1

BUSINESS RESCUE LEGISLATION:

EFFECTS ON CREDITORS AND THE DISTRESSED COMPANY

By

ABONGILE TSHETE

(43355749)

Submitted in partial fulfilment of the requirements for the LLB degree

BACHELOR OF LAWS

at the

UNIVERSITY OF SOUTH AFRICA (UNISA)

MODULE: RRLLB81 ASSESSMENT 3

SUPERVISOR: MR LC COETZEE

DATE: 30 JUNE 2023

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ACADEMIC HONESTY DECLARATION

I understand what academic dishonesty entails and am aware of Unisa’s

policies in this regard.

I declare that this assignment is my own, original work. Where I have

used someone else’s work, I have indicated this by using the prescribed
style of referencing. Every contribution to, and quotation in, this
assignment from the work or works of other people has been referenced
according to the prescribed style.

I have not allowed, and will not allow, anyone to copy my work with the
intention of passing it off as his or her own work.

I did not make use of another student’s work and submit it as my

own.
NAME: Abongile Tshete
SIGNATURE: ____________
STUDENT NUMBER:43355749
MODULE CODE: RRLLB81
DATE: 30 JUNE 2023

TOPIC SELECTED: Business Rescue

MARK RECEIVED FOR ASSESSMENTS 1: 86%
MARK RECEIVED FOR ASSESSMENT 2: 67%

KEYWORDS
Affected person; Business Rescue; Moratorium; Creditors

LIST OF ABBREVIATIONS AND ACRONYM

Abbreviation Meaning
BRP Business Rescue Practitioner
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Unisa University of South Africa

TABLE OF CONTENTS

Page

Title Page 1

Declaration 2

Keywords 2

List of Abbreviations 2

Table of contents 3

1. Introduction 4

1.1 General introduction 4

1.2 Statement problem and research objectives 5

1.3 Delineations and Limitations 5

1.4 Chapter overview 6

1.4.1 Chapter 1 6

1.4.2 Chapter 2 6

1.4.3 Chapter 3 6

1.4.4 Chapter 4 6

1.5 Research Methodology 6

2. Creditors 7

3. Business Rescue Legislation 9

4. Conclusion 11
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5. Bibliography 12

CHAPTER 1: INTRODUCTION

1.1 General introduction

The legislature introduced and implemented a new business rescue regime in the
South African corporate law in May 2011, the Companies Act of 2008 (herein after
referred to as the “2008 Act”). One of the fundamental 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 which
includes the interests of creditors, shareholders and employees. 1

2
In terms of Section 128(1)(b) of the Act, business rescue is described as follows:

“Business rescue means proceedings to facilitate the rehabilitation of a company that is

financially distressed …”
3
In Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd
the Court interpreted s128(1)(b) to mean that “business rescue” means to facilitate
rehabilitation to achieve one of two goals:

“a primary goal, which is to facilitate the continued existence of the company in a state of
solvency and secondary goal, which is to facilitate a better return for the creditors or
shareholders of the company than would result from immediate liquidation.” 4

“Affected persons” in relation to a distressed company during business rescue

process, mean and includes shareholders or creditors of the company, registered
trade union(s) representing the employees of the company or each and every
employee or their representatives.

The purpose of this research is to explore and consider as to what extent the 2008
Act has been able to achieve the balancing of interests of affected persons in the
business rescue process, more particularly the creditors of the distressed business.
1
Companies Act 71 of 2008 (Section 7k).
2
Section 128(1)(b), Act 71 of 2008.
3
Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539.
4
Oakdene at paragraph 23.
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1.2 Problem Statement and Research Objectives

Despite the introduction of the Act, the business rescue concept has given rise to
many challenges, one of which relates to striking a proper balance between the
competing interests involved during the business rescue proceedings. Over 240
South African businesses have been liquidated so far this year. New data from
Statistics South Africa shows that from the start of January 2023 until the end of
February, 243 businesses have liquidated.5 Businesses across the country have
found themselves between a rock and a hard place, fighting to keep their businesses
running amid current financial crisis that is crippling our economy, with load shedding
being the primary contributor to this crisis. The purpose of this research study is inter
alia:

(a) to explore the provision for the efficient rescue and recovery of financially
distressed companies in a manner that balances the rights and interests of all
relevant stakeholders, and

(b) to investigate whether the legislation has failed or succeeded in striking the
appropriate balance between the protection of the rights of the “affected persons”
during the business rescue process.

