What now to set aside a directors’ resolution placing a company in rescue – by Colin Strime

1. This topic again came before the Western Cape High Court, in the reported decision of Alderbaran (Pty) Ltd v Bouwer 2018 JDR 0587 (WCC) (per Judgment dated 22 March 2018).

2. The Honourable Davis J. following on the SCA decision of Panamo Properties (Pty) Ltd & Another v Nel N.O & Others stated that the test is a twofold test. Firstly, so he stated, the Court must be satisfied that the applicant to such an application makes out a case that –

2.1 there is no reasonable ground for believing that the company is financially distressed; or

2.2 there is no reasonable prospect of rescuing the company; or

2.3 the company failed to satisfy the procedural requirements of Section 129(3) and (4), i.e to place a company in business rescue by way of directors’ resolution (re service, giving notice and certain other formalities as set out in that Section); and

then, and only then, does the second leg of the test fall to be determined, namely that it would be just and equitable to set aside the resolution having regard to all the evidence in the particular case. The matter dealt with, inter alia, Section 130(3) and 130(5) of the Companies Act and made some novel findings which we deal with below.

3. Brief Summary of main facts

3.1 The Main Application

3.1.1 A company known as Alderbaran (First Applicant) and Faizel Noor (Second Applicant) in his capacity as the alleged business rescue practitioner of Alderbaran applied to interdict the transfer of a property to the Third Respondent pursuant to a sale in execution of the company’s immovable property and to declare such transfer unlawful in terms of Section 130(3) of the Companies Act 71 of 2008 (“the Act”).

3.1.2 The ground for this relief was that Alderbaran was in business rescue.

3.2 The Counter Application

3.2.1 The execution creditor (one Bouwer) who had attached the immovable property opposed the application and brought a counter application for the setting aside of the Section 129 resolution placing Alderbaran in business rescue and sought the termination of the business rescue in terms of Section 130 of the Act.

4. Having analysed the facts Davis J. satisfied himself that the Section 129 resolution fell to be set aside in terms of Section 129(5)(a) as read with 130(1)(a)(iii) as:

4.1 there was no statement of oath signed in support of the resolution as provided for in Section 129(3)(a)(i);

4.2 there was no publication of the resolution to affected persons as required in Section 129(3)(a)(i);

4.3 there was no publication of notice of the appointment of the business rescue practitioner to affected persons as required in Section 129(4)(b).

5. Having done so, Davis J. in applying the second leg of the test proceeded to state that:

“the next enquiry is whether, in light of all the facts, it would be just and equitable [writer’s underlining] to set the first resolution aside and terminate the business rescue. In my view the enquiry postulated in Section 130(5)(a)(ii) is similar to that in Section 344(h) of the Companies Act 61 of 1973 (“the old Act”) which dealt with the liquidation of companies on the ground that it appeared just and equitable to the Court. As in the case of Section 344(h) of the old Act, the conclusion that the termination of the business rescue would be just and equitable involves the exercise, not of a discretion, but of a judgment on the relevant facts, but once the conclusion has been reached, the making of an order to set aside the resolution and terminate the business rescue does involve the exercise of a discretion. (see Hennochsberg on the Companies Act, commentary on Section 344(h) of the old Act).”

6. The learned Judge then concluded that it would be just and equitable to set aside the resolution and terminate the business rescue based on the following facts:

6.1 the timing of the passing of the resolution – in this matter it was passed on the same day that an application to rescind a judgment against the company was dismissed and accordingly the courts found in this regard that this “… suggests that it was motivated by the ulterior purpose of awarding off execution of the default judgment. That suspicion is compounded when one considers that no steps were taken to comply with the procedural requirements of Section 129 after the passing and filing of the first resolution. No business rescue plan was drafted let alone adopted pursuant to the first resolution.”

6.2 the correspondence attached to the application papers which the courts concluded reflected that the business rescue practitioner “although nominally in control ….. was not truly in control of the affairs of Alderbaran, and that the real driving force behind the efforts to promote the sub-division and development of the property was ….. the director of Alderbaran.

