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Business rescue proceedings and the new Companies Act - International Law Office

International Law Office

Insolvency & Restructuring - South Africa

Business rescue proceedings and the new Companies Act

January 11 2013

Introduction
Operation of business rescue proceedings
The courts
Comment



Introduction

The remedy of judicial management was originally introduced in South African law under the Companies Act 1926 and retained in the 1973 act with the hope of restoring companies in financial distress to successful concerns. However, in practice, judicial management has been "a spectacular failure",(1) invariably being followed by the winding up of the company in question with the attendant collateral damage.

The advent of the new Companies Act (71/2008) brought with it the novel addition of an alternative route to the traditional one of liquidation. In an attempt to modernise its business law and avoid the deleterious consequences of liquidation, South Africa has now adopted and developed a business rescue regime similar to those found in foreign jurisdictions, most notably the United Kingdom and the United States.

One of the purposes of the act is to "provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders".(2)

Two imperative jurisdictional facts must be established in order to achieve a successful business rescue:

  • The company seeking rescue must be 'financially distressed', as opposed to companies that are insolvent. A company is deemed to be 'financially distressed' when it appears to be reasonably unlikely that:
    • it will be able to pay all its debts as they fall due and payable over a six-month period; or
    • it will become insolvent within the ensuing six months;(3)
  • There must exist a "reasonable prospect for the rescuing of the company".

Materially different from the requirements for a supervision order under the judicial management model, the act essentially creates a mechanism by which a company experiencing financial difficulties may be salvaged by being reorganised, have profitability restored and avoid going into liquidation (where creditors and suppliers are left unpaid and without recourse), and provides essential "breathing space"(4) to a company while a business rescue plan is implemented by the business rescue practitioner.

Operation of business rescue proceedings

The general notion of the business rescue model is the recognition of the value of the business, rather than the juristic person itself, as a going concern. In attempting to secure and balance the opposing interests of creditors, shareholders and employees, the new provisions evidence a shift from creditors' interests to a broader range of interests.

Two facets of the business rescue provisions in the act deserve mention due to their innovative nature:

  • The act permits a company to place itself under voluntary business rescue by passing a resolution of its own board. In the absence of a resolution, the court may, on application of a company or an affected person (ie, a shareholder, a creditor or an employee), place the company under supervision and commence business rescue proceedings. A company may not be placed under business rescue in either of the above instances unless it is financially distressed and there is a reasonable prospect of the company being rescued.
  • One of the effects of a company being placed under business rescue is that a statutory moratorium against the institution of legal proceedings (including enforcement action) against the company is put in place and creditors are accordingly barred from having the property of the company attached and sold in execution. However, South African courts are careful not to allow the procedure to be used where it appears that there may be an ulterior motive; it must be shown by the relevant applicant that the purpose of the business rescue is to achieve the aims of the statutory remedy, as opposed simply to evading creditors.(5)

During this necessary breathing space, a business rescue plan is implemented and a business rescue practitioner is appointed and given full control of the company. In contrast to judicial management, although the practitioner has full management control of the company, it will not replace the existing management, but rather will work with the management structure in place. It is thought that this factor alone increases the possibility of the success of the business rescue model.(6)

If after consideration of the company's affairs, business and financial situation, the practitioner opines that a rescue of the company is unachievable, an application is brought to court for an order discontinuing the business rescue proceedings and placing the company into liquidation.

The courts

Although the act is comprehensive, in the short time since it was promulgated a handful of issues have come before the courts for interpretation and decision.

In interpreting the meaning of a 'reasonable prospect' for the rescue of a company, the court in Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd(7) found that this requirement was less onerous than that prescribed in the previous company law disposition, signalling a deliberate abandonment of the earlier limited form of corporate rescue. This view has been endorsed in all subsequent reported decisions. However, notwithstanding the lower threshold imposed by the new act, it was still within the court's discretion to dismiss the application for business rescue.

In the limited number of reported cases to date, it has been held on more than one occasion that in order to succeed in an application, the applicant must provide cogent evidence to support the existence of a reasonable prospect that the desired business rescue objective can be achieved,(8) or alternatively that business rescue will at least yield a better return to creditors than immediate liquidation.(9) Vague and speculative averments on the likely outcome on which a court cannot possibly make the required determination of a reasonable prospect that the statutory objective could be achieved will not suffice.

Two cases before the judiciary considered whether the best results would be obtained by a liquidator selling the immovable property (being the only major asset of the company) or whether a business rescue practitioner would be able to achieve a better return for creditors.(10) The latter route, it was held in both instances, was a permissible objective in terms of the act, although each case was decided on its own merits.

Comment

While the full effect of the business rescue regime is yet to be tested, it is expected to have a substantial impact on corporate South Africa(11) and to provide a practical mechanism that has a significant chance of succeeding.(12) It is evident from the provisions of the act that the survival of the company is of paramount importance, and that all stakeholders are provided formal recognition in partaking in court proceedings – to the extent allowed by the act – in ensuring this objective.(13)

More than 10 years into South Africa's democracy, it appears as though Parliament has taken the view that corporate law should be considered against the dictates of the Constitution. Accordingly, the act must be interpreted in line with the promotion of economic development in its entirety, while simultaneously encouraging entrepreneurship and flexibility in the maintenance of companies.(14)

For further information on this topic please contact Gerhard Rudolph or Roxanne Francis-Pope at Baker & McKenzie by telephone (+27 11 911 4300), fax (+27 11 784 2855) or email (gerhard.rudolph@bakermckenzie.com or roxanne.francis-pope@bakermckenzie.com).

Endnotes

(1) Anthony Smits "Corporate Administration: A Proposed Model" (1999), 32 De Jure 80.

(2) Section 7(k) of the act.

(3) Section 128(f) of the act.

(4) Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd [2012] JOL 28893 (WCC) at 1.

(5) Southern Palace Investments 265 (Pty) Ltd supra 2; ABSA Bank Limited v Newcity Group (Pty) Ltd [2012] JOL 29353 (GSJ).

(6) Jeffrey Salant "Business rescue operations and the new Companies Act", De Rebus, August 2009 [accessed electronically].

(7) [2012] JOL 28893 (WCC).

(8) Koen v Wedgewood Village Golf & Country Estate (Pty) Ltd [2012] JOL 29024 (WCC); AG Petzetakis International Holdings Ltd v Petzetakis Africa (Pty) Ltd [2012] JOL 28598 (GSJ).

(9) Petzetakis International Holdings Ltd supra para 17.

(10) Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd 2012 (3) SA 273 (GSJ) and Zoneska Investments (Pty) Ltd t/a Bonatla Properties (Pty) Ltd v Midnight Storm Investments 386 Ltd [2012] JOL 29438 (WCC).

(11) Michael Katz, "A Practical Guide to the Implications of the Companies Act", De Rebus, September 2010.

(12) Salant, De Rebus supra.

(13) Salant, De Rebus supra.

(14) Nedbank Ltd v Bestvest 153 (Pty) Ltd [2012] 4 All SA 103 (WCC) at para 18.


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