1.3 Delineations and Limitations

Although the concept of business rescue is a convoluted topic, this study will be
narrowed to concentrate on business rescue provisions that deals with the rights of
the “affected persons” during business rescue proceedings. The central focus point
of this research will be limited to creditors: -

(a) their rights and the possible effect they have, if any, on other affected person
during the business rescue process;

(b) Whether the legislature has succeeded in striking an appropriate balance

between the protection of the rights of the creditors and the rights of the business in
distress.

5
Businesstech: The Businesses hardest hit by liquidations in South Africa, 28 March 2023.
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1.4 Chapter overview

1.4.1 Chapter 1-Introduction, this chapter introduces the research questions

and how it shall be answered. This chapter further gives a brief background
and indicates the conclusion that will be reached;

1.4.2 Chapter 2- Creditors. In this chapter, creditors as affected persons and

their rights during business rescue process will be discussed, the extent of
their involvement and participation, and, whether business rescue will improve
their position in the corporate rescue regime;

1.4.3 Chapter 3-Business Rescue Legislation, provisions contained in

chapter 6 of the Companies Act 71 of 2008 and other provisions of this Act as
far as relevant to the issues discussed in the preceding chapter(s) regarding
business rescue will be extensively explored.

1.4.4 Chapter 5- Conclusion, this chapter will discuss my findings and

conclusion reached on the balancing exercise and overall conclusion on the
topic at hand.

1.5 Research Methodology

This is a general desk top research which will be conducted on the information
gathered through current legislation, case law, literature in the form of academic
journal articles in print and electronic format.
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CHAPTER 2: CREDITORS

The 2008 Act does not provide a definition of the term “creditor”, and accordingly the
ordinary meaning thereof will apply.6 It is important for this research to establish the
category of persons who qualifies as creditors for purposes of business rescue as it
provides guidance as to the persons whose rights are likely to be prejudiced by the
process.

Levenstein states as follows:

“[the term] ‘pro-creditor’ describes a restructuring regime which favours the interests of the
creditor and the party or entity seeking full recovery of its debts due; and ‘pro-debtor’
describes a regime which favours the interests of the debtor and the ability of such debtor
[…] to continue to trade and preserve its business and jobs and which allows such […] entity
to continue to contribute to the particular jurisdiction`s economy. The pro-debtor regime
leans in favour of the ‘fresh start ‘principles which allow […] corporates to survive and not
end up being sequestrated or placed into liquidation.”7

The 2008 Act8 provides that during business rescue proceedings, no legal
proceedings, including enforcement action, against the company, or in relation to any
property belonging to the company or lawfully in its possession, may be commenced
or proceeded with in any forum except under certain exceptions. This moratorium
effectively gives a company in business rescue process, immunity against claims
from its creditors. In Cloete Murray and Another NNO v FirstRand Bank Ltd t/a
Westbank,9 The Supreme Court of Appeal held that a moratorium on legal
proceedings against a company under business rescue is of cardinal importance
since it provides the crucial breathing space or a period of respite to enable a
company to restructure its affairs, and that moratorium is a cornerstone of all
business rescue procedures.10 Effectively, creditors are prohibited from pursuing
their claims because of this limitation.

