2 December 2015 by Dispute Resolution Matters

Business rescue: moratorium on alternative dispute resolution mechanism

Section 133(1)(a) of the Companies Act 71 of 2008 (Companies Act) states that inter alia no legal proceeding against a company in business rescue may be commenced or proceeded with in any forum, except with the written consent of the business rescue practitioner (BRP). The Companies Act does not define the phrase ‘legal proceeding’.

The Supreme Court of Appeal (SCA), in the recent judgment of Chetty v Hart N.O. and another [2015] ZASCA 112, was called upon to interpret and determine 2 questions pertaining to this section, namely:

  • whether "arbitrations" fall within the definition of "legal proceeding(s)" and are subject to the moratorium imposed by the commencement of business rescue proceedings; and
  • if so, whether arbitration proceedings (leading to a subsequent arbitration award) conducted without the consent of the BRP, are a nullity.

In this specific instance, the Appellant and a company known as TBP Building and Civils (Pty) Ltd (TBP) had referred a dispute to arbitration which was heard on 12 October 2012, the award was handed down on 23 October 2012. Unbeknown to the Appellant and the arbitrator, TBP was placed into business rescue on 11 October 2012. The consent of the BRP to continue with the arbitration had neither been sought nor obtained, as per s133(1)(a) of the Companies Act.

The Appellant, dissatisfied with the arbitration award, subsequently applied to court to have it reviewed and set aside. Her argument centred on the premise that "legal proceeding(s)" under s133(1)(a) included ‘arbitrations’, she further submitted that the effect of non-

compliance with s133(1)(a) meant that the arbitrator had no competence to determine the issues between the parties and the arbitration award was a nullity. The respondent conversely contended that "arbitrations" did not fall within the definition of "legal proceedings" and were not subject to the moratorium.

The court a quo in this instance had held that an arbitration did not constitute a "legal proceeding" and that the consent of the BRP was not required to commence or continue arbitration proceedings once a company was placed in business rescue. 

In terms of point one above, the SCA considered inter alia the purpose of business rescue proceedings and held that it is to "give the company breathing space so that its affairs may be assessed and restructured in a manner that allows its return to financial viability", furthermore, the reason behind the requirement of consent from the BRP is so that s/he can assess how the claim will impact on the well-being of the company and its ability to regain financial health. In this regard, the SCA held that a general moratorium on the rights of creditors is crucial in order to achieve the aforementioned objective. Given the ubiquitous use of arbitrations to resolve commercial disputes, excluding these proceedings (which can be both costly and lengthy) from the moratorium created by s133(1)(a) would significantly hinder the attainment of the objectives of business rescue. Accordingly, the definition of "legal proceedings" in this context was held to include arbitrations.

In regard to the second point, the court held that the section was evidently enacted exclusively for the benefit of the BRP (as set out above) and confers no rights on creditors. Accordingly, a creditor has no locus standi to rely on non-compliance with the section, as the BRP could choose to either waive or seek the protection of the section.

It is submitted that the SCA was correct in its interpretation of s133(1)(a) and that the effect of the court a quo’s ruling would have drastically impaired BRPs’ abilities to attempt to rehabilitate companies in business rescue, as arbitrations can be lengthy, costly and often involve a diversion of the company’s resources which may hinder the effectiveness of the business rescue proceedings.

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