Rescue procedures

One of the changes effected by the New Companies Act 71 of 2008 (the Act) is the provision of Rescue Procedures and the repeal of inter alia Judicial Administration as provided for in the 1973 Act.

Where a company was insolvent under the Companies Act 61 of 1973, the mere noting of a CY Interdict alerted the examiner that no further dealings were allowed with such company’s immovable property unless it was the liquidators transferring the property by virtue of the court order filed, or with a disclaimer from the liquidator.

The examiner had to ensure that the liquidator or trustee was duly authorised to deal with the property by confirming the letter of appointment. The title did not need to be lodged as per Regulation 51(2) of the Deeds Registries Act 47 of 1937 and bonds did not have to comply with section 56.

According to the definition of "Business Rescue" in the Act, it means proceedings to facilitate the rehabilitaton of a company that is financially distressed by providing for:

  1. the temporary supervision of the company, and of the management of its affairs, business and property;

  2. a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

  3. the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company;

The legislator’s intention is clearly to assist companies in financial trouble and to prevent closure of a company as a result of winding up by liquidators. Section 133 of the Act, therefore places a moratorium on legal proceedings against a company which has been granted rescue proceedings in terms of chapter six of the Act. The implication hereof is the temporary supervision of the company by managing its business, property and affairs.

In terms of section 140 the Business Rescue Practitioner has full management and control over the company. The company continues to operate as before, but it will be under supervision of the Rescue Practitioner. In terms of Section 133 there will also be a temporary moratorium on claims against any possessions of the company. No legal proceedings against the company may be commenced or proceeded with, except:

  • with the written consent of the Business Rescue Practitioner;
  • as a set off against any claim which the company made;
  • criminal proceedings against the directors or company;
  • with the leave of the court;
  • proceedings by a regulatory authority in the execution of its duties after written notification to the Business Rescue Practitioner; and
  • proceedings concerning any property or right over which the company exercises the powers of a trustee.

The latter exemption will concern the Registrar of Deeds. It briefly implies that a company may continue to act as an agent under a General Power of Attorney if so appointed.

If business rescue procedures are implemented, any General Notarial Bond over the company’s movable assets will be affected. The Notarial Bond would have to be perfected prior to liquidation, as there will be no time to apply to court to have it perfected. Only if the creditor believes that the Business Rescue plan is not going to succeed, may he or she apply to court in terms of the exceptions of Section 133 of the Act to act upon its General Notarial Bond. If the company has ceded its book debts to a bank, the bank might enforce its rights prior to the commencements of the rescue proceedings, however, the book debt will probably no longer be in its lawful possession- all the more a warning to the bank to apply to court to perfect the Notarial Bond. It is interesting to know that section 135(2) of the 2008 Act allows for post-commencement funding during the business rescue process, and therefore bonds may still be registered over the company’s immovable and movable property.

Existing contracts
A further question to ask is; what would be the effect of Business Rescue Procedures on existing contracts or uncompleted contracts, e.g., the sale of company property entered into prior to a Business Rescuer being appointed? Sections 136(2) of Act 71 of 2008 allows the practitioner to entirely, conditionally or partially suspend any obligations entered into prior or during commencement of the procedures. There is a school of thought that reasons that affording the Practitioner such a wide discretion is contrary to the standards entrenched in the principles of South African laws of contract and that the practitioner should only have two options to either bind himself to the contract and to offer full performance or the other options to repudiate the contract where claims to damages will not be preferential. This has been amended by Section 87 of the Companies Amendment Act, 2011 so that the Practitioner has to apply to court to entirely, partially or conditionally cancel a contract. The onus will be on the Practitioner to advise the Registrar of the cancellation in which case an interdict will be noted against the relevant property. However, in Knipe and another v Noordman No and others 2015(4) SA 338 a provisional liquidator was afforded the power to sell company assets after a final liquidation order was granted. 

It was not curbed by a supervening business rescue application as per section 131(6) of the Act. This case is, however, contrasted with Elias Mechanicos Building & Civil Engineering Contractors (Pty) Ltd v Stedone Developments (Pty) Ltd and Others 2015 (4) SA 485 (KZD) where it was held that leave to institute legal proceedings should be obtained before instituting Rescue Proceedings and not sought as part of the main application. It should, however, be noted that the latter deals with s 133(1)(b), and not s 131(6), of the Act. The fact is that the Registrar when registering such a sale in execution will not be aware if rescue proceedings were instituted and a Practitioner appointed.

In terms of Section 134 the company may dispose of property only in the ordinary course of business; in a bona fide transaction for fair value approved in advanced and in writing by the Practitioner or in a transaction undertaken as part of the approved rescue plan. If the Rescue Practitioner elects to honour the deed of sale, such transfer may be registered as per CRC28/2013. Contracts entered into with or by the company may continue to exist- unless the contract regulates the relationship in the event of liquidation. The registrar is therefore dependent on the conveyancer whether it will be the directors of the company duly authorised, or the Rescue Practitioner transferring the property, unless the notification of appointment as Rescue Practitioner was received prior to the transaction. The Rescue practitioner may however, partially or conditionally suspend any obligation arising from an agreement to which the company was a party at the commencement of the business rescue proceedings and that would become due during the proceedings (Section 136(2)). Provisos do apply however.

Repealed Judicial Management under Act 61 of 1973 compared to Business Rescue Procedures under Act 71 of 2008
Where it appeared that a company or close corporation was in financial difficulty but could restore its situation with proper management, the court could order under Section 427 of the Companies Act 61 of 1973 the appointment of a judicial manager, but subject to the court’s supervision. The Registrar was provided with a copy of the Judicial Management order although the act did not make provision for it, which was then filed as an interdict. The bonds registered over the land title had to be disposed of as Section 56(1)(b) of the Deeds Registries Act did not apply due to the fact that the company was not wound up.

The manager assumed the position of a director with the same powers in so far as the old Act and the directions in the court order permitted. The manager however, could not act as a liquidator or sell or dispose of assets unless the court authorised the manager or acted upon in the normal course of business. Similar to Rescue Proceedings under Act 71 of 2008, the court usually ordered that while the company was under judicial management, all actions, executions of writs and summonses or procedures against the company be stayed and not proceeded with without the court’s consent. It is submitted that the Registrar is still in the same position regarding notifications under Rescue Procedures under Act 71 of 2008 as under Judicial management under Act 61 of 1973.

With regard to the appointment of the Business Rescue Practitioner, nowhere in the 2008 Act does it mention that the court must advise the Registrar of Deeds of the appointment of a Business Rescue Practitioner. The Practitioner will not be liable for any act of omission performed in good faith during exercise of his or her powers and functions, but may be held liable for gross negligence. It is totally up to the discretion of the Rescue Practitioner to notify the Registrar. Such a notification is filed as an interdict against the companies’ immovable property. Where the notification is not filed, the registrar would be none the wiser that the company is in trouble and that property may only be dealt with by the Rescue Practitioner.  The directors might unknowingly sell property or honour a sale in contravention of Section 142(3) of the Act, without the practitioner’s knowledge, and such transfer may be registered in the Deeds Office unless the registrar is notified of the appointment of the Rescue Practitioner.  Currently the examiner has to rely on the conveyancer and the provisions of Regulation 44A(c) of the Deeds Registries Act regarding the authentication of the transfer.

As the Registrar will not be held responsible in the unauthorised sale of company property when a Rescue practitioner has been appointed, and the prevalence of fraud in our society, perhaps the legislature should consider combatting this occurrence by additional compulsory notice to the Registrar of Deeds.

Tania Shawe, Law Lecturer
Deeds Training

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