Is it time to say goodbye to your business?

South Africa has been experiencing very slow economic growth and international rating agencies have subsequently downgraded South Africa’s investment outlook to “junk status”. This, and a myriad of other factors, have negatively impacted South African businesses, especially small and medium business enterprises. Many of these struggling enterprises are now at a crossroads: do they continue trading and hope that things will improve, whilst risking incurring further debts, or do they cut their losses and give up? This article will briefly explain what the difference is between business rescue and liquidation, two legal avenues which are available to financially distressed companies.

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.[1] Companies which are in financial distress can be placed under business rescue where after a business rescue practitioner will be appointed. The main objective of business rescue proceedings is to reorganise and restructure the business in order 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.[2]

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 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 it becomes due.[8]

Liquidation of a company results in the establishment of a concourses 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 will be responsible for collecting all of the company’s assets and to distribute same between the creditors after the costs of the liquidation have been paid.

Liquidation and business rescue proceedings, although applicable in similar circumstances have very different objectives and one should thus consider these objectives when choosing one or the other. 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 to 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 should consult a knowledgable attorney if your company is financially distressed in order to determine the best way forward.

Reference List:

  • Companies Act 71 of 2008.
  • Companies Act 61 of 1973.

[1] Chapter 6 of the Companies Act 71 of 2008.

[2] The purpose of the business rescue plan is to “rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.” See section 128(1)(b)(iii) and section 150 in this regard.

[3] Section 128(1)(f) of the Companies Act 71 of 2008.

[4] Section 133.

[5] Section 133(2).

[6] Section 134(1)(a).

[7] Section 136(2). It is important to note that employees remain employed by a company under business recue proceedings with the same terms and conditions as before the business rescue proceedings. See section 136(1) of the Act in this regard.

[8] This is often referred to as commercial insolvency. See section 345 of the Companies Act 61 of 1973 where circumstances are set out in which a company will be deemed to be unable to pay its debts.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Common Law position – in absence of a “force majeure” clause

A force majeure is an act of God or man (such as a war, strike, riot, crime, plague, or an event described such as a hurricane, flood, earthquake, volcanic eruption, etc.),  that is unforeseeable, out of the reasonable control of the parties to a contract and which makes it objectively impossible for one or both of the parties to perform their obligations under the contract.

In the absence of such a clause, or if the clause doesn’t specify the unforeseen event(s) on which the parties can reply, then the parties may be able to rely on the common law principle of “supervening impossibility of performance” to suspend their obligations under the contract, provided that it has become objectively impossible for them to perform under the contract as a result of an unforeseeable and unavoidable event(s). For the doctrine to be enforceable, the following applies:

  • The impossibility must occur after the conclusion of the contract.
  • These events must be unavoidable and make proper performance of the contract impossible and must not merely make performance more burdensome or economically onerous.
  • If performance becomes objectively or absolutely impossible, the contractual obligation is extinguished and the duty to perform and the corresponding right to claim performance falls away.
  • Objective impossibility includes instances of actual physical impossibility and also where performance remains physically possible but cannot reasonably be expected to be performed.
  • Both parties’ obligation to perform the contract will be extinguished.
  • If the event causing the impossibility was foreseen or foreseeable and could have been avoided, then the parties cannot rely on this doctrine to not perform their obligations.
  • Once the force majeure event has come to an end and performance has become possible again, the contract will continue.
  • The creditor will have the option to terminate the contract if the interruption is likely to endure for an unreasonably long time.

In applying the doctrine of supervening impossibility, the SCA in Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal [2008] held that in order to determine whether the doctrine applies, it is necessary to consider factors such as the nature of the contract, the relationship of the parties, the circumstances of the case and the nature of the impossibility. Accordingly, any analysis of whether a party would be able to rely on the defence of supervening impossibility in respect of its inability to perform its obligations in terms of an agreement due to the COVID-19 virus outbreak must take into account all of the surrounding circumstances of a case.

Contractual position – force majeure clauses

The principal objective of such a clause is to relax obligations and to set a limit to the strict liability imposed on a party to perform in terms of a contract, in the event of certain circumstances arising, which prevent or have an effect on the party’s ability to perform.

Parties often include time periods during which the contract will be suspended if a force majeure event occurs. This gives any party the right to elect to terminate the agreement unilaterally by way of notice to the other party should the force majeure event continue for longer than the set period. This period will depend on the agreement between the parties and the nature of the obligation, the contractual performance and the practicality of allowing for such a suspension.

Both parties will be excused from performing, because the impossibility of performance, due to an event beyond the control and foreseeable expectation of the parties, causes their intention of performing an agreement to be extinguished, and frustrates the purpose of their agreement.

If existing contracts have force majeure clauses in them, then one may be able to rely on these clauses, instead of the common law principle of “supervening impossibility of performance” to suspend one’s obligations under a particular contract if performance of that contract becomes impossible as a result of an uncontrollable event. However, if force majeure clauses are vague and incomprehensive, their interpretation could be problematic, as presumptions of interpretation are applied in our law to determine the meaning of words that are unclear.

In the case of Sucden Middle-East v Yagci Denizcilik ve Ticaret Ltd Sirketi (The ‘Muammer Yagci’) – [2020] 1 lloyd’s rep. 107, the UK court noted that the phrase “force majeure” is simply a phrase to label a list that includes a mixture of matters. The list informs the meaning of the phrase and not the other way around. The South African courts would likely follow the same approach. The parties cannot simply rely on a clause that is labelled as a “force majeure” clause or contains those words but does not list or elaborate on what the parties agree a force majeure to be. Force majeure clauses must be detailed and specifically list the force majeure events that the parties agree will suspend their performance of the contract (such as an epidemic). In this regard, parties should specifically list broad catch-all wording to contracts such as “act of God” or “acts of authorities” that they can rely on to encompass events they may not reasonably have foreseen.

Reference List:

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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