Business rescue protected from all legal proceedings

If a company is undergoing business rescue, the Companies Act states that it is immune to the commencement of any ‘legal proceeding,’ without the written consent of the business rescue practitioner. However, the phrase ‘legal proceeding’ is not defined by the Act.

The Supreme Court of Appeal (SCA) was required to scrutinise two critical questions in the recent judgment of Chetty v Hart, namely: (i) Does arbitration fall within the definition of ‘legal proceeding’ for purposes of the above?; and (ii) if so, are arbitration proceedings (leading to a subsequent arbitration award) conducted without the consent of the business rescue practitioner null and void?.

The Appellant and a company known as TBP Building and Civils had referred a dispute to arbitration, which was heard on 12 October 2012, with the award handed down on 23 October 2012. Without the knowledge of the Appellant and the arbitrator, TBP was placed into business rescue on 11 October 2012. The consent of the business rescue practitioner to continue with the arbitration was not requested or obtained, as per s. 133(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’ under s. 133(1)(a) included an arbitration. She also stated that the effect of non-compliance with s. 133(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 contended that arbitration did not fall within the definition of ‘legal proceeding’ and was not subject to the moratorium.

The lower court had originally held that arbitration did not constitute a ‘legal proceeding’ and that the consent of the business rescue practitioner was not required to commence or continue arbitration proceedings once a company was placed under business rescue.

In the present case, the SCA considered the purpose of business rescue proceedings and stated that, “It gives the company breathing space so that its affairs may be assessed and restructured in a manner that allows its return to financial viability.” In addition to this, the requirement of consent from the business rescue practitioner allows them to assess the impact of the claim against the business’ financial health.

In this regard, the SCA held that a general moratorium on the rights of creditors is crucial in order to achieve the above 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 s. 133(1)(a) would significantly hinder the realisation of a business rescue’s objectives. Accordingly, the definition of ‘legal proceedings’ in this context was held to include arbitrations.

Concerning the second point, the court held that the section illustrated a benefit to the business rescue practitioner (as set out above) and did not include the rights of creditors. Accordingly, a creditor has no locus standi to rely on non-compliance with the section, as the business rescue practitioner could choose to either waive or seek the protection of the section.

It is, therefore, submitted that the SCA was correct in its interpretation of s. 133(1)(a) and that the effect of the lower court’s ruling would have drastically impaired the business rescue practitioner’s 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 impede the effectiveness of the business rescue proceedings.

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