Introduction

The Companies Act 71 of 2008 (“Companies Act”) provides the framework to liquidate a company, but also introduced an alternative to liquidation, namely business rescue proceedings – the biggest advantage of a successful business rescue being that the company continues to exist and employees are retained. However, the disadvantage of both of these mechanisms is that the control of the company no longer lies with the directors and is relinquished to an outsider, namely the liquidator or the business rescue practitioner. Furthermore, the fees and costs payable to the liquidator or the business rescue practitioner are also considerable.

If it is intended to secure the continued existence of the business but in a restructured form, section 155 of the Companies Act provides an alternative to both of the above mechanisms: the framework for a company (or a close corporation) to enter into a compromise with its creditors, the result of which is largely the same as a successful business rescue. Given the effect on the economy of the Regulations promulgated to address Covid-19, coupled with the fact that it is illegal for companies to trade when insolvent, the section 155 compromise is an attractive alternative solution to relieve companies of their financial obligations towards creditors and to assist companies in recovering from financial distress.

The section 155 procedure and its advantages

Section 155(1) of the Companies Act provides that a company may engage the procedure set out therein, irrespective of whether the company is financially distressed or not. These principles are equally applicable to close corporations. The rationale behind section 155 is that the majority of businesses should be able to trade themselves into more favourable financial positions upon reaching an agreement with creditors.

In brief, the process entails the board of directors proposing a compromise to the company’s creditors (or to all of the members of a particular class of creditors), achieved via delivery of the compromise – which must contain sufficient detail as prescribed in section 155 to place creditors in the position to assess whether to accept or reject – as well as the notice of the meeting to be convened to consider the compromise. These two documents must be delivered to each creditor. The compromise must be supported by a majority in number, representing at least a 75% in value of the creditors or the class of creditors, present at the meeting and voting either in person or by proxy.

Once the compromise proposal has been adopted by the requisite majority of creditors, the company or close corporation may then apply to court for an order approving this compromise which, if sanctioned by the court, has the effect of making the order final and binding on all the business’ creditors or the members of the relevant class of creditors to whom the compromise is applicable. It is important to note, from a timing perspective, that the court order must be filed at the Companies and Intellectual Property Commission and only as of the date of such filing the court order becomes final and binding as afore-mentioned.

The biggest advantage of the section 155 procedure (and of a successful business rescue) in these turbulent circumstances is the continued existence of the business and the minimisation of job losses in the economy, while the added bonus of the section 155 procedure is that control of the business remains with the directors who are, in theory, in the best position to manage the affairs of the company. Both liquidation processes and business rescue proceedings are expensive and lengthy, thereby making section 155 also a more favourable option. The procedure to adopt a section 155 compromise is also a fairly simple one without much red tape. Not only from the perspective of the employee, but also in the context of South Africa’s extremely high unemployment rate, the section 155 procedure is preferable over liquidating a business.

Conclusion

Although both liquidation and business rescue are appropriate under specific circumstances, when businesses encounter financial distress largely caused by the Regulations restricting trade in light of Covid-19, the section 155 procedure could be the most viable. It could be the most appropriate way for a company to avoid liquidation and the more cost-effective option when compared to business rescue. The restructuring plan will usually be proposed by the board of directors of the company or the members of the close corporation and is available whether the business is solvent or insolvent. However, it must be stressed that the section 155 procedure cannot be utilised if the company or close corporation is already undergoing business rescue – it can be used as an alternative, producing largely the same results under the control of the directors of the company or the members of the close corporation (as the case may be).

From a broader perspective, the continued existence of businesses is crucial at present because of their contributions to the fiscus through taxes and their contributions to the GDP of the country.

Van der Spuy & Partners

in collaboration with Koos van Rensburg, licensed business rescue practitioner

For more information contact our offices:

Tel: 021 860 1240

    Email: vds@vdslegal.co.za