The recent judgment of the Gauteng High Court (Pretoria) in Commissioner for SARS v Louis Pasteur Investments (Pty) & Others highlights issues relevant to the abuse of the business rescue procedure.

The business rescue practitioner (BRP) was taken to task for the manner in which the business rescue procedure had been conducted.

Dr Eric Levenstein, head of Insolvency, Business Rescue & Restructuring at Werksmans Attorneys, says SARS approached the court for an order for the final winding up of Louis Pasteur Investments (LPI). Despite the fact that the company was both commercially and financially insolvent, the court also heard an application for rescission of the order converting the business rescue proceedings into liquidation proceedings, as well as an application for the discharge of the provisional winding up order.

In his analysis of the judgment on the Bizcommunity site, Levenstein notes in March 2021, an order was granted in terms of section 132(2)(a)(ii) of the 2008 Companies Act (the Act), to convert the business rescue proceedings to liquidation proceedings.

This was opposed by the BRP and LPI on two main grounds: It was not competent for a creditor such as SARS to bring an application for conversion of the business rescue proceedings into liquidation proceedings; and the business was in fact capable of being rescued – despite the fact that the 10-year expiry period of the business rescue plan was in November 2022.

The BRP and LPI argued that only a business rescue practitioner can convert business rescue proceedings to liquidation proceedings.

Millar pointed out that – while courts have previously said that BRPs may be best suited to apply for the conversion of proceedings to liquidation – that does not mean that only BRPs can make such an application.

Levenstein notes that section 132(2)(a) is silent on who should bring the application. It was held that a creditor such as SARS was entitled to apply to convert business rescue proceedings to liquidation.

The BRP and LPI also argued that the SARS debt arose prior to the adoption of the business rescue plan.

As such, in terms of section 152(2) read with section 152(4) of the Act, the claims could not be enforced except to the extent envisaged in the business rescue plan. Millar disagreed with this contention, pointing out that both those provisions deal with the enforcement of debt which is distinguishable from a conversion application.

The court also examined the underlying philosophy of business rescue, as set out in section 128(1)(b) of the Act.

In this regard, Millar pointed out that business rescue is for the ‘temporary supervision’ of a company.

Ultimately, Millar came to the conclusion that there was no commercial or rational basis to allow the business rescue to continue. Levenstein says as the court rightly pointed out, business rescue proceedings are designed to provide a shield for a company, in order to protect it and enable it to trade out of financial distress.

‘Business rescue proceedings cannot and should not be used by companies or BRPs as a sword to keep creditors at bay, without regard to whether or not there is a realistic prospect of success.’

Levenstein adds: 'This should be a warning to all BRPs who conduct litigation in a dilatory manner that such behaviour will not be tolerated. More importantly, it is a clear indication that courts will not hesitate to punish BRPs who act contrary to the purpose and objectives of business rescue. Judgments like this one will go some way to restoring public trust in business rescue and will provide support to counter the proposition of there being a ‘crisis of trust’ in SA’s business rescue procedure.’

Full analysis on the BizCommunity site