Section 129 of the Companies Act 71 of 2008 (the Act) provides for the process of commencing voluntary business rescue proceedings and placing a financially distressed company under supervision by way of a board resolution.
The section provides for grounds upon if a company’s board of directors may elect to resolve such, and these are in instances where the board reasonably believes that:
- The company is financially distressed; and
- There appears to be a reasonable prospect of rescuing the company.
In the matter of Engen Petroleum Limited v Jai Hind EMCC t/a Emmarentia Convention Centre (ECC) and Others (2022/046904) [2023] ZAGPJHC 38 (24 January 2023), the High Court had to determine whether such a resolution as adopted by the board of trustees of the JHG02 Trust (the Trust) (the purported owner of the ECC), intending to commence business rescue proceedings, was in fact null and void as alleged by one of the ECC’s major creditors and the applicant in this matter – Engen Petroleum Limited (Engen).
The application was brought by Engen on an urgent basis wherein it sought to obtain an order declaring that the resolution placing ECC under business rescue was null and void and further declaring that the business rather be placed under liquidation.
The court thus had to determine the validity of the resolution in the face of the statutory requirements as set out in section 129 of the Act. The court also had to consider whether the financial state of the business necessitated for the business to be placed into liquidation rather than business rescue.
Background facts
The ECC (the First Respondent in this case), trading as a close corporation, dealt in the trading of petroleum products (both petroleum and diesel), selling of consumer goods and providing car wash services.
In September 2022, due to the ECC’s inability to meet its financial obligations, the board of trustees of the Trust, as the purported owner of the ECC, resolved to place the ECC under voluntary business rescue. The resolution was signed by Avishkar Harilal Dukhi (Dukhi) and Desigan Naidoo (Naidoo) in their respective capacities as duly authorised trustees of the Trust.
This initially raised concern insofar as compliance with the provisions of section 129(1) of the Act was concerned, as only Dukhi was in fact a member of the ECC at the time that the resolution was taken, and even so, signed in his capacity as a Trustee Member – the meaning of which was never explained.
Further, section 129 of the Act provides for a board of a company to resolve that the company voluntarily commence with business rescue. As such, considering that the ECC is a close corporation and does not have a board of directors, the resolution to place ECC into business rescue should have been passed by the members of the ECC, and not the Trust. The only known member at the time of the passing of the resolution was Dukhi.
The Business Rescue Practitioner (the BRP), however, sought to rebut this concern by submitting that the trustees were in fact members of the close corporation by virtue of the Trust’s alleged member standing as the purported owner of the ECC. The BRP went further to state that the trustees, as members of the close corporation, and by virtue of holding such office, are in fact directors of the ECC.
The court dismissed this submission on the grounds that the ECC, as a close corporation, is not capable of appointing directors; further, that the resolution was taken by the Trust and not the ECC itself, and it was taken by a member, in conjunction with a non-member of the ECC. The question as to the validity of the resolution was thus at issue.
In considering the second issue before the court, as to whether the ECC should be finally wound up, the court noted that on the version put forward by Mr Dukhi in his sworn statement, as well as the BRP in the proposed Business Rescue Plan (the Plan), the ECC’s debts far outweighed its assets with the only motivating factor for reasonable rescue being attributed to a supported contention of the applicant that the ECC is unlawfully selling diesel as a wholesaler. As such, the court was not convinced of the averments of a reasonable prospect of rescue of the business.
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The Court’s Findings
Validity of the Resolution
Based on the above, the court found firstly, that the resolution as taken by the trustees of the Trust to commence business rescue proceedings of the ECC did not comply with the provisions of section 129 of the Act and is thus null and void and should be set aside on the ground provided for in section 130(1)(a)(iii) of the Act (being that the ECC has failed to satisfy the procedural requirements set out in section 129).
There were further concerns regarding the business rescue proceedings, however, given the conclusion that the resolution was not taken by the ECC, the court did not deal further with these.
Winding-up of the ECC
It was common cause that the ECC was unable to meet is financial obligations. According to the BRP, the ECC had assets to the value of R147,834.30 and faced claims of approximately R19 million.
The court found that on the versions presented by Mr Dukhi and the proposed Plan of the BRP, the ECC was in fact hopelessly insolvent with little to no rational basis to believe that the ECC could be rescued. As such, the court held that it would be just and equitable to grant Engen its relief sought by winding-up the ECC.
Conclusion
The above judgment emphasises the importance of complying with the statutory requirements as provided for in the Act when commencing business rescue proceedings. Failure to do so places the company at risk of having the proceedings being declared null and void and the business rescue proceedings set aside, which is a time consuming and expensive consequence – detrimental to the survival of an already struggling business.
Further to this, the case demonstrates the importance of pragmatically and reasonably assessing the viability of placing a company under business rescue, to ensure compliance with the provision of proving that there is a reasonable prospect of rescuing the business. This case also signals a warning to companies not to abuse the business rescue process and file for rescue, when actually the company is a candidate for a liquidation, as a court may order that the company be wound up.
