Zephan (Pty) Ltd & others v Noormahomed

The respondent, Ms Noormahomed, purchased 3,000 shares worth R3,000,000 from the first appellant (Zephan (Pty) Ltd) in May 2010. The transaction was governed by a buy-back agreement forming part of a prospectus issued by Highveld Syndication (Pty) Ltd (HS22). In terms of this agreement, the first appellant irrevocably undertook to repurchase the respondent's shares after five years at a 100% premium (R6,000,000). The second to fifth appellants guaranteed the first appellant's performance. When the five-year period expired in 2014, the first appellant failed to repurchase the shares despite demand. The respondent obtained default judgment against the appellants for R6,000,000 plus interest and costs. The appellants applied for rescission of the default judgment, arguing that the agreement had been novated by a business rescue plan and scheme of arrangement under section 155 of the Companies Act 71 of 2008 relating to associated entities (HS22 and Orthotouch Ltd), and that the respondent's acceptance of interest payments from Orthotouch constituted acceptance of novation. The respondent disputed this, maintaining she was unaware of the arrangement and that unsolicited interest payments did not affect her claim for specific performance against the first appellant.

• Whether the appellants established a bona fide defence to the respondent's claim for specific performance
• Whether the buy-back agreement was novated by a business rescue plan and scheme of arrangement involving third party companies (HS22 and Orthotouch)
• Whether the respondent's acceptance of interest payments from Orthotouch constituted acceptance of novation of the buy-back agreement
• Whether the application for rescission of default judgment should be granted

The appeal was dismissed with costs, including costs consequent on the employment of two counsel where applicable.

A buy-back agreement with a company remains enforceable against that company and its guarantors notwithstanding business rescue proceedings or schemes of arrangement affecting related third-party entities to which those entities are not parties. The business rescue of associated companies does not novate independent contractual obligations owed by other parties under separate agreements. For rescission of default judgment to succeed, an applicant must establish a bona fide defence by setting out averments which, if established at trial, would entitle them to relief. The receipt of interest payments from a third party company undergoing business rescue does not constitute acceptance of novation of an independent contractual obligation for specific performance, particularly where such payments were unsolicited and the recipient was unaware of the underlying arrangement. An undertaking to repurchase that is independent and insulated from the affairs of related companies cannot be affected by restructuring processes involving those related entities.

The court noted that at the commencement of the appeal hearing, it was informed that the first appellant and the Business Rescue Practitioner were agreed that the appeal should proceed and be finalized notwithstanding the moratorium under section 133 of the Companies Act that conventionally takes effect during business rescue proceedings. The court observed that proceeding with the appeal appeared to be in the interests of justice. The court also referenced its previous decision in Zephan (Pty) Ltd & others v De Lange, which dealt with similar issues in the context of a summary judgment application, demonstrating consistency in the court's approach to this series of related cases involving the same business rescue arrangements and buy-back agreements.

This case clarifies important principles regarding the independence of contractual obligations from business rescue proceedings affecting related but separate entities. It reinforces that business rescue arrangements and schemes of arrangement under the Companies Act do not automatically novate independent contractual obligations owed by parties not subject to those proceedings. The judgment emphasizes that for novation to occur, there must be clear evidence of intention to replace the original obligation, and that mere acceptance of collateral benefits (such as interest payments) from related entities does not constitute acceptance of novation. The case also provides guidance on the requirements for establishing a bona fide defence in rescission applications, particularly in the context of alleged novation. It demonstrates the courts' approach to protecting creditors' rights under independent agreements even when related corporate entities undergo restructuring.