In terms of the new Company’s Act 71 of 2008 the existing regime of judicial administration of failing companies is replaced by the business rescue regime which is largely self-administered by the company under independent supervision and subject to Court intervention from time to time.

The Chapter recognizes the interests of shareholders, creditors, and employees, and provides for their respective participation in the development and approval of the business rescue plan.



There are two methods of commencing business rescue proceedings 1) By the board 2) by order of court.


Commencement by the Board (s 129)

One of the main objections against judicial management has been that it may be commenced only by an order of Court thereby making the procedure extremely expensive and complicated.  Thus one of the major advantages of the new business rescue provision is that it may be commenced by a resolution of the board of directors without any approval from the shareholders at a general meeting.

The board of directors may pass a resolution commencing business rescue proceedings if the board has reasonable grounds to believe that:

a)    The company is financially distressed

b)    There appears to be  a reasonable prospect of rescuing the company (s 129(1))

 A company is financially distressed if “it appears to be reasonably unlikely that the company will be able to pay its debts as they become due and payable within the next six months; or if it appears to be reasonably likely that the company will become insolvent (i.e. its liabilities will exceed its assets) within the next 6 months”

The company must file the decision with the Commission and within five business days after filing the resolution, appoint a business rescue practitioner to oversee the company and its rescue proceedings.  The business rescue practitioner must provide his / her written consent and must meet the requirements as set out in s 138.

To protect affected persons from abuse of this procedure by the board, section 130 provides that the court may, on application, set aside the resolution, appoint another business rescue practitioner or order the practitioner to provide security.   In terms of S 128(1)(a) an affected person includes shareholders, creditors, trade unions  and any employee who is not so represented.

In terms of Section 129(7) if the board of directors believes that a company is in financial distress but nonetheless decides not to proceed with business rescue proceedings, a notice must be delivered to every affected person explaining why they believe the company is in financial distress and why they have taken the decision not to commence business rescue proceedings.

            Commencement by Order of Court (s 131)

In the event that the company has not taken a resolution as per S 129 an affected person may apply to court for an order placing the company under supervision and commencing business rescue proceedings.  The court may grant such an order of it is satisfied that:

a)    The company is financially distressed; or

b)    The company has failed to pay an amount due to a government authority in terms of a statutory obligation in respect of its employees, such as unemployment insurance or money due in terms of a contractual obligation; or

c)    It is otherwise just and equitable to do so for financial reasons; and

d)    There is a reasonable prospect of rescuing the company

Such an applicant must then serve a copy of the application on the company and the commission and notify each affected person of the application in the prescribed manner.


During proceedings any alteration in the classification or status of any of the issued securities of the company – other than by way of transfer of securities in the ordinary course of business is invalid, except if the court otherwise directs or such alteration is contemplated in and approved in the business rescue plan.

Directors are not relieved from office by business rescue proceedings but must continue to exercise their management functions subject to the authority of the business rescue practitioner, in accordance with his reasonable instructions or direction.  Directors must cooperate with the business rescue practitioner, deliver books and records of the company and within five business days of after the commencement of business rescue proceedings provide the commissioner with a statement of the company’s affairs.

Once a company is under supervision, no legal proceedings may be commenced or continued against the company in respect of its property or property lawfully within its possession, for the duration of the proceedings.  There are however a number of exceptions to this rule:

a)    The business rescue practitioner may provide written consent to commencement or continuation of the action

b)     If the court proves its consent.

c)    If the legal-proceeding is a set-off against a claim made by the company in legal proceedings which  commenced before or after business rescue proceedings began

d)    If the proceedings are criminal proceedings against the company, its directors or officers

e)    If the proceedings concern property or rights held by the company as a trustee.

Business rescue also have two other effects which have become issues of contention.  Firstly, S 135 states that any claims for remuneration or other payments to employees will take preference over all other claims, even those of creditors who provided post-commencement financing to the company. This will make it extremely difficult for a company to obtain any sort of financing during business rescue proceedings. An employee is thus a preferred unsecured creditor in regard to any monies which become due and payable by the company

Secondly, S 136(2), if interpreted literally, would mean that a business rescue practitioner may cancel or suspend any clause in a contract to which the company is a party.  For example the practitioner may cancel a clause in a contract which requires payment by the company in a contract of sale but may still require that the seller to deliver the goods. One can only hope that this was not the intention of those who drafted the legislation and it is thus likely that a court will have to pronounce on this aspect before we can be sure.



One of the main reasons why the judicial management procedure has been considered a failure is because it did not provide for the drafting and execution of a rescue plan.  The Act now prescribes highly detailed and complex requirements for business rescue plan and its approval by the creditors, a great deal of which seems unnecessary and will in all likelihood add significantly to the cost of the procedure.

The business rescue practitioner must convene a meeting of the company’s creditors and other holders of voting rights to consider the rescue plan.  Note that as is the position in insolvency law, secured creditors also have voting rights for the secured part of their claims and not just for the unsecured part. It will be preliminary approved if supported by the holders of 75% of the creditors voting interests that were voted and the votes in support of the plan included at least 50% of the independent creditors voting interests.

If adopted the plan is binding on the company and on all of the creditors and holders of security whether they were present at the meeting or not.

If a business rescue plan is rejected by the creditors the practitioner may either seek approval from the relevant meeting to prepare a revised plan, or inform them that the company will apply to court to have the result of their vote set aside on the grounds that the majority decision was inappropriate.  If the practitioner fails to do either of the above any affected person present at the meeting may ask for approval from the person who have voting rights that the business rescue practitioner be  required to follow one of the above two courses of action.  In the alternative, one or more of the affected person may offer to purchase the voting interests of any of the persons who opposed adoption of the plan.


Business rescue proceedings are brought to an end in one of three ways:

1)    A court order setting aside resolution or order that commenced rescue proceedings or application by practitioner that there is no reasonable prospect of rescue or no financial distress

2)    A notice of termination filed with the Commission because there is no financial distress or rescue plan has been rejected

3)    A business rescue plan has either been implemented (as confirmed in a filed notice) or rejected without any further steps taken.


The structured procedure in the Act is not dissimilar to the informal negotiated rescue proceedings conducted by creditors of a distressed company when they act together to reach a commercial solution to rescue the company and of course there are obvious advantages to such a negotiated rescue plan. How effective these new provisions are ,only time will tell, but from experience I predict they will perform better than the previous judicial management procedure.


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