The moratorium on legal proceedings against a company in business rescue offers critical breathing space to the company from its creditors, allowing the business rescue practitioner the opportunity to investigate affairs of the company and develop the business rescue plan for its restructure.

A recent case offers a useful interpretation of the extent and implications of this moratorium. It decided that cancellation of a contract is not enforcement action.

In Cloete Murray NO & Another vs FirstRand Bank Ltd the court held that the cancellation of an instalment sale agreement and repossession of the goods sold did not amount to “enforcement action” as contemplated in section 133(1) of the Companies Act. The liquidator of a company that had previously been in business rescue sought to overturn Firstrand Bank’s cancellation of an instalment sale agreement while the company was in business rescue. The liquidators used the approach that cancellation of the agreement constituted “enforcement action” that could not occur without the consent of the court or the business rescue practitioner under section 133(1).

Section 133(1) places a moratorium on any “legal proceeding, including enforcement action”. Legal proceedings usually mean a lawsuit. The court viewed the words “enforcement action” as being a species of “legal proceedings” and therefore relating to formal proceedings and ancillary legal proceedings such as the enforcement or execution of court orders. Cancellation amounts to the termination of obligations between parties to an agreement. It is a unilateral act of a party which does not require any legal process. Cancellation of a contract is not enforcement.

That does not mean the creditor can enforce its rights under the cancelled contract to take back any goods or premises in the possession of the company without consent. Section 134(1)(c) prohibits any person from exercising any right in respect of any property in the lawful possession of the company unless the practitioner consents in writing. For instance, hire purchase goods cannot be repossessed without the consent of the practitioner or the court. The court recognised that the outcome of this case may have been different had section 134(1) been used to challenge the cancellation and repossession.

Nonetheless this is an important judgment for those who can gain an advantage by cancellation of a breached contract with a company in business rescue. But do not rush into cancellation. You may be better off enforcing the contract rather than cancelling it for breach which leaves you with a damages claim to prove.