COMMENCEMENT OF BUSINESS RESCUE PROCEEDINGS

Is your company experiencing financial strain? Are creditors breathing down your neck? Business Rescue proceedings may be a solution to your problems.

Business Rescue is a new approach that is governed by the Companies Act 71 of 2008 (“the new Companies Act”) with the aim of assisting companies which are experiencing financial strain and are unable to pay their creditors in the ordinary course of business. This article will look at what Business Rescue encompasses, as well as how Business Rescue proceedings are commenced.

Section 128(1) (b) of the Companies Act defines Business Rescue proceedings as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing, inter alia, temporary supervision of a company under a Business Rescue practitioner.

The role of the Business Rescue practitioner (who must be appointed within 5 days after the company has been placed under Business Rescue) is to ensure that the company complies fully with the steps to be taken once Business Rescue proceedings have commenced. They must also ensure that everything reasonably possible is being done (including the drafting of a Business Rescue plan) to assist the company in getting out of its current state of financial strain and into a position where it will be able to pay its creditors in the ordinary course of business.

The new Companies Act stipulates that, in order to place a company under Business Rescue, a resolution must be taken by the Board of Directors and an application thereto must be made to the CIPC (Companies and Intellectual Property Commission). The Commissioner must then consider the application and approve or reject it. Alternatively, any interested or affected party may apply to the Court for a court order placing the company under Business Rescue.

A company that is under Business Rescue is protected from creditors in that no legal action or proceedings may be taken against a company that has commenced with Business Rescue proceedings.

It is imperative to note that a lack of full compliance with the requirements in respect of Business Rescue proceedings may render the Business Rescue proceedings null and void. This position was reiterated in the High Court case of Advanced Technologies & Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquees SAS (unreported CASE NO 72522/20110), and the Court further held that the new Companies Act does not provide for condonation of non-compliance with the requirements.

References:

  • Companies Act 71 of 2008
  • D Davis, W Geach, T Mongalo, D Butler, A Loubser, L Coetzee, D Burdette, 3rd Edition (2013) Commercial law: Companies and other Business Structures in South Africa.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. (E&OE)

GENERAL REMARKS ABOUT OWNERSHIP IN SOUTH AFRICA

By Hans Klopper

Independent Advisory (Pty) Limited

Transfer of ownership

The most comprehensive private right that a person can have in terms of South African law with regard to property is ownership.[1] We draw a distinction between original and derivative acquisition of ownership. Where ownership is acquired independently and not derived from the ownership of a predecessor it is viewed as original. Derivative acquisition of ownership occurs if ownership is derived from or depends on the ownership of the previous owner. In the case of movable assets, the most important element in the acquisition of ownership is delivery of the specific asset. In order to transfer ownership two main requirements must be satisfied.

First, there must be an agreement between the parties to transfer ownership and then there must be a form of conveyance of ownership. Consequently, failure to deliver the movable asset means that ownership does not transfer.

Furthermore, where movable assets are sold ownership does not pass, notwithstanding delivery, unless the purchase price is paid or security or credit for its payment is given. A sale of movables is usually a cash sale unless circumstances clearly indicate the existence of a credit sale such as, for example, a failure by the seller to reclaim the object, non-payment of the purchase price, failure to demand cash immediately on delivery, or where a cheque is post-dated. If a credit sale is intended or it is apparent that credit was extended to the buyer, ownership passes on delivery.

To summarise, therefore, ownership of movables is transferred by delivery and payment in a normal cash transaction and upon delivery in a credit transaction.

Unlike in some other jurisdictions, ownership in the case of movables therefore does not pass on the mere agreement between the parties.

In South African law, the agreement, such as for example a contract of purchase and sale giving rise to transfer, being the reason for the transfer, is strictly separate from the juristic act of transfer.

The underlying agreement relates only to personal rights and obligations and an additional legal transaction relates to the transfer of ownership. Consequently, there are two separate legal acts, each with its own requirements.

The question that arises is whether in terms of South African law the parties are entitled to agree on a time of transfer of ownership other than as is provided above.

Even though the agreement which gives rise to the personal obligation to transfer and the actual agreement to transfer ownership of the movable property[2] may take place simultaneously it is possible to distinguish between them.

In principle, two requirements[3] must be satisfied for the transfer ownership of movables: the parties must, in the first place, intend to transfer ownership, and, secondly, they must give effect to that conveyance by delivery of the asset.

The real agreement is distinguishable from the contractual agreement that gives rise to the obligation to transfer.[4] Two requirements for a valid to real agreement are as follows. The property must be capable of being held in private ownership, and the transferor must be capable of transferring ownership.

The parties to an agreement for the sale and transfer of movables may therefore enter into an agreement to sell movables, but may also agree to a delay in payment under which the seller agrees to provide credit for the payment of the purchase price and agrees that the transfer of ownership may follow later or at a specific date.

Insolvent persons cannot transfer ownership. Minors, insane persons and fiduciaries can transfer ownership only with the assistance of their guardians, curators and beneficiaries respectively.

The transferee must be capable of acquiring ownership. Infants and insane persons are legally incapable of having the intention to possess, and therefore need the assistance of their legal representatives to comply with the necessary registration formalities.

