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Homez Trailers And Bodies (Pty) v Standard Bank of South Africa Ltd (35201/2013) [2013] ZAGPPHC 465 (27 September 2013)

80 Reportability
Company Law
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Brief Summary

Business Rescue — Notification requirements — Applicant sought to declare obligations under an overdraft facility suspended during business rescue proceedings — Respondent contended that applicant's failure to notify it of the resolution to begin business rescue within five days rendered the resolution a nullity — Court held that non-compliance with notification requirements of section 129(3) of the Companies Act 71 of 2008 results in the resolution lapsing, and thus the applicant's obligations were not suspended.

Comprehensive Summary

Summary of Judgment


1. Introduction


This matter concerned an application in the North Gauteng High Court, Pretoria, in which Homez Trailers and Bodies (Pty) Ltd (under supervision) sought declaratory and mandatory relief against Standard Bank of South Africa Ltd arising from the applicant’s placement under business rescue proceedings and the respondent bank’s subsequent suspension (“lock-up”) of the applicant’s overdraft account.


The applicant approached the court for orders declaring, in essence, that the applicant’s obligations under the overdraft facility were suspended for the duration of business rescue, while the respondent’s obligations under that facility were not suspended, and for an order compelling the respondent to restore the applicant’s full use of the specified bank account during business rescue. Costs were sought against the respondent.


The procedural history central to the dispute was that the applicant’s board resolved to commence business rescue in terms of section 129(1) of the Companies Act 71 of 2008, filed the required notice and documentation with the Companies and Intellectual Property Commission, and appointed a business rescue practitioner. After the respondent learned of the business rescue, it suspended the account/overdraft. The applicant then relied on a “ruling” by the practitioner purportedly made under section 136(2)(a) to contend that the applicant’s obligations were suspended and that the bank should therefore restore access to the overdraft.


The subject-matter of the dispute was the interaction between business rescue mechanisms under the Companies Act and a bank’s contractual rights under an overdraft facility, together with a preliminary challenge based on alleged non-compliance with the notice requirements in section 129(3) and the consequence stipulated in section 129(5).


2. Material Facts


The following material facts were treated as common cause or otherwise relied upon by the court.


During May 2009 the respondent granted the applicant an overdraft facility governed by a written agreement. The agreement provided for an initial credit limit of R50 000, capable of increase at the applicant’s request, and that the respondent could suspend or reduce the credit limit in specified circumstances, including a deterioration in the applicant’s financial position or a change in the applicant’s control or ownership. The applicant was also obliged to notify the respondent in writing of any change in control or ownership. The overdraft credit limit was increased during January 2012 to R470 000.


On 15 May 2013 the applicant’s board adopted a resolution commencing business rescue in terms of section 129(1). On 22 May 2013 the applicant filed a notice beginning business rescue proceedings, together with the resolution and supporting affidavit, with the Companies and Intellectual Property Commission.


The applicant stated that on 28 May 2013 it sent a notice to its creditors informing them of the business rescue in accordance with section 129(3). It was, however, common cause that this notice was not sent to the respondent, and it was also common cause that the respondent was an affected person for purposes of the Act.


On 29 May 2013 a business rescue practitioner, Mr Marius Hamel, was appointed in terms of section 129(4), and the notice of his appointment was filed with the Commission on 30 May 2013.


The respondent’s evidence was that it obtained knowledge of the business rescue on 30 May 2013, via an email from the Commission to the banking sector indicating that the applicant had been placed under business rescue. Acting on that knowledge, on 30 May 2013 the respondent placed a “stop all debits” and “lock-up” status on the applicant’s account and advised that the account was suspended, and that if the applicant required use of the overdraft facility the practitioner should confirm how the debt would be repaid by publishing a business rescue plan. The applicant contended that the respondent had knowledge of the resolution by 29 May 2013, but this was not accepted as common cause; the court treated the respondent’s position as that it only became aware on 30 May 2013.


