Ellerine Brothers (Pty) Ltd v McCarthy Limited

In 2006, Ellerine Brothers (Pty) Ltd (appellant) leased business premises to Toits Motor Group (Pty) Ltd (the insolvent). The same year, the insolvent sub-leased a portion of the property to McCarthy Limited (respondent). In 2009, the insolvent failed to pay rental timeously. On 16 January 2009, Ellerine notified the insolvent in writing that if it failed to remedy the breach within seven days, the lease would be cancelled. The insolvent did not comply. On 21 January 2009, a creditor lodged an application for the winding-up of the insolvent with the registrar of the high court. On 27 January 2009, Ellerine delivered a letter cancelling the lease with immediate effect. A final winding-up order was issued on 27 February 2009. In June 2009, Ellerine and the liquidators entered into a cession agreement whereby the liquidator ceded the insolvent's rights to rental from the sub-lease to Ellerine, with the deed recording that the lease was still in existence. In October, Ellerine sued McCarthy for rental under the sub-lease. McCarthy defended, arguing the sub-lease terminated when Ellerine cancelled the main lease on 27 January.

• Whether a lessor can validly cancel a lease agreement after the commencement of winding-up proceedings against the lessee but before the final winding-up order, where notice of cancellation was given before the commencement of winding-up proceedings but the notice period had not expired when those proceedings commenced
• Whether the creation of a concursus creditorum on the date of lodging the winding-up application prevented the lessor from exercising its right to cancel the lease
• Whether section 37 of the Insolvency Act 24 of 1936 and section 348 of the Companies Act 61 of 1973 prevented the cancellation of the lease
• The effect of insolvency on uncompleted contracts, specifically lease agreements

The appeal was dismissed with costs, including the costs of two counsel. The lease was validly cancelled by Ellerine on 27 January 2009, which meant the sub-lease also terminated, and there were no rights in existence for the liquidator to cede to Ellerine.

The binding legal principles established are: (1) The creation of a concursus creditorum upon the insolvency of a party to an uncompleted contract (including a lease) does not terminate, alter, suspend or modify the rights and obligations of the parties under that contract. (2) The liquidator, as universal successor, steps into the shoes of the insolvent and must perform whatever is required under the contract, including unfulfilled past obligations. (3) The effect of the concursus is merely that the other party to the contract cannot demand specific performance from the liquidator if the liquidator elects not to abide by the contract, in which case the other party's claim is reduced to a monetary claim as a concurrent creditor. (4) A lessor's contractual right to cancel a lease (arising under a lex commissoria) can be validly exercised after the commencement of winding-up proceedings, provided all conditions precedent to the exercise of that right were fulfilled. (5) Section 37 of the Insolvency Act 24 of 1936 does not materially change the common law position regarding uncompleted contracts and does not prevent a lessor from exercising an enforceable right to cancel that arose after the creation of the concursus. (6) Section 348 of the Companies Act 61 of 1973, which deems winding-up to commence at the time of presentation of the application to court, does not freeze the estate so as to prevent the exercise of contractual rights that become enforceable after that date.

The court noted that it is unhelpful to speak of an 'accrued right to cancel' which survives the establishment of the concursus or of a right to cancel which only matures after the commencement of winding-up. The court stated that the real issue is simply whether there was an effective and enforceable right at the critical time – the time of cancellation. The court also observed that the Insolvency Act is not a codification of the common law of insolvency, and the common law still applies save to the extent it has been changed by or is inconsistent with the Act. The court expressed a preference for the approach in Smith & another v Parton NO and Porteous v Strydom NO over the cases relied upon by the appellant (De Wet NO v Uys NO & andere and Roering NNO & others NNO v Nedbank Ltd). The court also explained the legal nature of a sub-lease: a sub-lessee's rights are subject to those of the lessee, so termination of the main lease ipso jure brings the sub-lease to an end, as a sub-lessee cannot acquire more rights than the lessee has.

This case is significant in South African insolvency law as it clarifies the effect of the creation of a concursus creditorum on uncompleted contracts, particularly lease agreements. It confirms that the insolvency of a party to an executory contract does not suspend, alter or terminate the contract or the rights and obligations thereunder. The concursus merely prevents the other party from compelling specific performance by the liquidator if the liquidator elects not to perform. The case establishes that a lessor's contractual right to cancel a lease can be validly exercised even after the commencement of winding-up proceedings, provided the right to cancel became enforceable (i.e., all conditions precedent were fulfilled). The judgment reinforces that section 37 of the Insolvency Act does not confer rights on the liquidator that are inconsistent with the common law position on uncompleted contracts. It also clarifies that the liquidator inherits the lease in its entirety and must perform the insolvent's obligations unless electing to determine the lease. The case is important for understanding the interplay between contractual rights, the common law of insolvency, and statutory provisions governing insolvency.