At the moment of transfer, the transferor must have the intention to transfer ownership and the transferee must have the intention to accept ownership. Where a contractual party takes the law into his or her own hands and takes possession of the object in the absence of an intention to transfer ownership on the part of the transferor, the usurper does not become owner, but a possessor in bad faith, open to a ‘mandament of spolie’ (a type of order for restitution) or other remedy.

This is an extract of an international publication, Globe Law and Business which was published in 2015

[1] C G van der Merwe (ed) “Ownership” in Francois Du Bois (general ed) Wille’s Principles of South African Law, ninth edition,

[2] Van der Merwe, Sakereg, p300.

[3] Wille ‘s Principles of South African Law, ninth edition, p520.

[4] Wille’s Principles of South African Law, ninth edition, p521.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. (E&OE)

LIABILITY OF SURETIES FOR DEBTS OF A COMPANY IN BUSINESS RESCUE

By Hillary Plaatjies

of Independent Advisory (Pty) Ltd

It is clear from case law and the applicable sections in the Act that the current legal position regarding the liability of sureties for the debts of a company in business rescue, is not settled.  There are different interpretations and views regarding this which are illustrated by the various court cases and contrasting judgements.

Scope of applicable law, legal principles and case law:

Section 133(2) of the Companies Act 71 of 2008 states that during business rescue proceedings, a surety by the company in favor of any person may not be enforced by any other person against the surety except with the leave of the court.  This have the effect that the company under business rescue may not be sued by the creditor.  The Companies Act (“the Act”) is not clear as to whether this protection afforded to the company under business rescue, is also applicable to sureties and co-principal debtors of the company and the question is whether the moratorium is applicable to the sureties.   Since the inception of the Companies Act, it has been left to the courts to determine the extent of the protection to which the sureties and co-principal debtors of the company is entitled to.

Section 155(9) of the Act states that a compromise with the creditors of the company, does not affect the liability of a person who is a surety of the company.   In Investec Bank v Andre Bruyns 2012(5) SA 430 (WCC), it was held that the moratorium and protection under Section 133(2) of the Act is a defence in personam for the company under business rescue and this protection does not extend to the sureties of the company.  This have the effect that a creditor can enforce payment of the debt against the surety during business rescue proceedings.  This can only apply where no business rescue plan has been approved yet because the company can be discharged of its debts at a later stage in terms of an approved business rescue plan.

In African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd & Others 2013 (6) SA 471 (GNP) the court held that the liability of sureties is not affected and they remain liable.  In DH Brothers Industries (Pty) Ltd v Gribnitz NO & Others 2014(1) SA 103 (KZP) it was held that if the plan provided for a discharge of the main debt and the creditor acceded to it, then the common law position will be applicable which would have the effect that the liability of the surety for the debt will no longer exist.

Section 154(2) of the Act states that where a business rescue plan has been approved and or the implemented in accordance with the Act, a creditor is not entitled to enforce any debt owed by the company prior to commencement of the business rescue proceedings, except to the extent provided for in the business rescue plan.

In the case of Tuning Fork (Pty) Ltd v Green and another 2014 JOL (WCC), it was held that unless otherwise stated in the business rescue plan, a creditor may not proceed against any person who signed as surety for the debtor company in business rescue after the adoption of the business rescue plan which provides for the discharge of the debt by agreement between the debtor company under business rescue and the creditor or release of such debtor company’s obligations to the creditor.  In the Tuning Fork case, it appears as if the judge held the view that where there is no statute dealing with this situation, the common law must be followed and under the general principals of suretyship, if a debtor has been released of his liability, the surety is also released from such liability.

The Act does not make provision for the situation where a business rescue plan have been adopted and what the effect is on the sureties of the company.  Where a compromise was entered into by the company, with its creditors, Section 154(2) of the Act is applicable which states that the liability of sureties is not affected.

In Blignaut v Stalcor (Pty) Ltd 2014 JDR 0349 (FB), the court held that it could not have been the intention of the legislature to also give sureties and co-principal debtors the same protection that it gives the company.

Section 154(1) of the Act provides that if business rescue plan is implemented in accordance with the terms and conditons, the creditor who has acceded to the discharge of the debt in whole or in part, will lose the right to enforce the relevant debt.

Conclusion:

The purpose of the Act includes inter alia to provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders”.   It was never the intention of the legislator, to extent the same protection to sureties that it provides to the principal debtor.   The legislator would have made provision in the Act for such protection to the sureties.  The purpose of the suretyship, is to ensure that the creditor receives payment in the event of failure to pay the debt by the principal debtor.  Suretyships is for the purpose of protecting the creditor and to ensure that the creditor can pursue his claim against the surety and co-principal debtor.

The liability of the surety is not affected by the business rescue of the principal debtor.  Creditors must ensure that a business rescue plan must make specific provision for the situation of the sureties and that the business rescue plan preserve claims against sureties.

Alternatively, guarantees from third parties for the principal debt or obligation must be obtained rather than to rely on the suretyships as the only form of security.  The claim against the surety must be preserved by stipulation in the business rescue plan, so that the principal debt is not discharged by way of release of the principal debt in a business rescue plan.  Specific inclusion of the preservation of this claim in the Business Rescue Plan is of utmost importance.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. (E&OE)