On 4 June 2013 the practitioner purported to invoke section 136(2)(a) and made a ruling to the effect that, for the duration of business rescue, the applicant’s obligations toward (among others) the respondent were suspended. The applicant’s case was that the practitioner’s ruling had the effect that the respondent’s obligations under the overdraft facility were not suspended and that the account should be reopened for use. Despite that ruling, the overdraft remained suspended, which precipitated the application.


3. Legal Issues


The court was required to determine two principal questions.


The first question, raised as a point in limine, was a question of statutory compliance and legal consequence: whether the applicant’s failure to give the respondent (as an affected person) notice of the section 129 resolution within the period contemplated by section 129(3) resulted, by operation of section 129(5), in the resolution lapsing and becoming a nullity.


The second question, considered in the alternative, concerned the interpretation and application of section 136(2)(a) to the facts: whether a business rescue practitioner’s ruling under that provision could operate so as to require the respondent to make the overdraft facility available to the applicant during business rescue, notwithstanding the respondent’s contractual rights and its prior suspension of the facility.


The dispute thus involved questions of law (interpretation of statutory provisions and their consequences), together with the application of law to essentially common-cause facts regarding notice, timing, and the bank’s suspension of the overdraft.


4. Court’s Reasoning


On the preliminary issue, the court approached section 129(3) as imposing a peremptory obligation on a company that has adopted and filed a resolution to commence business rescue to publish notice of that resolution to every affected person within five business days (or such longer time as the Commission may allow). The court emphasised that it was common cause that the respondent was an affected person and that the applicant did not send the section 129(3) notice to the respondent.


The court then considered the consequence stipulated in section 129(5), which provides that if a company fails to comply with any provision of subsection (3) or (4), the resolution to begin business rescue proceedings lapses and is a nullity. The applicant accepted the failure to notify the respondent, but argued that there had been “substantial compliance” because the respondent became aware of the business rescue through the Commission within a short period, and also advanced a contention that the respondent had waived rights available under section 130 (which allows affected persons to apply to set aside a section 129 resolution on specified grounds, including procedural non-compliance).


In addressing “substantial compliance”, the court referred to authorities placed before it. Two unreported decisions of that division had treated the requirements of section 129(3) and (4) as peremptory, holding that non-compliance leads to lapse and nullity. The court also considered an unreported decision from the Gauteng High Court, Johannesburg, in which reliance had been placed on section 6(9) of the Companies Act 71 of 2008 in the context of deviations from prescribed methods of delivery, with emphasis on whether notice in fact reached the intended recipients within the prescribed period.


The court distinguished that Johannesburg matter on the basis that, in the present case, the respondent obtained knowledge of the resolution outside the prescribed five business day period. On that footing, and aligning itself with the strict approach in the two decisions from the same division, the court concluded that strict compliance with section 129 was required on these facts. The applicant’s failure to notify the respondent meant the section 129 resolution had lapsed and was a nullity, and the point in limine was upheld.


Although the finding on the point in limine was dispositive, the court proceeded to deal with the substantive issue in the event that it was wrong on the preliminary point. The court then interpreted section 136(2)(a) as empowering a practitioner, during business rescue proceedings, to suspend “any obligations of the company” arising under an agreement to which the company was a party at commencement of business rescue and that would otherwise become due during those proceedings. On the court’s reading, the provision was directed at suspending the distressed company’s obligations, not imposing or preserving performance obligations on counterparties in favour of the company.


Applying that interpretation, the court accepted the respondent’s submission that the practitioner’s power under section 136(2)(a) did not extend to compelling the respondent to continue affording overdraft credit, particularly where the contractual terms entitled the respondent to suspend or reduce the credit limit in circumstances including deterioration in financial position or changes in management/control. The court treated the commencement of business rescue as consistent with a deterioration in financial position and a change in management/control for purposes of the agreement’s suspension provisions.


The court also took into account the sequence of events: the respondent suspended the overdraft facility upon learning of the business rescue, and the practitioner’s ruling occurred after the suspension. In that context, the court was not persuaded that the practitioner’s ruling was intended to have retrospective effect so as to undo the already-implemented suspension.


