Business Rescue: An Employer’s Guide to Weathering the Storm

The insolvency of a contractor on a construction project has long been a threat to the timely and cost-effective completion of the works. Over time, the standard form contracts have evolved to minimise the risk of the insolvency of such contractor, to the employer, allowing the employer to bow out of such agreements with the vestiges of its dignity intact.

With the introduction, by Chapter 6 of the Companies Act No. 71 of 2008 (the Act), of business rescue proceedings into the South African business landscape, however, employers may be forgiven for wondering what protections, if any, are still available to them. The purpose of this article is to provide a quick reference guide for employers wanting to understand their rights when their contractors enter business rescue.

What is Business Rescue?

The Act defines business rescue as proceedings to facilitate the rehabilitation of a company that is financially distressed.

These proceedings can be initiated (provided that there appears to be a reasonable possibility of rescuing the company) by a resolution of the board of the financially distressed company, or by way of an application to court by a person affected by the company’s financial difficulties. The management of the company’s affairs, business and property are then placed under the temporary supervision of a business rescue practitioner, who develops and implements a rescue plan.

Only a shareholder, creditor, registered trade union representing employees of the company or its employees themselves, may challenge this resolution or the appointment of the business rescue practitioner, or bring an application for the institution of business rescue proceedings. This means that the employer to a contract, who is not owed money by the contractor, will have no say in the matter.

What are the Consequences of Business Rescue?

Business rescue proceedings are intended to last 3 months, or such longer period determined by the court, on application by the business rescue practitioner. Once business rescue proceedings have commenced:

1. There is a temporary moratorium on the rights of claimants against the company, and no legal proceedings may be commenced or proceeded with, while the company is under business rescue;
2. Despite any provision of a contract to the contrary, the business rescue practitioner may suspend, entirely, partially or conditionally, for the duration of the business rescue proceedings, any obligation of the company that arises under an agreement to which the company was a party when the proceedings commenced; and/or
3. Despite any provision of a contract to the contrary, the business rescue practitioner may apply to a court to entirely, partially or conditionally cancel (on any terms that are just and reasonable) any obligation of the company arising under such an agreement.

The other party’s only remedy for such suspension or cancellation is damages (which would render the other party a claimant, subject to the moratorium on legal proceedings).

Employers’ Rights under a Construction Contract

Business rescue proceedings do not automatically mean that a contractor will default on its obligations in terms of a construction contract, and it is by no means a given that the business rescue practitioner will decide to suspend or cancel any obligations under the contract. If this does transpire, however, the employer has a few options available to it:

1. Reciprocal Obligations – The Act does not address an employer’s duty to proceed with its own obligations in terms of the contract, where the contractor elects to suspend performance. As such, the common law principle of exceptio non adimpleti contractus applies, allowing the employer to suspend performance of its reciprocal obligations to the contractor [BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd and Others 2017 (4) SA 592 (GJ)].
2. Security – The moratorium on enforcement proceedings is a personal right afforded to a company by the Act. It does not extend to security provided by others on the company’s behalf [Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC)].

Should a contractor breach the terms of the contract entitling the employer to call upon the contractor’s security, the Act does not prevent the employer from doing so.

1. Cancellation – The Supreme Court of Appeal has determined that cancellation does not constitute enforcement action. Cancellation of an agreement with a company which is in business rescue would, therefore, be valid [Cloete Murray and Another NNO v Firstrand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA)].

An employer would, however, still need to demonstrate an entitlement to cancel or terminate in terms of the agreement e.g. due to a material breach. The suspension of obligations by the business rescue practitioner would constitute such a material breach entitling the employer to cancel the contract [BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd and Others 2017 (4) SA 592 (GJ)].

Once the contract is cancelled, the employer will be at liberty to employ another contractor to complete the works. Recovery of any additional costs occasioned thereby, together with the damages incurred due to the cancellation of the contract, will, however, once again, place the employer in the position of a creditor in the business rescue proceedings.

Author: Michelle Kerr, Senior Associate.