Business Rescue: Lapsing Of Board Resolution Not Automatic

The effect of business rescue proceedings is that a temporary moratorium is placed on the rights of all persons to claim against the company, during which time the affairs of the company are restructured through the development of a business rescue plan the purpose of which is to allow for the continuation of the business on a solvent basis, or where that is not possible, a better outcome for the company’s creditors and shareholders than would otherwise have occurred if the business were liquidated.

A company may be placed into business rescue in one of two ways, namely by order of court or by way of resolution of the board of directors. Once the board resolves that the company be placed into business rescue a number of procedural steps must be taken by the company in terms of section 129 (3) and (4) within predefined time periods, including the publication of the resolution to affected persons, the appointment of the business rescue practitioner and the notice of appointment of the business rescue practitioner.

The Act provides in section 129 (5) that if the aforementioned procedural steps are not taken timeously, the resolution to begin the proceedings lapses and is a nullity. This provision has created a large degree of uncertainty and lends the business rescue provisions to abuse because a board may adopt a resolution aimed solely at creating a moratorium and then, by its own lack of action, allow the resolution to lapse thereby restoring the company to its pre business rescue state. This can be particularly onerous if the issue of lapsing is only raised a long time after the commencement of business rescue proceedings as was the case in Panamo Properties (Pty) Ltd and Another v Nel N.O and Others.

In this case the Jan Nel Trust was the sole shareholder of Panamo Properties (Pty) Ltd. The trustees of the trust were Mr and Mrs Nel who were also the sole directors of Panamo. Panamo owned a property, part of which was occupied by Mr and Mrs Nel, and the remainder let out to a number of commercial tenants. The property was mortgaged in favour of Firstrand Bank Limited.

Panamo fell into arrears on its bond repayments, resulting in judgement being taken against it and the property being declared executable. Mr and Mrs Nel as directors of Panamo resolved to place the company into business rescue.

Two years later, after a business rescue practitioner had been appointed and a business rescue plan adopted which provided for the sale of the property, the trust sought an order declaring that the original resolution to place Panamo into business rescue had lapsed due to the failure by Mr and Mrs Nel to comply with the various procedural requirements of the Act under section 129 (3) and (4) and consequently that the business rescue process was a nullity in terms of section 129 (5).

The sole purpose of the application was to prevent the sale of the property so that Mr and Mrs Nel would not lose their home. The High Court found in favour of Mr and Mrs Nel which led to an appeal to the Supreme Court of Appeal which found that:

Section 129 (3), (4) and (5) must be read in conjunction with section 130 of the Act which deals with the rights of certain persons to apply to court to have a board resolution to commence business rescue set aside;

These sections mirror the provisions of section 129 in that they provide for the mechanism for setting aside resolutions which do not comply with section 129 and which are not passed with any intention to follow them through. This indicates that the lapsing and nullity of a resolution arising from non-compliance with sections 129 (3) and/or (4) may be less than complete, something more must happen;

Applications under section 130 are limited in that they may only be brought before a business rescue plan is adopted and some persons are precluded from brining such applications including directors who voted in favour of the board resolution;

Even if the trust had applied to set aside the board resolution in terms of section 130 it was out of time as the business rescue plan had been adopted and the application was brought in the name of Mr and Mrs Nel who voted in favour of the resolution;

The only procedural requirements to which section 130 could possibly refer are those in section 29 (3) and (4). If section 29 (5) operates to nullify a resolution without further ado there would be no purpose for section 130;

The only interpretation of section 129 (5) read with section 130 which avoids anomalies and absurdity in their context is that even though the resolution is a nullity for failure of the company to comply with the procedural requirements in section 129 (3) and/or (4), business rescue is only terminated when the court sets that resolution aside in terms of section 130.

For information or assistance with all legal aspects of business, please contact Ramsay Webber Attorneys on 011-778-0600.