Saved at the expense of others?

The case of Kythera Court v Le Rendez-Vous Café CC trading as Newscafé Bedfordview case number 2016/11853 GLDJ reiterated the Supreme Court of Appeal (SCA) decision in Cloete Murray NO & another v Firstrand Bank Ltd T/A Wesbank 2015 (3) SA 438 (SCA) that an agreement can be cancelled during business rescue as the unilateral act of cancellation does not constitute enforcement action in terms of s133(1) of the Companies Act, No 71 of 2008 ( Act).

10 Aug 2016 3 min read Dispute Resolution Alert Article

Section 133(1) creates a temporary moratorium in that during business rescue proceedings no legal proceeding, including enforcement action, against a 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 subject to certain exceptions.

The dispute involved a lease agreement concluded in 2010 between Kythera Court, being the landlord, and Newscafé. Newscafé had failed to pay rental since October 2015 but remained in occupation of the premises. After receiving breach notices from the landlord the members of Newscafé voluntarily resolved to place the close corporation into business rescue in December 2015.

By the time the matter was argued in court in April 2016 the business rescue plan had still not been published and no rental payments had been made.

On 7 March 2016, after the effective date of business rescue, the landlord sent Newscafé a notice cancelling the lease agreement. The landlord then brought an application for the eviction of Newscafé which was argued before Boruchowitz J. Newscafé opposed the eviction application on the ground that the moratorium created by s133(1) of the Act precludes the landlord from cancelling the lease agreement and launching eviction proceedings.

The court held with authority from the SCA’s decision in Cloete Murray that the lease was validly cancelled and Newscafé was no longer in lawful possession of the property but actually in unlawful occupation.

Boruchowitz J found that the phrases contained in s133 and s134 of the Act referring to lawful possession of property lead to an interpretation that excludes legal proceedings or enforcement actions dealing with property in unlawful possession of the entity under business rescue. Therefore the operation of
s133(1)(b) and s134(1)(c) of the Act did not apply. Practically this meant that the landlord did not need to seek leave of the court to institute the eviction proceedings and was not required to obtain the consent of the business rescue practitioner to exercise its rights in terms of the property.

Boruchowitz J further remarked that in the event that the business rescue practitioner had invoked s136(2)(a) of the Act by partially or conditionally suspending the obligations of Newscafé that arose under the lease agreement, he could have prevented the landlord from cancelling the lease or instituting the eviction proceedings.

While one can understand the motivation behind such an interpretation, the effects of it could be disastrous. One should not attempt to rescue a company at all costs, the reality is that not all companies should be or can be saved.

For example, in the event that the right to receive payment was suspended, the landlord would only be entitled to a damages claim. If the business rescue was terminated and the company liquidated, a damages claim would be a small consolation to a landlord who may have been without rental income for over a year.

It is important to note that during the period that the business rescue practitioner seeks to suspend the payment obligation, the business rescue practitioner is still in occupation of the premises and is still receiving a benefit to the detriment of the landlord.

It is our view that a better interpretation of the section should be that it only applies to executory contracts, ie contracts where a performance is still outstanding by the business rescue practitioner and he/she is entitled to elect whether to proceed with the contract or not, as it would not be in the interest of the general body of creditors. To extend this limited right which exists in a liquidation to a broader sphere of business rescue would, we believe, have disastrous effects upon creditors. While business rescue should always be preferred over liquidation, business rescue should never result in the liquidation of creditors where it can be helped.

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