Can a foreign business go into business rescue in South Africa?
As of late, small and large businesses have been under considerable financial stress – if it wasn’t the lingering effects of the COVID-19 lockdowns, it was the recent protests that ravaged the country. This often caused business to be placed under business rescue, in terms of section 129 of the Companies Act No. 71 of 2008 (the Act). This has been the situation for internationally based companies as well. In the case of Cooperativa Muratori & Cementisti and Others v Companies and Intellectual Property Commission and Others 2021 (3) SA 393 (SCA), the South African courts were presented with the question of whether business rescue proceedings were available to an external company (an entity incorporated outside South Africa, that is carrying on business within the Republic).
The Appellant in this case, Cooperativa Muratori & Cementisi-CMC Di Ravenna Societá Cooperativa a Responsibilita Limitata (CMC), is a company incorporated in Italy and involved in the construction industry globally. It was registered as an external company in terms of section 23 the Act.
In late 2018, CMC encountered a serious cash flow crisis and significant financial difficulties, which led them to apply to the Court of Ravenna, Bankruptcy Section, in December 2018, for an arrangement with its creditors pursuant to article 161 of the Italian Bankruptcy Law; the order was issued by the Court of Ravenna. During that same month, the board of directors of CMC resolved that the company was financially distressed, as defined in section 128 of the Act. They then appointed business rescue practitioners to initiate business rescue proceedings, which includes serving a copy of the application on the Companies and Intellectual Property Commission (CIPC). During February 2019, the Respondent, the CIPC, advised that CMC could not be placed under business rescue because it is an external company, and business rescue is only applicable to incorporated in terms of the Act. CMC then brought an application as a matter of urgency to the High Court, which dismissed its claims. The matter was then brought before the Supreme Court of Appeal (SCA).
The SCA began by setting out the definition of business rescue, which is defined by section 128(1)(b) of the Act as meaning the proceedings to facilitate the rehabilitation of a company that is financially distressed by:
- placing the company’s affairs, management, business and property under the temporary supervision of a business rescue practitioner;
- granting a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
- making provision for the approval of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
The SCA found that business rescue is only available to a ‘company’. The term ‘company’ is defined in section 1 of the Act as:
It is clear from the above that the legislature intended that the term ‘company’ (and the Act as a whole) only applies to companies that were incorporated in terms of the Act, subject to certain inclusions. Although CMC was registered as an external company in terms of the Companies Act, 1973 (Old Act), subsection (a)(i) expressly excludes an external company registered under the Old Act, and thus it was held that CMC is not a company to which the Act would apply to. Accordingly, it was held that CMC, as an external company, may not be placed under business rescue.
In the alternative, CMC sought to have the order from the Court of Ravenna recognised, however there was nothing in that order that was capable of being enforced or recognised in South Africa.
By applying the definition of ‘company’ in the Act, the inevitable conclusion is that a foreign or external company may not be placed under business rescue in terms of the Act.
The SCA also highlighted that where a foreign company is required to comply with provisions of the Act, there is usually special provision for this. For example, section 95(1) provides a special definition of ‘company’ by stating that “in addition to the meaning set out in section 1, [company] also includes a foreign company.” These special definitions reinforce the conclusion that elsewhere in the Act, where there is reference to ‘company’ it means a company as defined in section 1.