ABSA Bank Ltd v Naude NO

On 19 June 2012, the board of directors of Louis Pasteur Investments Ltd (the company) resolved to begin business rescue proceedings in terms of s 129 of the Companies Act 71 of 2008. The company was indebted to ABSA Bank Ltd (the bank) for approximately R8.5 million pursuant to two mortgage loans. The company and four other related companies had executed a cross-suretyship in favour of the bank, which increased the company's liability by approximately R150 million. A business rescue practitioner was appointed. When the business rescue plan was proposed, the bank's claim in respect of the cross-suretyship was treated as a 'contingent claim' and its voting interest was limited to approximately R2 million rather than the full amount. Despite the bank's objection to the voting interest allocated to it, the business rescue plan was preliminarily approved on 12 October 2012, having been supported by holders of more than 75% of the creditors' voting interest. Implementation of the plan began on 12-16 November 2012 with the first payments to creditors. On 15 November 2012, the bank launched an application to have the business rescue plan set aside and the practitioner removed from office.

• Whether the bank was required to join the creditors of the company in its application to set aside the business rescue plan
• Whether the bank required written consent of the practitioner or leave of the court in terms of s 133 of the Companies Act before bringing such an application
• Whether notice given in terms of s 130 of the Companies Act was sufficient
• Whether the cross-suretyship was void by virtue of s 226(1) of the old Companies Act 61 of 1973
• Whether the business rescue practitioner should be removed from office

1. The appeal was dismissed with costs including the costs of two counsel. 2. The cross-appeal succeeded to the extent that the order of the court below on the counter-application was set aside.

In an application to set aside an adopted and implemented business rescue plan, creditors who voted for the plan and who have received payments under it must be joined as parties because they have a direct and substantial interest in the subject matter of the litigation. Their interest would be necessarily prejudiced if the plan were set aside without their participation, as they would lose the benefit of their vote, would cease to receive anticipated payments, would have to repay amounts already received, and might face significantly reduced dividends in the event of liquidation. The test for non-joinder is whether a party has a direct and substantial interest in the subject matter of the litigation which may prejudice the party that has not been joined; if an order or judgment cannot be sustained without necessarily prejudicing the interests of third parties that have not been joined, then those third parties have a legal interest in the matter and must be joined. Notice given to affected parties pursuant to s 130 of the Companies Act 71 of 2008 is insufficient to cure non-joinder, as such notice provisions are confined to applications brought prior to adoption of a business rescue plan. Furthermore, a party's non-intervention after receipt of notice of legal proceedings, short of a citation, cannot be treated as a representation that the party will submit to and be bound by any judgment that may be given.

The court declined to address the question of whether consent of the practitioner or leave of the court should be sought before an application to set aside a business rescue plan is brought after the plan has been adopted (the s 133 issue), noting that any decision on this would be obiter dictum, the matter had not been fully ventilated, and the decision would not have any practical effect or result as envisaged by s 16(2)(a)(i) of the Superior Courts Act 10 of 2013. The court observed that there seems to be little point in keeping an application alive and remitting the matter to the high court where the relief sought is a simple declaratory order with no consequential relief (such as repayment by creditors) and where the relief would have to be amended in any event. The court noted the undesirability of declaratory orders in a vacuum, referring to City of Johannesburg v South African Local Authorities Pension Fund. The court also observed that where a counter-application is really a defence to the main application and is conditional upon the applicant succeeding in the main application, if the main application fails, the counter-application becomes academic and the court should not deal with it.

This case establishes important principles for business rescue proceedings in South African law, particularly regarding the joinder requirements when seeking to set aside an adopted business rescue plan. It clarifies that creditors who voted for a business rescue plan and who would be prejudicially affected by its setting aside have a direct and substantial interest in proceedings to challenge the plan and must be joined as parties. The judgment emphasizes the practical implications of setting aside an implemented business rescue plan, particularly after creditors have been receiving payments for an extended period. It also clarifies that notice provisions in s 130 of the Companies Act 71 of 2008 are limited to applications brought prior to adoption of a business rescue plan and cannot substitute for proper joinder of affected parties. The case demonstrates the court's reluctance to issue declaratory orders in a vacuum without consequential relief and the unwillingness to address academic issues once the main relief has failed.