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The effect of business rescue on adjudication

13 September 2018

As many construction companies are currently facing serious financial distress and are increasingly entering into business rescue proceedings, if you have a contract with a company that has been placed under business rescue, you may be wondering what effect this will have on adjudication proceedings, either already progressing or yet to be referred.

In terms of section 133 of the Companies Act, 71 of 2008 (the “Act”), during business rescue proceedings, no “legal proceeding” may be commenced or proceeded with in any forum. The Act lists certain exceptions to this rule including where written consent of the practitioner has been obtained or with leave of the court.

In 2015, the Supreme Court of Appeal, in Chetty v Hart[1], was faced with a challenge regarding the interpretation of section 133. Chetty and TBP Building and Civils (Pty) Ltd (“TBP”) had agreed to refer a contractual dispute between them to arbitration. Shortly before argument took place and the arbitrator’s award was made, TBP was placed under business rescue. Chetty (and the arbitrator) had not been aware that TBP was in business rescue and thus had not sought the consent of the practitioner to proceed with the arbitration. Chetty subsequently sought to invalidate the award in its entirety on the basis that the arbitration award was precluded by the moratorium on legal proceedings against companies under business rescue. Hart (the liquidator and respondent in the matter) contended that the moratorium only applied to legal proceedings and not to arbitrations.

The SCA considered whether arbitration fell under the term “legal proceeding”. In its interpretation of this term, the SCA considered the purpose of the moratorium, namely to give the practitioner breathing space to get the company’s financial affairs in order.[2] Arbitrations, like court proceedings, also involve several resources and may hinder the effectiveness of business rescue proceedings.[3] The SCA thus concluded that a narrow interpretation of “legal proceeding” so as to only include court proceedings defeats the purpose of the Act and leads to insensible and impractical consequences.[4]

Having reached this conclusion, the SCA went on to consider whether the failure by Chetty to seek and obtain the practitioner’s consent before continuing with the arbitration was fatal to its outcome and for this reason should be invalidated.

Again, the SCA considered the purpose of the moratorium in coming to its conclusion. The moratorium is there to prevent the practitioner from being inundated with legal proceedings without enough time within which to consider whether or not the company should resist them and also to prevent a company that is financially distressed from being dragged through litigation while it tries to recover from its financial woes.[5] The SCA considered that obtaining the practitioner’s consent is not supposed to serve as a shield behind which a company not needing protection may take refuge to fend off legitimate claims.[6] The SCA concluded that non-compliance with the requirement for the exception does not necessarily lead to a nullity or invalidate legal proceedings.[7] Furthermore, the exception is there to protect a company in business rescue and is not a defence available to a creditor.[8]

Although there has been no court pronouncement on whether adjudication falls under the term “legal proceedings”, a party seeking include adjudication will have a persuasive case given the SCA’s decision in Chetty v Hart in respect of arbitrations, and the reasoning behind it. Therefore, depending on the circumstances, a moratorium may be applicable to any adjudication proceedings currently underway between you and a party that is placed under business rescue or to adjudication proceedings you wish to refer against such party.

  1. (20323/14) [2015] ZASCA 112 (4 September 2015).
  2. Para 35.
  3. Para 35.
  4. Para 35.
  5. Para 39.
  6. Para 40.
  7. Para 41.
  8. Para 43.

Author: Kelly Stannard, Associate