A critical analysis of the business rescue regime in the Companies Act 71 of 2008
| Jurisdiction | South Africa |
| Published date | 15 August 2019 |
| Author | Jonathan Rushworth |
| Date | 15 August 2019 |
| Citation | 2010 Acta Juridica 375 |
| Pages | 375-408 |
A critical analysis of the business rescue
regime in the Companies Act
71 of 2008
JONATHANRUSHWORTH*
The Companies Act introduces a new business rescue regime into South
African law. The purpose is to facilitate the rescue and rehabilitation of a
company in financial difficulty, and in certain other circumstances. The
proceedings commence by resolution of the directors of the company or by
application to court by a shareholder, a creditor or employees (or their
representatives). The grounds for commencement are based on an insolvency
test and there must be a reasonable prospect of the rescue proceedings
succeeding. The court procedure may also be commenced on alternative
grounds.
The Act contains significant restrictions against any action by third parties
against the company, its property or property in its possession, during the
proceedings. A qualified business rescue practitioner is appointed to oversee
the operations of the company and to develop and implement a business
rescue plan. Employees, creditors and shareholders have certain rights, includ-
ing voting on the rescue plan, in certain circumstances.
Implementation of the rescue plan is intended to rescue the company by a
restructuring which maximises the likelihood of it continuing in existence on
a solvent basis or, if that is not possible, results in a better return for creditors or
shareholders than would result from its liquidation. If the plan is approved and
implemented, the formal process is terminated. If the plan (or a revised
version) is not approved, employees, creditors or shareholders may make an
offer to other stakeholders who opposed the plan to purchase their interests.
I INTRODUCTION
The Companies Act 71 of 2008 (the new Act) introduces a new business
rescue regime into South African law. The purpose is to facilitate the
rehabilitation of a company that is in financial difficulty or in certain other
circumstances. The process enables the company to be made subject to
proceedings, through a voluntary or a court process, on the basis usually
of an insolvency test, with the effect that a moratorium is introduced to
protect the company from actions by its creditors. A qualified business
rescue practitioner is appointed to oversee the operations of the company.
The process involves the preparation and submission to creditors of a
rescue plan which maximises the likelihood of the company achieving
* LLB (Liverpool University); Solicitor of the Supreme Court of England and Wales
(1974–2007); Partner, Slaughter and May,London (1981–2007), member of the International
Reference Teamfor Company Law Reform in South Africa.
375
2010 Acta Juridica 375
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solvency or, if that is not possible, provides a better return for creditors or
shareholders than would occur if the company were to be liquidated. If
the plan is approved by creditors and, where appropriate, shareholders,
and implemented, the formal process is terminated. If the plan or a revised
version of it is not approved, employees, creditors or shareholders may
make an offer to other stakeholders who opposed the plan to purchase
their interests.
The business rescue regime has been developed from similar concepts
in other jurisdictions, in particular in the United States and Great Britain,
and is intended to provide a reasonable balance between the interests of
the debtor company, which is given the opportunity to prepare a rescue
plan with some protection from action by creditors, and the creditors
themselves who have a right to vote on the plan. In many jurisdictions this
is considered a modern approach with a view to giving the company the
opportunity to put itself onto a sound financial footing, thereby saving the
underlying business, with the rights of employees, and for the benefit of
society generally.
The general interpretation section of the new Act states that the new
Act must be interpreted and applied in a manner which gives effect to its
purposes.
1
These purposes include provision for the efficient rescue and
recovery of financially distressed companies, in a manner which balances
the rights and interests of all relevant stakeholders.
2
The detailed provi-
sions contained in the new Act with respect to business rescue, which are
considered in this chapter, must therefore be addressed in the context of
this requirement.
II COMMENCEMENT OF BUSINESS RESCUE
PROCEEDINGS
The proceedings are commenced by resolution passed by the directors of
the company or by a shareholder, creditor, trade union or employee
making an application to the court for an order to place the company into
supervision proceedings.
3
The Act sets out grounds on which there may
be objections to the court by certain interested parties if the proceedings
are commenced by the directors.
4
The Act provides that the Judge
President of the High Court may designate a judge of the court as a
specialist to determine issues relating to commercial matters, commercial
insolvencies and business rescue.
5
The definition of court refers to the
High Court that has jurisdiction over the relevant matter or a designated
1
Section 5(1).
2
Section 7(k).
3
Sections 129 and 131.
4
Section 130.
5
Section 128(3).
376 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY
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judge or another judge of the High Court with jurisdiction who is
assigned to hear the matter.
6
(1) Commencement by resolution of the directors
The board of directors may pass a resolution by majority vote (or by the
majority of the board giving written consent) that the rescue proceedings
should begin and that the company be placed under the supervision of a
business rescue practitioner.
7
The procedures for majority voting are
subject to the Company’s Memorandum of Incorporation providing
otherwise. The board must have reasonable grounds to believe that the
company is financially distressed and there appears to be a reasonable
prospect of rescuing it.
8
In order to be ‘financially distressed’ at any
particular time, it must appear to be reasonably unlikely that the company
will be able to pay its debts as they fall due and payable, within the
immediately following six months, or it appears to be reasonably likely
that the company will become insolvent, within the following six
months.
9
The first of these tests concerns cash-flow insolvency, on the basis of
the company being unable to pay its debt as they fall due. The second is
presumably a balance-sheet test, on the basis that the value of the assets of
the company is less than the amount of its liabilities at any particular time.
The cash-flow test can be the more critical, as it is generally fairly clear
when a company simply cannot meet its liabilities from its cash flow.
However, establishing values for a balance-sheet test at any particular time
can be subject to many variables and uncertainties, for instance the basis of
valuation and whether a guarantee of another company’s debts is treated
as a liability. In addition, the test for financial distress applies on a
day-to-day basis, whereas companies would probably not expect to
prepare balance sheets on a frequent basis. Directors will need to be aware
that, if there is concern about the company’s viability, balance sheets may
need to be prepared on a fairly regular basis. It should, in any event, be
noted that the proceedings may commence, with the right of the
company to be protected from creditors enforcing their rights, a consider-
able time before the company becomes insolvent, either on a cash-flow or
balance-sheet basis.
As described above, there are a number of tests of reasonableness which
have to be satisfied before the directors can commence the proceedings.
Appropriate levels of comfort to meet these tests will have to be obtained
by the directors and a record of how they are satisfied noted appropriately,
6
Section 128(1)(e).
7
Section 129(1).
8
Section 129(1).
9
Section 128(1)(f).
377A CRITICAL ANALYSIS OF THE BUSINESS RESCUE REGIME
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