6
Delport et al Henoschsberg on the Companies Act 71 of 2008 (2011) at 445.
7
Levenstein Procedure (2019) at 2-5.
8
Companies Act 71 of 2008 Section 133(1).
9
2015 (3) SA 438 (SCA).
10
Silangwe “Affected persons in business rescue proceedings: Has a balance been struck” LLM dissertation
2016 University of Kwa-Zulu Natal at 11.
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Wassman states that while this moratorium may provide some breathing space for
the company to re-arrange its debts and financial structures, it provides no relief for
11
any aggrieved party as the moratorium can potentially continue indefinitely.
However, the legislature has granted creditors general participation rights which
enables them to play an important role in the business rescue process.

During business rescue proceedings, creditor(s) are entitled to notice of, and
participation in each court proceeding, decision, or meeting. They have the right to
vote, to amend, approve or reject a proposed business rescue plan. Creditors may
form a creditors` committee and are entitled to consult with the business rescue
practitioner during the preparation of the business plan, but may not instruct, or
direct the practitioner.12 This, in my view limits their participation powers during the
business rescue process.

Creditors as “affected persons” have a right to apply to court to have the resolution
which initiated the business rescue proceedings set aside, and if the creditors are
successful in their application, the court can make an order placing the company in
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liquidation. In Swart v Beagles Run Investment 25 (Pty) Ltd an application brought
in terms of section 128f of the Companies Act 14 was opposed by the creditors of the
company, who alleged that the application amounted to an abuse of process and it
was an attempt by the respondent to avoid or postpone paying its debts. 15 The court
held, inter alia, that when weighing up the interests of the company and the creditors,
those of the creditors should prevail.16 The court held further that it must be
reasonably probable that the company is capable of ultimate solvency. The court
found that it was not indicated that the granting of business rescue would place
creditors in a better position than they would be, should it be wound up. 17 This
position of reasonable prospect was re-affirmed in Southern Palace Investment18
where the court remarked that when one is faced with the question of whether or not
there is a ‘reasonable prospect’, one needs to look at various factors with each case

11
B Wassman “Business rescue: getting it Right” De Rebus, Jan/Feb 2014:36(2014).
12
Companies Act 71 of 2008 Section 149 (1) (a).
13
Swart v Beagles Run Investment 25 (Pty) Ltd 2011 (5) SA 422 (GNP).
14
Companies Act 71 of 2008.
15
Swart v Beagles 12.
16
Swart v Beagles 41.
17
Swart v Beagle 25.
18
Southern Palace Investment 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC) at
49-50.
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examined on its own merits. These factors must go beyond looking at a mere
possibility of success and the information provided must also go beyond mere
speculation.

Having regard to the above, it is clear that creditors are granted extensive rights in
the business rescue process as the affected persons. It is however important to
weigh these rights against the rights of a company in business rescue as well as the
business rescue legislation. This takes us to the next chapter where I explore the
business rescue legislation itself.

CHAPTER 3 – BUSINESS RESCUE LEGISLATION

The Act states that one of the main objectives with regards to business rescue is
ensuring that the procedure balances the competing interests involved. It is of
importance to note the 2008 Act`s failure to place a clear and definitive time
limitation for termination of business rescue proceedings. The business rescue
proceedings do not have an automatic termination or an allocated time period.
19
Section 132(3) merely requires that, in the event that a company`s business
rescue proceedings should continue beyond 3 months from commencement thereof
(or such longer time as the court may allow upon application by the BRP), the BRP
must prepare and submit a monthly progress report on such proceedings. Even in
the event that the business rescue proceedings do come to an end within a
reasonable time, the provisions of section 150(5)(2)(b) of the Act allows for a
business rescue plan to provide for a moratorium that extends beyond the duration
of the business rescue proceedings. It is my submission in this regard that this failure
to restrict business rescue period whilst the creditors suffer the consequences is
undesirable. Although section 133(3) of the 2008 Act attempts to mitigate the
prejudice which the moratorium may cause to creditors, by providing for a stay on
the computing of the prescription period of such creditors’ claims against the
company, I submit that this provision does not assist to remedying the prejudice and
detrimental effects which creditors may suffer.