5. Outcome and Relief


The application was dismissed with costs. No declaratory or mandatory relief was granted compelling the respondent to restore use of the overdraft account.


Cases Cited


Advanced Technologies and Engineering Company (Pty) Ltd (in business rescue) v Aeronautique Et Technologies Embarquees SAS and Three Others (North Gauteng High Court, Pretoria) (Case number 72522/11) (6 June 2012) (unreported).


Madodza (Pty) Ltd (in business rescue) v ABSA Bank Limited and Five Others (North Gauteng High Court, Pretoria) (Case number 3890-6/12) (15 August 2012) (unreported).


Credit Suisse Group AG and Another v Petrus Francois van Steen NO and Another (Gauteng High Court, Johannesburg) (Case number 3624/2013) (27 February 2013) (unreported).


Legislation Cited


Companies Act 71 of 2008, sections 6(9), 129(1), 129(3), 129(4), 129(5), 130(1), 136(2)(a), 138, 152.


Companies Regulations, 2010 (reference made in relation to the definition of “publish a notice”).


Rules of Court Cited


No rules of court were cited in the judgment.


Held


The court held that the applicant’s failure to provide the respondent, as an affected person, with notice of the board resolution commencing business rescue within the period required by section 129(3) triggered section 129(5), with the result that the resolution lapsed and was a nullity. On that basis, the application could not succeed.


In the alternative, the court held that section 136(2)(a) empowers a business rescue practitioner to suspend obligations of the distressed company, not obligations owed by third parties to the company. The respondent was accordingly not compelled by the practitioner’s ruling to restore the overdraft facility, and the respondent was entitled under the overdraft agreement to suspend the facility in the circumstances. The practitioner’s ruling, made after the suspension, was not treated as having retrospective effect to reverse the bank’s earlier suspension.


LEGAL PRINCIPLES


The judgment applied the principle that compliance with the procedural requirements of section 129(3) and (4) of the Companies Act 71 of 2008 is peremptory in the sense that non-compliance triggers the statutory consequence in section 129(5), namely that the resolution commencing business rescue lapses and is a nullity. On the facts, the court preferred a strict compliance approach to arguments based on “substantial compliance” where an affected person did not receive notice within the prescribed period.


The judgment also applied the interpretive principle that section 136(2)(a) is concerned with the suspension of obligations of the company under business rescue, arising from agreements in existence at the commencement of business rescue, and does not in itself confer power on a practitioner to compel counterparties to continue performing obligations (such as advancing credit) in favour of the company where the statutory text confines the suspension power to obligations of the company.


Finally, the judgment applied the contractual principle that where an agreement expressly permits a party (here, a bank) to suspend or reduce a facility upon specified triggers such as deterioration in financial position or change in control/management, the bank may exercise that right, and a practitioner’s later ruling under section 136(2)(a) was not treated as retrospectively undoing steps already taken pursuant to contractual entitlement.

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[2013] ZAGPPHC 465
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Homez Trailers And Bodies (Pty) v Standard Bank of South Africa Ltd (35201/2013) [2013] ZAGPPHC 465 (27 September 2013)

