The lazy bird can still catch the worm –perfecting notarial bonds under business rescue

Section 133 of the Companies Act, No 71 of 2008 places a general moratorium on legal proceedings, while the company is under business rescue. This provides a company with time and resources to be rehabilitated through the implementation of a business rescue plan. As a result, there is some debate as to whether creditors are precluded from perfecting their security, such as a notarial bond, under business rescue.

4 May 2016 3 min read Dispute Resolution Alert - 4 May 2016 Article

While there has been no definition of ‘legal proceedings’ the legislature appears to have included specific claims to perfect security in this definition. So what’s next for a creditor who has security over movable property, which is not perfected before the commencement of business rescue proceedings, and which property the Business Rescue Practitioner (BRP) intends to dispose of? Is the creditor’s right to perfect the security suspended?

Firstly, the creditor may approach the BRP at any time after commencement of the business rescue proceedings, in terms s133(1)(a), for written consent to allow the perfection of the creditor’s securities. However the BRP is unlikely to consent to this as the perfecting of notarial bonds will more than likely diminish the prospects of rescuing the business.

As such, we encourage creditors to utilise the protection afforded by s134, which seeks to protect the property interests of both the company and third parties. S134 provides as follows:

‘If, during a company’s business rescue proceedings, the BRP wishes to dispose of any property over which another person has any security or title interest the company must obtain the prior consent of that person unless the amount is sufficient to satisfy the debt provided the company promptly pays same creditor.’

Chapter 6 of the Companies Act does not provide a definition of ‘security’ or ‘title interest’ and there has been some debate as to whether or not an unperfected notarial bond can be classified as either a security or title interest.

Commentary on the Act suggests that when taking into consideration the context surrounding s134(2), ‘security’ or ‘ title interest’ undoubtedly refers to any situation where the property of the company is subjected to a valid form of security in favour of a third party creditor.

A purposive approach to interpreting the Act supports this view - while the holder of a security only obtains a real right once they have perfected their security – the perfection would mean the actual attachment of the assets and not a perfection order itself. It would be difficult to argue that before an attachment of movable property, the creditor had no interest or right to the movable property which formed the subject matter of the security.

In the event of the notarial bond not being perfected whilst the company is under business rescue and the proceedings are converted to liquidation proceedings, the unperfected notarial bond will be treated as preferent security and the creditor will enjoy a higher ranking than normal concurrent creditors. This implies that an unperfected notarial bond can be interpreted as ‘security’ or ‘title interest’ as a preferential ranking is linked to it in liquidation proceedings.

The BRP will undoubtedly argue that allowing a creditor to perfect a notarial bond, during business rescue, and effectively precluding the practitioner to freely deal with the movable assets of the company, cannot support the rehabilitation of a company that is financially distressed and that this is not the purpose sought to be achieved by Chapter 6.

Nonetheless without a wide interpretation of the terms ‘security’ or ‘title interest’ creditors would have no protection against the reckless disposition of property over which they have an interest. Creditors would more readily seek to protect themselves before business rescue, by perfecting their security and taking possession of property that could have otherwise been used to rescue the business and this too would circumvent the stated purpose.

We are of the view that creditors who have not perfected their security before the commencement of business rescue proceedings should approach the BRP and inform him of their right. The BRP must further be instructed to cease any disposal of their security. Should the BRP refuse, the creditor will be entitled to apply to court in accordance with s133(1)(b) to have their security perfected. Once perfected, the creditor will be entitled to remove all movable assets and proceed to sell same outside of the business rescue proceedings.

Therefore, whilst we advocate perfection before business rescue, it appears possible to perfect under business rescue, with or without the consent of the practitioner.

Written by Tobie Jordaan and Jeffrey Long

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