Godknows Hofisi
Business Law
I have written many articles on insolvency proceedings covering both corporate rescue and liquidation of companies.
In this article, I write on the effect of liquidation on a lease agreement.
Liquidation
Liquidation is the process of winding up a company. This is done by selling off the company’s assets and paying its creditors. If there is any residue, it is then distributed to the company’s shareholders. Liquidation can be voluntary or involuntary.
Voluntary liquidation of a company
This can be done in terms of section 5 or 9 of the Insolvency Act (Chapter 6:07) or “the Insolvency Act”.
Section 5(1)(a) provides for voluntary liquidation of a company by an order of the Court whereby the company passes a resolution for voluntary liquidation and then makes an application to the High Court seeking the Court to grant a liquidation order, essentially to confirm the company’s resolution for voluntary liquidation.
Alternatively, voluntary liquidation can be done in terms of section 9, whereby the company passes a liquidation resolution and subjects the resolution to a vote by the company’s creditors.
In this case the High Court is not involved.
Involuntary liquidation
Section 6 of the Insolvency Act applies. In this case, a creditor with a liquidated claim may apply to a court for the liquidation of the company.
In the case of a company or private business corporation (PBC):
Corporate rescue proceedings have ended in the manner contemplated in part XXIII of the Act and it appears to the Court that it is just and equitable in the circumstances for the company to be liquidated.
It is otherwise just and equitable for the company to be liquidated.
According to section 6(2), a claim in respect of a liquidated debt which is payable at some determined time in the future may be taken into account.
Effect of liquidation upon lease
This is covered in section 39 of the Insolvency Act. This section does not apply to a financial lease.
According to section 39(2), a lease of movable or immovable property is not terminated by the liquidation of the estate of the lessee, but the liquidator of the insolvent estate may, without prior notice, terminate the lease by standard notice to the lessor (landlord) with the approval of the Master or in terms of a resolution of creditors taken at a meeting of creditors of the insolvent estate.
Section 39 (3) provides that the lessor may claim from the insolvent estate compensation for any loss which he or she may have sustained by reason of the non-performance of the terms of the lease.
In terms of section 39(4), if the liquidator does not, within three months of his or her appointment, notify the lessor by standard notice that he or she continues the lease on behalf of the insolvent estate, he or she is regarded as having terminated the lease at the end of the said three months.
This provision is very important and ought to be paid attention to.
According to section 39(5), the rent due in terms of the lease from the date of liquidation of the estate of the lessee (tenant) to the termination or cession of the lease by the liquidator, must be included in the cost of the liquidation.
It is important to note that in terms of section 39(6), the termination of the lease by the liquidator in terms of this section deprives the insolvent estate of any right to compensation for improvements, other than improvements made in terms of an agreement with the lessor, to the leased property during the period of the lease.
Conclusion
Unless stated in the lease agreement, the agreement is not terminated by the liquidation of the entity, but the liquidator may terminate such lease agreement.
If the liquidator does not give notice of his or her intention to continue with the lease within three months of appointment, then the lease will be deemed to have been terminated after three months.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons BCompt (UNISA), CA(Z), ACCA (Business Valuations), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or [email protected]. Visit www//:hofisilaw.com for more articles./He can be contacted on +263 772 246 900 or at gohofisi@ gmail.com