REPUBLIC
OF South Africa
NORTH
GAUTENG HIGH COURT, PRETORIA
CASE
NO: 35201/2013
DATE:
27 SEPTEMBER 2013
In
the matter between:
HOMEZ
TRAILERS AND BODIES (PTY) (under
supervision)
.....................
Applicant
And
STANDARD
BANK OF SOUTH AFRICA
LTD
............................................
Respondent
JUDGMENT
MNGQIBISA-THUSl
J:
1.
The applicant is seeking the following relief:
1.1
an order declaring:
1.1.1
that the applicant’s obligations in terms of an overdraft
facility the respondent granted to the applicant, are suspended
for
the duration of the business rescue proceedings;
1.1.2
that all the respondent’s obligations in terms of the overdraft
facility are not suspended for the duration of the business
rescue
proceedings.
1.2
that the respondent be ordered to restore full use of account number
60698209, held at Hillcrest Branch, to applicant for the
duration of
the business rescue proceedings; and
1.3
a cost order against the respondent.
[2]
During May 2009 the respondent granted the applicant an overdraft
facility in terms of an agreement concluded between the parties.
The
agreement made provision, inter alia, for the following:
2.1
that the applicant’s initial credit limit would be R50 000.00,
which could be increased at the request of the applicant
(clause
1.1.1 of Part A of the agreement). During January 2012 the credit
limit on the overdraft facility was increased to R470
000.00.
2.2
that the respondent would be entitled, inter alia, to suspend or
reduce the credit limit in the event of a deterioration in
the
applicant’s financial position or if there is a change in the
control or ownership of the applicant, (clause 10.1.4 read
with
clause 10.1.11 and clause 10.2.2 Part B of the agreement).
2.3
that the applicant was obliged to inform the respondent in writing of
any change in the control or ownership of the applicant
(clause 15.5
of Part A of the agreement).
[3]
On 15 May 2013 the applicant’s board of directors adopted a
resolution in terms of section 129 (1) of the Companies Act
71, 2008
(“the Act”), initiating business rescue proceedings. On
22 May 2013 the applicant filed a notice beginning
business rescue
proceedings together with a copy of the resolution adopted on 15 May
2013 and a supporting affidavit, with the
Companies and Intellectual
Property Commission (“the Commission”).
[4]
As appears from the applicant’s replying affidavit, on 28 May
2013 it sent a notice to its creditors informing them about
the
business rescue proceedings in accordance with section 129(3) of the
Act.
[5]
On 29 May 2013, Mr Marius Hamel (“Hamel”), the deponent
to the applicant’s founding affidavit, was appointed
as the
applicant’s business rescue practitioner (“the
practitioner”) in terms section 129(4); and a notice of
his
appointment as practitioner was filed with the Commission on 30 May
2013.
[6]
As appears from the respondent’s answering affidavit, the
respondent got knowledge of the applicant’s business rescue

proceedings on 30 May 2013 through an email sent by the Commission
informing the banking sector that the applicant was placed under

business rescue proceedings. As a result, on 30 May 2013 the
respondent loaded a “stop all debits” and “lock-up”

status on the applicant’s account and informed the applicant
that:
6.1
its account is suspended; and
6.2
should the applicant need to use its suspended overdraft facility,
the practitioner should confirm how the debt would be repaid
by
publishing a business rescue plan.
[7]
On 4 June 2013, Hamel purported to invoke the provisions of section
136(2)(a) of the Act, by making a ruling that for the duration
of the
business rescue proceedings the applicant’s obligations
towards, among others, the respondent, were suspended. It
is the
applicant’s contention that the ruling made by Hamel has the
effect that the respondent’s obligations towards
the applicant
under the credit facility agreement were not suspended.
[8]
Despite Hamel’s ruling, the applicant’s overdraft
facility remains suspended. The refusal by the respondent to lift
the
suspension of the applicant’s overdraft facility, led to the
applicant launching these proceedings.
[9]
The respondent raised as a point in limine the issue as to whether
the failure by the applicant to notify the respondent, as
an affected
person, about the resolution within 5 (five) days of its adoption and
filing in terms of section 129(3) of the Act,
results in the
resolution lapsing and being a nullity.
[10]
A further issue to be determined is whether the ruling made by the
practitioner in terms of section 136(2)(a) of the Act empowers
the
practitioner to enforce obligations in favour of a company to be
effective even though the company is under business rescue.
Point
in limine
[11
] Section 129 (3) of the Act reads as follows:
“
(3)
Within five business days after a company had adopted and filed a
resolution, as contemplated in subsection (1), or such longer
time as
the Commission, on application by the company, may allow, the company
must -
(a)
publish a notice of the resolution, and its effective date, in the
prescribed manner to every affected person, including with
the notice
a sworn statement of the facts relevant to the grounds on which the
board resolution was founded: and
(b)
appoint a business rescue practitioner who satisfies the requirements
of section 138, and who has consented in writing to accept
the
appointment.”
[12]
It is common cause that the respondent is an affected person in terms
of the Act. Furthermore, it is common cause that the
notice sent to
the applicant’s creditors on 28 May 2013 was never sent to the
respondent.
[13]
Section 129(5) of the Act provides that:
“
(5)
If a company fails to comply with any provision of subsection (3) or
(4)-
(a)
its resolution to begin business rescue proceedings and place the
company under supervision lapses and is a nullity; and
(b)
the company may not file a further resolution contemplated in
subsection (1) for a period of three months after the date on
which
the lapsed resolution was adopted, unless a court, on good case shown
on an ex parte application, approves the company filing
a further
resolution.”
[14]
It is the respondent’s view that as an affected person, the
applicant was obliged to inform it of its resolution to begin

