Late last year, business rescue specialists went to court over the future of game on a 2,800ha farm in Limpopo. They were concerned about the ongoing cost of feeding the animals and keeping them healthy, as well as the effect of the veld being overstocked at "criminally high levels".
But they were also seeking clarity on a crucial legal point — one that affects other SA businesses in financial difficulties as well as business rescue practitioners (BRPs) involved in trying to assist these outfits.
Until that case, there had been no decision by a court on whether it would cancel a contract already "suspended" as part of business rescue proceedings.
The Companies Act allows BRPs to "suspend" contracts. But it also says BRPs may bring an urgent application to court asking that an "obligation" entered into by the ailing company be cancelled.
Would a "contract" count as an obligation that could be cancelled? Would a court order that the contracts agreed to by the game farm be cancelled immediately?
The judge involved in the game-farm case, Andre le Grange of the Western Cape high court, did just that, issuing an order cancelling a raft of contracts involving the game farm. According to Neill Hobbs, heading the game company’s business rescue efforts, the order enabled one of SA’s biggest game capture and removal operations.
The courts are starting a close engagement with the law on business rescue to define what is and what is not permitted
But the order will also affect other SA businesses and BRPs, because it has begun to clarify whether, and under what circumstances, the courts will grant an order, on an application from a BRP, to cancel a contract.
"In this case the contract was so onerous that something had to be done," says Hobbs. "There were far too many animals on the farm. They had to be fed and looked after, but doing so caused escalating debt that the company could not afford."
However, Hobbs points out that a court order cancelling a contract could well have further implications: "The court order does not deprive the other party to the contract from claiming damages for its cancellation."
Just a month after the game-farm case, the high court in KwaZulu Natal had to deal with a related matter. BRPs working on a fast-food operation were faced with a situation in which the eatery had sold its expected credit card sales to a factoring company, Retail Capital. The question was whether that "contract" could be cancelled, which would mean that the rescue team would no longer need to pay Retail Capital every month.
However, the court made it clear that when a debt is ceded — to a bank, for example, or in this case to Retail Capital — a BRP cannot treat incoming money as income: it must go to the bank as it belongs to it. In other words, once there has been a cession of book debts, that contract is not capable of suspension or cancellation.
Setting parameters
For attorney PJ Veldhuizen, who worked on the two matters, these and similar recent judgments show that the courts are starting a close engagement with the law on business rescue to define exactly what is and what is not permitted.
He says BRPs need clarity on the law so that when they examine a company to see if it can be saved, they understand the precise implications of any contracts — which of them may be suspended or cancelled, and which cannot be touched.
"Where assets are given as security to a bank, there is zero chance of realising these assets unless the bank co-operates," says Veldhuizen. "These were debatable points before, but now BRPs are getting certainty. Over the past five years we have been trying to understand what the legislature meant in these sections and how they are to be applied. Now we are getting clarity."
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