Averting Liquidations with Business Rescue: Does a Section 155 Compromise Place the Bar too High?

• Jurisdiction: South Africa
• Citation: (2014) 25 Stell LR 549
• Pages: 549-565
• Published date: 16 August 2019
• Date: 16 August 2019

549

AVERTING LIQUIDATIONS WITH BUSINESS

RESCUE: DOES A SECTION 155 COMPROMISE

PLACE THE BAR TOO HIGH?

Hans Klopper

B Proc B Comm

Managing Director, Independent Advisory

Richard S Bradstreet

BA LLB LLM

Lecturer in Commercial Law, University of Cape Town

1 Introduction

1 1 Compromise with creditors in the contex t of business rescue

South Africa’s new regime of business rescue contained in Chapter 6 of the

Companies Act 71 of 2008 (“Companies Act 2008”) has been a topic of much

discussion, and has been welcomed as a long-overdue re placement for judicial

management. A sense of hope in the new procedure has been based on the fact

that it presents itself in a more debtor-friend ly format, within the context of an

Act that expressly seeks to encourage efcient and responsible management

of companies a nd provide for the efcient rescue and recovery of nancial ly

distressed compa nies, in a manner that balances the right s and interests of all

relevant sta keholders.1

In what ha s been perceived as a “shif t away” f rom the t raditional

creditor-oriented ap proach that prevailed in South Africa under the previous

Companies Act 61 of 1973 (“Companies Act 1973”), the involvement of the

debtor company itself in the rescue is pr obably the most noteworthy feature

of a “debtor-friend ly” system to be i ncorporated in the new business rescue

legislation (“Chapter 6”). Whereas a fully debtor-oriented system such as that

which is used in United States ba nkr uptcy cases allows the debtor to remai n

entirely in possession of its own affai rs during t he period of reorganisation

(hence the term “debtor-in-possession” which is used to describe such a

procedure), South A frica’s business rescue under Chapter 6 relies heavily

on an outsider – the business rescue practitioner (“BRP”) – to oversee the

rescue, and displace the author ity of the existing management for the durat ion

of rescue proceedings.

Chapter 6 does, however, envisage the involvement of the debtor in two

key respects: rst, with regard to the right to commence business rescue

proceedings by board resolution in term s of section 129; and second, the right

to propose a compromise or an ar rangement to cred itors outside of a formal

business res cue in terms of section 155. Both of the se provisions facilitate a

1 S 7(j) and (k) of the Compan ies Act 2008

(2014) 25 Stell LR 549

© Juta and Company (Pty) Ltd

debtor’s access, in principle, to cor porate reorganisation, generally sp eaking:

the former more closely resembling a tra ditional admi nistration by vir tue

of the mandatory involvement of a BRP, the latter providing the option for

the debtor to remain enti rely in possession.2 This a rticle will explore the

potential of the section 155 comp romise or arrangement in pa rticular, and

expand on some of the pr actical difculties that ar ise in relation to the use of

the section in pract ice. Further, it will be arg ued that, in view of the pur pose

of Chapter 6 and “business rescue” broadly dened, use of section 155 to avert

liquidation fur thers the purposes of the Companies Act 2008.

1 2 Terminological distinctions: “rescue”, “compromise”,

“arrangement”

The Companies Act 2008 includes the section 155 compromise under

Chapter 6, which is titled “business rescue and compromise with creditors”.

There is clearly a distinction to be drawn, in the rst place, bet ween these

two concepts. “Business re scue”3 refers to proceedings to facilitate the

rehabilitation4 of a company that is “nancially distressed”5 by providing

for a temporary supe rvision of the company by an exter nal practitioner who

will develop a plan to restruc ture the affairs of the company to achieve one of

two goals: the primar y goal is to enable the business to conti nue in existence

on a solvent basis, but where this is not possible, the secondar y goal is to

obtain a “better retur n for the company’s creditors or shareholders than would

result from the im mediate liquidation of the company”.6

These goals are of fund amental impor tance by virt ue of the fact that

they are reected indi rectly in the purposes of the Act itself, which include

“provid[ing] for the efcient rescue and recover y of nancially distressed

co mp an ie s”.7 Fur thermore, achieving this purpose will also “reafrm the

company as a means of achieving e conomic and social benets”.8

Importantly, although section 155 is titled “Compromise with cred itors”,

the section expressly provides for an “arrangement or a compromise” of

2 This, however, presuppo ses fairly signif icant creditor co operation

3 See the definition of “ business rescue ” in s 128(1)(b) of the Companies Act 2008

4 Although this word is not def ined in the Act, it should pr obably be under stood to refer to the proces s of

“rescuing th e company” by restruct uring the compa ny’s affairs generally, or by means of any appropr iate

business turnar ound str ategies “ Rehabilitation” seems to imply that s uch process es would be applie d

with a prima ry view to enabli ng the company to cont inue in existence o n a solvent basis

5 “Financially distr essed” has a specific me aning in terms of s 128(1)(f) of the Companie s Act 2008, and in

reference t o a particu lar company me ans that “(i) it appears t o be reasonably unlikely th at the company

will be able to pay al l of its debts as they become due a nd payable within the im mediately ensuing six

months; or (ii) it appears to be reasona bly likely that the company w ill be come in solvent wit hin the

immediat ely ensuing six mont hs”

6 See definition of “rescu ing the company” in s 128(1)(h) as well as Oakdene S quare Propert ies (Pty) Ltd v

Farm Bothasfon tein (Kyalami) (Pty) Ltd 2 012 3 SA 273 (GSJ) 289 where CJ Claassen J held that obtaining

a better ret urn for creditor s was the “secondar y goal” of business resc ue The decision was conf irmed on

appeal in Oak dene Square Pro perties (Pty) Ltd v Fa rm Bothasfontein ( Kyalami) (Pty) Ltd 2013 4 SA 539

(SCA)

7 S 7(k) of the Companies Act 2008

8 S 7(d)

550 STELL LR 2014 3

© Juta and Company (Pty) Ltd