7. These sets of facts led the court “…. to the ineluctable conclusion that the first resolution was not passed in good faith in that there was no genuine intention to attain the objectives of the Act in regard to business rescue. The remedy of business rescue was used as a stratagem to defeat Bouwers [i.e the execution creditor and applicant in the counter-application] enforcement of the default judgment.

(the above underlining is the writers)

8. Lastly then, so the court concluded that it was not just and equitable if the business rescue was not set aside as this would force the execution creditor to act as the banker of the company and “…. that justice and equity will best be served by setting aside the first resolution and terminating the resultant business rescue”.

9. What makes this case so interesting is that this is not where the court stopped. The Court having regard to the wording of Section 130(5)(c) then made the following interesting statements and findings:

– “Furthermore, because of business rescue, once validly initiated, remains operative until set aside by a court – even if affected persons have not been notified thereof as required in Section 129 – I do not consider that there should be a blanket rule that the setting aside of a Section 129 resolution and termination of business rescue operates ex tunc, i.e retrospectively with effect from the date of the Section 129 resolution.”

– “In my view circumstances may differ from case to case so that a different approach is required in order to ensure that justice is done. For instance, there may be uncertainty regarding the status of legal proceedings or enforcement action taken against the company while the company was in business rescue at a stage when affected persons were unaware thereof. “

– “… there may be instances where a business rescue practitioner has taken steps during the course of the business rescue which affect the rights of third parties and/or are beneficial for the company which should not be invalidated when a Section 129 resolution is set aside and the business rescue terminated.”

– “To my mind the rational for the wide discretion conferred on the Court in Section 130(5)(c) to grant “any further necessary and appropriate order” is to equip the court to deal equitably with the various circumstances which may arise and require regulation following the setting aside of the Section 129 resolution and termination of business rescue (the writer’s underlining). The discretion must be exercised judicially, and only limit on the further order which may be made is that it must be both necessary and appropriate”.

10. The courts then concluded further in this matter that with regards to the sale in execution, that:

10.1 “to my mind it is both necessary and appropriate in all the circumstances of this case, to make an order confirming the validity of the sale in execution of the property on 15 June 2017 and authorising the finalisation of transfer of the property in terms thereof”.

and then proceeded to make such order.

11. The courts also then dealt with how, the words “service” and “notice” as they are utilised in terms of Section 130(3) should be interpreted and applied in practice. Section 130(3)(a) (dealing with objections to resolutions passed under Section 129) and 131(2)(a) (which deals with applications to court to begin business rescue) read as follows:

130. Objection to Company Resolution

(3) An applicant in terms of subsection (1) must—

(a) serve a copy of the application on the company and the Commission; and
(b) notify each affected person of the application in the prescribed manner.”

131. Court order to begin business rescue proceedings

(1) Unless a company has adopted a resolution contemplated in section 129, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings.

(2) An applicant in terms of subsection (1) must—

(a) serve a copy of the application on the company and the Commission; and
(b) notify each affected person of the application in the prescribed manner.”

12. Section 130(3)(a)

12.1 The Courts considered earlier decisions in this regard and held that the word “serve” as set out in 130(3(a) of the Act “means service in terms of Rule 4 [of the High Court Rules] more particularly service in terms of Rule 4(1)(a) in the case of the company, i.e service by sheriff in one of the manners referred to in Rule 4(1), and, in the case of the Commission service in terms of Rule 4A(c) as read with Practice Note 9 of 2017, i.e service by electronic mail at the dedicated email address provided by the Commission, namely corporatelegalservices@cipc.co.za.”

13. Section 130(3(b)

13.1 With regard to the word “notice” as utilised in Section 130(3)(b), i.e notification of the application to affected person “in the prescribed manner”, the courts held that “… Regulation 124 of the Companies Regulations, 2011 (“the Regulations”) sets out the manner in which the applicant is required to notify affected persons in terms of this Section”. It states that:

“An applicant in court proceedings who is required, in terms of either Section 130(3)(b) or 131(2)(b), to notify affected persons that an application has been made to court, must deliver a copy of the court application in accordance with Regulation 7, to each affected person known to the applicant.”

