Business Rescue & Insolvency: The Pendulum Swings to the Creditors
Business rescue was introduced by the 2008 Companies Act and commenced in 2011. It provides for a regulated process in terms of which a company in financial distress is allowed the opportunity of engaging with its stakeholders and creditors to find a solution, which generally would result in the recue or restructuring of its financial affairs.
Since inception there have been approximately 2148 companies which have applied for business rescue. Whilst the statistics as to how successful business rescue has been are not fully available, it is generally considered that the success rate of rescuing companies is as low as 10%. What has also become apparent is that the business rescue process can be manipulated by unscrupulous companies seeking a breather from creditor's claims. The result is general suspicion by creditors of the business rescue process and most creditors approach any rescue process with a degree of trepidation coupled with concerns that it will be a long process not likely to improve their positions.
One of the situations that commonly arise is when a company is placed in business rescue and remains in occupation of leased premises without payment of rental. This places undue financial hardship on the landlord who often has its own bond indebtedness to service. Two recent cases have provided some hope for long suffering creditors that they are not entirely without rights if one of their debtors does go into business rescue.
Kythera Court v Le Rendez-Vous Cafè CC t/a Newscafe Bedfordview. The facts of the case were that a company had failed to pay its rental obligations and placed itself in business rescue. The landlord then cancelled the lease and asked the company to vacate the leased premises which it refused to do relying on Section 133(1) of the Act and the general statutory moratorium which precludes creditors from taking any form of "legal action".
The wording of Section 133 is "during business rescue proceedings, no legal proceedings, including enforcement actions, against the company or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except:
a) With the written consent of the practitioner;
b) With the leave of the court and in accordance with any terms the court considers suitable."
Ultimately, the landlord took the matter to court and the Judge found that the moratorium, referred to in Section 133 of the Act was temporary in nature and not an absolute bar to legal proceedings and could not be used to indefinitely delay creditors from satisfying their claims. In addition, the court having analysed the phrase "in relation to any property belonging to the company or lawfully in its possession" and found it must have some purpose and when the company is in "unlawful" possession of property then the moratorium would logically not apply and proceedings may commence without the leave of the court or without the consent of the practitioner. Ultimately, the court found that the cancellation of the lease agreement for the failure to pay rental does not constitute enforcement action (referred to in section 133) and once the contract had been cancelled then the company could no longer be in lawful possession of the leased premises and the landlord would be entitled to commence legal action for the eviction of the company. The result – a happy landlord!
JVJ Logistics vs Standard Bank is a judgment in the Durban High Court handed down on 22 July 2016 by Olsen J who came to a similar conclusion but provided more detailed legal reasoning. The facts in this case were that a company in the transport business possessed one vehicle. The company fell into arrears with its instalments to the financing bank and as a consequence, the bank cancelled the agreement and sought an order for the immediate repossession of the vehicle. The question was whether this was permissible due to the business rescue of the company and whether the moratorium envisaged in terms of section 133 applied.
The Judge, after detailed reasoning, found that when considering the likely duration of business rescue and balancing the property interests of the creditors, the legislature must have intended the moratorium in Section 133 to be restrictively interpreted and this would not preclude a bank from enforcing an order for the return of its financed asset when the continued possession of the asset was unlawful.
What does this mean in practice? The trend developing with landlords and banks is that when there is a risk of business rescue and an existing breach of an agreement, the creditor immediately must act on the breach and where possible cancel the agreement. If, by the time, the company goes into business rescue there is already a court order in place allowing for the return of property or premises, then the continued possession of property by the company in business rescue would be "unlawful" and hence, the moratorium would not apply. The benefit to the creditors is that they are not dragged into the long process of business recue where their properties or financed equipment are effectively sterilized.
It is possible to cancel a contract with a company, even whilst the company is in business rescue as the cancellation of the contract does not constitute either legal action or enforcement action as prescribed by Section 133. However, it must also be remembered that in terms of Section 136(2) of the Act, a business rescue practitioner is entitled to suspend a contractual obligation either in full or partially. Therefore, the business rescue practitioner, once appointed, may assess the financial position of the company and may elect to suspend certain of the obligations of the company relating to payment and that may preclude a breach from ever arising.
The effect of these judgments is to interpret the business rescue process, as prescribed by the Act, in a restrictive manner against the company in business rescue, thus emphasising the equal importance of balancing the rights of the company against the property rights of creditors.