Limiting the scope of the moratorium in business rescue: Ejectment of unlawful occupier of a leased property

March 1st, 2017

By Ryan Smith

Section 133 of the Companies Act 71 of 2008 (the Act) makes provision for a moratorium on legal proceedings and enforcement action against a company, or in relation to any property belonging to a company, or lawfully in its possession, being commenced or proceeded with in any forum, during business rescue proceedings, save for certain exceptions.

The predominant debate in our courts around the moratorium in s 133(1) of the Act has been on what constitutes a ‘legal proceeding’ or ‘enforcement action’ for the purposes of the moratorium.

In Cloete Murray and Another NNO v FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA) the importance of the moratorium was articulated, at para 14 of the judgment, where the court held: ‘It is generally accepted that a moratorium on legal proceedings against a company under business rescue is of cardinal importance since it provides the crucial breathing space or a period of respite to enable the company to restructure its affairs. This allows the practitioner, in conjunction with the creditors and other affected parties, to formulate a business rescue plan designed to achieve the purpose of the process.’

The court in the Cloete Murray matter dealt with the question of whether the cancellation of an agreement constituted enforcement action in terms of s 133(1) of the Act. Ultimately, the court found that it did not.

Is the moratorium absolute?

While the moratorium has, in the past, been considered as an all-encompassing bar against legal proceedings and enforcement action during business rescue, the matter of Kythera Court v Le Rendez-Vous Cafe CC and Another 2016 (6) SA 63 (GJ) has clarified that it does not actually apply to all legal proceedings and enforcement actions.

The applicant in the  Kythera matter brought an urgent application for an order evicting the tenant (the company in business rescue) on the ground that the lease agreement between the parties had been cancelled, alternatively, had expired. In the notice of motion, the applicant sought an order granting it leave in terms of s 133(1)(b) to bring the applications. In light of his findings, Boruchowitz J found that this leave was not necessary.

The judgment specifically addresses the issue of whether and when a landlord may evict a tenant company (and bring proceedings for this purpose), which has instituted business rescue proceedings and is in arrears with its rental (or for that matter, is in breach of the lease in general). In doing so, it provides useful guidance on the rights of landlords (and tenant companies) in business rescue proceedings.

In summary, the judgment found that –

  • where a business rescue practitioner has not suspended the obligations of the tenant under a lease (in terms of s 136(2)(a) of the Act), and the landlord has validly cancelled the lease due to non-payment, the landlord can bring ejectment proceedings to evict the tenant, despite being in business rescue, who is an unlawful occupier; and
  • the general moratorium contained in s 133(1) of the Act, does not include legal proceedings for ejectment, where the property is in possession of the tenant in business rescue unlawfully (the lease having been lawfully cancelled).

The decision is likely to result in a dash to the line between business rescue practitioners and landlords, the former seeking to suspend the tenant’s obligations in terms of the lease and the latter seeking to cancel it.

Implication of the findings in Kythera?

While the judgment deals specifically with the lease of immovable property, the principles set out may be applicable to other arrangements, like hire purchase agreements.

I say so, bearing in mind the following passages in the judgment:

‘[8] But the moratorium is not an absolute bar to legal proceedings being instituted or continued against a company under business rescue. It is intended to be of a temporary nature only and cannot be utilised to indefinitely delay satisfaction of the claims of creditors; or result in the extinguishment of the claims of creditors. …

[9] The phrase “in relation to any property belonging to the company, or lawfully in its possession”, which appears in s 133(1), is, in my view, a textual indication that the purpose of the moratorium is to preclude the institution or continuation of legal proceedings or enforcement action in relation to property that belongs to the company in business rescue or is lawfully in its possession. In its plain meaning the phrase appears to limit the reach of the moratorium and renders it inapplicable to legal proceedings or enforcement action in relation to property belonging to persons or entities other than the company in business rescue, or in relation to property that is unlawfully possessed by the company. Were it the intention of the drafters of the section that the moratorium applies to all actions of whatever nature, there would have been no need to have introduced the italicised phrase. It is an interpretive principle that, when the lawmaker uses particular words to achieve its purpose, they must be given effect. Based on these considerations I am of the view that vindicatory proceedings or proceedings for the repossession or attachment of property in the unlawful possession of a company in business rescue would be permissible.

[10] …

[11] Section 134(1)(c) conditionally proscribes the exercise of any right in respect of property in the “lawful possession of the company,” irrespective of whether the property is owned by the company. But, what it does not proscribe is the converse, namely the exercise of a right in respect of property in the unlawful possession of the company.

[12] The justification for the introduction of the italicised phrases in the aforesaid sections is self-evident. To apply the moratorium to all legal proceedings of whatever nature, including those brought by persons who legitimately seek to vindicate or protect their property, would be a drastic interference with their common law rights of ownership. When interpreting a statute, it is presumed that the lawmaker does not intend to alter the common law more than is necessary. It could not have been the intention of the legislature to frustrate the rights of property owners and render them remediless during business rescue proceedings (see in this regard: Barloworld South Africa and Others v Blue Chip Mining & Drilling (Pty) Ltd NCK 2015/332 para 15; compare also Madodza (Pty) Ltd v Absa Bank Ltd 2012 JDR 1350 (GNP))’ (my italics).

The above passages do not deal exclusively with ‘immovable’ property, but rather refer to ‘property’ in the general sense, which would, on a plain reading, include moveable property. While the conclusions reached by Boruchowitz J deal specifically with immovable property, I am of the view that the same outcome would be reached in dealing with moveable property.

Bearing the above in mind, as soon as a business rescue practitioner is appointed (or if possible, just shortly prior) an analysis must be done of all the contracts to which the company in business rescue is a party to. A decision must be made, to suspend totally, or in part, various obligations of the company in rescue, arising in terms of any agreement. This will avoid the lessor being in a position to cancel an agreement validly (if there is a breach by the company), which would have the effect that the company is considered an unlawful possessor of the property that is the subject of that agreement. Once this occurs, the company loses the protection of the moratorium. From the lessor’s perspective, they will need to take steps to validly cancel the agreement, prior to the practitioner suspending the company’s obligations, in order to avoid the reach of the moratorium.

If a business rescue practitioner does not take the steps mentioned above, or is too slow in getting up to speed with the affairs of the company, the company may find itself losing the protection of the moratorium and facing an eviction application or facing its critical machinery/vehicle being vindicated.

While the finding in Kythera is only binding in Gauteng, until the Supreme Court of Appeal has ruled definitively on the issue, the judgment is well reasoned and as persuasive authority, is likely to be followed in other high courts throughout South Africa.

Ryan Smith BCom LLB (UKZN) is an attorney at Webber Wentzel in Cape Town.

This article was first published in De Rebus in 2017 (March) DR 20.