24 May 2021

SCA Judgment Provides clarity on the general moratorium of proceedings against a company in Business Rescue

by Letacia Govender, Associate, Durban, Kahla Hemero, Associate, Durban,
Practice Area(s): Litigation |

Business rescue is a mechanism which provides for the restructuring of financially distressed businesses by inter alia placing the business under the supervision of a Business Rescue Practitioner (“BRP”) and placing a temporary moratorium on claims of creditors against the business.  Whilst this moratorium is designed to facilitate the successful rescue of a company, some companies have used the moratorium solely to get themselves out of their obligations to creditors. The business rescue procedure is regulated by the Companies Act 71 of 2008 (“the Act”).

The general moratorium is regulated by section 133(1) of the Act, which provides that no legal proceedings, including enforcement action, may be instituted against the company, or in relation to any property belonging to the company, during business rescue proceedings. This general moratorium protects the company against legal action by creditors, save with the written consent of the BRP or with leave of the court.

The Act requires creditors to be notified of legal proceedings instituted against the company in business rescue. This is dealt with in section 145, which provides that each creditor is entitled to receive notice of court proceedings, decisions or meetings concerning business rescue proceedings and to participate in such court proceedings. It also provides that each creditor is entitled to formally and informally participate in the business rescue proceedings.

In the case of Timasani (Pty) Ltd (In Business Rescue) and another v Afrimat Iron Ore (Pty) Ltd (91/2020) [2021] ZASCA 43 (13 April 2021), the Supreme Court of Appeal (“SCA”) had to determine whether Afrimat, the respondent in the appeal and a creditor of Timasani, was precluded, in terms of the moratorium on legal proceedings in terms of section 133 of the Act, from launching proceedings for the repayment of a deposit. Timasani was placed in business rescue and, in terms of the business rescue plan, the business rescue practitioner was authorised to sell the company’s assets. The business rescue practitioner instructed auctioneers to invite offers for the purchase of Timasani’s assets, namely a farm together with mineral rights and mining equipment. Afrimat made an offer to purchase these assets. In terms of the offer, Afrimat paid a deposit of R1.7 million to Timasani and the balance of the purchase price would be paid upon fulfilment of certain conditions. The conditions were not met and the contracts for the purchase of the assets did not materialise. In Afrimat’s view, the offer lapsed when the parties failed to conclude the sale agreement and Afrimat withdrew its offer to purchase and requested the repayment of its deposit.

In the court a quo, an order was granted declaring that section 133 of the Act did not apply to the proceedings instituted and ordering Timasani to repay the deposit. On appeal, it was argued that Afrimat failed to comply with the provisions of section 133(1) of the Act as they had not obtained the written consent of the business rescue practitioner or leave of the court and that they had failed to join all the creditors of Timasani in terms of section 145(1) of the Act.

The SCA stated that Timasani’s reliance on the non-joinder of all the creditors was misplaced and the test is whether a party has a direct and substantial interest in the subject matter of the proceedings. In this case, the deposit was a provisional payment pending the fulfilment of suspensive conditions and the conclusion of final agreements. It was therefore not necessary for the auctioneer to be joined as it had no interest in the terms upon which the deposit was paid. Furthermore, section 145(1)(a) provides a general notification requirement to creditors of court proceedings concerning business rescue. It does not specify that all creditors need to be joined in the legal proceedings and the duty to give notice to the creditors rests on the BRP. In the circumstances, Afrimat was not required by section 145(1) to join all the creditors in the application to recover its deposit.

The SCA also considered whether section 133(1) of the Act precluded Afrimat from claiming repayment of the deposit.  In this respect, the SCA was of the view that the provision could not have intended for the restructuring of the affairs of a company in business rescue to prevent the recovery of property not belonging to it or unlawfully in its possession.

The SCA found that where a contract is subject to a suspensive condition which is not fulfilled, the obligation under the contract becomes unenforceable and it is as if the contract never existed. A party who has made payment under a contract is entitled to the return of the money if the suspensive conditions are not fulfilled. In this case, the suspensive conditions were not fulfilled and Timasani had no right to retain the deposit because it did not belong to it. Section 133 therefore did not apply and Afrimat was entitled to repayment of the deposit. The appeal was dismissed.

This SCA judgment provides guidance in respect of sections 133 and 145 of the Act and the limitations thereto. Companies in business rescue cannot use the general legal moratorium as a defence to legal proceedings being instituted where the company is not in lawful possession of the property in dispute. In addition, the judgment provides clarity on section 145 of the Act regarding the joinder of creditors in legal proceedings against the company in business rescue.