Abusing business rescue proceedings by a director and its impact on King IV™ ethics of good corporate governance

• Citation: (2023) 9(1) JCCL&P 25
• DOI: https://doi.org/10.47348/JCCL/V9/i1a2
• Published date: 15 November 2023
• Pages: 25-42
• Author: Phungula, S.P.
• Date: 15 November 2023

https://doi.org/10.47348/JCCL/V9/i1a2

25

ABUSING BUSINESS RESCUE

PROCEEDINGS BY A DIRECTOR

AND ITS IMPACT ON KING IV™

ETHICS OF GOOD CORPORATE

GOVERNANCE

SIMPHIWE P PHUNGULA†

Senior Lecturer, Department of Commercial Law,

University of Cape Town

ABSTRACT

In the past few years, the impact of COVID-19 in South Africa has

given rise to the need for business rescue proceedings for financially

distressed businesses. Moreover, the looting, unrest, and floods in

certain parts of South Africa have exacerbated businesses’ financial

stress. To help financially distressed companies in South Africa,

the Companies Act 71 of 2008 has introduced a business rescue

procedure aimed at helping these ailing companies. This mechanism

aims to rehabilitate financially distressed companies so that they

become solvent again and, if that is not possible, yield a better

return for the company’s creditors or shareholders than would result

from the immediate liquidation of the company. Unfortunately,

since the introduction of business rescue, evidence has shown

that sometimes companies resort to business rescue proceedings to

seek refuge from creditors even if the facts do not justify that the

company should commence business rescue. In most cases, the abuse

of business rescue is done by directors who pass a resolution that

the company should embark on business rescue even if evidence

shows that the company should not commence the proceedings.

This is done notwithstanding the principles of the King IV Report

on Corporate Governance™ (King IV™), which requires ethics and

good governance on the part of directors. This article demonstrates

how the abuse of business rescue can impact the principles of good

governance and ethics of King IV™. It argues that directors should

rethink their corporate practices and ethical standards when passing

a resolution to commence business rescue proceedings.

Keywords: business rescue, King IV, Companies Act, directors, ethics

† LLB, LLM, PhD (UKZN).

(2023) 9(1) JCCL&P 25

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26 (2023) 9(1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

https://doi.org/10.47348/JCCL/V9/i1a2

I INTRODUCTION

South Africa’s economy has seen several crises that left many businesses

in financial distress. These crises include the COVID-19 pandemic,

the looting in KwaZulu-Natal and Gauteng, and the most recent

floods in parts of KwaZulu-Natal. One of the mechanisms that can

help financially distressed businesses is the business rescue process.

The underlying philosophy of business rescue is not necessarily to

prevent the company from being wound up or liquidated. Even if

the company is liquidated, business rescue may still provide a better

return for creditors than they would have received on immediate

liquidation. The definition is found in s 128(1)(b) of the Companies

Act 71 of 2008 (Companies Act), which provides that the term

‘business rescue’ means proceedings that are aimed at facilitating

the rehabilitation of a company that is financially distressed by

providing for

the temporary supervision of the company, and of the management

of its affairs, business and property; a temporary moratorium on the

rights of claimants against the company or in respect of property in its

possession; and the development and implementation, if approved,

of a plan to rescue the company by restructuring its affairs, business,

property, debt and other liabilities, and equity in a manner that

maximises the likelihood of the company continuing in existence on

a solvent basis or, if it is not possible for the company to so continue

in existence, results in a better return for the company’s creditors or

shareholders than would result from the immediate liquidation of the

company.

In Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami)

(Pty) Ltd,Claassen J held that:

The general philosophy permeating the business rescue provisions is

the recognition of the value of the business as a going concern rather

than the juristic person itself. Hence the name ‘business rescue’ and

not ‘company rescue’. This is in line with the modern trend in rescue

regimes. It attempts to secure and balance the opposing interests of

creditors, shareholders, and employees. It encapsulates a shift from

creditors’ interests to a broader range of interests. The thinking is

that to preserve the business coupled with the experience and skill

of its employees, [it] may, in the end, prove to be a better option for

creditors in securing full recovery from the debtor.1

1 2012 (3) SA 273 (GSJ) para 12.

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