A financially distressed company is placed under business rescue to facilitate the rehabilitation of the company. The temporary moratorium has been enacted by means of section 133(1) of the Companies Act which provides 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”.
This paper looks at the court’s decision in Cloete Murray v Firstrand on the interpretation of the moratorium provision in s133(1). It seeks to discuss the proper interpretation of s 133(1) of the Companies Act and the impact of the judgement in Cloete Murray on business rescue. In the Cloete Murray case, Wesbank and Skyline entered into an Instalment sale agreement. During the agreement period, Skyline was unable to pay the monthly payments to Wesbank as agreed upon. Skyline voluntarily placed itself under business rescue in terms of section 129 of the Companies Act.
Wesbank cancelled the contract with Skyline unilaterally with immediate effect due to the non-payment. Skyline was later placed under liquidation in September 2012 and the liquidators who were appointed were of the opinion that the termination of the agreement between Wesbank and Skyline could not be enforced as it was against the provision of section 133(1) of the Companies Act. The court held that the words “enforcement action” in terms of section 133(1) does not include the cancellation of an agreement concluded prior business rescue proceedings. The court concluded that the property owner is not prevented from cancelling an agreement with a company which breaches the contractual obligations.
The Cloete Murray judgement provides clarity on the matter of whether cancellation of an agreement during business rescue proceedings is against section 133(1) of the Companies Act. The judgment in Cloete Murray case does not make sense. The main objective of business rescue is to ensure that the company continues to exist on a solvent basis. The moratorium provision prevents the property owners from interfering with the whole process of business rescue by preventing legal proceedings and enforcement of actions for the repossession of property from the company during business rescue.
The fact that the courts are deciding that a property owner can simply cancel an agreement with a company which is under business rescue, may involuntarily result in the property owner having to repossess the property without having to seek leave of the court.
I agree with Cassim’s argument that by doing so the courts are undermining the very purpose of business rescue and the business rescue regime is being destabilized. The judicial approach being employed by South African courts possibly due to them understanding the predicament of property owners who have an agreement with a company which goes under business rescue, have resulted in the courts destabilising the cornerstone of business rescue by making inroads into the moratorium provision. It is submitted that the current moratorium provision in section 133(1) of the Companies Act do not provide enough protection and breathing space for the company that is undergoing business rescue.