28 April 2020 by , and Business Rescue, Restructuring & Insolvency Newsletter

Business rescue proceedings during the lockdown period

On 24 March 2020, the Companies and Intellectual Property Commission (CIPC) published a document titled “Notice to Customers – Company Close, Corporation and Co-operative Services during Government Lockdown in South Africa” (CIPC Notice), which was later amended by a further notice from the CIPC, dated 15 April 2020.

The CIPC Notice, as amended, deals mainly with the measures put in place by the CIPC in response to the total lockdown that was announced by the President of South Africa, which was initially scheduled to run from 26 March 2020 to 16 April 2020 but was later extended to 30 April 2020.

This CIPC Notice was also discussed during the recent Webinar which the Business Rescue, Restructuring & Insolvency team of CDH presented on 23 April 2020. Various questions were posted by the attendees during the webinar and will be responded to in this article.

The CIPC Notice, as amended, states that:

For purposes of business rescue, a general extension is provided for business rescue proceedings which commenced, but which did not complete the procedure as stated within section 129 of the Companies Act, 2008 (the Act), until two weeks after the lockdown period, or CIPC communicates otherwise. Furthermore, for proceedings that have not yet commenced in terms of section 129 of the Act, dies non will apply until national lockdown ceases, or CIPC communicates otherwise.” (Our emphasis)

From a first reading of the CIPC Notice, it appears as if:

(i)    New business rescue proceedings, in terms of section 129 of the Companies Act 71 of 2008 (Companies Act), cannot commence until the lockdown ceases or the CIPC communicates otherwise (as a result of dies non); and

(ii)    Companies already under business rescue, where a business rescue practitioner has not yet been appointed as required in terms of section 129(3) of the Companies Act, will receive an extension to comply with all of the time periods set out in section 129 of the Companies Act, until two weeks after the lockdown period.

The CIPC Notice raises a couple of questions, which we will deal with in this article. In addition to dealing with these questions, we will also briefly discuss bringing urgent business rescue applications during the lockdown period, and the essential aspects to consider before launching such an application.

Can and should companies file for business rescue during the lockdown period?

As mentioned above, it appears as if the CIPC envisaged that the CIPC Notice would prevent companies from filing for business rescue during the lockdown period, since the CIPC declared the period between 26 March 2020 – until the lockdown ceases, as dies non (days on which court or legal procedures are not permitted, or days not counted for purposes of calculating legal time periods), and since the CIPC didn’t make provision for the filing of section 129 resolutions as part of its continuing automated services, as per the CIPC Notice.

The question that now arises is whether the CIPC has the authority to declare a certain time period as dies non. The reason why this question is important, is because if the CIPC does not have this authority, directors of financially distressed companies could potentially still be held personally liable for breaching their fiduciary duties set out in the Companies Act, by failing to timeously take adequate steps, even if they are acting in terms of the information contained in the CIPC Notice.

As a departure point, it is important to take note that the CIPC is a creature of statute and was established in terms of section 185 of the Companies Act. Since the CIPC is a creature of statute, its powers and duties are set out in the act in terms of which it was established, namely, the Companies Act (read together with the regulations published under the Companies Act). The CIPC cannot take any steps outside the confines of its powers as set out in the Companies Act.

Section 185 of the Companies Act states the following in relation to the CIPC:

(i)    It has jurisdiction throughout South Africa;

(ii)    It is independent, and subject only to:

  • The Constitution and the law; and
  • Any policy statement, directive, or request issued to it by the Minister of Trade and Industry, in terms of the Companies Act.

(iii)   It must exercise the functions assigned to it in terms of the Companies Act or any other law, or by the Minister of Trade and Industry, in the most cost-efficient and effective manner, and in accordance with the values and principles mentioned in section 195 of the Constitution.

Regulation 4 of the Companies Regulations, 2011 (Companies Regulations), which is directly applicable to the CIPC, states that the commissioner of the CIPC may:

(i)    issue a Guideline at any time by publishing a notice of the Guideline to the general public in the Gazette, any generally circulated newspaper, on the regulatory agency’s website, or by any similar means of providing information to the public generally; or

(ii)    issue a Practice Note at any time by publishing it in the Gazette and may amend or withdraw any such Practice Note at any time by subsequent notice in the Gazette.

Guideline” is defined in Regulation 4, as a document issued by a regulatory agency (such as the CIPC) with respect to a matter within its authority, which sets out recommended procedures, standards or forms reflecting that regulatory agency’s advice as to what constitutes best practice on a matter.

Furthermore, “Practice Note” is defined in Regulation 4, as a document issued by a regulatory agency (such as the CIPC) with respect to a matter within its authority, which sets out:

(i)    a procedure that will be followed by that regulatory agency; or

(ii)    a procedure to be followed when dealing with that regulatory agency; or

(iii)   that regulatory agency’s interpretation of, or intended manner of applying, a provision of the Act or these regulations.

However, very importantly, Regulation 4 further states that a Guideline or Practice Note must be consistent with the Companies Act and the Companies Regulations, and a provision of the Companies Act or the Companies Regulations prevails if there is any inconsistency between that provision and any such Guideline or Practice Note.

