Business rescue: major risk for the distressed company’s clients and suppliers

Business rescue is the mechanism for intervention when a company suffers financial distress in terms of the new Companies Act (Act 71 of 2008). In terms of the Act, a business rescue practitioner is appointed, who has wide powers to, inter alia, suspend or apply to court to cancel:

  • any agreement to which the distressed company is a party, or
  • any obligation of the distressed company (section 136(2)).

Where does this leave anyone who is trading with the distressed company or providing finance to the company? In a position which is unnecessarily precarious, unless that person has explicitly contracted with the distressed party on a basis which allows it to escape the risk of suspension or cancellation. Even where the distressed company is a key client or key supplier, such a contractual clause can allow the supplier / client an opportunity to rethink the relationship once the financial distress becomes evident, and possibly trade only on an order-by-order cash basis.

Don’t let your suppliers or clients spread their commercial risk to you should they encounter financial difficulty- contract out of the risk. How should such a clause look? This is a matter for expert drafting, as one cannot effectively exclude the Act by simply stating this in an agreement. I recommend that you speak to an expert in the field of corporate drafting and ask whether he or she has a solution or feel free to contact Trudie Broekmann at the contact details set out elsewhere on this blog.

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