BUSINESS RESCUE PROCEEDINGS – PROBLEMS, HEADACHES AND ANOMALIES

The 2008 Companies Act has been criticised, in many respects and in many quarters.  A great many of the provisions found therein are difficult to understand, and some of them are downright bizarre.

Take, for example, the business rescue dispensation created by Chapter 6 of the 2008 Companies Act.  Business rescue is, of course, a well-intentioned and potentially promising alternative to the liquidation of companies.  The liquidation process results in the destruction of the company, loss of jobs, the sale of assets frequently at a fraction of their market value.  It is a lose-lose situation.  The underlying aim of business rescue is to provide an alternative mechanism by which the company can be restored to commercial viability, which should ultimately better serve the interests of creditors, employees and other stakeholders.

To achieve this, Chapter 6 of the Companies Act provides that a company may be placed in business rescue by resolution of its board of directors, or by order of court.  A business rescue practitioner (hereinafter referred to as “the BRP”) is appointed, who has wide-ranging powers of investigation and control and who, ultimately, prepares a business rescue plan.  That plan is required, by Section 150 of the 2008 Companies Act, to list the assets and liabilities of the company, probable dividend if the company was to be liquidated, a list of shareholders, and business plan proposals which set out the steps to be taken to restore the company to the position where it can continue trading or (if that cannot be achieved) to wind up the affairs of the company in such a manner that creditors will receive a more favourable dividend than would have become payable, on liquidation.

In the course of the business rescue investigation, however, the BRP is vested with various powers which are, to say the least, perplexing.  One of these is found in Section 136(2)(a) which empowers the BRP to either partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company under business rescue (hereinafter referred to as “the BR company”) that arises under an agreement to which the BR company was a party, prior to the commencement of the business rescue proceedings, and which would otherwise become due during those proceedings.

The question is – how does that draconian power fit in with the well-known contractual principle of reciprocity?  Reciprocity means that, if two parties conclude a contract in which both of them have rights and obligations, Party A cannot enforce any of its rights without, at the same time, tendering to comply with its obligations.

So where does Section 136(2)(a) leave a creditor who concluded a contract with a BR company, prior to commencement of business rescue, under which both parties have outstanding rights and obligations?  Is the BRP able to suspend, for the duration of the business rescue proceedings, the obligations of the BR company but, at the same time, require the creditor to carry out the creditor’s obligations, without receiving any counter-performance from the BR company?

Take, for example, a distributorship agreement under which the manufacturer of products has, prior to BRP, appointed the BR company as a sole distributor in South Africa, on condition that the BR company markets and advertises the product in question, thereby ensuring that it acquires a reputation and market share.  May the BRP simply suspend those marketing and advertising obligations, but still insist that the BR company carry on acting as exclusive distributor?  Can the BRP of a franchise company under business rescue decide to suspend the obligation to pay royalties to the franchisor, but insist that the franchisee nevertheless be entitled to carry on the franchise operation?  Many other examples will illustrate why, in a commercial setting, it would be grossly unfair to expect a party to continue performing under a contract, although the obligations of the other party are suspended.

The courts have to thus far not had occasion to pronounce upon the meaning and effect of Section 136(2)(a), or how it will impact on contracts which create reciprocal obligations.  All that one can safely say is that, in the meantime, creditors with ongoing contractual obligations with companies in business rescue are left in a state of uncertainty and vulnerability, and exposed to a mechanism which is certainly open to abuse and exploitation by companies who have been placed in business rescue.

Clarification from the courts, or an amendment to Section 136 of the 2008 Companies Act, is urgently required.

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.