19
Companies Act 71 of 2008.
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It is important to note that not all companies are suitable for business rescue, in
some cases business rescue does not seem like a suitable remedy and a
compromise in terms of section 155 of the Companies Act, or perhaps liquidation
could prove more suitable. The suitability of business rescue in respect of a
company will largely depend on the cause of such company`s financial distress. 20
Although section 155 compromise comes without the detrimental effects to creditors
of a moratorium, it allows the financially challenged companies to attain the
discharge of their debts at a compromised amount. The 2008 Act is silent on the
effects of a compromise between creditors and a company in terms of a business
rescue plan. The question that follows would be why a compromise in terms of
section 155 and one in terms of a business rescue plan under section 128 should be
treated differently.

In Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC) it was held that business
rescue proceedings do not affect suretyships, creditors were free to sue the sureties
despite the institution of BRP. The court held that the defence of the moratorium is a
defence in personam and nota defence in rem. This means that the defence can only
be raised by the distressed company but not by the sureties who signed a suretyship
in favour of the distressed company. This create another way of protecting creditors
of a distressed company from losing their claims against sureties. A different
approach was adopted in Tuning Fork (Pty) Ltd t/a Balanced Audio v Jonker 2014 (4)
SA 521 (WCC) where the court held that a creditor loses his claim against a surety
when a business rescue plan is adopted. The court applied the common law on the
reasoning that the Act is silent on the right of a creditor to hold a surety of the
principal debtor liable after the creditor`s claim has been fully settled in the adoption
and implementation of a business rescue plan.

It is clear that the courts have adopted opposing views, holding either that sureties
21 22
are liable or they are exempt from liability. The legislation has couched section
154 in unclear terms through its choice of the word ‘acceded’. Section 154(1)
provides that a business rescue plan may contain a provision or provisions in terms
of which a creditor who has acceded to the discharge of the whole or part of the debt
20
Cassim et al 863.
21
African Banking Corporation of Botswana Limited v Kariba Furniture Manufactures (Pty) Ltd & Others 2013
(6) SA 471 GNP.
22
DH Brothers Industries (Pty) Ltd and Another v Nedbank Limited 2016 (5) SA 503 (SCA).
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owing to that creditor, will lose the right to enforce the debt or part of it. 23 One may
interpret this wording as that in certain circumstances a creditor will not be able to
enforce its debt against a company in business rescue. The question would then rise
as what would happen where that creditor does not accede to the BRP? The court in
DH Brothers answered this question by stating that a business rescue plan may only
specify that a creditor who acceded to the discharge of the whole or part of the debt,
may be deprived of its rights to enforce its claims. Where the business rescue plan
provides for more than voluntary discharge of a whole or part of the debt, it is not
considered valid. 24 In light of the conflicting judgments and unclear legislation, the
position remains uncertain.

CHAPTER 4 – CONCLUSION

Business rescue, which is provided for by the Companies Act, is an attempt to

rehabilitate financially distressed companies by restructuring their affairs. Although
25
the Companies Act has introduced this corporate rescue regime into South African
law, chapter 6 of the Act (which contains the business rescue provisions) fails to
address certain issues. The provisions fail to clearly provide whether creditors lose
their claims against sureties of the company while the company is under business
rescue, and what effect an adopted business rescue plan will have on a creditor`s
right to recourse against sureties of the company. The legislature`s omission to set
clear timeframes for the business rescue proceedings also has detrimental effects on
creditors. Furthermore, the fact that the Companies Act gives the High Court
jurisdiction of the objection applications, I submit that it is an oversight on the part of
the legislature with regards to legal costs involved. The costs issue will be a
deterring factor for creditors who wants to exercise their right to object against the
business rescue proceedings.

Having regard to the provisions of chapter 6 of the Companies Act and the conflicting
judgments from different courts, I submit that the provisions could be more balanced
as that would allow for some flexibility in the process.