Furthermore, the Companies Act does not provide the Minister of Trade and Industry with the authority to suspend or amend the time periods set out in section 129 of the Companies Act, and therefore, even if the Minister of Trade and Industry, by notice in the Government Gazette, issued a directive that the lockdown period is declared a dies non period for purposes of commencing business rescue proceedings, such a notice would be unlawful.

Considering the above, and the fact that there is no provision in the Companies Act or the Companies Regulations, authorising the CIPC to declare a period as dies non, and since the Minister of Trade and Industry is also unable to declare a period as dies non, it is clear that under normal circumstances, the CIPC does not have the authority to declare a certain period as dies non, since this will create inconsistency between the Guideline/Practice Notice published by the CIPC and, inter alia, section 129 of the Companies Act, which will result in section 129 of the Companies Act (and the time periods set out therein) prevailing.

The question now arises whether the lockdown period and the provisions of the Disaster Management Act 57 of 2002 (Disaster Management Act) (and the regulations published thereunder), changes the abovementioned position.

In short, the answer is no, it doesn’t change the position. The reasons for this are the following:

(i)    Firstly, the Disaster Management Act (and the regulations published thereunder), does not provide the CIPC with any authority to declare a certain period as dies non.

(ii)    Secondly, although the Minister of Cooperative Governance and Traditional Affairs, in terms of section 27(2) of the Disaster Management Act, read together with Regulation 10(6) of the Regulations issued in terms of section 27(2) of the Disaster Management Act, granted the Minister of Trade and Industry authority to, inter alia, issue directions to address, prevent and combat the spread of COVID-19, the Minister of Trade and Industry has to date not issued any such directions.

(iii)   Thirdly, even if the Minister of Trade and Industry issued directions in terms of his authority under Regulation 10(6) of the Regulations issued in terms of section 27(2) of the Disaster Management Act, it could still potentially be argued that a declaration that a certain period is dies non for purposes of the calculation of time periods set out in the Companies Act, would be unlawful, since it would be in conflict with the provisions of the Companies Act. The reason for this is that section 5 of the Companies Act, which deals with the interpretation of the Companies Act, states that if there is an inconsistency between any provision of the Companies Act, and any provision of any other national legislation, the provision of the Companies Act would prevail if it is impossible to apply the provisions of both acts concurrently. This is subject to section 5(4)(b)(i) of the Companies Act, which lists certain Acts that would prevail if there is an inconsistency between them and the Companies Act. However, it is important to take note that the Disaster Management Act is not one of the Acts listed in section 5(4)(b)(i) of the Companies Act. 

In light of the above, we believe that should a company be under financial distress during the lockdown period, the board of directors of the company must remain cognisant of their fiduciary duties, specifically as set out in section 129(7) to either place the company under business rescue or deliver a notice to each affected person setting out, inter alia, the reasons for not placing the company under business rescue.

How can companies voluntarily commence business rescue proceedings during the lockdown period?

Section 129(2)(b) of the Companies Act states that a resolution by a board of directors to voluntarily place a company under business rescue “has no force or effect until it has been filed”.

The word “file” is defined in section 1 of the Companies Act as “when used as a verb, means to deliver a document to the commission (CIPC) in the manner and form, if any, prescribed for that document”.

Regulation 7 of the Companies Regulations, which deals with the delivery of documents in terms of the Companies Act, states that a notice or document to be delivered for any purpose contemplated in the Companies Act or the Companies Regulations, may be delivered in any manner – (i) contemplated in section 6(10) or (11); or (ii) set out in Table CR3.

Table CR3, which is attached to the Companies Regulations as Annexure 3, states that if a document is to be delivered to the CIPC, it can be done by “transmitting the document as a separate file attached to an electronic mail message addressed to the CIPC”. The date and time of the deemed delivery, and therefore the deemed filing, will be on the date and time recorded by the CIPC’s computer system, unless, within one business day after that date, the CIPC advises the sender that the file is unreadable.

Therefore, companies will be able to file for business rescue by following the process above, and if the company sends the email to the CIPC, by using the correct email address of the CIPC, with the section 129 resolution attached to the email, and it does not receive a failed delivery report from its email server, it could assume that it successfully “filed” the resolution with the CIPC and that the company is under business rescue. 

What about the appointment of the business rescue practitioner after the company is placed under voluntary business rescue during the lockdown period?

We are of the view that as soon as the company filed for business rescue by sending the email to the CIPC with the resolution in terms of section 129 attached as a separate file, the company must within 5 days thereafter publish the notice of the resolution to every affected person and appoint a business rescue practitioner, even if this takes place during the lockdown period.

After the business rescue practitioner has been appointed by the company, the company must within two business days thereafter send another email to the CIPC, with the notice of appointment of the business rescue practitioner attached as a separate file and publish a copy of the notice of appointment to each affected person within five days after the notice was filed with the CIPC.

