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[2014] ZASCA 162
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Newcity Group (Pty) Limited v Pellow N.O. and Others (577/2013) [2014] ZASCA 162 (1 October 2014)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
No.: 577/2013
In
the matter between:
NEWCITY
GROUP (PTY)
LIMITED
............................................................................
APPELLANT
and
ALLAN
DAVID PELLOW N.O.
…..................................................................
FIRST
RESPONDENT
GONASGREE
GOVENDER
N.O
...............................................................
SECOND
RESPONDENT
LEBOGANG
MICHAEL MOLOTO N.O.
…...............................................
THIRD
RESPONDENT
LEBOGANG
MORAKE N.O.
…................................................................
FOURTH
RESPONDENT
CHINA
CONSTRUCTION BANK
CORPORATION
(JOHANNESBURG
BRANCH)
.......................................................................
FIFTH
RESPONDENT
ABSA
BANK
LIMITED
...................................................................................
SIXTH
RESPONDENT
HENRY
MAYO
N.O.
….............................................................................
SEVENTH
RESPONDENT
REZIDOR
HOTEL GROUP SOUTH
AFRICA
(PTY)
LIMITED
........................................................................
FIRST
AFFECTED PARTY
NON-UNIONISED
EMPLOYEES
.....................................................
SECOND
AFFECTED PARTY
Neutral
citation:
Newcity Group v Allan
David Pellow NO
(577/2013)
[2014] ZASCA
162
(1 October 2014)
Coram:
Maya, Cachalia, Willis, Zondi JJA and
Gorven AJA
Heard:
26 August 2014
Delivered:
1 October 2014
Summary:
Companies Act 71 of 2008
–
business rescue proceedings –whether company has a reasonable
prospect of rescue as contemplated in
s 131(4)
(a)
of the Act.
ORDER
On
appeal from:
South Gauteng High Court,
Johannesburg (Van Eeden AJ sitting as a court of first instance)
The
appeal is dismissed with costs, including the costs of two counsel
where employed.
JUDGMENT
Maya
JA:
(Cachalia, Willis, Zondi JJA and
Gorven AJA concurring)
[1]
This is an appeal against the judgment of the South Gauteng High
Court, Johannesburg (Van Eeden AJ). The high court dismissed
the
appellant’s application to place Crystal Lagoon Investments 53
(Pty) Limited (in provisional liquidation), (Crystal Lagoon),
under
supervision and business rescue in terms of s 131 of the Companies
Act 71 of 2008 (the Act)
[1]
and
granted an order placing it under final liquidation. The appeal is
with its leave.
[2]
The appellant, Newcity Group (Pty) Limited (Newcity), is the sole
shareholder of Crystal Lagoon. Mr Chaim Cohen, who deposed
to
Newcity’s affidavits in the application, is its sole
shareholder and director. Crystal Lagoon is the owner of a mid-market
273 room hotel and conference facility trading as ‘Park Inn by
Radisson’ (the hotel). The hotel is operated by the
Rezidor
Hotel Group (Rezidor) in terms of a written management agreement (the
management agreement) concluded between Crystal Lagoon
and Rezidor.
[3]
On 9 September 2009 the fifth respondent, China Construction Bank
Corporation (Johannesburg Branch) (CCBC), and Crystal Lagoon
concluded a property development loan facility agreement (the
facility agreement). In terms of this agreement CCBC advanced a sum
of R200 million to Crystal Lagoon for the purposes of building
and developing the hotel. One of the material terms of the
facility
agreement was that on completion of the development, the facility
would be converted into a ten year term loan on the
basis that
Crystal Lagoon would pay the interest capitalised monthly during the
first year after the hotel opened so that the balance
on the facility
would not exceed the amount of R200 million. Thereafter, interest and
capital would be repaid over the next 120
months on an amortised
basis. As security for the loan CCBC took various securities,
including a first deed of suretyship from
Cohen, limited to an amount
of R200 million, and a first mortgage bond registered over the hotel
in the capital sum of R200 million.
[4]
Between January 2010 and April 2011, Crystal Lagoon drew down on the
loan facility. On 29 June 2010 the hotel was opened and
on 29
November 2010 the development was completed. But trouble soon arose.
