Tag Archives: financial distress

THE MORATORIUM AGAINST LEGAL ACTIONS DURING BUSINESS RESCUE AND THE AMENDMENT OF BUSINESS RESCUE PLANS

The recent judgment in Booysen v Jonkheer Boerewynmakery (Pty) Limited and Another[1]  reminded us again that we would appear to have lost sight of the fact that business rescue was always intended to be a mechanism whereby companies experiencing financial distress should be afforded breathing space in order to restructure its affairs. The intention of the legislature was to ensure that businesses be rescued and being saved from liquidation as opposed to merely been liquidated by every dissatisfied and the recalcitrant creditor. The ability to stay legal proceedings against the entity while exploring restructuring options is vital for a successful business rescue regime.

The aim with the business recue provisions in Chapter 6 of the Companies Act 71 of 2008 (‘the Companies Act’) was surely that business rescue could only be achieved under circumstances where there is “peace and quiet” and circumstances under which the business rescue practitioner could go about this tasks unhindered and pursue the possibilities of restructuring the affairs of the company and finding common ground with creditors in order to arrive at a business rescue plan that balances the rights of all affected persons.

Section 133 of the Companies Act was in my view drafted to provide for a general moratorium on legal proceedings by creditors or other parties against the company under business rescue. It would however appear to have become common practice that unhappy creditors willy-nilly launch liquidation or legal proceedings against companies under business rescue without seeking the written consent of the practitioner and merely proceeds to request the court to grant it leaves to pursue with legal action.

This has not been without legal challenges, and in this regard the courts initially had differing views as to what ‘legal proceedings’ are[2] in certain instances and whether ‘arbitration’ or labour law issues are included. The matter was settled in the SCA[3] where it was held that on the basis that the phrase ‘legal proceeding’ 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.[4]

The SCA[5] also thereafter that where a right to cancel an agreement had accrued prior to the commencement of proceedings that the subsequent cancellation is not ‘enforcement action’.

The SCA also held that if cancellation is ‘enforcement action’, such steps would change the basic principles of the Law of Contracts, which provides for a unilateral act of cancellation in the case of a breach of contract.

It was held that the moratorium did not apply to proceedings for the ejectment of a company in business rescue from a premises where the lease regulating rights of occupation had been validly cancelled and the company had failed to vacate and was thus not in lawful possession of the property[6].

The Act provides that during business rescue proceedings no legal proceedings (including enforcement action) against a company may be “commenced or proceeded with” in any forum, except with the written consent of the business rescue practitioner[7] or with the leave of the court, in accordance with such terms as the court may deem “suitable”.[8]

This provision in the Act was the subject matter of conflicting decisions in certain judgments to date and which judgements were thoroughly analysed in the abovementioned Jonkheer judgment.[9] In Jonkheer, the court referred to the various conflicting judgments on the issue and the opposite views which have been expressed as to whether the provisions of the Act require a separate prior application[10] to be made for leave to commence or proceed with legal proceedings, or whether such leave may be sought in one and the same matter.[11]

In the further recent judgment of Arendse[12]  the court held that if “the legislature had intended to limit the grant of leave to ‘exceptional circumstances’[13], that test would have been expressly stated”. The court then held that it is “given wide powers not only to grant leave, but also to determine the terms on which such leave is granted”.

The Jonkheer judgment then also dealt with the vexing issue as to whether an adopted business rescue plan could be amended. I am of the opinion that, like any agreement or arrangement between parties, a business rescue plan may be amended by giving notice to the stakeholders or affected persons who initially adopted the business rescue plan.

In Jonkheer however the issue was whether there could be a unilateral amendment of business rescue plan by a practitioner.  It was contended buy the business rescue practitioner that the business rescue plan was subject to a proviso in terms of which the practitioner had reserved the right to amend that business rescue plan unilaterally, without reference to creditors

The court held that whole scheme of sections 150 and 153 of the Companies Act is that there is no room for a business rescue practitioner to reserve to himself the right to amend a business rescue plan and that this would circumvent the Companies Act in terms of which claims, which are to be discharged in terms of a rescue plan, derive their binding force.

I agree with this judgment insofar as the prohibition of the unilateral amendment of a business rescue plan by the practitioner is concerned but remain of the view that a business rescue plan may be amended by the same parties who adopted it, namely all creditors or affected persons.

By: Hans Klopper
Independent Advisory


[1]Booysen v Jonkheer Boerewynakery (Pty) Limited and Another (10999/16) [2016] ZAWCHC 192; [2017] 1 All SA 862 (WCC) (15 December 2016)

[2]Van Zyl v. Euodia Trust [Page 478(5)] (Edms) Bpk 1983 (3) SA 394 (T) at 397 as to mean: ‘…the ordinary meaning of legal proceedings in the context of s 13 [“regsgeding” in the signed Afrikaans version] is a law suit or “hofsaak”,’ a definition accepted in Lister Garment Corporation (Pty) Ltd v. Wallace NO 1992 (2) SA 722 (D) at 723; The test in the Van Zyl case supra was accepted in Chetty t/a Nationwide Electrical v. Hart NO and Another (12559/2012) [2014] ZAKZDHC 9 (25 March 2014).

[3] The Chetty (a quo) case, supra, was reversed on appeal in Chetty t/a Nationwide Electrical v Hart and Another NNO 2015 (6) SA 424 (SCA) .

[4]Delport PA and Vorster Q, Henochsberg on the Companies Act 71 of 2008.

[5] Cloete Murray and Another NNO v. FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA).

[6]Kythera Court v Le Rendez-Vous Café CC 2016 (6) SA 63 (GJ)

[7]Section 133(1)(a) of the Act.

[8]Section 133(1)(b) of the Act.

[9]Booysen v Jonkheer Boerewynakery (Pty) Limited and Another (10999/16) [2016] ZAWCHC 192; [2017] 1 All SA 862 (WCC) (15 December 2016)

[10]Merchant West Working Capital Solutions (Pty) Ltd v Advanced Technologies (Pty) Ltd and Another, [2013] ZAGPJHC 109, decided on 10 May 2013; Redpath Mining SA (Pty) Ltd v Marsden NO and Others [2013] ZAGPJHC 148 decided on 14 June 2013; Msunduzi Municipality v Uphill Trading 14 (Pty) Ltd & Others [2014] ZAKZPHC 64 decided on 27 June 2014; Elias Mechanicos Building and Civil Engineering Contractors (Pty) Ltd v Stedone Developments (Pty) Ltd and Ors 2015 (4) SA 485 (KZD).

[11] Safari Thatching Lowveld CC v Misty Mountain Trading 2 (Pty) Ltd 2016 (3) SA 209 (GP).

[12] Arendse and Others v Van der Merwe and Another NNO 2016 (6) SA 56 (GJ)

[13] As was held in Redpath Mining SA (Pty) Ltd v Marsden NO and Others

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)