The legal protection of a company in business rescue
Companies often crumble due to pressure from creditors in the form of lawsuits. To prevent this, the Companies Act provides a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, thus giving the company breathing space to restructure its affairs.
During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except: with the written consent of the practitioner; with the leave of the court; as a set-off against any claim made by the company in any legal proceedings; criminal proceedings against the company and proceedings concerning any property for which the company is a trustee.
The phrase “legal proceedings and enforcement action” was defined in Cloete vs Wesbank, a case heard in 2015. According to this case, legal proceedings mean a lawsuit and enforcement action means formal proceedings ancillary to legal proceedings, such as the enforcement or execution of court orders by means of writs of execution or attachment. The Act further states that during business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances. It should, however, be noted that if any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time is suspended during the company’s business rescue proceedings. In other words, prescription is suspended during the company’s business rescue proceedings.
Although it is not a prerequisite, the business rescue practitioner usually sends a notice to the creditors to inform them of the moratorium.
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