BUSINESS ENTITIES LAW

BUSINESS RESCUE

LEARNING OUTCOMES:
After completion of this unit, you should be able to explain:
1. The concept of business rescue, its commencement, legal
consequences of commencement of business rescue proceedings,
2. The business rescue practitioner, rights of creditors, the business
rescue plan; and ultimately termination of rescue proceedings
I DECLARE BUNKRUPTCY

Business Rescue

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EXAMPLES OF SUCCESSFUL BUSINESS RESCUE IN RECENT
YEARS

DELTA AIR LINES AND UNITED AIRLINES

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SAA
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Questions and Discussion
Business Rescue

Agenda

1. Introduction
2. The meaning of business rescue
3. Commencement of business rescue through board resolution
4. Court order to commence business rescue proceedings
5. Legal consequences of business rescue proceedings
6. The business rescue practitioner
7. The rights of creditors during business rescue proceedings
8. The business rescue plan
9. Termination of business rescue proceedings
Introduction

• Aims of the Business Rescue session:

• To consider the circumstances under which companies may be rescued,

• To evaluate the process and consequences of business rescue, and

• To interrogate the termination of business rescue process

Introduction (Cont.)

• Regulation of Business Rescue:

• Business rescue proceedings are set out in chapter 6 of the Companies Act,
2008;

• The philosophy behind business rescue is captured in section 7(k) of the

Companies Act:
• to provide for the efficient rescue and recovery of financially distressed companies,
in a manner that balances the rights and interests of all the relevant stakeholders’

• The reasoning is to provide temporary assistance to companies in financial

difficulties, so that they may emerge from financial distress, to operate
profitably.
The meaning of business rescue

• This is provided for in section 128(1)(b) of the Companies Act.

• Business rescue means, proceedings to facilitate the rehabilitation of a

company that is financially distressed by providing for the following:

• A temporary supervision of the company, and of management of its affairs,

business and property;
• A temporary moratorium on the rights of claimants against the company or in
respect of property in its possession; and
• The development and implementation, if approved, of a plan to rescue the
company by restructuring its affairs, business, property, debt and other liabilities,
and equity in a manner that maximises the likelihood of the company continuing in
existence, results in a better return for the company’s creditors or shareholders
than would result from the immediate liquidation of the company.
The meaning of business rescue (Cont.)

• The two goals of business rescue are:

• ‘to maximise the likelihood of the company continuing in existence’ (primary

goal) and
• ‘to result in a better return for the company’s creditors or shareholders than
would result from the immediate liquidation of the company’ (secondary goal).
• Any one of the two goals constitutes valid ground for the
commencement of business rescue proceedings.:

• Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd,
2013 (4) SA 569 (SCA)[23].

• The two goals referred to in section 128(1)(b) rank equally.

Commencement of business rescue through board resolution

• The board may take a resolution that the company voluntarily begin business rescue
proceedings: (S129(1)

• The resolution by the board may be taken if

• the board reasonably believes that the company is financially distressed and
• there appears to be a reasonable prospect of rescuing the company

• No approval by shareholders is required to commence the proceedings and the general meeting
is also not authorised to take such a resolution.

• The responsibility to commence proceedings in terms of section 129(1), lies strictly with the
board of directors.

• Board’s failure to adopt a resolution to rescue a company even if it believes the company is in
financial distress triggers a notice requirement to all affected persons (s 129(7))

• What effect do you think this notice will have on the business of the company and its creditors?
Commencement of business rescue through board resolution

• Abuse of the procedure by company boards may result.

• Section 130 provides safeguard mechanisms through which affected

persons may approach the court for various orders.

• The court may set aside the resolution or appoint another business rescue
practitioner.

• In terms of the definition in section 128(1)(a),

• any shareholder or creditor of the company,
• a registered trade union representing employees of the company, and
• any individual employee who is not so represented,

• Qualify as affected persons and may thus bring such an application.

Commencement of business rescue through board resolution
(Cont.)

• Power of the board to pass a resolution to commence business

rescue is not unqualified.
• May the board of directors commence business rescue proceedings
after liquidation proceedings have been initiated against a company?

• Commencement of business rescue proceedings by a board resolution is no

longer possible after liquidation proceedings have been initiated by or against
the company (section 129(2))

• even if the liquidation application has only been launched and long before any
liquidation order is made, a resolution by the board of directors to place the
company in business rescue is not possible.
Court order to commence business rescue proceedings

• In terms of section 131(1) of the Companies Act,

• Each affected person has a right to participate in the hearing of this application.
• The court may upon considering an application brought in terms of section 131(1),
make an order placing the company under supervision and commencing business
rescue,
• if the court is satisfied that any of the grounds provided for in terms of section
131(4)(a), are met.

