Insolvency & Business Rescue

Your best interests are our primary concern.

General

South African insolvency law regulates three main types of insolvency proceedings:

  1. Sequestration of personal estates
  2. Winding-up of companies
  3. Winding-up of close corporations

In addition, the law regulates proceedings which are aimed at rescuing businesses in dire financial straits.

Sub-fields

  • Liquidations
  • Sequestrations
  • Business rescue

Legislation

  • Insolvency Act, Act No. 24 of 1936
  • Companies Act, Act No. 61 of 1973
  • Companies Act, Act No. 71 of 2008

Case Law

Even though a company remains the owner of its assets, the custody and control of those assets vest in the Master of the High Court and then later in the liquidator. This applies regardless of the prestige or commercial or sentimental value of an asset. In South African Reserve Bank v Leathern 2021 (5) SA 543 (SCA), the Supreme Court of Appeal emphasised the principle that it is only those assets which belong to the company which vest in the liquidator. Assets which may be in the possession of the company but belonging to a third party, or assets in respect of which the company has control but which do not belong to the company, do not vest in the liquidator.

Frequently asked questions

Your Title Goes Here

Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

What is liquidation?

The objective of liquidation proceedings is fundamentally different from that of business rescue proceedings. Liquidation proceedings are not aimed at rescuing a financially struggling company, but rather to permanently end the company. It is important to note that liquidations of insolvent companies are still done in terms of the Companies Act 61 of 1973 (hereinafter referred to as “the Old Act”).

A company is regarded as being insolvent if its liabilities exceed its assets, or if it is unable to pay its debts as and when they become due.

Liquidation of a company results in the establishment of a concoursus creditorium and the company will cease to trade and its assets will be frozen. All civil proceedings against the company will stop as well as any execution processes against the company. The Master of the High Court will appoint a liquidator who is responsible for collecting all the company’s assets and distributing the same between the creditors after the costs of the liquidation have been paid.

Liquidation and business rescue proceedings, although applicable in similar circumstances, have vastly different objectives and one should thus consider these objectives when choosing one or the other.

What is sequestration?

The administration is made up of all government departments, the police and the army, parastatals (e.g. ESKOM, Telkom and the SABC) and any decision the administration takes that affects people’s rights is an administrative action.

 

Voluntary and involuntary sequestration

sequestrated (voluntary), or the application can be brought by a creditor (involuntary). In both instances, the person seeking the order will have to prove to the court that there will be some form of benefit to the creditors of the debtor.

To aid creditors who apply for the sequestration of a debtor’s estate, certain “acts of insolvency” are contained in the Insolvency Act. Should the debtor commit one of these acts, a rebuttable presumption that the person is insolvent is established.

What does the law say about insolvency?

In terms of current South African insolvency law, a debtor commits an act of insolvency if the debtor:

  1. leaves the Republic or otherwise absents him/herself with the intention of evading or delaying the payment of his/her debts
  2. fails to satisfy a judgment by the court or fails to point out sufficient disposable property to satisfy it or where a nulla bonareturn has been made by the officer responsible for the execution of the judgment. Nulla bona is a Latin legal term meaning “no goods” – a sheriff writes this when he can find no property to seize to pay off a court judgment.
  3. disposes, or attempts to dispose of property, which has, or would have the effect of prejudicing his/her creditors, or of preferring one creditor above another.
  4. removes, or attempts to remove, any of his/her property with the intent of prejudicing his/her creditors or of preferring one creditor above another.
  5. makes, or offers to make, an arrangement with any of his/her creditors in order to release him/her wholly, or in part from his/her debts.
  6. after having published a notice of intention to bring an application for voluntary surrender, fails to comply with the formal requirements, or to bring such application, or where he/she lodges an incorrect statement of affairs.
  7. gives notice in writing to any one of his/her creditors that he/she is unable to pay certain, or all of his/her debts; or

sells his/her business without following the advertising procedures in terms of the Insolvency Act.

What is business rescue?

Failing companies traditionally only had the option to liquidate. The Companies Act 71 of 2008 (hereinafter referred to as “the Act”) has created another option in the form of business rescue proceedings. Companies which are in financial distress can be placed under business rescue whereafter a business rescue practitioner will be appointed. The main objective of business rescue proceedings is to reorganise and restructure the business to make it a more profitable and stable entity. This is achieved by placing the company and the management of its affairs, business and property under temporary supervision. Furthermore, it provides for the development and implementation of a business rescue plan.

Business rescue proceedings should be strongly considered where there is a reasonable prospect that the company may be able to trade on a solvent basis again. However, it does sometimes happen that a company is completely “down and out” and that there are absolutely no prospects of the company ever being able to service its debts and/or trade on a financially viable manner again. In such cases, one should liquidate the company in order to protect the remaining assets in favour of the creditors. You can consult with one of our knowledgeable attorneys if your company is financially distressed to determine the best way forward.

