Business rescue has become an important cornerstone of South African corporate insolvency law, aiming to preserve the value of distressed companies for creditors, employees and shareholders. But occasionally, boards of these distressed entities may try and obstruct the process. A recent judgment by the North West Division of the High Court has shown that circumventing the process is a high-risk and low-reward strategy, which opens the business up to adverse findings.
The judgment provides important guidance on two deceptively simple yet significant questions: when does voluntary business rescue actually commence, and can it be used to thwart a pending compulsory business rescue application? It also provides welcome certainty for creditors and reinforces the integrity of South Africa’s business rescue framework.
Background to the case:
Zizwe Open Cast Mining Proprietary Limited (Zizwe) rendered contract mining services to Lethabo Minerals Proprietary Limited (Lethabo). Following the termination of their commercial relationship, Lethabo acknowledged that there was a substantial debt owing to Zizwe. Zizwe instituted an urgent compulsory business rescue application under section 131(1) of the Act.
Lethabo’s answering affidavit was conspicuously narrow, it didn’t dispute the debt or its amount, offered no evidence demonstrating solvency or a viable recovery plan. Furthermore, Lethabo’s affidavit did not take issue with either the qualifications or the independence of the nominated business rescue practitioner.
READ – Group Five’s Six-Year Business Rescue Ends — Creditors Paid in Full
However, shortly before the hearing, Lethabo informed Zizwe and the Court that its board had adopted a written resolution two days prior to the hearing, voluntarily commencing business rescue proceedings. Lethabo stated that the requisite paperwork had been lodged with the Companies and Intellectual Property Commission (CIPC), thereby commencing business rescue proceedings and rendering Zizwe’s application moot.
The Court considered whether the board’s actions constituted an abuse of the business rescue procedure. Given that the board had been aware of the pending business rescue application for at least two weeks prior to the hearing, and its own answering affidavit did not mention any intention to pursue voluntary business rescue or an objection to Zizwe’s nominated practitioner, the Court was unsurprisingly critical of Lethabo’s conduct.
The Court found this conduct constituted an abuse of process: the resolution was adopted not in genuine pursuit of rehabilitation, but as a tactical manoeuvre to retain control over the identity of the business rescue practitioner and to derail the court-driven proceedings. As such, the Court held that it was just and equitable to set aside the resolution commencing the business rescue proceedings.
The judgment has several practical implications. First, boards of directors and creditors should not assume that a board resolution or proof of electronic submission is sufficient to commence business rescue proceedings. They should verify that the CIPC has formally accepted and confirmed the filing. Second, boards seeking to secure a tactical advantage by adopting a resolution to thwart a compulsory business rescue application must understand that this is a high-risk and low-reward strategy. Third, the judgment confirms that directors who invoke the legislation for purposes other than genuine rehabilitation expose themselves to adverse findings.
READ – Tongaat Hulett’s Business Rescue Bolsters Industry
Ultimately, this decision reinforces the procedural integrity of business rescue, while providing much-needed certainty for creditors, companies and practitioners alike.
For the full commentary on this issue, please click here.
By Eric Levenstein, Director and Head of Insolvency & Business Rescue; Brandon Starr, Senior Associate and Clio Patricios, a Candidate Attorney at Werksmans Attorneys