• If the court is not satisfied that the application brought in terms of section 131(1)
meets the grounds enumerated in section 131(4)(a), the court may dismiss the
application.

• Proceedings under this section may only be brought by affected persons.

• The company or directors may not apply, as section 129 already provides the
company or its directors, with the legal standing to commence proceedings.
Court order to commence business rescue proceedings
(Cont.)

• The two alternative grounds upon which a section 131(1) applicant

may rely, instead of proving financial distress
• Failure to pay over any amount in terms of an obligation under or in terms of a
public regulation
• It is otherwise just and equitable to do so for financial reasons.
• Also note the provisions of section 31(3) in terms of which a trade
union may demand access to a company’s financial statements for
purposes of applying for an order commencing business rescue
proceedings.
Court order to commence business rescue proceedings
(Cont.)
• Activity

• On 05 June 2023, The South African Lawyer reported that “[t]he SA Post
Office (Sapo) – which was put in provisional liquidation in February [2023]
– is applying to the courts to be placed in business rescue, enabling it to
avoid further lawsuits by unpaid creditors and perhaps escape liquidation.
• According to a Business Day report of the same day, Post Office
spokesperson Suzie Khumalo said a formal application has been made for
business rescue, with a court hearing set down for 4 July 2023.
• This came after Communications & Digital Technologies Minister Mondli
Gungubele told the SOE’s provisional liquidators by letter in May the
Cabinet supported the move.
• He urged them not to make any ‘precipitous decisions’ that might lead to
Sapo going under.
Court order to commence business rescue proceedings
(Cont.)
• Activity (Cont.)

• The letter, which formed part of court documents, also said should
the business rescue process proceed, the R2.4bn bailout announced
by the Treasury in February would be made available to Sapo,
possibly along with additional funds, which will require Parliament’s
approval.”
• The application was granted on 10 July 2023 by Judge Professor
Elmarie Van der Schyff in the Gauteng Division of the High Court,
with Notices to abide being filed by the Municipal Employees Pension
Fund and Chrisal Investments, two of Sapo's creditors, and Sapo's
provisional liquidators, the second and third respondents
Legal consequences of business rescue proceedings

• The duration of Business Rescue

• Section 132(1) deals with when the business rescue proceedings

begin and subsection (2) details scenarios for ending/terminating
the business rescue proceedings whereas subsection (3) provides
the duration of the business rescue proceedings.
• Focus is on subsection (3), which provides that :
• if a company’s business rescue proceedings have not ended within three
months after the start of the proceedings or “such longer time as the court, on
application by the practitioner, may allow”
• Does this indicate that the business rescue proceedings end within three
months?
• Is this period reasonable, given the nature of the process?
Legal consequences of business rescue proceedings

• The duration of Business Rescue (Cont.)

• The duration appears to be what the statutes authoritatively set, unless

application has been made to Court

• The Commission’s mandate is not to draft policy but to implement policies.

• In Koen and Another v Wedgewood Village Golf and Country Estate (Pty) Ltd and
Others 2012 (2) SA 378 (WCC), the court highlighted:
• the need for a speedy conclusion of the business rescue proceedings and confirmed that
strict timelines imposed by the legislation is indicative of such urgency

• In Welman v Marcelle Props and Another (2012) 1 (ZAGPJHC), Tshoka J,

commented that the success of any business rescue rests on the hope that
matters will be settled speedily.
Legal consequences of business rescue proceedings
• Section 133 provides for a moratorium on legal proceedings against a company in business rescue.

• The importance of a moratorium is that it protects a company from any legal proceedings that may
arise, while the company is trying to regain its viability.

• Section 133(1) provides that:

• no legal proceeding, including enforcement action , against the company, or in relation to any property of the
company, or lawfully in its possession, may be commenced or proceeded with in any forum.
• Section 133(1)(a)-(f) provides for exceptions under which this principle may not apply.
• This provision has been the subject of legal uncertainty, due to the fact that the Companies Act does
not define the phrase ‘legal proceedings’.