Business rescue proceedings can, similarly to liquidation proceedings, be launched on a voluntary basis or by way of a court application brought by creditors or other affected persons. A company must be in financial distress before it can file for business rescue. A company will be deemed to be financially distressed for purposes of this Act if:

(i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months; or

(ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.[3]

Companies meeting either of the requirements as set out above will thus be eligible to commence with business rescue proceedings in order to rehabilitate the financially distressed company. Some of the most prominent effects of a company being placed under business rescue are the following:

  1. A general moratorium on legal proceedings against the company is imposed. Creditors will accordingly not be able to institute civil claims against the company or execute on any court orders already granted.[4]
  2. A guarantee or surety previously given by the company in favour of any other person may not be enforced by any person against the company.[5]
  3. The company may only dispose of its property in the ordinary course of its business in a bona fide transaction which is at arm’s length.[6]
  4. The business rescue practitioner can “cancel or suspend entirely, partially or conditionally any provision of an agreement to which the company is a party at the commencement of the business rescue period, other than an agreement of employment.”[7] This places the business rescue practitioner in a powerful position to alleviate some of the financial commitments of the struggling company by renegotiating payment schemes with the company’s creditors.

The ultimate objective of business rescue proceedings is to save companies. This should, if possible, be the preferred course of action for a financially distressed company since it has the potential to preserve jobs and to reinstitute a stable and solvent company which can contribute to the South African economy.

The primary objective of business rescue is to allow financially distressed companies to restructure their affairs, business, property, debt and other liabilities in order to avoid insolvency, and maximise the likelihood of the companies continuing on a solvent basis. If this is not possible, the secondary objective of business rescue is to obtain a better result for the creditors or shareholders than would result from the immediate liquidation of the company.

    Your Title Goes Here

    Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

    What are the consequences of sequestration?

    The consequences of sequestration are inter alia the following:

    1. The insolvent is divested of his/her estate and the estate vests in the Master of the High Court until a trustee has been appointed, upon which appointment, the estate vests in the trustee. This means the insolvent loses the ability to deal with their estate as they wish and the trustee takes full control of the estate.
    2. Civil proceedings by and against the insolvent are stayed until the appointment of the trustee, save for certain limited exceptions.
    3. The execution of judgments against the insolvent are stayed, unless the Court orders otherwise.
    4. If an insolvent is married in community of property, the spouse of the insolvent is considered to be insolvent as well in light of the fact that there is one joint estate.
    5. The separate estate of the insolvent’s spouse (i.e. where the parties are married out of community of property), if the spouses are not living apart under a judicial order of separation, also vests in the Master until a trustee is appointed, upon which appointment, the estate of the spouse of the insolvent also vests in the trustee, as if it were property of the insolvent estate. The trustee shall release the If the spouse of the insolvent can prove that the property of the solvent spouse which is proved to have been the property of that spouse immediately before her or his marriage to the insolvent or before the first day of October, 1926; or
      • to have been acquired by that spouse under a marriage settlement; or
      • to have been acquired by that spouse during the marriage with the insolvent by a title valid as against creditors of the insolvent; or
      • to be safeguarded in favour of that spouse by section 28 Of the Insolvency Act, Act No. 24 of 1936; or
      • to have been acquired with any such property as aforesaid or with the income or proceeds thereof.
    6. The insolvent may enter into contracts provided that the insolvent does not purport to dispose of any property in the insolvent estate and provided further that the insolvent may not enter into a contract without the trustee’s written consent whereby the estate of the insolvent or any contribution towards the estate that the insolvent is obliged to make is or is likely to be adversely affected.
    7. An unrehabilitated insolvent is prevented from holding certain positions which in turn could restrict the insolvent’s ability to earn a living:
      • An estate agent may only act as an estate if in possession of a valid fidelity fund certificate, which may not be issued to an unrehabilitated insolvent and his trustee has not certified that he is a fit and proper person to assume a position of trust and to be issued with such certificate;
      • An unrehabilitated insolvent disqualifies a person from being registered as a manufacturer and distributor of liquor, a credit provider, a debt counsellor, payment distribution agent, dealer in second hand goods, pawnbroker, scrap metal dealer, from conducting an auction and being a financial services provider.
      • The Legal Practice Council may apply for an attorney whose estate has been finally sequestrated be struck from the roll of attorneys, or be suspended from practice unless he is able to satisfy the court that he is still a fit and proper person to continue to practise as an attorney.
      • Several other professional bodies impose restrictions on insolvent persons to register or to continue in the relevant profession e.g. the Regulatory Board for Auditors may decline to register a person who is an unrehabilitated insolvent, has entered into a compromise with creditors, has applied for debt review or has been provisionally sequestrated as an auditor or candidate auditor. The Board may also cancel his registration if his estate is sequestrated or provisionally sequestrated or if he entered into a compromise with creditors or has applied for debt review.
      • An unrehabilitated insolvent:
        • may not be a member of the National Assembly, the provincial legislature or a municipal council;
        • is disqualified from being a director of a company or from taking part in the management of a close corporation of which he is a member, except with the leave of the Court;
        • is disqualified from being a business rescue practitioner, a liquidator of a company or a close corporation, or a trustee of an insolvent estate;
        • who is the executor of a deceased estate may be removed if he does not lodge satisfactory security with the Master of the High Court;
        • who is the trustee of a trust may be removed from his office by the Master of the High Court;
      • Information pertaining to sequestration orders may only be available for a maximum period of five years, or until a rehabilitation order has been granted, whereafter the information pertaining to the granting of a rehabilitation order must appear on the credit record of an insolvent for a further period of five years after rehabilitation. Accordingly, even though rehabilitation is supposed to have the effect of “putting an end to sequestration” and “relieving” the insolvent of every disability resulting from the sequestration”, the insolvent is not completely freed from all disabilities as his ability to obtain credit, rent a home, obtain a home loan and find employment etc. may be limited for at least five years after granting of a rehabilitation order due to credit checks being performed in the insolvent.
      What are the consequences of liquidation?

