After a business rescue plan is rejected by creditors, when do business rescue proceedings terminate?
Ricky Klopper
Director at Klopper Attorneys Inc.
ricky@klopper.co.za
When a business rescue plan is rejected by creditors, section 153(1) of the Companies Act 71 of 2008 (Companies Act) sets out various actions that may be taken by the practitioner or affected persons. If none of these actions are taken (when the plan has been finally rejected), section 153(5) provides that a business rescue practitioner must “promptly” file a notice of termination of business rescue proceedings.
In a recent judgment handed down by Koen J in the KwaZulu Natal Division of the High Court in Land Bank v Agri Oil Mills,[1] the court held that business rescue proceedings end automatically if a business rescue plan has been finally rejected by creditors. This has the consequence that, after a plan is finally rejected, the business rescue practitioner no longer has the legal standing to bring an application for the liquidation of the company (formerly) in business rescue.
Although this appears to be the correct decision, there has been uncertainty regarding the correct interpretation of section 153 read with the other relevant provisions in Chapter 6 of the Companies Act, and until the Supreme Court of Appeal rules on the matter, a degree of uncertainty will remain due to conflicting judgments in different divisions of the High Court.
In this article, we briefly consider the Court’s reasons for deciding as it did in Land Bank v Agri Oil Mills (in relation to the issues raised above) while also comparing it to other interpretations of the relevant sections. To conclude we will consider the implications of the Land Bank judgement.
Court’s reasoning in Land Bank
In the relevant part of the judgment, Koen J considers section 132(2) of the Companies Act, which lists circumstances in which business rescue proceedings end, including when the practitioner has filed a notice of the termination of business rescue proceedings[2]; or when a business rescue plan has been finally rejected – i.e. proposed and rejected, and no affected person has acted to extend the proceedings in any manner contemplated in section 153[3].
The court held that section 132 is the provision which prescribes situations in which business rescue proceedings end and that this is confirmed by section 129(6), which provides that one must determine whether business rescue proceedings have ended in accordance with the provisions of section 132(2).
From section 132(2)(b), it is clear that if a notice of termination is filed by a practitioner, the proceedings are brought to an end. However, section 132(2)(c)(i) makes it obvious that the plan being finally rejected is an independent, sufficient ground which brings proceedings to an end. This means that when a plan is finally rejected, that is all that is required for proceedings to end and the filing of a notice of termination is not a necessary, additional requirement.
Koen J referred approvingly to the judgment in Landosec (Pty) Ltd v McLaren[4] where Smith J had held that section 132(2)(c)(i) is unambiguous and can only be interpreted to mean that business rescue proceedings end automatically when the business rescue plan is finally rejected.
Therefore, according to the court, section 153(5) does not introduce a further prerequisite for the termination of business rescue proceedings but rather provides for good administrative governance, so that the CIPC can promptly be made aware of the fact that business rescue proceedings have been terminated.
The court further ruled that the business rescue practitioners be held personally liable for the costs of the opposition of the application subsequent to the date that the business rescue plan had been finally rejected by creditors due to their failure to promptly file a notice of termination of business rescue as they are obligated to do in terms of section 153(5) of the Companies Act.
Differing interpretations
As pointed out in the Landosec judgment, the provisions of section 132(2) are unambiguous and therefore the decision in the Land Bank case appears to be the correct one.
However, in Ex Parte Target Shelf 284 CC[5] the Gauteng Division of the High Court in Pretoria had ruled that the Companies Act does not allow for automatic termination of business rescue proceedings and that, if a business rescue plan is finally rejected, business rescue proceedings will only terminate when the notice of termination is filed by the business rescue practitioner.
In coming to this conclusion, the court had relied on the judgment of the same division in CSARS v Primrose Gold Mines (Pty) Ltd[6], which has subsequently been overturned by a full bench. In that case, the court a quo had (wrongly) concluded, based on section 141(2), that business rescue proceedings may only end if the company in business rescue is no longer financially distressed (after the adoption of a business rescue plan) or otherwise if the company is placed in liquidation.
On appeal, a full bench of the Gauteng Division, Pretoria pointed out that the court a quo had overlooked the fact that a notice of termination may also be filed after a business rescue plan had been finally rejected.[7] The court in that case had concluded that business rescue proceedings terminate after a plan has been finally rejected and the practitioner, thereafter, has filed a notice of termination.
The conclusion reached in the Land Bank case therefore differs from the Primrose judgment by the full bench in Pretoria. In the Land Bank case, the Court concluded that business rescue proceedings end automatically when a plan is finally rejected, while in Primrose it was held that proceedings will only end once the practitioner files a notice of termination. This was also the conclusion reached in Western Crown Properties 61 (Pty) Ltd v Able Walling Solutions (Pty) Ltd and Others[8] in the Western Cape Division.
Implications
Due to the uncertainty that remains, business rescue practitioners would be well advised to ensure that they do promptly file a notice of termination of business rescue proceedings once a business rescue plan has been finally rejected as failing to do so (and possibly delaying the termination of proceedings) may result in the practitioner being held personally liable for losses to creditors or other stakeholders as a result of the delay in filing the notice of termination.
What is however clear is that once a notice of termination has been filed by the practitioner in these circumstances, business rescue proceedings will end, and the practitioner will not have the legal standing to bring a subsequent liquidation application. Creditors will then have the ability to enforce their claims against the company or to bring a liquidation application.
The impact that this may have on the conduct of business rescue practitioners will be interesting to observe. A business rescue practitioner who is still owed fees by the company under business rescue may be very reluctant to allow a plan to be voted on unless the practitioner is absolutely sure that it will be approved. This may have the unintended consequence that business rescue proceedings are not promptly finalised, which would be contrary to the policy goals of business rescue.[9]
[1] Land and Agricultural Development Bank of South Africa v Agri Oil Mills (Pty) Ltd and Others; Agri Oil Mills (Pty) Ltd and Others v CIPC and Others (Land and Agricultural Development Bank of South Africa Intervening) (not yet reported) (KZP) case no: 3246/2019P (13 May 2021).
[2] Section 132(2)(b) of the Companies Act.
[3] Section 132(2)(c)(i) of the Companies Act.
[4] Landosec (Pty) Ltd t/a Lasertech v McLaren 2017 JDR 1492 (ECP) para 7.
[5] Ex Parte Target Shelf 284 CC (Commissioner for the South African Revenue Service and Business Partners Ltd Intervening Parties) 2015 JDR 2219 (GP).
[6] [2014] ZAGPPHC (12 September 2014).
[7] CSARS v Primrose Gold Mines (Pty) Ltd and Others [2016] ZAGPPHC 737 (23 August 2016).
[8] [2017] ZAWCHC 167 (13 November 2017).
[9] As provided in section 7(k) of the Companies Act, 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”.
