By: Danielle Koen and Thabile Fuhrmann
Since the inception of Chapter 6 of the Companies Act 71 of 2008, many creditors have become loathe of the word moratorium albeit the cornerstone of business rescue procedures. Section 133(1) of the Companies Act heralds the automatic and inevitable consequence of the commencement of business rescue proceedings, the general moratorium. The section sets out, with a number of exceptions that, during business rescue proceedings, no legal proceeding, including enforcement action, 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.
What we have come to understand about Section 133(1) is that it acts as a general moratorium or stay on legal proceedings or executions against the company, its property and its assets and, on the exercise of the rights of creditors of the company. This general moratorium, in principle, restricts legal proceedings against the company since such proceedings may have a detrimental effect on the outcome of the business rescue process. The stringency of the protection afforded to the company is however not a blank restriction against proceedings and can be relaxed by inter alia, (a) the written consent of the business rescue practitioner and (b) leave of the court.
The ambit of what is meant by legal proceedings and enforcement action was initially an uncertainty. A practical interpretation of the section clearly intends that enforcement action relates to formal proceedings ancillary to legal proceedings, such as the execution of court orders by means of writs of execution or attachment. These steps against the company cannot be initiated, and if they have already commenced, are frozen until the written consent of the business rescue practitioner or leave of the court has been obtained. A clear understanding of ‘enforcement action’ or legal proceedings relates to that which must be commenced or proceeded with in a forum, i.e. a court or tribunal. If this is what is understood by ‘enforcement action’ what then is left of a creditors contractual rights and obligations in terms of an agreement concluded between it and the company in rescue?
In a recent decision of the Supreme Court of Appeal, Cloete Murray NO & another v FirstRand Bank Ltd (20104/2014)  ZASCA 39, the issue to be decided by the court was, whether once business rescue proceedings have commenced, the creditor of a company under business rescue can unilaterally cancel an existing agreement that it had concluded with the company prior to it being placed under business rescue.
Briefly set out, on 22 July 2010, FirstRand Bank Ltd t/a Wesbank, concluded a written Master Instalment Sale Agreement (the MISA) with Skyline Crane Hire (Pty) Ltd, in terms of which Wesbank sold and delivered movable goods to Skyline, with Wesbank retaining ownership in the goods until the purchase price had been paid in full. Skyline was voluntarily placed under business rescue on 30 May 2012 and by that date had fallen into arrears with its monthly payments to Wesbank. On this same date, Wesbank sent a letter to Skyline cancelling the MISA as a result of Skyline’s failure to make payment and reserved its right to repossess the goods, value and sell same and credit the relevant accounts. In any event, Wesbank sought and obtained the written consent of the business rescue practitioner to cancel the MISA. The business rescue proceedings were eventually discontinued and Skyline was placed in liquidation.
The liquidators of Skyline, the appellants in this instance, were of the view that in terms of Section 133(1), the cancellation of an agreement constitutes ‘enforcement action’ which requires the consent of the business rescue practitioner or the court. The court disagreed and found that if this interpretation was favoured, it would fundamentally change our law of contract which provides for unilateral cancellation in the case of a breach of contract.
Business rescue is intended to provide a company in distress with the necessary breathing space to enable it to restructure its affairs by placing a moratorium on legal proceedings and enforcement action but is not intended to interfere with the contractual rights and obligations of the parties to an agreement. This lends itself then to the concept that the general moratorium is a temporary one in respect of a creditor bringing claims against the company, rather than a greater restriction on a creditors’ rights. The decision of the Supreme Court of Appeal has therefore confirmed that the general moratorium is not as generally wide or far reaching so as to equate a creditor’s contractual right of cancellation to that of enforcement action and, that these concepts are in fact mutually exclusive.
Danielle Koen and Thabile Fuhrmann are attorneys at Cliffedekkerhofmeyer Attorneys at their Johannesburg Office
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)