By Dean Scher, Candidate Attorney and Caitlin Wilde, Partner
Economic uncertainty has affected every stratum of society. This article seeks to explore the practicalities of the business rescue process and the effect of entering into business rescue on a contract of lease.
The purpose of the business rescue procedure, as enacted under the Companies Act of 2008 (“the Act”), is to facilitate the rehabilitation and reorganization of a company that is in financial distress. The effectiveness of the business rescue regime is premised on the moratorium (or stay) on legal proceedings commenced or proceeded with, including any enforcement action, against a company or in relation to any property belonging to the company, or lawfully in its possession, while the company is subject to business rescue proceeding. This stay on legal proceedings is designed to provide the company with breathing space while the business rescue practitioner (“BRP”) attempts to rescue the company by designing and implementing a business rescue plan.
Effective immediately upon the commencement of business rescue proceedings, the moratorium automatically stays (or suspends) legal proceedings and enforcement actions by creditors against the company, its property, and its assets. No legal steps may be taken by creditors (including the lessor) to enforce any security, nor may legal proceedings or execution be commenced (or continued) without leave of the court or the BRP. The moratorium freezes the rights of both secured and unsecured creditors. Perhaps most importantly, the moratorium only attaches to property lawfully in the possession of the company. The moratorium is not a blanket prohibition on legal proceedings. The Act affords further statutory protection to the business rescue process by providing a moratorium on property interests. At section 134(1)(C), the Act provides that “… no person may exercise any right in respect of any property in the lawful possession of the company, irrespective of whether the property is owned by the company, except to the extent that the practitioner consents in writing.” [emphasis added]
Cancellation of a Lease and the Moratorium
The moratorium, importantly, does not simply prevent a landlord (lessor) from cancelling a lease agreement with his tenant (lessee) – the cancellation of an agreement does not amount to enforcement action by the landlord against his tenant. This principle was confirmed by the Supreme Court of Appeal in Cloete Murray v FirstRand Bank Ltd t/a Wesbank. In addition, the cancellation of an agreement is a juristic act – juristic acts are not stayed by the moratorium in s133, therefore such cancellation would be valid. In Stamfordhill CC v Velvet Star Entertainment CC, the Court held that, “This [would] not permit the business rescue practitioner to remain in occupation of the property, for the respondent to continue trading, and not honour its obligation to pay rent. It had to honour its obligations in terms of the contract incurred prior to the business rescue proceedings commencing, and as it had not done so, the applicant was entitled to cancel the contract” [emphasis added].
Accordingly, while reprieve may be obtained through a suspension of the contract, discussed herein below, a company in business rescue may not simply escape obligations which it breached prior to the commencement of business rescue proceedings, by the operation of the moratorium. Importantly, if the lease agreement in place may be cancelled, the possession of the leased property would be rendered unlawful, such that s134(1)(c) would not attract application in such circumstances. without a valid cancellation of the lease agreement, the tenant may remain in occupation of such for some time, such occupation being (at least in the sense of the extant lease agreement) lawful. The BRP may also apply to court to entirely or partially or conditionally cancel a lease agreement provided the “terms … are just and reasonable in the circumstances”.
Suspension of Contracts
Section 136(2)(a) of the Act allows the BRP to suspend, for the duration of the business rescue proceedings, either entirely, partially, or conditionally, any obligation of the company that “(a) arises under an agreement to which the company was a party at the commencement of the business rescue proceedings, and (b) would otherwise become due during those proceedings.”
In effect, this means that the BRP may suspend the lease agreement to which the company in business rescue (as tenant) is party, such that the landlord could validly cancel the lease on the basis of a breach of obligations occurring subsequent to the commencement of business rescue proceedings. However, the landlord has the right to withhold his performance once the BRP has suspended the lease agreement (in addition to his normal rights of cancellation) – the landlord may invoke the exceptio non adimpleti contractus which permits a party to stop or suspend performance under a reciprocal contract if the other party has stopped or suspended its performance under that agreement .
Breach of Lease Agreement before Business Rescue
As mentioned above, the landlord may validly cancel a lease agreement prior to the suspension of that agreement under s136(2)(a). However, the landlord may not cancel a lease agreement once the agreement has been suspended by the BRP under s 136(2)(a), provided that there has not been a breach of contract prior to commencement of business rescue. If this is the case, than the suspension of the lease of property cannot amount to anything more than the business rescue practitioner’s right not to be compelled to perform in terms of the contract. Many commentaries agree with the notion that if the contract (lease) with the company (landlord) is validly terminated before the commencement of business rescue, the company is not lawfully in possession of the property and it can be claimed by the other contracting party.
In Kythera Court v Le RendezVous Cafe CC and Another (a judgment specifically addressing the issue of whether and when a Landlord may evict a tenant company which has initiated business rescue proceedings and is in arrears with its rental), the Court held that during business rescue proceedings ,eviction/ ejectment proceedings may be brought when: (1) the business rescue practitioner has not suspended the obligations of the tenant under a lease (in terms of s 136(2)(a) of the Act); and (2) the landlord has validly cancelled the lease due to non-payment.
As a result of the competing legal interests and rights, as mentioned above, a race often ensues between the landlord and the BRP. When the parties to a lease foresee the possibility of a breach of contract or, in present circumstances, when the financial impact resultant from the lockdown is expected to force a business to seek business rescue, decisions must be made in a rapid manner, in order to prevent any further loss or damage to the parties. If one is a landlord (lessor) and one’s tenant (lessee) has breached the lease contract before business rescue commenced (and appears likely to be placed in business rescue), swift action should be taken by the landlord to cancel the lease. Further, if a lease contract has been suspended by a BRP, as a landlord, one must consider whether to invoke other contractual remedies such as the exceptio non adimpleti contractus or ordinary rights of cancellation. If one is the tenant in this situation, swift action must be taken as soon as the business becomes financially distressed (for a number of reasons), the business must commence business rescue proceedings if the situation requires and the company appears rescuable, and must ensure that the BRP immediately suspends the obligations due under the lease agreement, as per the terms of s136(2)(a), in order to avoid the lease agreement being validly cancelled. Further to this, the BRP and landlord are encouraged to engage in order to reach an equitable solution. The solution may take the form of rentals being regarded and treated by both parties as business rescue expenses, alternatively, the rental forming part of the post commencement finance required to conduct a business rescue process, with the amounts due being further secured by the landlord’s hypothec and paid out as such.