As at 1 April 2011 the balance on the facility exceeded
the sum of
R200 million – the precise amount is in dispute – and
Crystal Lagoon failed to pay the monthly interest
on the due date and
reduce the facility despite CCBC’s repeated demands. It was
therefore in breach of the facility agreement.
[5]
On 27 January 2012 Cohen passed resolutions in terms of s 129 of the
Act
[2]
to (a) voluntarily place
the latter under supervision and commence business rescue proceedings
and (b) have Mr Cornelius Fourie
Myburgh appointed as its business
rescue practitioner. On 3 February 2012, CCBC withdrew the loan
facility and demanded immediate
repayment of all the amounts due in
the sum of R 215 973 902,23 together with interest thereon
at the rate of 12 per
cent per annum.
[6]
On 22 February 2012, Myburgh was formally appointed as Crystal
Lagoon’s business rescue practitioner.
[3]
He promptly set the process in motion and called the first meeting of
affected persons
[4]
in terms of
s 147(1) of the Act
[5]
on 29
February 2012. He was optimistic that Crystal Lagoon could be
rescued. He reported that five entities, which he did not specify,
had expressed an interest in investing in the hotel and that he
expected a formal proposal from one of them in the near future.
He
was expected to deliver a business rescue plan by 26 March 2012 but
sought an extension from Crystal Lagoon’s creditors
until 13
April 2012. On 12 April 2012 Myburgh informed Cohen and the creditors
that he had received a written proposal from Rezidor
which would
allow Crystal Lagoon’s creditors not to write off any portions
of the amounts owed to them, ensure that the bond
repayment was
maintained and all the creditors paid in full. Myburgh sought a
further extension to file the business rescue plan
on 4 May 2012.
[7]
After protracted negotiations which dragged until late November 2012,
the proposed offers
[6]
came to
naught. Notably, they were substantially less than R200 million,
required CCBC to forfeit recourse to the securities furnished
by
Crystal Lagoon and Cohen and were payable over extended periods of
time. Significant developments had occurred in the interim.
CCBC had
launched an application, in which Absa intervened, to set aside
Cohen’s resolution placing Crystal Lagoon under
supervision and
have it placed under final liquidation. And on 23 October 2012 the
parties had taken a consent order in terms of
which Crystal Lagoon’s
business rescue application was set aside and an order placing it
under provisional winding up was
granted. Interestingly, a month
later Myburgh, who was no longer Crystal Lagoon’s business
rescue practitioner, participated
in investment negotiations with
CCBC in relation to Crystal Lagoon in his capacity as a director of
Orthotouch Limited, a public
company.
[8]
It is against this background that Newcity brought application
proceedings to have Crystal Lagoon placed under supervision and
business rescue in December 2012. The application was supported by
140 members of its staff in terms of s 144(3)(
b
)
of the Act.
[7]
In his founding
affidavit, Cohen alleged that he anticipated an imminent capital
injection from potential investors, Rezidor,
Zephan and Curatio
Capital. This would enable Crystal Lagoon to discharge its
indebtedness to Absa and release Newcity from its
obligations to Absa
under the suretyship signed by it. And Extrabold would replace
Rezidor
as hotel operator. In the replying affidavit mention was made, for
the first time, of other entities, whose details were
specified,
[8]
from which it was alleged Newcity had received firm ‘expressions
of interest’. Reference was also made to Crystal Lagoon’s
daily revenue reports and the monthly operational reports for the
period January to December 2012 to show that there had ‘been
a
consistent improvement in the performance of the hotel’ after
the institution of the application.
