The Role of Shareholders during Corporate Rescue Proceedings: Always on the Outside Looking In?

• Jurisdiction: South Africa
• Published date: 25 May 2019
• Author: Anneli Loubser
• Pages: 372-390
• Date: 25 May 2019
• Citation: (2008) 20 SA Merc LJ 372

The Role of Shareholders during Corporate

Rescue Proceedings:

Always On the Outside Looking In?*

ANNELI LOUBSER**

University of South Africa

1 Introduction

When a company is wound up for reasons of insolvency, it is obvious that

there will be no funds left to compensate, even partly, its ordinary

shareholders for the loss of their invested funds. One can therefore argue that

it would be a waste of time, effort and money to involve these shareholders in

the winding-up process, because their interest in the company has, in almost

all cases, become a purely academic or theoretical one.

However, on the basis of the same argument, shareholders have every right

and reason to be involved in a corporate rescue procedure, because they have

a real interest in the outcome.

1

A successful rescue will revive their shares and

these shares will regain at least some of their previous value. This is an

important point to keep in mind, because the prof‌ile of the modern company

shareholder is far removed from the traditional one of a wealthy capitalist

who knows the risks involved in investing in a company and can also afford to

lose some money on these investments. The reality of today is that investing

in shares is one of only a few ways to prevent the disastrous and eroding

effects of inf‌lation. Individual shareholding has also increased in South Africa

as a result of demutualisation and the special issue of shares such as Sasol’s

Inzalo shares to historically disadvantaged South Africans.

2

Furthermore,

although the majority of listed shares today are held by institutional investors,

Hill

3

points out that behind the corporate veil of the institutional investor, one

would f‌ind the majority of a country’s working population because their

money is invested in pension funds and other retirement funds. The recent

collapse of Fidentia was a clear illustration of the hardship that the most

vulnerable segments of our society – the widows, orphans and pensioners –

can suffer as a result of corporate failure.

* This article is based on a paper presented at the Corporate Law Teachers Association Annual

Conference held on 3-5 February 2008 in Sydney,Australia.

** BA LLB (UP) LLM (Unisa).Associate Professor, Department of Mercantile Law, College of Law,

University of South Africa.

1

Dan Prentice ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in: Charles

EF Rickett & Ross B Grantham (eds) Corporate Personality in the 20th Century (1998) 99 at 105 refers

to the ‘perverse incentive’ for shareholders to continue trading when a company is insolvent because

‘they have everything to gain and nothing to lose’.

2

See, eg, 10 July 2008 Business Day at 1 on the rush to buy these shares on the last day of the offer

that forced the Post Officeto extend its working hours.

3

Jennifer Hill ‘Changes in the Role of the Shareholder’ in: Rickett & Grantham op cit note 1 175 at

208.

372

(2008) 20 SA Merc LJ 372

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Unfortunately, however, the traditional view in South Africa has always

been that creditors have the most to lose when a debtor becomes insolvent,

and that they should therefore play the most prominent role not only in

insolvency proceedings but also in corporate rescues.

4

Shareholders, on the

other hand, have been afforded the benef‌it of limited liability, and the price

they have to pay for this is that they carry the risk of losing their investment if

the company becomes insolvent. However, this view does not take into

account that major creditors, such as f‌inancial institutions, will invariably hold

some form of security for their claims and would often have no commercial

reasons for supporting a rescue attempt that would merely postpone the

payment of their claims.

5

Furthermore, when judicial management was introduced in 1926, the

concept of business rescue was still fairly unknown and thus viewed with a

certain degree of suspicion. This is ref‌lected in the case law that developed

around judicial management where our courts explained that creditors have

the right to liquidate a company to obtain payment of their debts. As a judicial

management order invariably includes a moratorium preventing creditors

from enforcing their claims, judicial management is therefore an infringement

of the rights of creditors.

6

This resulted in the courts’ adopting the principle,

still applied today, that judicial management is a special and extraordinary

privilege that should be granted only in very special circumstances.

7

A

business rescue procedure dating from that time, such as judicial management

under the Companies Act 61 of 1973, must therefore be expected to show a

def‌inite bias towards protecting the rights of creditors and giving them a

prominent role in the rescue process.

However, the rights of shareholders,

8

particularly when a company fails,

have in recent times received increasing attention,

9

and it is thus appropriate

to look at the role and powers of shareholders when an attempt is made to

rescue the company or its business. This article investigates to what extent the

present system of judicial management allows shareholders

10

to participate

and possibly inf‌luence the outcome of the procedure (or prevents them from

4

See, eg, Mars The Law of Insolvency in South Africa 9 ed (2008) by Eberhard Bertelsmann, Roger

G Evans, Adam Harris, Michelle Kelly-Louw,Anneli Loubser, Melanie Roestoff,Alastair Smith, Leonie

Stander & Lee Steyn at 3.

5

As a result of the moratorium on all actions, proceedings, execution of writs and other processes

against the company which usually forms part of a judicial management order (s 428(2) of the

Companies Act 61 of 1973).

6

See Anneli Loubser ‘Judicial Management as a Business Rescue Procedure in South African

Corporate Law’ (2004) 16 SA Merc LJ 137 at 147-50; Alastair Smith ‘The Major Creditor’s Wishes

Usually Prevail’ (2001) 9 Juta’s Business Law 144.

7

See, eg, Ladybrand Hotel (Pty) Ltd v Segal & Another 1975 (2) SA 357 (O) at 359; Ben-Tovimv

Ben-Tovim & Others 2000 (3) SA325 (C) at 327; Le Roux Hotel Management (Pty) Ltd & Another v E

Rand (Pty) Ltd (FBC Fidelity Bank Ltd (under Curatorship), Intervening) 2001 (2) SA 727 (C) at 739.

8

See Hill op cit note 3 at 190, where she refers to the ‘gradual attenuation’ of the participatory rights

of shareholders in (solvent) companies, a situation which many commentators regard as lamentable.

9

In Australia, eg, the decision in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 started a

large-scale discussion on the nature of shareholders’ claims against the insolvent company.

10

The term ‘shareholders’ will be used interchangeably with the term ‘members’, and both terms

must be understood to have the same meaning for the purposes of this article.

SHAREHOLDERS IN CORPORATE RESCUE PROCEEDINGS 373

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