SCA confirms that the moratorium in business rescue proceedings does not extend to unlawfully possessed property
Ricky Klopper
Director at Klopper Attorneys Inc.
ricky@klopper.co.za
In the recent case of Timasani (Pty) Ltd and Another v Afrimat Iron Ore (Pty) Ltd[1], the Supreme Court of Appeal (SCA) had to consider the application of the moratorium on legal proceedings against companies in business rescue as contained in section 133 of the Companies Act 71 of 2008 (the Companies Act).
The take-home points that we have identified in the judgment are as follows:
- Section 145(1) of the Companies Act does not require that all creditors of a company in business rescue be joined in any legal proceedings against the company in business rescue. The test for joinder of creditors remains whether the creditors have a direct and substantial interest in the subject matter of the litigation.
- The SCA confirmed that the moratorium in section 133(1) of the Companies Act does not apply to property which is in the unlawful possession of the company under business rescue.
- The court expressed the view that the moratorium may not apply to transactions that had been entered into by the business rescue practitioner subsequent to the commencement of business rescue proceedings. The court opted to not definitively answer this question and as such this does not constitute binding precedent, but it may hint at how the SCA may deal with this issue in future.
Below we set out the facts of the case, before summarising the salient parts of the SCA judgment.
The business rescue practitioner (BRP) of Timasani (Pty) Ltd (the Company) had been authorised to sell the Company’s assets in terms of its adopted business rescue plan. The Respondent, Afrimat Iron Ore (Pty) Ltd (Afrimat), made an offer to purchase the Company’s assets, which included a farm and farming equipment. The offer provided that Afrimat was to pay a 10% deposit and the balance would be payable after the fulfilment of the suspensive conditions to the offer. Afrimat’s offer was accepted by the BRP and Afrimat proceeded to pay a R1,7 million deposit into a separate investment account of the Company.
Subsequent to the payment of the deposit, the suspensive conditions were not fulfilled and the offer lapsed. Afrimat demanded repayment of the deposit from the Company and, after the Company failed to make payment, Afrimat brought an application against the Company and the BRP (the appellants) for repayment of the deposit. The High Court found in favour of Afrimat and ordered the Company to repay the deposit.
The SCA Judgment
The appellants appealed the High Court decision to the SCA and, in a judgment penned by Schippers JA, the SCA pronounced on some important legal issues relating to business rescue, including:
- Whether section 145(1) of the Companies Act requires that all creditors be joined to legal proceedings against a company in business rescue.
- The application of the moratorium contained in section 133(1) of the Companies Act in respect of property unlawfully possessed by the company in business rescue.
Non-joinder of the Company’s creditors
The appellants had argued that all the creditors of the Company had to be joined in terms of section 145(1) of the Companies Act.
The SCA held that section 145(1)(a) of the Companies Act imposes an obligation on a business rescue practitioner to give notice to creditors of court proceedings, while section 145(1)(b) confers a right on creditors to intervene in legal proceedings that a company in business rescue is a party to without the leave of a court. These sections do not, however, have anything to do with the joinder of creditors in legal proceedings involving a company in business rescue. The test for joinder remains whether the party has a direct and substantial legal interest in the subject matter of the litigation.
The SCA therefore held that Afrimat was not required by section 145(1) to join all the Company’s creditors as no right of any creditor to payment of any amount was affected by the High Court’s order directing the Company to repay the deposit.
Application of the section 133 moratorium in the circumstances
Section 133(1) of the Companies Act provides as follows (only relevant parts included):
‘General moratorium on legal proceedings against company. – (1) During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except–
(a) with the written consent of the practitioner;
(b) with the leave of the court and in accordance with any terms the court considers suitable;
(c) . . .
(d) . . .
(e) proceedings concerning any property or right over which the company exercises the powers of a trustee;
(f) . . .
(2) During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with the leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.
(3) If any right to commence proceedings or otherwise assert a claim against the company is subject to a time limit, the measurement of that time must be suspended during the company’s business rescue proceedings.’
The SCA considered the purpose of the moratorium and, referring to a prior SCA judgment, stated that the moratorium provides the company in business rescue with breathing space, allowing the business rescue practitioner, in consultation with affected persons, to develop a business rescue plan.
According to the SCA this case was the first occasion on which the moratorium had been sought to be invoked in respect of a transaction concluded after the commencement of business rescue or in respect of property that came into the company’s possession after the commencement of business rescue. The court, in an obiter statement, commented that there may not be a valid reason for enforcing a moratorium in such circumstances, but held that this particular case could be resolved even if assumed that the moratorium may have an effect on transactions concluded after the commencement of business rescue.
The appeal in this case concerned the moratorium as it relates to property belonging to, or in the lawful possession of the company.
According to the SCA, in the context of property, the moratorium could only conceivably apply to property owned by or in the lawful possession of the company in business rescue and that it could not prevent the recovery of property not belonging to the company or which is unlawfully in the company’s possession.
This construction is reinforced by section 134(1) which does not prohibit the exercise of any right in relation to property which is in the unlawful possession of the company in business rescue.
In light of the facts of the case, the SCA proceeded to conclude that because the suspensive condition to the sale agreement between the Company and had not been fulfilled, the Company was in unlawful possession of the deposit and therefore the moratorium did not apply in the circumstances. The court held that, for this reason, the High Court had rightly ordered the Company to repay the deposit.
[1] Timasani (Pty) Ltd (in business rescue) and Another v Afrimat Iron Ore (Pty) Ltd (91/2020) [2021] ZASCA 43 (13 April 2021).
