Section 136(2)(a) of the Companies Act 71 of 2008 (Act) allows business rescue practitioners to suspend, during business rescue proceedings, “any obligation” of the company that “arises under an agreement to which the company was a party at the commencement of the business rescue proceedings” and “would otherwise become due during those proceedings”. Section 136(2)(b) of the Act, permits business rescue practitioners to urgently apply to a court to “cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company” as contemplated in the Act.

Knoop NO and Another v Pillay and Others [2024] (3) SA 116 (GJ) concerned an application for eviction brought by the first applicant, a business rescue practitioner, to evict the first to fourth respondents from three properties owned by the second applicant, a company in business rescue. The business rescue practitioner’s objective with the eviction was to market and sell the properties. It is important to note that the rent payable in terms of the properties was about R15,000 for properties worth in excess of R20 million. The court was tasked with considering whether cancellation of the lease agreement and subsequent eviction from the properties were just and reasonable in the circumstances in terms of section 136(2)(b).

The respondents did not contest the business rescue practitioner’s mandate and power to sell the properties but argued that there was no need to cancel the lease agreement in order for the sale of the properties to go ahead, as they alleged that they were not in breach of the lease agreement. The business rescue practitioner argued that the objective of marketing and selling the properties to realise the most optimal price as part of the business rescue process would be frustrated if the respondents remained in occupation. Furthermore, the business rescue practitioner presented evidence that the lease agreement was a simulated transaction, based on the rent payable, the timing of the conclusion of the agreement (which was two weeks before the company was placed in business rescue), and the burdensome dispute resolution process outlined in the lease agreement.

Findings

The court agreed with the business rescue practitioner that the objective to get the most value from the properties would be more likely to be achieved in the absence of a tenant who enjoyed the benefit of lease that made no commercial sense. In considering what is just and reasonable in the circumstances, the court held that the effect of cancellation on the sanctity of a contract was only one consideration to keep in mind, and should be considered alongside the purpose of business rescue and its impact on the various stakeholders.

The court ordered that the lease agreement between the second applicant and the respondents be cancelled in its entirety in terms of section 136(2)(b) of the Act as it found it to be just and reasonable in the circumstances. 

What is just and reasonable depends on the facts of the case, and therefore, a lease that was concluded in good faith and with commercially reasonable terms may be able to escape the fate of the lease agreement in the Knoop case. However, it is always important to obtain legal advice if a company that one has contractual relations with, in any capacity, is placed into business rescue.