A declaratory order relating to business rescue, handed down last week by the South Gauteng High Court, has significant ramifications for the banking, insolvency and business restructuring industries, according to Claire van Zuylen, Director at pan-African law firm Bowman Gilfillan.

In the case of Petrus Francois van den Steen NO & Southgold Exploration, Credit Suisse AG and Standard Chartered Bank Intervening, the court held that failure by the company applying for business rescue, Southgold, to formally notify one group of creditors did not nullify the business rescue.

“Had the court order not been granted, lenders to Southgold would not have been prepared to advance further funding because the validity of the business rescue would have been in doubt,” explained Ms van Zuylen.

As a result, Southgold and the business rescue practitioner, represented by Webber Wentzel, and the lenders, represented by Bowman Gilfillan, sought a declaratory order that the failure to formally notify a group of creditors was condoned and that the business rescue was valid. The order was granted on 1 March 2013.

This represented an important departure from previous cases in which it was held that the business rescue must fail because a single creditor had not been timeously notified.

In terms of section 129 (3) of the Companies Act, 2008, a company that places itself into business rescue has a set period in which to appoint a business rescue practitioner and to give notice to “affected persons”, which includes creditors. Section 129 (5) states that if a company fails to comply with any provision of subsection 129 (3), the resolution to begin business rescue proceedings and place the company under supervision lapses.

Said Ms van Zuylen: “The legal interpretation of section 129 (5) held the absurd result that if a company timeously notified, say, 4 950 of its creditors but failed to notify one of its creditors - due to the fact that it was not aware that the creditor was in fact a creditor, either as a matter of law or simply because the creditor had not yet made demand - that the entire business rescue must fail.”

This had disastrous consequences for the company, the business rescue practitioner and financiers to the company.

Business rescue practitioners became reluctant to take appointments due to the possibility that they could be exposed to damages claims for contracts concluded in the period when the business rescue was assumed to be valid.

“Lenders to the company faced even more serious consequences. Most companies only survive a business rescue if they are able to procure post-commencement financing. In order to incentivise lenders to give facilities to companies in business rescue, section 135 of the Companies Act, 2008, provides that any lender who advances money to the company post the commencement of business rescue shall have a preference for that advance, both in the business rescue and in any subsequent liquidation if the business rescue failed.

“If the resolution for business rescue were to be found to be a nullity under section 129 (5), all of that funding would effectively have been advanced prior to the commencement of business rescue, and thus not enjoy the preference,” said Ms van Zuylen.

The Bowman Gilfillan team comprised Claire van Zuylen (Insolvency and Restructuring), Lionel Shawe and Lisa Botha (Banking and Finance), and Bianca Masterton (Litigation).

Commenting on the ruling, Bowman Gilfillan partner, Ezra Davids, said: “Closely following on successfully obtaining recognition for the first time of a United States bankruptcy order in South Africa, Bowman Gilfillan has again distinguished itself as a leader in the rapidly developing field of insolvency and business rescue.”