The requirements of business rescue proceedings in South Africa: a critical analysis of ‘reasonable prospect’ in light of business rescue proceedings in terms of Companies Act 71 of 2008.
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Abstract
This paper will analyse the requirements of business rescue as provided in the Companies Act
71 of 2008 (hereinafter referred to as Companies Act 2008). During the course of the
discussion the paper will also provide an analysis of the ways in which the Courts have
specifically interpreted the phrase ‘reasonable prospect’ of rescuing a company as provided in
section 129(1) of the Companies Act 2008.
The provisions of business rescue apply to all the companies and close corporations which in
terms of the Companies Act 71 of 2008 are financially distressed.1 In terms of the Companies
Act 71 of 2008, the company is financially distressed at any time if it reasonably appears to
be unlikely that the company will be able to pay its debts when they become immediately due
and payable within the ensuing six months,2 or it appears to be reasonably likely that the
company will become insolvent immediately within the ensuing six months.3 The main
objective of the business rescue is to ensure that companies do not immediately get liquidated
when they are in financial difficulty. The business rescue provisions aim at rendering it
possible for the companies under financial constrains to be reinstated to commercial
viability.4
The Companies Act 2008 provides two pathways in which business rescue may be initiated.
The first one is by a resolution of the board of directors of the company. The board of
directors will adopt this resolution if there are reasonable grounds to believe that the company
is financially distressed and that there is a reasonable prospect that the company will be
rescued if it is placed under business rescue5. The second way in which business rescue
proceedings may be initiated is when an affected person applies to court and seek an order
placing the company under business rescue proceedings.6
The Companies Act 2008 has provided a new test under which the company may be placed
under business rescue proceedings. The test is a requirement of reasonable prospect which has been considered to be a more lenient test by our courts.7 The Companies Act 61 of 19738
(hereinafter referred to as Companies Act 1973) did not use the phrase reasonable prospect.
Instead, this act used the phrase ‘reasonable probability’ in respect of rescue proceedings
which was referred to as judicial management. The Companies Act 1973 provided that ‘when
any company by reason of mismanagement or for any other cause a company is unable to pay
its debts or is probably unable to meet its obligations; and has not become or is prevented
from becoming a successful concern, and there is a reasonable probability that, if it is placed
under judicial management, it will be enabled to pay its debts or to meet its obligations and
become a successful concern, the court may, if it appears just and equitable, grant a judicial
management order in respect of that company’.9
The courts were faced with difficulties when interpreting the phrase reasonable probability.
This was consequently due to the fact that the Companies Act 1973 did not provide for the
meaning of the phrase reasonable probability. This issue has found its way in the new Act as
well, although phrases are defined in chapter 6 of the Companies Act of 2008, the phrase
reasonable prospect is not defined in the Companies Act 2008. This has given rise to
difficulties to the courts when interpreting this phrase and has led to inconsistent
interpretation amongst different jurisdictions in the country.
This paper therefore aims at analysing the requirements of business rescue proceedings, why
there was a need for incorporation of business rescue provisions in the Companies Act of
2008, discuss the reasons for the failure of judicial management and to look at how the
Courts have interpreted the phrase ‘reasonable prospect’ of rescuing a company as provided
in section 129(1) of the Companies Act of 2008.
Description
Masters Degree. University of KwaZulu-Natal, Pietermaritzburg.