Business rescue has become a cornerstone of South African corporate insolvency law. Introduced by Chapter 6 of the Companies Act 71 of 2008 (the Act), it seeks to rehabilitate financially distressed companies while preserving value for creditors, employees and shareholders.
Business rescue has become a cornerstone of South African corporate insolvency law. Introduced by Chapter 6 of the Companies Act 71 of 2008 (the Act), it seeks to rehabilitate financially distressed companies while preserving value for creditors, employees and shareholders.
For creditors seeking to place a company under surveillance, boards of distressed entities may attempt to hinder this process, which risks undermining the purpose of business rescue proceedings.
A recent decision of the North West Division of the High Court provides important guidance on two deceptively simple but important questions: when does voluntary business rescue actually commence, and can voluntary business rescue be used to defeat a pending mandatory business rescue application?
This decision provides welcome certainty for creditors and reinforces the integrity of South Africa's business rescue framework.
case details
Zizwe Open Cast Mining Proprietary Limited (Zizwe) provided contract mining services to Lethabo Minerals Proprietary Limited (Lethabo), the mining rights holder at a chrome mine near Rustenburg.
Following the end of their business relationship, Lethabo admitted that Zizwe owed a substantial debt that had not been repaid. Zizwe instituted an urgent mandatory business rescue application under section 131(1) of the Act.
Lethabo filed a counter affidavit which was clearly limited in scope. The replying affidavit failed to dispute either the indebtedness or the quantum thereof and did not present any financial information demonstrating solvency or a viable path to recovery.
Furthermore, Lethabo did not (at that stage) raise any issues with the qualifications or independence of the business rescue practitioner nominated by Zizwe.
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Shortly before the hearing, Lethabo informed both Zizwe and the court that Lethabo's board had adopted a written resolution two days before the hearing, voluntarily initiating business rescue proceedings.
Lethabo said the requisite CoR123.1 form has been submitted to the Companies and Intellectual Property Commission (CIPC), triggering business rescue proceedings by operation of law and rendering Zizwe's application moot.
Section 129 of the Act allows the board of a company to resolve to initiate voluntary business rescue where the company is financially distressed and there is a reasonable prospect of saving it. However, the resolution must be filed with the CIPC along with the prescribed notice and supporting documentation.
first mover advantage
The first important issue before the court was whether electronic submission of documents to the CIPC is considered a “filing” for the purposes of section 129 of the Act.
At the time the hearing began, Lethabo had uploaded the relevant documents electronically, but the CIPC had not yet reviewed, accepted or confirmed the filing. Formal confirmation from the CIPC was only issued during the hearing.
In terms of section 132(1) of the Act, business rescue proceedings commence when:
(1) A company files a resolution to place itself subject to supervision in accordance with section 129(3) of the Act; Or
(2) An affected person applies to the court for an order placing the company under surveillance in accordance with section 131(1).
In relation to the latter example, previous court decisions have held that in order to make a mandatory business rescue application, the application must be issued by the Registrar, sent to the company and the CIPC, and notified to affected persons.
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Zizwe's counsel argued that Chapter 6 of the Act prevents a board from passing a voluntary business rescue resolution in terms of section 129 after a mandatory application has been made.
Although the court did not agree with this argument, it acknowledged that the Act does not permit parallel business rescue proceedings. Instead, the start date of the business rescue proceedings is important as it informs the start date of the moratorium, the rights of the businessman and the rights of creditors.
Section 129(2)(b) of the Act states that a resolution of the Board to commence business rescue has no force and effect unless it is filed with the CIPC.
In this regard, CIPC Practice Note 3 of 2021 was issued in terms of Regulation 4 of the Regulations of the Act, which confirms that the business rescue filing date will be the date when the relevant information is confirmed to be correct by a member of the CIPC team.
Furthermore, within the meaning of section 129(2)(b), a confirmation letter from the CIPC is required before a voluntary business rescue resolution can be considered for filing.
In this case, the CIPC certificate of confirmation was only forthcoming during the hearing, and clearly indicated a commencement date later than the date on which Zizwe's compulsory business rescue application was made.
Strategic or offensive?
The Court considered whether the manner in which Lethabo's board acted constituted an abuse of the business rescue process.
In circumstances where Lethabo's board was aware of the pending business rescue application at least two weeks before the hearing, and where Lethabo's answering affidavit did not mention any intention to pursue voluntary business rescue or any objection to Zizwe's nominated practitioner, the court was surprisingly critical of Lethabo's conduct.
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The Court found that this conduct amounted to an abuse of process: the motion was adopted not in a genuine pursuit of rehabilitation, but as a tactical maneuver to maintain control over the identity of the business rescue practitioner and derail the court-conducted proceedings.
Thus, the court held that it was fair and equitable to quash the motion to initiate business rescue proceedings.
conclusion
The decision has several practical implications.
First, creditors of the board of directors should not assume that a board resolution or proof of electronic submission is sufficient to initiate business rescue proceedings. They should verify that the CIPC has formally accepted and confirmed the filing.
Second, boards seeking to secure a strategic advantage by adopting a resolution to thwart a mandatory business rescue application should understand that this is a high risk and low reward strategy.
Third, the decision confirms that Chapter 6 is not a tactical tool: directors who use it for purposes other than genuine rehabilitation expose themselves to adverse findings.
Ultimately, this decision strengthens the procedural integrity of business rescue, while providing much-needed certainty for creditors, companies and occupiers alike.