A critique of rescuing failing businesses: A legal perspective

JurisdictionSouth Africa
AuthorFidelis Manyuchi
Date16 August 2019
Published date16 August 2019
Citation(2015) 1(1) JCCL&P 44
LLM Candidate
University of the Witwatersrand, Johannesburg
Keywords: business rescue, information asymmetry costs,
management of transaction costs, commencement of business
rescue proceedings, ‘reasonable prospect’ of rescuing the company.
The South African legal field has a novel concept of business
rescue. This concept is mainly premised on the management,
by a business rescue practitioner, of transaction costs that cause
business entities to get into financial distress. Through the use
of three case studies, this article introduces and demonstrates
the importance of information asymmetry costs in the business
rescue arena. Information asymmetry costs mainly cause losses to
a business entity and also determine the success of proceedings
towards business rescue, the assumption and execution of the
business rescue plan by the business rescue practitioner. The study
therefore, calls for a holistic approach to business rescue that
combines analysis of transaction costs and information asymmetry
costs throughout the business rescue processes.
This paper focuses on the concept of business rescue. Whilst business
rescue is a legal concept, this study employs modified transaction
costs, contract and institutionalist theories deriving from disciplines
such as economics, law and business studies to build a conceptual
framework and provide a critique of the legal perspective on that
concept. The conceptual framework alludes to the fact that although
businesses or firms are institutions or entities that are inherently
created to transact, they are faced with several transaction costs
such as information, bargaining and observation. Hence it is the
management of these transaction costs that makes an entity succeed
or fall into financial distress. The latter calls for business rescue.
(2015) 1(1) JCCL&P 44
© Juta and Company (Pty) Ltd
A critique of rescuing fAiling businesses: A legAl perspective
The notion of business rescue from a legal perspective involves
understanding the laws governing business entities, the application of
the laws and an examination of the effects of the laws on the entities.1
In South Africa, the guiding statute for this is the Companies Act 71
of 2008, which defines business rescue as proceedings to facilitate
the rehabilitation of a financially distressed company by providing
temporary supervision of the company, temporary moratorium on
the rights of the claimants against the company and the development
and implementation of a business rescue plan. The business rescue
plan should be intended to ensure that the company’s creditors get
better returns from the distressed entity than would result from the
immediate liquidation of the company.2
From the definition, in order for the company to qualify for
business rescue it should be ‘financially distressed’. A company can
be regarded as financially distressed if it appears that the company
will reasonably be unlikely to pay all of its debts as they become
due and payable within the immediately ensuing six months, or if it
reasonably appears that the company will become insolvent in the
immediately ensuing six months.3
Business rescue proceedings can be commenced in two ways.4
These proceedings can be commenced either through a resolution
by the board of directors of the company or by a court order.5 If the
business rescue proceedings are commenced through a resolution by
the board of directors of the company, the procedure stipulated in s
129 of the Companies Act has to be followed and complied with.6
It is important to note that the board of directors cannot adopt the
resolution if the company is under liquidation.7
If the board of directors does not pass a resolution to commence
business rescue proceedings, then an ‘affected person’ may bring
an application to court for the business rescue proceedings to be
* This article is based on research conducted under the supervision of Professor
Tshepo Mongalo in fulfilment of the University of the Witwatersrand’s final year
LLB degree curriculum requirements. My gratitude goes to him for his guidance
and encouragement throughout the writing process.
LLB (Wits).
1 PA Delport & Quintus Vorster Henochsberg on the Companies Act, 71 of 2008 (2011)
ch 6.
2 Companies Act 71 of 2008 s 128(1)(b).
3 Ibid s 128(f)(i) and s 128(f)(ii).
4 DennisDavis, Farouk Cassim, WalterDGeachet al Companies and Other Business
Structures in South Africa 2 ed (2011) 228.
5 Ibid.
6 A Loubser ‘The business rescue proceedings in the Companies Act of 2008:
Concerns and questions (part 1)’ (2010) 3TSAR 501.
7 Act 71 of 2008 s 129(2)(a). See also ABSA Bank Ltd v Makuna Farm CC 2014 (3) SA
86 (GJ) on the meaning of liquidation proceedings.
© Juta and Company (Pty) Ltd

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