The Effects of Business Rescue on Property Owners

/ / 2020, COVID-19, News

Contributors: Paul-Michael Keichel and Elani Vogel

The Effect of the Moratorium

In terms of section 133 of the Companies Act, 71 of 2008 (hereinafter “the Act”), a general moratorium/suspension is placed on any legal proceedings/enforcement action against the company or in relation to property owned or lawfully possessed by the company. In addition to such suspension, section 134(1)(c) of the Act further protects the property interests of a company undergoing business rescue. In terms of this section, 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 Business Rescue Practitioner (hereinafter “BRP”) consents thereto in writing.

It is important to note that the general moratorium excludes the cancellation of an agreement of lease by the property owner and, as such, cancellation has no effect on the company’s continued possession, occupation or use of the property. Therefore, the moratorium initiated by business rescue proceedings does not prevent a property owner from cancelling the contract, albeit that eviction will remain unlawful if not on the basis of having obtained an Order of Court, duly executed by the Sheriff of the High Court.

However, in terms of section 136(2)(a) of the Act, despite any agreement to the contrary, the BRP may entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that arises from an agreement to which the company was a party at the commencement of the business rescue proceedings, or would otherwise become due during such time. In other words, a BRP is entitled to suspend any obligations that a company may have in terms of a contract of lease, including the payment of rent and other charges, having the effect that the company undergoing business rescue can continue its possession and enjoyment of the property at the expense of the property owner. Consequently, the failure by the company to satisfy its obligations in terms of the agreement would not constitute a breach of contract and the property owner would not be entitled to cancel the agreement.

The Safeguards

Proper interpretation of the Act, together with case law, i.e. that developed through our Courts, provide for at least two safeguards for property owners affected by business rescue proceedings. Firstly, in terms of section 134(1)(c), a property owner may recover his/her property (or any amounts in relation thereto) through the written consent of the BRP. Secondly, in terms of section 133(1)(b), the same outcome can be achieved through the written consent of the BRP, or with the leave of the Court and in accordance with any terms the court considers suitable.

Finally, in the case of Mabote and Others v Van Der Merwe NO and Another (2015/40324) [2016] ZAGPJHC 185 (8 July 2016), it was held that the Court has a wide discretion to grant the upliftment of the moratorium in terms of section 133(1)(b) of the Act and that it is to be exercised in accordance with:

  1. the effect of the grant or refusal of leave on the applicants’ rights, as opposed to other affected persons and relevant stakeholders;
  2. the impact of the proposed legal proceedings on the wellbeing of the company and its ability to regain financial viability; and
  3. whether the grant of leave would be inimical to the object and purpose of business rescue proceedings.

The same guiding principles may be used when evaluating the suspension made by the BRP in terms of section 136(2)(a) of the Act.

The general moratorium on legal proceedings against a company placed under business rescue is a vital mechanism to achieve the ultimate goal of business rescue proceedings. To prevent this moratorium from giving rise to inequitable results for property owners, the Courts’ proper interpretation and application of the Act is essential.

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