A comparative assessment of the treatment of unincorporated business entities in financial distress in South Africa

• Citation: (2023) 35 SA Merc LJ 138
• DOI: https://doi.org/10.47348/SAMLJ/v35/i2a2
• Published date: 26 March 2024
• Pages: 138-161
• Author: Mpofu, K.
• Date: 26 March 2024

A COMPARATIVE ASSESSMENT OF THE

TREATMENT OF UNINCORPORATED

BUSINESS ENTITIES IN FINANCIAL

DISTRESS IN SOUTH AFRICA

KUDZAI MPOFU*

Senior Lecturer, School of Law, Walter Sisulu University

HERMANUS JOHANNES MOOLMAN

†

Senior Lecturer, Department of Mercantile Law,

University of the Free State

Abstract

The main objective of this paper is to examine how business rescue

schemes in South Africa facilitate the rescue of sole proprietorships and

partnerships (unincorporated business entities) in financial distress. It

is premised on the view that when a business is in financial distress, the

lawmaker should provide some form of business rescue scheme

accessible to all debtors regardless of their legal status, size, or

commercial activities. The business rescue process has arguably

received the most scholarly attention in recent times, yet, little or no

attention is paid to the fate of financially distressed unincorporated

entities in South Africa. The article sheds light on the role and

significance of small and medium enterprises in promoting economic

growth and the need to promulgate a debtor-friendly rescue regime.

Through a comparative assessment, different business rescue schemes

available to unincorporated business entities in South Africa, the

United States of America and the United Kingdom are explored. It is

observed that sole proprietorships and partnerships, which account for

most unincorporated business entities in South Africa, are not eligible

for business rescue or debt relief under the existing legislation. The

rationale behind excluding unincorporated business entities from

business rescue legislation seems to be that they lack legal personality.

However, in other jurisdictions, the legislature has promulgated special

business rescue procedures customised to match the unique personality

of unincorporated business entities. Therefore, the South African

*LLB LLM (UNIVEN), LLD (UFS).

†

BCom BIur LLB LLM PhD (UFS), PhD (UCT), Advocate of the High Court.

138

https://doi.org/10.47348/SAMLJ/v35/i2a2

(2023) 35 SA Merc LJ 138

© Juta and Company (Pty) Ltd

legislature should consider promulgating a business rescue model for

unincorporated business entities separate from the current Chapter 6

business rescue. Chapter 13 of the USA Bankruptcy Code provides an

ideal rescue scheme for sole proprietors, while the UK insolvent

partnership administration provides lessons on how to modify a

business rescue scheme applicable to companies to accommodate

partnerships in financial distress. The article contributes to the

development of business rescue legislation that is targeted at relieving

small businesses in financial distress.

Keywords: business rescue scheme, juristic personality, financial exclusion,

sole proprietorships, partnerships, unincorporated business entities

IINTRODUCTION

One of the most lucrative development opportunities for South Africa is

the development of small businesses.

1

Small businesses, such as sole

proprietorships and partnerships, contribute signif‌icantly to the South

African economy.

2

The impact of these businesses is visible in job

creation, increased trade, income distribution, and poverty alleviation.

3

For example, the Small Enterprises Development Agency estimated that

there were 710 000 small formal enterprises which generated about

30 per cent of total employment in South Africa in 2022.

4

1

Small Enterprises Development Agency (SEDA) annual report, 2022 at 24, available at

http://www.seda.org.za, accessed on 18 June 2023. SEDA is a division of the South African

Department of Small Business Development. It is responsible for implementing the

government’s small business strategy, developing and implementing a standardised and

common national delivery network for small business development, and integrating

government-funded small business support organisations at all levels of government. This

work relies on the reports provided by SEDA and accepts that these reports are accurate. See

also Mtshali & Chinyamurindi, ‘Determinants of small business performance in a selected

region in South Africa: The role of entrepreneurial orientation and competitive advantage’

(2021) 18(1) Journal of Contemporary Management 1 at 2; Maziriri & Chivandi, ‘Modelling

key predictors that stimulate the entrepreneurial performance of small and medium-sized

enterprises (SMEs) and poverty reduction: Perspectives from SME managers in an emerging

economy’ (2020) 20(1) Acta Commercii 1 at 1–5.

2

SEDA annual report, 2022 at 8, available at http://www.seda.org.za, accessed on

18 June 2023.

3

See Maf‌ini & Okoumba, ‘Extending green supply chain management activities to

manufacturing small and medium enterprises in a developing economy’ (2018) 21(1) South

African Journal of Economic and Management Sciences 1 at 1–2; see also Abor & Quartey,

‘Issues in SMEs development in Ghana and South Africa’ (2010) 39 International Research

Journal of Finance and Economics 218 at 219–277.

4

SEDA annual report, 2022 available at http://www.seda.org.za, accessed on 20 June 2023.

https://doi.org/10.47348/SAMLJ/v35/i2a2

THE TREATMENT OF UNINCORPORATED BUSINESS ENTITIES IN FINANCIAL DISTRESS

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