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Business Rescue and Construction Contracts

16 April 2019

According to Statistics South Africa, the construction sector had its worst year in 2018, Production slumped by 1.2% and the sector experienced its second economic decline in two years. This as a result of limited infrastructure spending by the government which has translated into fewer major infrastructure projects. These projects are necessary for major construction companies to continue operating.

The ongoing lack of new projects has had a negative impact on a number of construction companies. NMC Construction commenced with liquidation proceedings, while Esor Construction, Liviero Construction, Basil Read and recently Group Five have each commenced business rescue proceedings.

This article briefly reviews aspects of business rescue proceedings that directly impact parties contracting with a company which has commenced with business rescue. These include the management and administration of the company (or a specific contract); the impact of the business rescue on existing contracts; the powers of the business rescue practitioner (“BRP”); and the business rescue plan.

Business rescue is intended to rehabilitate a company that is financially distressed. This achieved by providing temporary supervision of the company, and the management of its affairs, business and property; a temporary moratorium (stay) of legal proceedings against the company; and the development and implementation (if approved) of a business rescue plan to rescue the company by restructuring it.

The company’s management remains in its place, although the BRP has the power to remove a director by application to court in terms of section 137 of the Companies Act No 71 of 2008 (“the Act”). The BRP has effective full control over the company. The nature of a company’s contracts is that contractors and/or subcontractors – whichever is applicable – have relationships with contract managers, project managers, commercial managers and/or commercial directors. On commencement of business rescue, these individuals are stripped of all authority relating to the affairs of the company (or the contracts). Business rescue is aimed at either maximising the likelihood of the company continuing in existence on a solvent basis, or to achieve a better return for all the creditors of the company than would ordinarily result from the liquidation of the company. Payment of one creditor under a specific construction contract, without the authority of the BRP, may impact the prospect of achieving these aims or prejudice the remaining creditors.

In practice, the simple process of making payments as an when they fall due is transferred to the BRP unless he delegates authority to do so. Similarly, any undertakings by these individuals on behalf of the company are rendered of no force or effect. It is important to note that commencing with business recue doesn’t excuse a company from having to repay its debts, but is does provide breathing space to delay paying pre-existing debts – i.e. interim payments or monies due under a construction contract – and to continue trading until the business is rescued At this point, the company will have to pay its creditors the pre-existing debts, in accordance with the business rescue plan which may be only a portion of the claim. Unfortunately, payment under the approved business rescue plan is likely to occur significantly later than when the amount was due.

When business rescue commences, the company continues to operate as before. The contractors or subcontractors are obliged to comply with their obligations under the specific existing contract, u Unless the contract regulates the relationship between the parties in such circumstances. It is understandable for contractors and subcontractors – who are faced with either suspending their performance or continuing during the period of business rescue – will be reluctant to continue on the same terms and conditions as those in place prior to the commencement of business recue.

Broadly speaking, section 136 of the Act regulates the position of the company in respect of its obligations in terms of any existing contracts in force at the time of business recue. Under section 136(2) the BRP may, during business rescue, and despite any provision to the contrary in an agreement: (1) entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that – (i) arises under an agreement to which the company was a party at the commencement of business rescue proceedings; and that would otherwise become due during the proceedings; (ii) apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated above. The practical implication of these wide-ranging powers is the power to unilaterally amend a contract concluded between parties in favour of the company under business rescue. These powers are a clear prejudice against a contractor or subcontractor executing its obligations in terms of the contract, in expectation of the other party reciprocating its obligations – making payment timeously.

Despite the clear disadvantage under subsection 2 above, subsection 3 offers some relief. Any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, may assert a claim against the company for damages. Be that as it may, this is little consolation for a contractor or subcontractor which undertook to execute the works to realise cash periodically or within a reasonable period of time. They are left out of pocket indefinitely.

The BRP is required to prepare, develop and implement a business rescue plan. Unless a formal extension is received from creditors, the Plan must be published within 25 days after appointment of the BRP. Within 10 days after publication of the plan it will be presented to a meeting of affected parties (affected parties are creditors, shareholders and employees of the business). The plan will be approved on a preliminary basis if supported by the holders of more than 75% of creditors’ voting interest; and if the votes in support of the proposed plan included at least 50% of the independent creditors voting interest.

Contractors and subcontractors operate on the basis of decisions being made without delay. A contractor or subcontractor’s payment is subject to acceptance of its claim and the final approved plan. In construction, time is money.

Similarly, they operate in a credit environment, in terms of which payment of goods and materials procured is made upon payment for the works completed. Given the above constraints, business rescue can become a great burden for contractors and subcontractors. This is especially true because in management and decision-making, the BRP has authority over the affairs of the business and payments. The time-consuming process required to prepare the plan is a further disadvantage to contractors and subcontractors.

There are a number of important issues and procedural requirements arising out of business rescue that have not been dealt with in this article. It is widely accepted that business rescue is a positive step in guiding companies towards rehabilitation. However, the overall benefits of it may not be as attractive when applied to the particular circumstances of a construction contract.

Author: Tsele Moloi, Associate