Ex Parte – a step too far in rescue

Ryszard Lisinski
Director: Business Rescue & Insolvency, Litigation at Fluxmans Attorneys

In the recent unreported judgment of EBM Project (Proprietary) Limited (In Business Rescue) (“EBM”), Venter, Kenneth Colin N.O and Barak Fund SPC Limited (“Barak Fund”), GLD Case No. 2021/18884, Judge Opperman considered whether an ex parte application brought by a business rescue practitioner is competent given the notification requirements set out in sections 141(2)(a)(i) and 145(1)(a) of the Companies Act 71 of 2008 (“the Companies Act”).

The EBM matter dealt with two competing applications:

  • the first was an ex parte application brought by the business rescue practitioner of EBM to discontinue the rescue of EBM, place it in provisional liquidation and bestow a number of powers on the provisional liquidator;
  • the second was an application brought by Hollard Insurance Company Limited (“Hollard”) for an order placing EBM in final liquidation.

There were two other applications which preceded the application but it is not necessary to discuss them in any detail in order to highlight the principle that can be extracted from the current case.

Barak Fund intervened in the ex parte application and opposed it predominantly on the basis that EBM had not complied with the notice requirements set out in sections 141(2)(a)(i) and 145(1)(a) of the Companies Act i.e. to notify affected persons of any relevant event affecting the business rescue and affording them the opportunity to participate in any court proceedings arising during the business rescue.

In Hollard’s application, EBM argued that Hollard did not have locus standi to approach the court to grant an order for final liquidation on the basis of section 141 of the Companies Act i.e. that only the business rescue practitioner of EBM was afforded this right.

While the last part may be true, this contention on the part of EBM was found to be incorrect as Hollard’s application was actually based on sections 344, 345 and 346 of the Old Companies Act (61 of 1973).

Thus, the court was faced with two competing applications based on different statutory regimes, each crystallizing creditors rights at a different date.

Practically, if the EBM application was granted by the court, Hollard’s application would fall away. If the converse occurred, the Hollard’s application would then be live and decided on its merits once Hollard was granted leave to bypass the moratorium created by business rescue in terms of section 133(1) of the Companies Act.

I will deal with each application sequentially.

Negotiating an an ex parte application is a delicate operation
Photo By: Marcelo Moreira via Pexels

EBM Application
Section 141(1) of the Companies Act obliges a business rescue practitioner to investigate the affairs of the entity in rescue and having done so, consider whether there is any reasonable prospect of the entity being rescued.

If the business rescue practitioner discovers that the entity cannot be rescued, in terms of section 141(2)(a)(i) of the Companies Act, he or she must inform creditors of this and then apply for an order discontinuing the rescue and placing the entity in liquidation.

Section 145(1)(a) of the Companies Act is equally prescriptive in its terms, both sections requiring that affected persons are notified of the lack of prospects of rescuing the entity and court proceedings relevant to the business rescue.

In this matter, Judge Opperman found correctly, that any conduct that has the effect of preventing the participation of affected persons in litigation is unlawful. This is primarily because any such conduct defeats the statutory rights afforded to affected persons.

Judge Opperman went on to dismiss the additional relief sought by EBM i.e. granting the provisional liquidator certain powers ahead of the liquidation. In doing so, Judge Opperman pointed out that chapter 6 of the Companies Act does not afford the business rescue practitioner the power to apply for extended powers for a liquidator. The powers of a liquidator are set out expressly in the Old Companies Act.

This is particularly so in circumstances where the views of affected persons are not known and before the court. The EBM application was dismissed on this basis as well.

When deciding on costs, Opperman J ordered that costs be awarded de bonis propriis as against the business rescue practitioner given the true nature of the ex parte application i.e. to attain a provisional order of liquidation in circumstances where the outcome of the provisional order is to end business rescue proceedings, a result that is final in effect.

Hollard Application
Given that EBM’s technical defence of not having locus standi was dismissed by Judge Opperman, Hollard’s application was successful and EBM was placed into final liquidation.

Do not approach
The key principle that can be derived from this judgment is accordingly that a business rescue practitioner is not permitted to approach a court ex parte without joining parties that have a real and substantial interest in the outcome of those proceedings.

In doing so, a business rescue practitioner should be prepared to face punitive sanctions in the form of a de bonis propriis costs order as well as the reputational damage that will surely follow.

Ryszard Lisinski is a Director at Fluxmans