Arbitration during business rescue: is it allowed?

arbitration during business rescue

The new Companies Act states that you may not institute legal proceedings in any forum against a company in business rescue, except with the written consent of the business rescue practitioner (BRP) (see section 133(1)(a)). The Act does not, however, define the phrase “legal proceeding(s)”.

A recent case was taken to the Supreme Court of Appeal (SCA) regarding a matter that related to the above. This case looked at the concept of arbitration during business rescue.

arbitration during business rescue

Arbitration during business rescue

The case was Chetty v Hart. In this case, the appellant and a company called TPB had referred a dispute to arbitration. The matter was heard the day after TPB was placed into business rescue. The consent of the BRP to enter into these proceedings was not sought, nor was it obtained in line with s 133 of the Companies Act.

The appellant was not satisfied with the arbitration award. She applied to court to have it set aside. She argued that “arbitrations” fell within the definition of “legal proceedings” under s 133(1)(a). There was no compliance with s 133 as was therefore needed, so the arbitrator did not have competence to hear and rule on the matter. The arbitration award was a nullity. The respondent conversely argued that “arbitrations” did not fall within the definition of “legal proceedings”, so were not subject to the moratorium.

Arbitration during business rescue: allowed or not?

The court was asked to determine whether “arbitrations” fell within the definition of “legal proceedings” of section 133(1)(a). If it did, arbitrations would be subject to the moratorium imposed once business rescue began.

The SCA considered the purpose of business rescue proceedings. It held that business rescue “gives the company breathing space so that its affairs may be assessed and restructured in a manner that allows its return to financial viability.” It went on to state the reason for the requirement of consent from the BRP. Having this requirement allows the BRP to assess how the claim will impact the wellbeing of the company and its ability to return to financial health.

To achieve these purposes, a general moratorium on the rights of creditors is necessary, held the SCA. Arbitration proceedings are widely used to resolve commercial disputes; they can be costly and lengthy. Because of these facts, excluding “arbitrations” from the moratorium created by s 133(1)(a) would greatly hinder achieving the purposes of business rescue, said the SCA. It therefore had to be that “arbitrations” fell within the definition of “legal proceedings” in this context.

Arbitration during business rescue: take-home message

Going forward, the effect of the SCA’s judgment is that you will have to obtain written consent from that business’s BRP if you wish to institute arbitration proceedings with the business. If you do not obtain that consent, but nevertheless enter into arbitration proceedings and an arbitration award is made, the BRP can choose to waive or seek protection of s 133(1)(a), whichever outcome benefits the business. The SCA held this because it found the section was crafted exclusively for the benefit of the BRP and confers no rights on creditors.

If you require assistance regarding arbitration during business rescue, or any other matter relating to the above, please do not hesitate to contact us at info@gunstons.com.

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