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
DOIhttps://doi.org/10.47348/JCCL/V9/i1a2
Published date15 November 2023
Pages25-42
AuthorPhungula, S.P.
Date15 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
© Juta and Company (Pty) Ltd
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.
© Juta and Company (Pty) Ltd

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