thus fall within the moratorium created by s133. However, the SCA found (on the particular facts) that failure to obtain the business rescue practitioner’s permission to institute proceedings did not mean the arbitration award was a nullity (on a reading of s133 of the Act) but more fundamentally noted that the Appellant’s attempt to invalidate the arbitration award merely due to its dissatisfaction with the result would not be considered by the courts.

Conclusion

It seems clear that the prominence of business rescue within South Africa will continue to grow. This growth now necessitates legislative development to ensure that the spirit and objectives of Chapter 6 of the Companies Act are properly realised.