SA court rejects ‘tactical’ abuse of voluntary business rescue laws in mining case

The dispute arose when a creditor – also a mining contractor – sought to place a distressed mining right holder under supervision.

The creditor applied under section 131 of South Africa’s Companies Act 71 of 2008 (‘Companies Act’) to place the financially distressed right holder under supervision after its cashflows were negatively impacted by a significant drop in the chrome price, resulting in the right holder defaulting on a contractual payment obligation to the creditor.

The right holder subsequently admitted it had a “strain on cash flow” and requested a three-month moratorium on the payment of a debt which exceeded R43 million (approximately £2 million). 

Business rescue was favoured over liquidation as the only income-generating asset and only meaningful source of value for creditors was the right holder’s mining right for the extraction of chrome. 

Under s56(d) of the Mineral and Petroleum Resources Development Act 28 of 2002, a mining right lapses when the holder is liquidated, thus rendering a liquidation unfavourable to creditors in these circumstances.

On the eve of the hearing, the mining right holder’s board of directors adopted a voluntary business rescue resolution under s129 of the Companies Act, which permits company boards to place a company under supervision if that company is financially distressed and there appears to be a reasonable prospect of rescuing the company or, as confirmed by the Supreme Court of Appeal in its 2014 Newcity decision, if a business rescue would yield a better return for creditors and shareholders than they would receive in a liquidation. The company sought to rely on this last-minute effort to render the creditor’s court application moot. 

However, in its judgment, the North West High Court in Mahikeng rejected the board’s approach as a “tactical instrument”. It held that the board’s actions had an “ulterior purpose of retaining control” over the appointment of the business rescue practitioner to oversee the business rescue proceedings and such motives were “not … in a genuine pursuit of the objectives of business rescue”.

The court also reaffirmed that a s131 application is properly “made”, and the date of commencement of business rescue fixed, once it has been issued at court; served on the company and the Companies and Intellectual Property Commission; and affected persons have been notified. The court further confirmed that the Companies Act does not permit two competing business rescue processes to co-exist.

Commenting on the court’s decision, Christopher Majuru, a corporate and commercial litigator at Pinsent Masons specialising in mining and energy disputes, said the decision provided clarity on the interaction between voluntary business rescue proceedings under s129 and court-driven applications under s131 of the Companies Act. “Courts will not permit business rescue to be used as a tactical device to disrupt existing business rescue processes,” he said. “The attempt to introduce a voluntary process was treated as an abuse of process.”

“In the mining context, these disputes are rarely isolated from operations, and the judgment reflects how contractor and mining right owner disputes can destabilise operations and accelerate financial distress”.

Mark Thomas, a corporate litigation and regulatory expert in mining and energy disputes at Pinsent Masons, said the case acts as a sobering reminder for mining houses, contractors, lenders, investors and restructuring practitioners that the courts take a dim view of boards abusing the voluntary resolution process for tactical purposes other than for the genuine rescue of a finically distressed company, and that such attempts were susceptible to challenge.

“This is important for the mining sector where business rescue often intersects with operations and regulatory consideration,” he added. “The court recognised that liquidation would destroy any value that might be realised by the transfer of the mining right and shows the importance of business rescue in preserving such value.”