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Business rescue - how to rescue your own business

How to rescue your own business when your debtor becomes a business in need of rescuing
In order to facilitate the rehabilitation of a company that is financially distressed, the new Companies Act, 2008 ("Act") has introduced the business rescue provisions. During business rescue proceedings the company's affairs are temporarily managed by a business rescue practitioner ("practitioner"). The Act gives the practitioner some powers relating to his management of the business of the company being rescued. The most controversial is the power under section 136(2). In terms of section 136(2) of the Act, the practitioner can suspend (wholly, partially or conditionally) any obligation of the company being rescued. This power has been criticised as constituting a drastic intrusion into the rights of creditors as it completely disregards the firmly entrenched legal principle of sanctity of contract. As a creditor, how do you protect yourself against a position where you find yourself being obliged to provide services to a company which in turn is not obliged to pay you because the practitioner has suspended the company's obligation to pay?

In terms of the Act, business rescue proceedings can be initiated by the board of the company passing a resolution, if it believes that the company is financially distressed; and there appears to be a reasonable prospect of rescuing the company. Thereafter the company must publish a notice of the resolution within five days and appoint a practitioner.

The rationale behind business rescue is that the development and implementation of a plan to rescue a company in a manner that maximises the likelihood of the company continuing in existence should result in a better return for the company's creditors or shareholders, than the immediate liquidation of the company would.

Although business rescue proceedings are considered to be a remedy or helping hand to a company in distress, this is not the case for the people who do business with those companies. If the Practitioner suspends a vital part of the contract, it could prove detrimental to the other contracting party.

Example:

Company A enters into a contract with Company B in terms of which Company A will provide Company B with internet services for a period of three years.

The contract reads as follows:
"1.1 Company A shall provide internet services to Company B for a period of three years.
1.2 Company B shall pay Company A an amount of R20000 per month as follows:..."

A year later Company B is placed under business rescue. Shortly after the Practitioner is appointed, he suspends clause 1.2 such that the contract reads as follows:
1.1  Company A shall provide internet services to Company B for a period of three years.
1.2  Company B shall pay Company A an amount of R20000 per month as follows:..."


Therefore for the duration of the business rescue proceedings (which could be three months or longer) Company A will not receive payment but will be obliged to provide internet services under the contract. The Act goes on to add that the only recourse that the other party to the contract has, after the practitioner has suspended the contract, is to claim damages. Therefore the innocent party cannot place the company on terms and thereafter cancel the contract based on breach.

It might be worthwhile for the parties to a contract to agree from the outset as follows:
    "This contract shall commence on X date and shall terminate on Y date or, in the event that any of the party's board of directors passes a business rescue resolution, on the day immediately preceding the date on which such resolution is passed, whichever occurs first."
There are obviously many other ways of incorporating a provision of this nature in a contract. A provision of this nature will ensure that the contract does not fall within the scope of section 136(2) as it would have terminated by the time the company enters into business rescue proceedings. The downside is that in the event that the business is rescued (or rather if the business rescue proceedings are successful) a new contract may have to be renegotiated or the business will be lost.

The other alternative is to incorporate the usual breach clause in the contract along the following lines:
    "Either Party shall be entitled to cancel this contract in the event that the other Party's board of directors passes a resolution placing that Party under business rescue"
This may arguably give the innocent party, who can foresee that the business is less likely to be rescued, the opportunity to cancel the contract prior to it being suspended, wholly or in part, by the practitioner.

Adams & Adams
Africa's largest intellectual property law practice, and one of South Africa's foremost corporate, property and commercial law firms - assisting organisations of any size, local and global, across all industries.
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