The Leak in the Chapter 6 Lifeboat: Inadequate Regulation of Business Rescue Practitioners May Adversely Affect Lenders' Willingness and the Growth of the Economy

• Jurisdiction: South Africa
• Citation: (2010) 22 SA Merc LJ 195
• Published date: 25 May 2019
• Author: Richard Bradstreet
• Pages: 195-213
• Date: 25 May 2019

The Leak in the Chapter 6 Lifeboat: Inadequate

Regulation of Business Rescue Practitioners

May Adversely Affect Lenders’ Willingness and

the Growth of the Economy*

RICHARD BRADSTREET**

University of Cape Town

1Recent Corporate Rescue Reform in South Africa

The Companies Act 71 of 2008

1

(‘Companies Act 2008’) provides in its

Chapter 6 (‘Chapter 6’) for ‘business rescue’.

2

This procedure is intended to

provide for temporary measures to facilitate the rehabilitation of f‌inancially

distressed companies. During business rescue, the company’s management

will be under supervision and a moratorium on the rights of claimants against

the company will operate. The rescue itself will be effected by a ‘business

rescue plan’ provided for in theAct,

3

in terms of which the company’s affairs,

business, property, debt and other liabilities and equity will be restructured

‘in a manner that maximises the likelihood of the company continuing in

existence on a solvent basis or, [if this is not possible], results in a better

return for the company’s creditors or shareholders than would result from the

immediate liquidation of the company. ..’.

4

These provisions, based on the improvements made in foreign

5

jurisdic-

tions,

6

will replace Chapter XV of the current Companies Act 61 of 1973

* This article is based on a research paper evaluating creditor protection under South Africa’s new

corporate rescue regime submitted in fulf‌ilment of the University of Cape Town’s f‌inal-year LLB

curriculum requirements. The original paper was conducted during 2009 under the supervision of

Graham Bradf‌ield, to whom I am most grateful for his invaluable guidance throughout.

** BALLB (UCT). Currently completing an LLM in Commercial Law at the University of Cape

Town.

1

Act 71 of 2008 was signed by the State President on 8 April 2009 and published in Government

Notice 421 Government Gazette 32121 of 9 April 2009 and, at the time of writing, is expected to come

into operation in the second half of 2010.

2

Chapter 6 uses the more inclusive term ‘business rescue’ rather than ‘corporate rescue’. Although

these terms are often used interchangeably, the term ‘corporate rescue’might arguably be more accurate

as referring specif‌ically to the rescue of corporate entities than the term ‘business rescue’, which might

be considered to refer more broadly to include the rescue of business debtors that are not corporate

entities. However, it is perhaps worth noting that in these rescue mechanisms the real emphasis falls less

on the survival of the juristic person and more on that of the ‘enterprise and the real business carried on

by the juristic person, in whole or part’ so that the term ‘business rescue’, even in the context of

corporate legislation, might be considered more apt. See P Omar ‘Thoughts on the Purpose of Corporate

Rescue’ (1997) 12(4) Journal of International Banking Law 127 at 127; P Kloppers ‘Judicial

Management – A Corporate Rescue Mechanism in Need of Reform?’(1999) 3 Stellenbosch LR 417 at

418.

3

Part D of Chapter 6 deals with the development and approval of the business rescue plan.

4

Section 128(1)(b).

5

In particular, the United States of America,Australia and the United Kingdom.

6

Despite warnings such as that issued by A Loubser ‘Judicial Management as a Business Rescue

Procedure in South African Corporate Law’(2004) 16 SA Merc LJ 137 at 162, where the author suggests

195

(2010) 22 SA Merc LJ 195

© Juta and Company (Pty) Ltd

(‘Companies Act 1973’), which provides for what is currently the equivalent

of business rescue, referred to as ‘judicial management’

7

of f‌inancially

distressed companies.

8

The reform of this aspect of companies legislation in South Africa both

addresses the need to reform the unsuccessful current judicial management

mechanism

9

and ref‌lects a trend evident worldwide

10

to implement rescue

mechanisms for f‌inancially ailing companies rather than simply provide for

their demise through liquidation.

11

The trend to rescue arises from an increasing recognition of the value in

many instances to creditors and other stakeholders such as employees of ‘the

revival of companies on the brink of economic collapse and the salvage of

economically viable units to restore production capacity, employment and the

continued rewarding of capital and investment’.

12

This growing recognition is

prompted, at least in part, by a global increase in corporate insolvencies in the

twentieth century.

13

The reform initiatives in response to this factor,

particularly in the United Kingdom and Australia, indicate a move away from

that judicial management be amended rather than replaced, partly because a new procedure derived

from another legal system imposed on South African law may not suit the circumstances peculiar to our

system of law.

7

First introduced in South Africa in the CompaniesAct 46 of 1926 and left largely unchanged in the

Companies Act 61 of 1973, despite strong criticism. Yet the origins of judicial management may be

traced as far back as the Roman-Dutch reception period (see Johan Henning ‘Judicial Management and

Corporate Rescues in South African Law’in: H Rajak (ed) Insolvency Law: Theory and Practice (1993)

302 at 304, research kindly mentioned to me by Prof Harry Rajak).

8

Whereas eligible debtors in terms of the Companies Act 1973 were limited to companies registered

in terms of that Act, the Companies Act 2008 extends access to, theoretically, any form of business. It

seems, however, that the intention is similarly to restrict access in terms of the 2008Act and regulations

to the forms of companies provided for in the Act. The terms ‘company’and ‘business’ have been used

loosely throughout this article.

9

This need has long been recognised. See AOlver ‘Judicial Management – A Case for Law Reform’

1986 Tydskrif vir Hedendaagse Romeins-Hollandse Reg 84 at 86 and Le Roux Hotel Management (Pty)

Ltd & Another v E Rand (PTY) Ltd (FBC Fidelity Bank Ltd (under Curatorship), Intervening) 2001 (2)

SA 727 (C) in par 55 where Josman J states:

‘The review of the cases reveals the limited scope of judicial management in this country.

Mr Steenkamp, in a very able argument, urged me to try to breathe some new life into this

moribund old horse and to take a cue from developments in other parts of the world. Clearly one

has to take note of the fact that in the f‌irst world countries referred to above, the need for a business

rescue provision in company law has been recognised. Nor can one overlook the distinct possibility

that the f‌lourishing economies in the countries mentioned might have something to do with the

progressive attitude adopted towards assisting an enterprise that encounters difficulty which is

capable of being overcome.’

10

Colin Anderson & David Morrison ‘The Commencement of the Company Rescue: How and When

Does It Start?’ in: PJ Omar (ed) International Insolvency Law: Themes and Perspectives (2008) 83 at

83, noting that

‘the spread of the so called ‘‘rescue culture’’in insolvency has been a recognisable trend across

jurisdictions in recent times’ and that ‘it is difficult to f‌ind a developed economy where there has

not been at least some consideration given to implementing a specif‌ic updated rescue regime aimed

at salvaging the corporate structure in certain circumstances of insolvency’.

11

Corporate rescue provides an alternative to using insolvency laws to convert a debtor’s assets to

cash by ‘restructuring the f‌inancial structure of the debtor involving the issuance of new debt and equity

in accordance with the claimant’s priorities’ (ASmits ‘Corporate Administration: AProposed Model’

(1999) 32 De Jure 80 at 81).

12

See the def‌inition of corporate rescue in Omar op cit note 2 at 127.

13

Kloppers op cit note 2 at 418.

(2010) 22 SA Merc LJ196

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