      In the winding up of a company unable to pay its debts (liquidation), the law of insolvency is applied mutatis mutandis, insofar as is applicable, and as such the consequences of liquidation are the same as for sequestration mutatis mutandis. Instead of the estate of an insolvent company or close corporation vesting in a trustee, the estate of the liquidated entity vests in the liquidator appointed by the Master of the High Court.

      The consequences of liquidation are inter alia the following:

      1. The powers of the directors cease and they have no power to represent the company once the company is liquidated and the liquidator takes control of the company. The liquidator steps into the shoes of the board of directors.
      2. Assets of the company may not be sold or transferred without the liquidator’s permission.
      3. The Company’s funds are transferred to a separate bank account controlled by the liquidator.
      4. The business operations of the company may continue only to the extent necessary to for the beneficial winding up of the company as determined by the liquidator, having regard to the interests of all creditors of the company (as opposed to the interests of shareholders).

      Although the company remains the owner of its assets, custody and control vest in the Master of the High Court and thereafter in the liquidator.

      What are the consequences of business rescue?

      The consequences of business rescue are inter alia the following:

      1. The company continues to operate as before, however under the supervision of the business rescue practitioner.
      2. Creditors must continue with their obligations to supply goods or services to the company in the same manner in which they did prior to the commencement of business rescue proceedings.
      3. The directors of the company remain the directors, however their powers and duties are greatly restricted as the business rescue practitioner has full management control over the company in substitution for the board of the company and its pre-existing management. The directors are subject to the authority of the practitioner and must act in accordance with the business rescue practitioner’s directions. Any actions taken without the business rescue practitioner’s approval, where such approval is required and was not obtained, is void.
      4. Employees who were employees of the company, immediately prior to the commencement of business rescue, remain employed by the company on the same terms and conditions on which they were employed prior to the commencement of business rescue proceedings.
      5. The business rescue practitioner may, during business rescue proceedings, and despite any provision to the contrary in an agreement:
        • entirely, partially or conditionally suspend any obligation of the company that arises under an agreement to which the company was a party at the commencement of business rescue proceedings; and would otherwise become due during the proceedings for the duration of the business rescue proceedings;
        • apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company, provided that the business rescue practitioner may not, suspend or cancel respectively, any provision of an employment contract or an agreement and certain other limited exclusions.
      6. There is a “statutory moratorium” in place from the moment that business rescue proceedings commence – no legal proceedings against the company or in relation to the company’s property or property in its possession. There are however some exceptions:
        • where the written consent of the business rescue practitioner has been obtained;
        • where the leave of the Court has been obtained;
        • as a set-off against a claim made by the company in any legal proceedings;
        • criminal proceedings against the company or any of its directors or officers;
        • proceedings concerning any property or right over which the company exercises the powers of a trustee; and

      proceedings by a regulatory authority in execution of its duties after written notification to the business rescue practitioner.

      How is the status of being insolvent terminated?

      The insolvency of a person comes to an end when an insolvent person is rehabilitated. Rehabilitation has the effect of putting an end to the sequestration, discharging the debts of the insolvent which were due or the cause of which arose before sequestration and did not arise out of any fraud on the part of the insolvent and relieves the insolvent of every disability resulting from sequestration.

      Rehabilitation applies only to individuals and not to legal entities such as a company.

      An insolvent person can be rehabilitated in the following instances:

      1. At any time
        • If an offer of composition is made and accepted by three quarters of creditors in number and value and after payment has been made or security given, or;
        • All creditors’ claims and sequestration costs are paid in full.
      2. Six months

      If after six months no claims have been proven against the estate provided the insolvent has not been convicted of certain offences and has not previously been sequestrated.  

      1. Twelve months

      The insolvent may apply for rehabilitation after 12 months from the date of the Master’s confirmation of the first trustee’s account in the estate if the insolvent has not been convicted of certain offences and has not previously been sequestrated.

      1. Three years

      The insolvent may apply for rehabilitation after three years have passed from the date of the Master’s confirmation of the first trustee’s account in the estate if the insolvent has not been convicted of certain offences but has been sequestrated previously.

      1. Five years

      If the insolvent has been convicted of certain offences e.g. fraud, he may not apply for rehabilitation until five years have elapsed from the date of such conviction; 

      1. Ten years

      After 10 years have expired an insolvent is deemed to be rehabilitated unless a court orders otherwise upon the application of an interested person, which application must be made within that ten year period.

      CONTACT
      close slider