[9]
CCBC (and Absa) opposed the application. (Three other companies,
Quantum Property Group Limited, A Million Up Investment 105
(Pty)
Limited and GLM Investments (Pty) Limited subsequently launched
applications to be heard as affected parties in these proceedings,
which they opposed, accusing Cohen and Newcity of unlawful conduct
and fraud.) It contended that it would not be just and
equitable to place Crystal Lagoon under business rescue as there was
no reasonable prospect of rescuing it. It also contended that
in the
entire period of two years Newcity had failed to proffer a feasible
business plan which would give Crystal Lagoon reasonable
prospects of
being rescued and continuing trading on a solvent basis. It pointed
out that although Newcity alleged that during
the time in which
Crystal Lagoon was under business rescue it was able to meet all its
operational expenditure. It was, however,
undisputed that Crystal
Lagoon was unable to pay the interest on CCBC’s loan facility
which formed part of its day-to-day
expenses. CCBC further stated
that it would not vote in favour of the proposed business plan
[9]
even if the business rescue application succeeded as to do so would
result in increasing Crystal Lagoon’s indebtedness which
had
already ballooned to over R230 million without a single payment
either towards the interest (in the monthly sum of approximately
R2,35 million) or capital since December 2011. CCBC also objected to
the appointment of Myburgh whose impartiality and integrity
it
questioned after his involvement in the quest for the hotel. It
alleged that Myburgh failed to perform certain material duties
in
that capacity, showed a lack of independence and had a conflict of
interest. It then sought an order placing Crystal Lagoon
under final
winding up, in the event that the business rescue application was
unsuccessful, which the court below granted.
[10]
The court below accepted that Crystal Lagoon was financially
distressed. Regarding whether there was a reasonable prospect
for its
rescue as envisaged in s 129 of the Act, the court found that it was
unnecessary for a business rescue applicant to attach
a business
rescue plan to its founding affidavit. In the court’s view it
merely had to ‘advance facts that could be
developed into a
plan that, if approved, would maximise the likelihood of the company
continuing in existence on a solvent basis
or … result in a
better return for the company’s creditors or shareholders than
would result from the immediate liquidation
of the company’ as
contemplated in s 128(1)(
b
) of the Act. The court further held
that if there was a reasonable possibility of the occurrence of
either of these two events
the jurisdictional requirements would have
been satisfied for a court to exercise its discretion to grant the
relief sought. The
court below thus held that on the facts before it
neither the proposed replacement of Rezidor with a different manager,
which would
likely result in litigation, nor the touted third party
funding offers, of which none had proven viable in over a year,
created
a reasonable prospect that rescue the company would be
rescued. The court concluded that as things stood, the company could
be
sold as a going concern and a balancing of the parties’
rights and interests favoured finality and a grant of a final winding
up order.
[11]
It is common cause that Newcity and CCBC are both affected persons as
envisaged in s 128(
a
)(
i
) of the Act. And it is not in
dispute that Crystal Lagoon is financially distressed within the
contemplation of s 131(4)(
a
)(
i
) as it is commercially
and factually insolvent: it is unable to pay CCBC’s debt,
which is due and payable, and its
liabilities exceed its assets.
(There was some contestation between the parties regarding the
computation of the value of Crystal
Lagoon’s assets but it
falls short of its liabilities on any version.) The main issue on
appeal before us, therefore, is
simply whether Newcity has shown a
reasonable prospect of rescuing Crystal Lagoon.
[12]
It was argued on Newcity’s behalf that (a) the facility
agreement contemplated a repayment period in excess of ten years
thereby allowing Crystal Lagoon to accumulate capital through the
conduct of the business in order to repay the loan; (b) CCBC
impermissibly withdrew the loan facility as it did so not on the
basis of non-payment but rather as a result of the company having
exceeded the facility, which specifically contemplated an increase in
excess of R200 million against which the interest payable
would be
increased; (c) it had demonstrated that there was a reasonable
prospect for rescuing the company which, on the undisputed
version of
the hotel operator Rezidor, was improving and making profit
notwithstanding that it was in the challenging start-up
phase, the
so-called ‘ramp-up phase’ which lasts about four years,
during which a newly opened hotel attempts to penetrate
the market
and establish its fair market share against its competitors; (d)
Crystal Lagoon had received binding expressions of
interest from
third parties keen to invest capital in the hotel which would
facilitate a repayment of the debt to CCBC and (e)
liquidating
Crystal
Lagoon
, which would cost far
more than business rescue, would destroy the business and its 140
employees’ jobs. Newcity also challenged
Absa’s standing
in the appeal on the basis that Crystal Lagoon’s indebtedness
to it was disputed and the subject of
pending proceedings in the high
court. But nothing turns on this.
[13]
CCBC’s case, on the other hand, was that the appeal should fail
simply by reason of Newcity’s failure to establish
in its
papers that there was a reasonable prospect to rescue Crystal Lagoon.