23
Section 154(1).
24
DH Brothers at paragraph 67.
25
Act 71 of 2008.
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It has to be noted that the business rescue process is not suitable for all businesses.
For example, South African Airways (“SAA”) was placed under business rescue in
December 2019 and emerged from the process in 2021 and the airline has resumed
flights as a smaller entity. On the contrary, Mango Airlines is still under business
rescue while SA Express`s process has failed and the airline has shut down ahead
of liquidation. The SA Post Office has been recently placed under provisional
liquidation by its creditor with a loss of R2.1 billion for the 12 months ending 31
March 2023 and has been recording losses for 16 consecutive years. 26 With such
dire financial analysis, I do not believe that the business rescue process can save
the SA Post Office.

Some businesses do take advantage of business rescue process and run their
companies into the ground intentionally, taking advantage to force a settlement with
creditors, whilst creditors take the big fall financially. These businesses escape with
a restructured business and the whole process is unfair to creditors. It prevents
competent competition from taking over the sales and building a better industry.

Having regard to conflicting court decisions referred to in this study, some seemingly
protecting the creditor`s interests as against the company`s interests and some
protecting the company in business rescue, I believe that up to now, the legislature
has failed to achieve a proper balance of interests of the parties involved during the
business rescue proceeding. Depending on the particular circumstances of a
company, there is a possibility that a business rescue process will in fact be more
advantageous to creditors and shareholders. A sale of the business to an interested
purchaser would be much quicker, effective and less expensive. Even a compromise
with creditors in terms of section 155 of the Companies Act may in certain
circumstances be more appropriate than business rescue. Therefore, taking all the
above in consideration, it is my submission that the legislation has failed so far in
striking this appropriate balance and more research needs to be conducted and the
legislation amended to provide for a balanced approach in protecting the rights of the
affected persons during the business rescue.

26
Ray Mahlaka, ‘Mail in the coffin? With R5bn owed to creditors, SA Post Offices takes the business rescue
route’ 05 June 2023 (https://www.dailymaverick.co.za).
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BIBLIOGRAPHY

Statutes

Companies Act 71 of 2008

Cases

 African Banking Corporation of Botswana Limited v Kariba Furniture

Manufactures (Pty) Ltd & Others 2013 (6) SA 471 GNP
 Cloete Murray and Another NNO v FirstRand Bank Ltd t/a Westbank 2015 (3)
SA 438 (SCA)
 DH Brothers Industries (Pty) Ltd and Another v Nedbank Limited 2016 (5) SA
503 (SCA)
 Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC)
 Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty)
Ltd and Others 2013 (4) SA 539
 Southern Palace Investment 265 (Pty) Ltd v Midnight Storm Investments 386
Ltd 2012 (2) SA 423 (WCC)
 Swart v Beagles Run Investment 25 (Pty) Ltd 2011 (5) SA 422 (GNP)
 Tuning Fork (Pty) Ltd t/a Balanced Audio v Jonker 2014 (4) SA 521 (WCC)

Books

Cassim et al Contemporary Company Law

Cassim MF et al (eds) “Contemporary Company Law” 2 ed (Juta Cape Town

2012)

Delport Henoschsberg on the Companies Act

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Delport P et al “Henoschsberg on the Companies Act 71 of 2008” (LexisNexis

Durban 211)

Levenstein Procedure (2019) 2-5

Levenstein E “South African Business Rescue Procedure” (2019) Lexis Nexis

SA

Journal Articles

Staff Writer 28 March 2023 Businesstech

Staff Writer “The businesses hardest hit by liquidations in South Africa” 28

March 2023 Businesstech

Wassman 2014 De Rebus

Wassman B “Business rescue – Getting it right” 2014 De Rebus 36

Ray Mahlaka, 05 June 2023 Dailymaverick

Ray Mahlaka ‘Mail in the coffin? With R5bn owed to creditors, SA Post Offices takes
the business rescue route’

Dissertation

Silangwe “Affected persons in business rescue proceedings: Has a balance been

struck” LLM dissertation 2016 University of Kwa-Zulu Natal
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