business rescue proceedings. That since the applicant failed to
comply with the provisions of section 129(3) the resolution taken
on
15 May 2013 and filed with the Commission on 22 May 2013 had
therefore lapsed and was a nullity in terms of section 129(5).
[15]
It was conceded on behalf of the applicant that even though notices
were sent to other creditors of the applicant, such notice
was not
sent to the respondent. However, counsel for the applicant argued
that the applicant has substantially complied with the
provisions of
section 129(3) in view of the fact that the respondent did get
knowledge of the business rescue proceedings by 29
May 2013 through
the Commission. However, even though the respondent does not dispute
having knowledge of the resolution, it contends
that it only became
aware of the resolution on 30 May 2013 and not on 29 May 2013 as
contended by the applicant. Furthermore, applicant
argued that the
respondent, having had knowledge of the applicant’s resolution,
had waived its rights which it could have
exercised in terms of
section 130. Section 130(1) of the Act reads 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 section129.”
[16]
In support of its contention that it has substantially complied with
the provisions of section 129(3), counsel for the applicant
referred
the court to three decisions, two from this division and the third
from the Gauteng High Court, Johannesburg Division,
dealing with what
amounts to compliance with the provisions of s129(3) and (4) of the
Act. The unreported judgements of (i) Advanced
Technologies and
Engineering Company (Pty) Ltd (in business rescue) v Aeronautique Et
Technologies Embarquees SAS and three others,
Case number 72522/11,
delivered on 6 June 2012 and (ii) Madodza (Pty) Ltd (in business
rescue) v ABSA Bank Limited and five others,
Case number 3890-6/12,
delivered on 15 August 2012 dealt with the failure by a company,
after having taken a resolution, to appoint
a business rescue
practitioner within the stipulated time period. In both these matters
the court held that the provisions of section
129(3) and (4) were
held to be peremptory and that non- compliance leads to the
resolution lapsing and being a nullity. In the
Advanced Technology
matter (supra), Judge Fabricius held at paragraph 26 that:
“
The
purpose of s129(5) is plain and blunt. There can be no argument that
substantial compliance can ever be sufficient in the given
context.
If there is non-compliance with s129(3) or (4) the relevant
resolution lapses and is a nullity. There is no other way
out, and no
question of any condonation or argument pertaining to “substantial
compliance”. The requirements contained
in the relevant
sub-sections were either complied with or they were not.”
[17]
In Credit Suisse Group AG and Another v Petrus Francois van Steen NO
and Another, Case number 3624/2013, delivered on 27 February
2013,
the Gauteng Johannesburg Division, the facts of which are similar to
the facts in matter except that in the Credit Suisse
matter (supra),
although some creditors (referred to as note holders) were not
notified about the resolution taken, they became
aware of the
resolution within the prescribed period as set out in section 129(3),
whereas in this matter the respondent only knew
about the resolution
outside the prescribed time period.). In Credit Suisse matter the
court placed reliance of its decision on
section 6(9) of the Act
which reads as follows:
“
(9)
If a manner of delivery of a document, record, statement or notice is
prescribed in terms of this Act for any purpose
(a)
it is sufficient if the person required to deliver such document,
record, statement or notice does so in a manner that satisfies
all of
the substantive requirements as prescribed; and
(b)
any deviation from the prescribed manner does not invalidate the
action taken by the person delivering that document, record,

