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.
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.
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.
Legal proceedings
Notwithstanding this general moratorium, a person will be able to bring legal proceedings against the company in the following circumstances:
- with the written consent of the practitioner;
- with the leave of the court;
- as a set-off against any claim made by the company in any legal proceedings, irrespective of whether those proceedings commenced before or after the commencement of business rescue;
- criminal proceedings against the company or any of its directors or officers; or
- proceedings concerning any property or right over which the company exercises the powers of a trustee.
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.
Originally published 10 June, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.