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Johannesburg - A court order relating to a business rescue plan for Southgold Exploration has “significant ramifications” for the banking and business restructuring industries, law firm Bowman Gilfillan said on Wednesday.

A declaratory order was granted by the High Court in Johannesburg last week, according to Claire van Zuylen, a director at the law firm.

It meant Southgold's failure to formally notify one group of creditors did not nullify the company's business rescue,

“Had the court order not been granted, lenders to Southgold would not have been prepared to advance further funding, because the validity of the business rescue would have been in doubt,” she said.

On September 18, Canadian company Great Basin Gold announced that its principal South African subsidiary, Southgold Exploration, which owns the Burnstone mine in Mpumalanga, had filed for protection under South African business rescue procedures because of financial problems.

It was going to find either a buyer or backers to bring it back to solvency.

To keep its mining licence, which would help it stay a viable company, it had to stay out of liquidation, according to court papers posted on Southgold's website.

It also had to notify creditors, as part of business rescue procedures, but there was uncertainty about whether one creditor had been notified.

Van Zuylen said the order was granted in an application by business rescue practitioner Petrus Francois van den Steen and Southgold Exploration, with Credit Suisse AG and Standard Chartered Bank intervening.

The latter two companies had lent large sums to Southgold.

Southgold and Van den Steen, represented by Webber Wentzel, and the lenders, represented by Bowman Gilfillan, had applied for the order to have the failure to formally notify a group of creditors condoned, and the business rescue declared valid.

The order was granted on March 1.

In previous cases, it was held that the business rescue had to fail because a single creditor had not been timeously notified.

In terms of a section of the Companies Act, a company which places itself into business rescue has a set period to appoint a business rescue practitioner and to give notice to “affected persons”, including creditors.

If a company then fails to comply with certain provision of the act, the resolution to begin business rescue proceedings and place the company under supervision lapses, Bowman Gilfillan said.

This had the absurd result that the entire business rescue had to fail even if a creditor was not notified because it was not known the creditor was a creditor, or had not yet made a demand, the law firm said.

Business rescue practitioners became reluctant to take appointments because of the possibility of being exposed to damages claims for contracts concluded in the period when the business rescue was assumed to be valid.

Lenders to the company faced even more serious consequences. Most companies survived a business rescue only if they were able to procure post-commencement financing, the law firm said.

In order to incentivise lenders to give facilities to companies in business rescue, the act provides that any lender who advances money to the company after business rescue starts will have a preference for that advance, both in the business rescue and in any subsequent liquidation if the business rescue fails.

Van Zuylen said that if the resolution for business rescue were found to be a nullity under the act, all that funding would, in effect, have been advanced prior to the commencement of business rescue, and would not enjoy the preference. - Sapa