- This article narrowly addresses the power of a business rescue practitioner (“BRP”) to suspend contractual obligations on the part of a distressed company. Readers are advised to consult section 136 of the Companies Act 71 of 2008 (“the Act”) in its entirety before taking any related steps.
- Once business rescue proceedings commence, all contracts to which the distressed company is party remain in place. However, section 136(2)(a) empowers a BRP, for the duration of the business rescue proceedings, to extricate a company from onerous contractual obligations that are preventing it, or may prevent it, from being rescued.
- In practice, section 136(2)(a) is used very effectively by practitioners in the business rescue process. Lease agreements with very high rentals, loan agreements with excessive interest payment terms, supply agreements with unfair pricing arrangements, service or maintenance agreements, and the like, are all possible subjects of suspension during the course of the business rescue proceedings.
- However, it is important to note that the obligation/s which is/are being suspended must arise from a contract which was concluded before the business rescue proceedings commenced and must fall due during the business rescue proceedings.
- Section 136(2A) further provides that:
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- a BRP may not suspend any term of an employment contract or any term of a contract relating to exchange-traded derivatives or Master Agreements as dealt with in sections 35A or 35B of the Insolvency Act 24 of 1936 (which the reader is advised to consult); and
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- if a BRP suspends a provision of a contract relating to security granted by the company, such suspension does not mean that the company may circumvent the provisions of section 134(3) of the Act, which, among other things, forces a company, despite being in business rescue, to seek the consent of the holder of the security interest before disposing of the property to which the security relates.
- The aforementioned provisions exhibit a clear intention by the legislature to protect employees during business rescue proceedings, which sentiment is echoed throughout South Africa’s labour and commercial laws.
- However, as to the impact that these provisions have on third parties who have contracted with a distressed company, which is subsequently placed into business rescue: –
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- Where a BRP has suspended a contractual obligation in terms of section 136(2)(a), the company will not be in breach of the contract for failing to deliver on that obligation for the duration of the business rescue proceedings and the third party will not be able to cancel the contract on this basis.
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- Where a company failed to deliver on a contractual obligation before business rescue proceedings commenced, the third party, subject to South Africa’s law of contract, retains the right to cancel the contract.
- Suspension of contractual obligations in terms of section 136(2)(a) of the Act occurs through the issuing of a letter of suspension by the BRP. This letter will be sent directly to parties contractually bound to the distressed company and will set out which obligations are suspended.
- BRPs will consider which obligations ought to be suspended as a matter of priority in order to afford the distressed company the “breathing room” that has become synonymous with business rescue proceedings.