• In absence of the legal definition, various court pronouncements were made regarding its
application and interpretation.
• In LA Sport 4x4 Outdoor CC v Broadsword Trading 20 (Pty) Ltd (A513/2013) [2015] ZAGPPHC 78 (26 February
2015), the court held that the term ‘legal proceeding’ was held to include a termination of a contract during business
rescue proceedings.
• In Cloete Murray NO v FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA) [33], the issue for consideration was
whether a creditor of a company under business rescue could unilaterally cancel an extant instalment sale agreement
concluded with the company prior to the company commencing business rescue.
• The SCA held that such a contract may be cancelled by the creditor while the moratorium is in place, as a
cancellation of a contract is neither a ‘legal proceeding’ nor an ‘enforcement action’. This is because cancellation of a
contract is a unilateral act of a party to an agreement which does not occur in any forum, namely, a court or tribunal.
Legal consequences of business rescue proceedings
• Two very contentious provisions are also mentioned in this part of the
discussion.
• Firstly, section 135 provides that any claims for remuneration or other
payments that become due to employees during business rescue
proceedings will enjoy preference above all other creditors’ claims,
even above those of secured creditors who provided post-
commencement financing to the company.
• Only the business rescue practitioner’s claims for remuneration and
expenses, and other claims for costs of the business rescue
proceedings, rank higher than the claims of employees.
• It remains to be seen whether a company will be able to obtain any
financing during business rescue proceedings under these conditions.
Legal consequences of business rescue proceedings
• The second issue deals with section 136(2), which gives a business
rescue practitioner the power to suspend, for the duration of the
business rescue proceedings, any obligation of the company in a
contract (except an employment contract or a contract to which ss 35A
or 35B of the Insolvency Act apply) to which the company is a party,
• for example by suspending the clause that requires payment by the company in a
contract of sale, but demanding delivery of the goods, or suspending the clause
requiring the provision of security by the company for a loan, but insisting on the
loan being made.
• The business rescue practitioner may also apply to court for an order
to entirely, partially or conditionally cancel any agreement to which the
company is a party, on any terms that are
• just and reasonable in the circumstances.
The business rescue practitioner
• The provisions of section 138 regulates the qualifications of a business
rescue practitioner.
• A business rescue practitioner plays an important part in the
proceedings.
• Section 138(1) requires a person eligible for appointment as a business
rescue practitioner, to be a member in good standing of the legal,
accounting or business management profession, or he/she must be
licensed by the Commission.
• Although the Companies Act does not prescribe the exact educational
qualifications that the practitioner needs to qualify as such, the success
of the proceedings hinges upon the practitioner’s skill, experience and
competency. A practitioner may be appointed in a variety of ways.
• Once appointed, a practitioner has full managerial control of the
company.
The rights of creditors during business rescue proceedings
• As affected persons during business rescue proceedings, creditors have a number of
rights, which affords them the ability to influence the outcome of the proceedings.
• In terms of section 145, creditors of the company are entitled to be notified of each
court proceeding, decision, meeting pertaining to the proceedings.
• They have a right to participate in any court proceeding arising during business
rescue proceedings; and to informally participate in a company’s proceedings by
making proposals for a business rescue plan to the practitioner.
• Creditors have a right to form a creditors committee, through which to exercise their
rights and to be consulted by a practitioner during the developmental stages of the
business rescue plan.
• Most importantly, the practitioner must convene the first meeting of creditors,
following the practitioner’s appointment, in terms which, the practitioner informs the
creditors if there exists a reasonable prospect of rescuing a company.
• It is in this meeting, held in terms of section 147, that the practitioner receives proof
of claims by creditors, and the creditors determine whether or not there is a need for
a creditors committee, and if so, to appoint members of such a committee.
The business rescue plan
• It is the duty of a business rescue practitioner to prepare a business rescue plan.
• Section 150(1) provides that the practitioner must prepare the plan after consultation
with other affected persons, and the management of the company.
• The business rescue plan must contain all the relevant information required to assist
the affected persons in deciding whether or not to accept or reject the plan.
• The plan is divided into three parts, which must be presented in the following
manner:

• Part A- provides the background of the plan

• Part B- contains the proposals
• Part C- contains the assumptions and conditions

• It is important to note that a practitioner cannot proceed to adopt or amend a rescue

plan, without consultation with the affected persons.
• Affected persons have a right to challenge the adoption of a rescue plan if it fails to
meet the substantial requirements of the Companies Act.
Termination of business rescue proceedings
• Business rescue proceedings are terminated in any of the following
ways:

• By an order of court setting aside the resolution or order that commenced the
proceedings
• By the court converting the proceedings into liquidation proceedings
• By the practitioner filing a notice of termination of rescue proceedings with the
CIPC
• By adoption and substantial implementation of the rescue plan, as duly confirmed
by the practitioner through filing of a notice to that effect, or
• By a rejection of a rescue plan and no affected person has subsequently filed a
notice to extend the proceedings.
Questions and Discussion
Business Rescue and the Companies Amendment Act,
2024: Courtesy of Fasken presentation by Mr. Haroon
Laher (Partner) at Companies Amendment
Bills Update: Company
Law and Corporate
Restructuring Seminar
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