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Covid Advisory: Contracts, contractual obligations and business rescue
20 April 2020
 
Did you know that business rescue proceedings can assist in managing your contractual obligations?

In the wake of the COVID-19 pandemic, the uncertainty created by the extended national lockdown, it has become an undeniable reality for most businesses that difficult economic times lie ahead. Over the course of the next few months, many South African companies, including businesses that were profitable and successful prior to the influence of the COVID-19 pandemic, will experience varying degrees of financial distress and are fighting for survival.

As indicated in our previous advisory communications, the option of engaging business rescue proceedings in terms of the Companies Act 71 of 2008 (“Companies Act”), is a feasible option for companies that are financially distressed as a result of the current circumstances. Business rescue is designed specifically for assisting companies that are under financial pressure in order to restructure and reorganise their affairs in such a manner that facilitates their rehabilitation in future.

In order to drive the business rescue process, a business rescue practitioner must be appointed to assist the company. This practitioner will, in terms of the Companies Act, have various powers and obligations in performing his or her mandate to formulate and implement a business rescue plan. One such power that rests with the business rescue practitioner, is that he or she may suspend (either completely, partially or conditionally) any obligation that the company is due to perform or deliver on under an agreement to which the company is a party at the commencement of the process. This suspension will be valid for the duration of the business rescue proceedings.

All companies engage in business transactions which result in the conclusion of contracts, in terms of which one party will generally render a performance (such as the delivery of goods or the provision of services) and the other party some form of counter performance (such as payment). Current circumstances, have placed many businesses in a difficult position to deliver on their contractual obligations and therefore also to receive income for such performances. This problem, while not the sole consideration, lies at the heart of the financial distress presently experienced by most businesses.

Therefore, the power of a business rescue practitioner to suspend the performance of contractual obligations (be it for the rendering of goods or services, or in fact making payment for goods and services received) is a crucial aspect in the formulation of a feasible business rescue plan.

It should be kept in mind that the suspension of contractual obligations in this regard does not apply to employment agreements or an agreement to which section 35A or 35B of the Insolvency Act 24 of 1936 would apply if the company had been liquidated, these being transactions on an exchange (i.e. any platform on which securities are traded) and agreements providing for termination and netting.

The business rescue practitioner is also empowered in terms of the Companies Act to apply to court for an order to cancel any agreement, either partially or conditionally, to which the company is a party. Such cancellation must however be just and reasonable under the circumstances.

It may also be noted that the other party to a contract that has been suspended or cancelled by a business rescue practitioner is not left without recourse. Such party may not claim specific performance under the contract (i.e. that the company should render the performance that was due), but may claim for any damages that such other party may have suffered as a result of the suspension or cancellation, although they will not be in a position to institute legal action against the company to enforce their rights while the business rescue process is ongoing.

In light of the broad powers extended to a business rescue practitioner and the severity of his or her obligations in rehabilitating the company, it is of the utmost importance that a business rescue practitioner with sufficient qualifications, knowledge and experience be appointed in order to assist the company during these difficult times, with the aim of carefully considering all circumstances in order to formulate a business plan that can rehabilitate a company and assist them in becoming profitable and successful again in future.

We will be happy to provide you with further information or answer any questions that you may have regarding the option of business rescue for your company. Please send all queries to linki@phinc.co.za.

Although we have used our best efforts to ensure that all information contained in this communication is accurate as at the date hereof, we cannot guarantee the accuracy thereof and recommend verification thereof before use.
 
 
 
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