This court consequently had no cause to exercise its
discretion,
continued the argument, and even if it did the appeal must
nevertheless fail if proper regard was had to the competing
interests
of the creditors, shareholders, employees and the public interest.
[14]
Section 131of the Act provides for a ‘court order to begin
business rescue proceedings’ and reads in relevant part:
‘
(4)
After considering an application in terms of subsection (1), the
court may–
(
a
)
make an order placing the company under supervision and commencing
business rescue proceedings, if the court is satisfied that–
(i)
the company is financially distressed;
(ii)
the company has failed to pay over any amount in terms of an
obligation under or in terms of a … contract …;
or
(iii)
it is otherwise just and equitable to do so for financial reasons,
and
there is a reasonable prospect for rescuing a company; or
(
b
)
dismissing the application, together with any further necessary and
appropriate order, including an order placing the company
under
liquidation.’
[15]
It is plain from the wording of these provisions that a court may not
grant an application for business rescue
unless there is a reasonable
prospect for rescuing the company ie facilitating its rehabilitation
so that it continues on a solvent
basis or, if that is not possible,
yields a better return for its creditors and shareholders than what
they would receive through
liquidation.
[10]
In deciding that question the court exercises a discretion in the
wide sense – it makes a value judgment – and if a
court
of appeal should disagree with the conclusion, it is bound to
interfere.
[11]
[16]
As to what ‘reasonable prospect’ means, Brand JA, in
Oakdene
Square Properties (Pty) Ltd
,
[12]
properly described it as a yardstick higher than ‘a mere prima
facie case or an arguable possibility’ but lesser than
a
‘reasonable probability’ – a prospect based on
reasonable grounds to be established by a business rescue applicant
in accordance with the rules of motion proceedings.
He
elaborated as follows:
[13]
‘
Self-evidently
it will be neither practical nor prudent to be prescriptive about the
way in which the [applicant] must show a reasonable
prospect in every
case. Some reported decisions laid down, however, that the applicant
must provide a substantial measure of detail
about the proposed plan
to satisfy this requirement … But in considering these
decisions Van der Merwe J commented as follows
in
Propspec
Investments (Pty) Ltd v Pacific Coast Investments 97 Ltd and another
2013 (1) SA 542
(FB) para 11:
“
I
agree that vague averments and mere speculative suggestions will not
suffice in this regard. There can be no doubt that, in order
to
succeed in an application for business rescue, the applicant must
place before the court a factual foundation for the existence
of a
reasonable prospect that the desired object can be achieved. But with
respect to my learned colleagues, I believe that they
place the bar
too high.”
And
in para 15:
“
In
my judgment it is not appropriate to attempt to set out general
minimum particulars of what would constitute a reasonable prospect
in
this regard. It also seems to me that to require, as a minimum,
concrete and objectively ascertainable details of the likely
costs of
rendering the company able to commence or resume its business, and
the likely availability of the necessary cash resource
in order to
enable the company to meet its day-to-day expenditure, or concrete
factual details of the source, nature and extent
of the resources
that are likely to be available to the company , as well as the basis
and terms on which such resources will be
available, is tantamount to
requiring proof of a probability, and unjustifiably limits the
availability of business rescue proceedings.”
…
I
agree with these comments in every respect … [Thus] the
applicant is not required to set out a detailed plan … but
must establish grounds for the reasonable prospect of achieving one
or two goals in s 128(1)(
b
).’
[17]
This leads to the crisp question whether Newcity established grounds
for the reasonable prospect of restoring Crystal Lagoon
to solvency
or, if that was not possible, to provide a return for its creditors
and shareholders better than what they would receive
through
liquidation.
[18]
A close look at each of the ‘third party offers’
mentioned in Newcity’s founding affidavit –
in which its
case ought to have been made out – readily shows that they were
not commercially viable, would not have resulted
in the temporary
supervision envisaged in the Act
[14]
and
were, in any event, probably no longer available. They all amounted
to a mere substitution of Crystal Lagoon with another debtor
over
prolonged periods. As mentioned above, they required CCBC to write
off substantial portions of the loan facility in excess
of R70
million, provide funding and forfeit the securities put up by Crystal
Lagoon to which CCBC was understandably not prepared
to accede.
