A critique of rescuing failing businesses: A legal perspective

• Jurisdiction: South Africa
• Author: Fidelis Manyuchi
• Date: 16 August 2019
• Published date: 16 August 2019
• Pages: 44-62
• Citation: (2015) 1(1) JCCL&P 44

44

A CRITIQUE OF RESCUING FAILING

BUSINESSES: A LEGAL PERSPECTIVE*

FIDELIS MANYUCHI†

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.

ABSTRACT

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.

I INTRODUCTION

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

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45

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.

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