In Panamo Properties (Pty) Ltd v Nel and Another NNO (35/2014) [2015] ZASCA 76 (27 May 2015) Panamo Properties Proprietary Limited (Panamo) is a property-owning company whose sole shareholder is the Jan Nel Trust (the Trust). The trustees of the Trust, Mr and Mrs Nel are also directors of Panamo.

In an effort to prevent the sale in execution of the property owned by Panamo, the Trust resolved on 19 August 2011 to place Panamo under business rescue supervision. Two years later, after the adoption of a business rescue plan and the sale of the property pursuant to the plan, the Trust sought an order declaring that the business rescue resolution had lapsed and was a nullity.

After adopting a resolution commencing business rescue supervision and filing it with CIPC, the Trust failed to comply with certain of the requirements prescribed in section 129(3) and (4) of the Companies Act 71 of 2008 (the Act). The argument on behalf of the Trust was that section 129(5)(a) of the Act stipulates that the consequences of such non-compliance are that the resolution lapses and is a nullity and hence the entire business rescue process was fruitless. The court a quo upheld these contentions and issued a declaratory order that the resolution had lapsed and was a nullity and that the appointment of the business rescue practitioner was void.

In various High Court decisions, the approach adopted by Fabricus J in Advanced Technologies and Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquées SAS has been followed. He found that the purpose of section 129(5) of the Act is plain and blunt. If there is non-compliance with section 129(3) or (4) the resolution lapses and is a nullity. There is no question of condonation or substantial compliance with the provisions. Although he did not say so it follows that his view was that the lapsing of the resolution resulted in the termination of the business rescue proceedings.

In Ex Parte van den Steen NO, the courtheld that Fabricus J was dealing only with non-compliance with time limits in regard to the appointment of a business rescue practitioner and the court found that where there was substantial compliance with the other aspects of subsections (3) and (4), section 129(5) did not operate to nullify the resolution.
In the present matter, the SCA said that section 129(5)(a) of the Act cannot be read in isolation. One must have regard to section 130 which expressly deals with objections to a board resolution commencing business rescue proceedings.

Section 130 provides as follows –
“(1) Subject to subsection (2), at any time after the adoption of a resolution in terms of section 129, until the adoption of a business rescue plan in terms of section 152, an affected person may apply to a court for an order—
(a)       setting aside the resolution, on the grounds that—
(i)        there is no reasonable basis for believing that the company is financially distressed;
(ii)       there is no reasonable prospect for rescuing the company; or
(iii)      the company has failed to satisfy the procedural requirements set out in section 129;”

Section 130(1) provides for three grounds upon which an application to set aside the resolution may be brought. The first two are that the grounds for passing the resolution are lacking, the third is that the procedural requirements of section 129 have not been observed. The time period for bringing such an application is limited to any time after the adoption of the resolution until a business rescue plan has been adopted.

A director of the company who voted in favour of a resolution for business rescue is precluded from bringing such an application, unless they can show that in doing so they acted in good faith on information furnished to them that was false or misleading.  The underlying purpose being that those responsible for placing the company in business rescue should not be entitled to challenge that decision due to a change of heart or to suit private interests.

The SCA had to decide how one aligns the automatic lapsing of the business rescue resolution under section 129(5) and as a result the apparent end of the business rescue proceedings with the provisions of section 130(1)(a)(iii). The SCA applied the principles of statutory interpretation which dictate the use of a sensible interpretation that will avoid anomalies between statutory provisions. If provisions of statue that appear to conflict with one another are capable of being reconciled they should be reconciled.

The SCA found that there would be no purpose in bringing an application under section 130(1)(a)(iii) of the Act if the lapsing of the resolution resulted in the automatic termination of the business rescue proceedings. Furthermore, section 132(2)(a)(i) of the Act provides that business rescue proceedings end, inter alia, when the court sets aside the resolution or order that began those proceedings. In other words, the effect of a court order granted in terms of section 130(5)(a) will be to set aside the resolution and terminate the business rescue proceedings. The SCA therefore held that until the court sets aside the resolution, the business rescue proceedings will not be terminated.

In addition, the SCA found that over and above establishing one of the grounds set out in section 130(1)(a) of the Act, the court must be satisfied that it is just and equitable to set the resolution aside and terminate the business rescue proceedings. Just and equitable is not an additional ground to set aside the resolution. The word “or” in between section 130(5)(a)(i) and (ii) leads to inconsistency and should therefore be read conjunctively as if it were an “and”. This approach or interpretation precludes directors and affected persons from exploiting technical grounds to stymie a business rescue or abuse the process by taking advantage of the moratorium afforded to companies in business rescue only to terminate the proceedings at later stage.

In summary if there is non-compliance with the procedural requirements in section 129(3) and (4) of the Act the resolution lapses and becomes a nullity and is liable to be set aside under section 130(1)(a)(iii). Therefore, business rescue proceedings can only be terminated by court order, the business rescue practitioner filing a notice of termination, the rejection of business rescue plan in terms section 152(3)(a) read with section 153 of the Act or when the practitioner files a notice of substantial implementation of an adopted business rescue plan.

Written by Bianca Masterton, senior associate in Bowman Gilfillan Africa Group's Dispute Resolution Department