[19]
For example, the Rezidor agreement, touted as a firm agreement, was
upon scrutiny merely a ‘statement of
the parties intentions’
and subject to the conclusion of ‘Formal Agreements’,
Rezidor’s board would approve
the transactions and its funders
would agree to advance a sum not less than R160 million within 21
days failing which the agreement
would lapse. As it turned out, none
of these conditions came to fruition and the agreement failed because
Rezidor itself was unwilling
to confirm that it had raised the
necessary funds or that its board had approved the proposed
transaction. As already stated, the
offers also contemplated that
another entity, Extrabold, would replace Rezidor and manage the
hotel, a plan which Rezidor said
it would fiercely resist in light of
the existing management agreement. It bears mentioning that in
addition to a number of problems
besetting the Extrabold offer, the
projected fixed rental which would have been received from it under
the 25-year lease agreement
it proposed to conclude with Crystal
Lagoon, which would provide a source of income to service the debt
owed to CCBC, would have
yielded an amount to no more than R1,3
million a month. This would not have even covered the monthly
interest of about R2,35 million.
[20]
The so-called ‘expressions of interest’ from other
entities mentioned for the first time in the replying affidavit
were
also not capable of yielding any concrete funding. The simple fact is
that Crystal Lagoon remained unable to service the debt
due to CCBC
or even pay its manager, Rezidor in over three years. There is no
reasonable prospect of returning Crystal Lagoon to
solvency in these
circumstances.
[21]
As to whether there is a reasonable prospect that business rescue
would yield a better return for Crystal Lagoon’s creditors
and
shareholders, all that is alleged in Newcity’s affidavits is
that the costs of liquidation would exceed those incurred
in business
rescue. But, as was pointed out in
Oakdene
Square Properties
,
[15]
the ‘mere savings on the costs of the winding-up process in
accordance with the existing liquidation provisions [can] hardly
justify the separate institution of business rescue’. And that
apart, Newcity does not even show that such a saving would
result. It
was correctly contended on CCBC’s behalf that Newcity’s
calculations in its replying affidavit overlooked
the litigation
costs that would be incurred in relation to the termination of the
management agreement. In addition, other costs
such as the interest
that had already accrued in excess of R30 million, the costs to be
paid in terms of the envisaged Extrabold
lease agreement in excess of
R10 million, attorneys’ and directors’ fees in addition
to the business practitioner’s
costs and transactional fees
would be incurred by Crystal Lagoon should agreements be concluded or
the loan refinanced.
[22]
But there is a more fundamental hurdle for Newcity to overcome. On
its version, the hotel property is worth R297
million. Assuming that
this is the true value of the property that will be realised on
liquidation, CCBC as a secured creditor
would then receive the
capital sum of the R200 million and have a concurrent claim for the
balance of R30 million constituted by
undisputed interest. As was
correctly contended for CCBC, to meet the minimum threshold to
qualify as a business rescue mechanism
in this scenario, any business
rescue plan would have to provide a return for CCBC of at least R200
million. As indicated, none
of the proposed offers came anywhere
close to providing a payment to CCBC over and above of what it could
expect to receive in
liquidation as they involved payments
substantially less than R200 million over protracted periods of time
and required CCBC to
forfeit the securities it held. This starkly
shows that business rescue on the proposed offers would not result in
a better return
for CCBC than what it would otherwise receive in
liquidation proceedings.
[23]
In the premises, Newcity has failed to establish a prospect based on
reasonable grounds that business rescue would
return Crystal Lagoon
to solvency or provide a better deal for its creditors (bearing in
mind that CCBC is its majority creditor
holding in excess of 75 per
cent of its independent creditor’s voting interests, envisaged
in ss 128(1)(
j
) and 145(4), (5) and (6) of the Act) and sole
shareholder (Newcity) than what they would receive through
liquidation. As I see
it, the matter ends here and the enquiry does
not progress to issues regarding the exercise of this court’s
discretion and
balancing the interests of the creditors,
shareholders, employees and the public interest that was urged upon
us. Suffice it to
say, however, that all indications are that the
liquidator would be able to sell the hotel as a going concern and
thereby yield
a better result for all concerned than placing it under
business rescue.
