It is important to note that non-compliance with a statutory prescript does not always result in automatic invalidity. In line with this principle and in the context of business rescue, the Gauteng High Court in Infinitum Holding and Another v Hugo Lerm and Others (26799/2017) [2022] ZAGPJHC 341 (18 May 2022) made noteworthy comments regarding the effects of noncompliance with section 129(2)(a) of the Companies Act 71 of 2008 (Companies Act) and whether a resolution to place a company in business rescue, which falls foul of this section, is without more void ab initio.

Loan agreement

Briefly, this dispute has its roots in an oral loan agreement concluded between Infinitum Holding (Pty) Ltd (Infinitum), and Mrs Nelia Lerm, in terms of which Infinitum borrowed an amount of R1 million from Lerm. Infinitum failed to repay the loan in accordance with the agreed terms and Lerm instituted legal action for recovery of the outstanding loan amount, which Infinitum defended. The matter was heard on 26 and 27 August 2019. While awaiting judgment, on 28 August 2019 the parties entered into a settlement agreement in terms of which Infinitum not only explicitly and unequivocally admitted liability to Lerm for the amount claimed, but also committed to specific repayment terms. 

During the period leading up to the trial and in an apparent effort to circumvent compliance with Infinitum’s obligation arising from the loan agreement, on 7 August 2019 Mr Bouwer in his capacity as the sole director, passed a resolution to place Infinitum under supervision and commence business rescue proceedings. In the very same resolution, which he duly filed with the Companies and Intellectual Property Commission, Bouwer appointed Mr Johan Christo Lotter as the business rescue practitioner (BRP). The upshot of this was that when the matter went to trial on 26 August and the subsequent settlement agreement was concluded, Lotter, in his capacity as the duly appointed BRP, represented and acted on behalf of Infinitum.

At the heart of this case lies Bouwer’s challenge against the settlement agreement. One of his bizarre grounds of attack was that neither his erstwhile attorney of record nor the BRP had the authority to conclude it. He argued that on this ground, the settlement agreement was invalid, and the corollary therefor was a rescission of the judgement granted against Infinitum. One other ground for the rescission sought was that Infinitum did not receive the funds advanced by Lerm and therefore could not be held liable for the debt. However, a fact placed before the court, which remained unassailable, was that the bank account into which Lerm paid the loan amount of R1 million was furnished to her by Bouwer himself acting in his capacity as the sole director of Infinitum.

The High Court’s analysis

In its analysis, the court firstly assessed the law related to rescission of judgment, citing the Constitutional Court in Zuma v Secretary of the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector Including Organs of State and Others 2021 ZACC 28. In Zuma, the Constitutional Court restated the principle that when bringing an application of rescission of judgment in terms of Rule 42, the applicant must show both that judgment was granted in their absence and that it was granted erroneously. The Constitutional Court then went on to explain that, in terms of our common law, in order to successfully rescind a judgment an applicant must, firstly, provide a reasonable and satisfactory explanation for its default and, secondly, must demonstrate a bona fide defence which presumptively carries some prospect of success.

Turning to the present case, Bouwer essentially argued that the judgment should be rescinded because (i) his erstwhile attorney of record acted without instructions, (ii) the business rescue practitioner did not have the mandate to sign the agreement on behalf of Infinitum, and (iii) Infinitum was unable to consent to the agreement being made an order of court because it was in liquidation at the time. This fact about Infinitum being in liquidation arose for the first time during the rescission application.

Compliance with section 129(2)(a)

In this article we examine Bouwer’s argument that the resolution, which he passed in his capacity as the sole director, to place Infinitum under business rescue was invalid ab initio on the ground of noncompliance with section 129(2)(a) of the Companies Act. This section provides that:

“(1) Subject to subsection (2)(a), the board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision if the board has reasonable grounds to believe that:

(a)  the company is financially distressed; and

(b)  there appears to be a reasonable prospect of rescuing the company.

(2)  A resolution contemplated in subsection (1):

(a) may not be adopted if liquidation proceedings have been initiated by or against the company; and

(b) has no force or effect until it has been filed.”

In support of his argument that the resolution in terms of which Infinitum was effectively placed in business rescue was void ab initio, Bouwer contended, we submit incorrectly so, that a party confronted with a resolution passed in terms of section 129 which was not compliant with the above provisions, had no legal recourse.

In response, Lerm argued that the legislature would have phrased section 129(2)(a) differently if it intended to automatically invalidate every resolution adopted to place a company into business rescue proceedings where liquidation proceedings had already commenced.  

Findings

In agreeing with Lerm’s argument, the court, held that contrary to Bouwer’s contention, section 130 of the Companies Act does in fact provide a mechanism through which one could seek to set aside a resolution which falls foul of the procedural requirements set out in section 129. The court emphasised that it cannot be that a resolution placing a company in business rescue is without more, automatically void ab initio if liquidation proceedings have already commenced. The correct process to invalidate such a resolution would be to apply to court for an order setting such impugned resolution aside in terms of section 130 of the Companies Act.

This approach was also followed by Davis J in Henria Beleggings CC v Changing Tides 17 (Pty) Ltd NO; Changing Tides 17 (Pty) Ltd v CIPC and Others (5412/2008; 43912/2016) [2022] ZAGPPHC 378 (1 June 2022) where the court held that:

“… in terms of section 130(5)(a), a court considering an application for setting aside a resolution to place a corporation in business rescue, may set aside such a resolution, with reference to section 130(1)(a), on the grounds that there is no reasonable prospect for rescuing the company or, with reference to section 130(5)(a)(ii), if, having regard to all of the evidence, the court considers it is otherwise just and equitable to do so.”

Consequent to the findings illustrated above, the court held that the applicants failed to make out a case for the rescission of the court order primarily since the resolution adopted to place Infinitum under business rescue was not void ab initio. Additionally, the court delivered a punitive cost order at the expense of Bouwer due to his abuse of court process.

It is clear from the above case that noncompliance with section 129(2)(a) of the Companies Act does not automatically invalidate a resolution taken in this respect. Rather, the resolution maintains legal effect until a court makes an order to set it aside. Therefore, if an interested party is of the view that a company has taken a resolution in contravention of section 129(2)(a), it is imperative that they do not sit idly with the assumption that the resolution is automatically void. Rather, the interested party must approach the court in terms of section 130 of the Companies Act in order to set the resolution aside.