With South Africa’s recent repo-rate increase and subsequent grey listing, it is no surprise
that many companies are under financial distress. Construction companies are not an
exception to the economic downturn with the construction industry currently inundated with
matters involving business rescue practitioners aiming to rehabilitate companies. In these
matters, it is widely accepted for the employer to invoke the cancellation clause of the
contract on the basis that the contractor is undergoing business rescue, however, this seems
to contradict the powers of the business rescue practitioner provided for in the Companies
Act 71 of 2008 (the Act). This raises the question whether the employer may rightfully cancel
in terms of the construction contract notwithstanding the fact that the business rescue
practitioner (the BRP) has taken over the execution of the rights and obligations of the
company in terms of the Act.
The Act
Section 128(1)(b) of the of the Act provides that business rescue proceedings create a
moratorium on the rights of claimants in relation to entities undergoing business rescue. This
means that the exercise and/or enforcement of rights by claimants such as an employer
should be suspended until the business rescue proceedings are finalised.
It is widely accepted that the powers of the BRP are often regarded as being “wide”. This is
so because, the BRP is tasked with “breathing life” into a distressed company. However, it is
our considered view that the cancellation clauses found in most construction contracts
rightfully narrow these wide powers.
The employer’s right to terminate the contract, is often triggered by the appointment of the
BRP or the commencement of the business rescue proceedings. Practically the BRP is not a
skilled construction contractor but rather an administrator of a construction contract. This
exposes the employer and the project to significant risks, which must be mitigated and often
termination may be the best option.
A few considerations
In deciding whether to exercise its right to terminate the contract, in cases where the
contractor is undergoing business rescue, we believe the employer should consider, among
others, the following questions:
The percentage of progress achieved and the balance to be completed by the contractor (including defects);
The costs of appointing a replacement contractor;
The value of the construction guarantee in favour of the employer;
The contractor’s other obligations on other projects, if any; and
The extent of delay damages that have been levied against the contractor, if any.
Conclusion
The appointment of the BRP is essential in rescuing companies in distress. However, as an
employer, the importance of the project being completed on time and within budget cannot
be superseded by the need to breathe life into a company that may or may not survive the
business rescue process. This remains a critical balance that must be struck and the
employer should not lose sight of what is important in such cases.