statement or notice unless the deviation
(i)
materially reduces the probability that the intended recipient will
receive the document, record, statement or notice; or
(ii)
is such as would reasonably mislead a person to whom the document,
record, statement or notice, or is to be, delivered.”
[18]
The court held stated at paragraph 19 that:
“
19.
.... The section 6(9) and also from the definition of “publish
a notice” in the Companies regulations 2010 recognise
that what
is of paramount importance in respect of the delivery of notices to
persons
entitled thereto is not whether or not delivery has taken place
strictly in accordance with the prescribed manner, but whether
or
not, as a fact, the person to whom delivery ought to have been
affected received the requisite notice.”
[19]
The court being of the view that the purpose of section 129 is “to
protect the rights of affected persons so that they
could not be
bypassed in an attempt by a company to opt for the option of business
recue without such affected party having had
the opportunity of
utilising the provisions of section 130 ... in order to set aside any
such resolution opting for a business
rescue”, and the fact
that the creditors who were not notified supported the resolution,
the court came to the conclusion,
in the context of the facts in that
matter, that the company had substantially complied with the
provisions of section 129 (3)
of the Act.
[20]
The De Suisse matter is distinguishable from the current matter in
that the respondent got knowledge of the resolution outside
the
prescribed 5 days period. I am of the view that and am in support of
the Advanced Technologies and Madodza decisions that strict

compliance with the provisions of section 129 is required. I am of
the view that the applicant did not comply with the provisions
of
section 129 and therefore the resolution taken on 15 may 2013 has
lapsed and is a nullity. The respondent’s point in limine
is
upheld.
[21]
Should I be wrong on the conclusion on the point in limine, the next
issue to be determined is whether the ruling made by the
practitioner
in terms of section 136(2) of the Act empowers the practitioner to
enforce obligations against a company to be effective
even though the
company is under business rescue.
[22]
It is the applicant’s contention that the business rescue
practitioner can, in terms of a ruling it made under the provisions

of
section 136(2)(a)
of the
Companies Act oblige
the respondent to
give the first applicant access to an overdraft facility it had
suspended when the first applicant initiated
business rescue
proceedings.
[23]
Section 136 (2)(a) of the Act provides that:
“
(2)
Subject to section (2A), and despite any provision of an agreement to
the contrary, during business rescue proceedings, the
practitioner
may-
(a)
Entirely, partially or conditionally suspend for the duration of the
business rescue proceedings, any obligations of the company
that-
(i)
arises under an agreement to which the company was a party at the
commencement of the business rescue proceedings; and
(ii)
would otherwise become due during those proceedings.”
[24]
It is the applicant’s contention that the practitioner’s
ruling in terms of section 136(2)(a) on 4 June 2013, had
the effect
of suspending the respondent’s right to apply set-off, ex lege.
It was submitted on behalf of the applicant that
by suspending the
overdraft facility, the respondent had compromised the business
rescue proceedings in that, as a result of the
applicant’s lack
of cash-flow, it would be unable to process orders for trailers in
the amount of R10m. Counsel argued that
this was contrary to the
spirit of business rescue
proceedings
which was to give companies in financial distress some reprieve from
being liquidated.
[25]
From the reading of section 136(2)(a), it is clear, as correctly
pointed out by counsel for the respondent that on a correct

interpretation of the section, only the obligations of the company in
distress are susceptible to be suspended by the practitioner.

Furthermore, from reading of the agreement between the parties I am
of the view that the respondent was within its rights to suspend
the
overdraft facility as the applicant’s resolution amounted to an
actual change in the management of the applicant and
a deterioration
in its financial position. I have also taken into account that the
ruling made by Hamel was made after the applicant’s
had already
suspended the overdraft facility and it cannot be said that a ruling
in terms of the section was intended to have retrospective
effect.
[26]
Accordingly the following order is made:
The
application is dismissed with costs.
MNGQIBISA-TyHUSI
J
Appearances:
For
the Applicant Adv G C MULLER SC
Instructed
by Hamel Attorney
For
the Respondent Adv K W LUDERITZ SC
Instructed
by Norton Rose Fulbright South Africa

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