[emphasis added]

“Regulation 7(1), in turn provides that:

a notice or document must be delivered for any purpose contemplated in the Act or these regulations may be delivered in any manner –

(a) contemplated in Section 6(10) or (11);
(b) set out in Table CR3.”

13.2 The courts then considered Section 6(11)(b) of the Act, Table CR3, Regulation 7(3)(a) and concluded in connection with the giving of notice to affected persons in terms of Section 130(3)(b) that:

13.2.1 “therefore this court is empowered, in terms of Regulation 124 as read with Regulations 7(1) and 7(3) and Table CR3, to determine the manner in which notice of the application is to be given to affected persons in terms of Section 130(3)(b)”

13.2.2 “Regulation 124 might well be ultra vires” what may lawfully be prescribed under Section 131(2)(b) (and 130(3)(a)) if, properly construed, it requires service of the whole application on all affected parties. However I humbly disagree with this interpretation of Regulation 124. It seems to me that Regulation 124 requires delivery of a copy of the application in accordance with Regulation 7 to all affected persons known to the applicant. Regulation 7 specifically refers to Section 6(11) of the Act which, in terms of Section 6(11)(b)(ii) allows for a summary of the contents of the application to be delivered by email where the whole application cannot be printed conveniently by the recipient, for instance because it is too voluminous to be printed quickly and cheaply. Furthermore Regulation 7(1) permits the delivery if any manner referred to in Table CR3, which provides for a number of delivery options and includes any method of delivery authorised by the High Court. It therefore seems to me inaccurate to say that Regulation 124 requires service of the whole application on all affected parties. The scope of Regulation 124 is limited to affected persons known to the applicant and delivery in accordance with one of the methods sanctioned in Section 6(11) or Table CR3, read with Regulation 7(1) is what is required.”

(the writer’s underlining)

14. In this matter the execution creditorscounter application for setting aside and termination of the business rescue in terms of Section 130 was served on the applicant’s attorneys of record. The Courts held that this constituted proper service in terms of Rule 4(1)(aA) of the Uniform Rules and therefore there had been due compliance with Section 130(3)(a) insofar as the company was concerned.

15. For “Service” in terms of Section 131(2)(a)

15.1 In summary then to satisfy the requirements of service as set out in Section 131(2)(a) service must be effected on the company in question in terms of Rule of Court 4(1) (by the sheriff) and on the Commission by way of email.

16. For “Notice” – in terms of Section 131(2)(b)

16.1 To satisfy the requirements of notice as set out in Section 130(3)(b) and 131(2)(b) a copy of the application in question or the pleadings must be delivered in full or in summarised version to all known affected parties, i.e those who are known to the applicant at the time and certainly not all if there are certain affected parties whose identities were not known to the applicant at the time in accordance with one of the methods sanctioned in Section 6(11) or Table CR3 as read with Regulation 7(1) of the Act.

17. Practical Matters

17.1 Although this case is not on all fours with the previous decisions of the High Court, it does go into detail as to what the courts will require:

17.1.1 when making orders under Section 130(5)(a) and (c); and

17.1.2 for “service” (insofar as the company and the CIPC is concerned) and giving “notice” to affected parties as required by Sections 130(3) and 131(2) of the Act.

17.2 The Judge also provided certain examples of what he believed the Court could order in this matter as “necessary and appropriate” as provided for in terms of Section 130(5)(c) of the Act, i.e in this matter it confirmed the validity of a sale in execution of an immovable property and authorised the finalisation of the transfer of the property. A possible explanation as to why the Judge went this far can be gleaned from his opening sentence to his judgment which reads as follows:

“This matter aptly illustrates the potential for abuse of the remedy of business rescue.”

17.3 Because of this it appears that the Judge went out of his way to accommodate the execution creditor and to make adverse findings against the company and its business rescue practitioner.