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

JurisdictionSouth Africa
AuthorHans Klopper
Pages549-565
Citation(2014) 25 Stell LR 549
Published date16 August 2019
Date16 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

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