If the company fails to take the steps mentioned above, its resolution to begin business rescue and place the company under supervision will lapse and will be a nullity. The company will then also be unable to file a further resolution to place the company under voluntary business rescue for a period of three months after the date on which the lapsed resolution was adopted, unless a court, on good cause shown on an ex parte basis, approves the filing of a further resolution by the company.

What about business rescue proceedings that commenced before the lockdown period started, where the procedure set out in section 129 of the Companies Act has not been completed?

Regulation 166 of the Companies Regulations state that the senior officer of a regulatory agency (such as the CIPC) may generally extend any particular time limit set out in the Companies Act or the Companies Regulations for filing any document with that agency, to the extent necessary or desirable having regard to the public demand for access to the agency’s services, the administrative capacity of the agency to meet that demand, and the interests of efficiency and equality of access.

In light of the above, it appears as if the CIPC does have the authority to extend the time limits set out in section 129 of the Companies Act, for the filing of documents with the CIPC. However, the CIPC does not have the authority to extend other time periods set out in section 129 of the Companies Act, which does not relate to the filing of documents with the CIPC (e.g. the time period prescribed in terms of the Companies Act for the publishing of the notice of the resolution to commence the voluntary business rescue proceedings, to every affected person).

Therefore, it appears as if the CIPC might have acted ultra vires when it stated that there is a general extension for business rescue proceedings which commenced before the lockdown period, but which did not complete the procedure as stated within section 129 of the Companies Act.

If a company was placed under business rescue before the commencement of the lockdown period, and it did not comply with the time periods set out in section 129(3) and (4) of the Companies Act, its resolution to begin business rescue and place the company under supervision would lapse.

We would advise companies who find themselves in this situation, to contact Cliffe Dekker Hofmeyr Inc. immediately, in order for our Business Rescue, Restructuring & Insolvency Team to assist with bringing an ex parte application to obtain approval from the court for the company to file a new resolution in terms of section 129 of the Companies Act.

What to consider when contemplating whether to bring an urgent business rescue application during the lockdown period or not

As all legal practitioners know, bringing an urgent application to court under normal circumstances is very difficult, if not nearly impossible, and it is therefore normally used by parties as a last resort.

In light of the above, litigants should be very wary to bring urgent applications during the lockdown period, since it is very likely that during the lockdown period, it will be even more difficult to succeed with an urgent application.

However, if an affected person is contemplating whether or not to bring an urgent business rescue application in terms of section 131 of the Companies Act during the lockdown period, here are a few factors which it should consider:

(i)    On 31 March 2020, the Minister of Justice and Correctional Services issued directions to address, prevent and combat the spread of COVID-19, in terms of Regulation 10(6) of the Regulations issued in terms of section 27(2) of the Disaster Management Act. In these directions, it is stated that “entry into the courts and court precincts may only be allowed in respect of urgent and essential matters”. Although the directions do not clarify whether all matters which would be urgent under normal circumstances, would still be urgent, it does list examples of urgent and essential matters in which the sheriff will be allowed to serve pleadings and execute writs of execution, namely:

  • Service and execution of court orders relating to COVID-19;
  • Service of domestic violence protection orders;
  • Service of protection from harassment orders;
  • Service of process relating to claims which are prescribing;
  • Service of urgent court process relating to court hearings scheduled during the lockdown period; and
  • Service of urgent court process in family law matters as determined in the directions.

Although a court or judge may, if it is an urgent application, dispense with the forms and service provided for in the Uniform Rules of Court and may dispose of an urgent application at such time and place and in such manner and in accordance with such procedure (which should comply as far as possible with the Rules set out in the Uniform Rules of Court) as it deems fit, the abovementioned list can be seen as an indication of matters which will most likely be considered as urgent or essential by a court. Since urgent business rescue applications will most likely in some manner relate to COVID-19 and the national lockdown, we are of the view that under certain exceptional circumstances, it will be justified to bring an urgent business rescue application during the lockdown period. Each case will, however, have to be considered on its own facts, before a final decision is reached on whether or not to proceed with the urgent application.

(ii)    If the company under financial distress renders an essential service, it could be argued that the company’s services will assist with the fight against COVID-19 during the lockdown period, and it is therefore important that a business rescue practitioner takes control of the company as soon as possible;

(iii)   If the company under distress does not render an essential service, and the issue is raised that the business rescue practitioner will in any event only be able to take effective control of the company after the lockdown period, and as such the application is not urgent, it could be argued that the business rescue practitioner needs to be appointed as soon as possible in order for him/her to take control of the bank accounts of the company, in order to prevent the current board of directors from using the money in the company’s bank account during the lockdown period.

Conclusion

As the COVID-19 pandemic wreaks economic havoc across the board, companies should carefully consider their financial positions and undertake the necessary assessments and seek guidance where necessary.

Making the right decisions during the lockdown period is very important for the board of directors of companies, since the fiduciary duties of directors are not suspended during this period. We would therefore advise companies who are in financial distress, to reach out to the Business Rescue, Restructuring & Insolvency Team at Cliffe Dekker Hofmeyr Inc, who will be able to assist and guide them through these difficult times and unfamiliar waters.

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