Business rescue is a process which gives financially distressed companies an opportunity to restructure and reorganise their business under the supervision of a business rescue practitioner.
According to section 129(1) of the Companies Act 71 of 2008 (“Companies Act”), the board of a company may resolve that the company voluntarily commences business rescue proceedings. Business rescue commences after the resolution is adopted and filed with the Companies and Intellectual Property Commission (CIPC). Section 129(3) of the Companies Act requires a company to publish a notice of the business rescue and appoint a business rescue practitioner within 5 business days after a company has filed the resolution with the CIPC. Where a company fails to do either the resolution lapses and is a nullity.
The effect of the resolution lapsing is unclear. The court in Panamo Properties (Pty) Ltd and another v Nel and Others NNO 2015 (5) SA 63 (“Panamo Properties”) provided some guidance. The court found that the business rescue does not automatically terminate if the resolution lapses. Rather, the resolution must be set aside by a court in terms section 130(1) read with 130(5)(a) of the Companies Act and the business rescue then terminates in terms of section 132(2)(a)(i).
The business rescue resolution may, in terms of section 130(1), be set aside, inter alia, if the company has failed to satisfy the procedural requirements set out in section 129 and if the court in exercising its discretion in terms of section 130(5)(a) finds that it is just and equitable to do so. To determine whether it is just an equitable, the court must consider all the available evidence.
Before the resolution is set aside by a court the business rescue continues despite the fact that the resolution is a nullity. The court confirmed this by stating in Panamo Properties that once a business rescue plan is published a failure to comply with the procedures in section 129(3) and (4) is “of purely historical importance thereafter”. Therefore if no affected party approaches a court to have the resolution set aside before the business rescue plan is adopted, the procedural deficiency of failing to publish a notice of the business rescue or appoint a practitioner timeously is ineffectual.
The court warned, however, that a company’s failure to fulfil these procedural requirements is an indication that the company has no genuine intention to follow the business rescue process. The steps the company takes after the adoption of the resolution is therefore an important factor in determining whether to set aside the business rescue.
In conclusion, where a business rescue practitioner is not appointed or a notice is not published in accordance with section 129(3) of the Companies Act, that failure has no effect on the business rescue unless an application is brought to set aside the business rescue. However, a company must only adopt a resolution to commence business rescue if it has a genuine intention of following the process, without which a resolution to commence business rescue may be set aside.