[24]
In the result, the appeal is dismissed with costs, including the
costs of two counsel where employed.
________________________
MML
MAYA
JUDGE
OF APPEAL
APPEARANCES:
For
Appellant: JJ Brett SC (D Mahon)
Instructed
by:
Terry
Mahon Attorneys, Sandton
Webbers,
Bloemfontein
For
Fifth Respondent: AJ Eyles (JM Hoffman)
Instructed
by:
Bowman
Gilfillan, Sandton
Symington
& De Kok, Bloemfontein
[1]
Section
128(1)(
b
)
of the Act defines ‘business rescue’ as the proceedings
to facilitate the rehabilitation of a company that is financially
distressed by providing for–
(i)
the temporary supervision of the company,
and of the management of its affairs, business and property;
(ii)
a temporary moratorium on the rights of
claimants against the company or in respect of property in its
possession; and
(iii)
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 maximises 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.’
[2]
Section
129 reads in relevant part:
‘
(1)
Subject to subsection (2)(
a
),
the board of a company may resolve that the company voluntarily
begin business rescue proceedings and place the company under
supervision, if the board has reasonable grounds to believe that–
(a)
The company is financially distressed;
and
(b)
There appears to be a reasonable
prospect of rescuing the company.
(2)
A resolution contemplated in subsection
(1)–
(a)
may not be adopted if liquidation
proceedings have been initiated by or against the company; and
(b)
has no force or effect until it
has been filed.’
[3]
In
terms of s 128(1)(
d
)
‘business rescue practitioner’ means a person appointed,
or two or more persons appointed jointly, in terms of [Chapter
6] to
oversee a company during business rescue proceedings and
‘practitioner’ has a corresponding meaning;
[4]
According to s
128(1)(
a
)
“
‘
affected
person”, in relation to a company, means –
(i)
a shareholder or creditor of the company;
(ii)
any registered trade union representing employees of the company;
and
(iii)
if any of the employees of the company are not represented by a
registered trade union, each of those employees or their
respective
representatives’.
[5]
The
section provides: ‘Within 10 business days after being
appointed, the practitioner must convene, and preside over, a
first
meeting of creditors, at which–
(a)
The practitioner–
(i)
must inform the creditors whether the
practitioner believes that there is a reasonable prospect of
rescuing the company;
and
(ii)
may receive proof of claims by creditors’.
[6]
Various
offers from Rezidor and other entities such as Mvelaphanda Group
Limited, Curatio Capital Africa (Pty) Ltd, Zephan Properties
(Pty)
Limited and Extrabold Hotel Management (Pty) Limited were explored
during this period.
[7]
Section
144(3)(
b
)
of the Act reads: ‘During a company’s business rescue
process, every registered trade union representing any employees
of
the company, and any employee who is not so represented, is entitled
to …
participate
in any court proceedings arising during the business rescue
proceedings.’
[8]
Peermont
Global (Pty) Limited, Zamcamp Investments (Pty) Limited, EAH
Executive Apartments and Hotels, Hospitality Property Fund
Limited,
Joe Holdt and Wideopen Platform (Pty) Limited.
[9]
Section
145(2)
gives creditors, inter alia:
‘
(a)
the right to vote to amend, approve or reject a proposed business
rescue plan, in the manner contemplated in section 152; and
(b)
if the proposed business rescue plan is rejected,
a further right to-
(i)
propose the development of an alternative plan, in the manner
contemplated in section 153; or
(ii)
present an offer to acquire the interests of any or all of the other
creditors in the manner contemplated in section 153.’
[10]
Section
128(
b
)
and (
h
)
of the Act.
[11]
Oakdene
Square Properties (Pty) Ltd and others v Farm Bothasfontein
(Kyalami) (Pty) Ltd and others
2013
(4) SA 539
(SCA) para 21.
[12]
Ibid
para 29.
[13]
At
paras 30-31.
[14]
For
example, in
s
128(1)(
b
)(i)
and (ii) which respectively refer to ‘temporary supervision of
the company’ and ‘a temporary moratorium
on the rights
of claimants against the company’ and s 132(3) which
contemplates completion of the business rescue proceedings
within
three months or, upon application by the business rescue
practitioner, such longer time as the court may allow.
[15]
Ibid,
para 33.