Insolvency & Reorganisation
It is imperative that companies in financial distress prioritise their continued existence and consider business rescue as an alternative to liquidation. One of the major advantages of the business rescue process is the moratorium (stay) on legal proceedings which aims to give financially distressed companies sufficient breathing space to trade out of its insolvency. A temporary moratorium automatically comes into operation upon the filing of a resolution placing the company into business rescue or the issuing of an application for an order to this effect.
This moratorium has the effect of preventing any person from instituting or continuing the prosecution of any already instituted legal proceeding, including any enforcement or vindicatory action against the company or in relation to any property belonging to the company or lawfully in its possession.
Notwithstanding this general moratorium, a person will be able to bring legal proceedings against the company in the following circumstances:
In terms of section 133(3) of the Companies Act 71 of 2008 (“the Act”), the running of prescription will be suspended for the duration of the business rescue proceedings.
The enforcement of suretyship agreements during the moratorium
Section 133(2) expressly provides that no guarantee or surety executed by the company in favour of any other person may be enforced against the company except with leave of the court and in accordance with any terms that the court considers just and equitable in the circumstances. Importantly, this provision does not empower the business rescue practitioner to consent to the enforcement of a surety or guarantee against the company.
In circumstances where the company in business rescue is the principal debtor and individuals and/or juristic persons have provided sureties or guarantees for the company in favour of the creditor, any creditor with a valid and enforceable obligations against the company may seek to recover the debts from the company’s sureties. The court in Investec Bank v Bruyns held that the statutory moratorium provided for in section 131 of the Act is a personal defence which may only be relied upon by the company in business recue. The moratorium serves only to provide the financially distressed company with temporary immunity against its debtors.
For legal advice on the protection of your rights and the enforcement thereof while a company is in business rescue, please contact us.
Authors: Lauren Fine and Tiffany Agulhas