An appraisal of the new South African business rescue procedure

684 Pages·2016·19.53 MB·English

An appraisal of the new
South African business
rescue procedure

by

ERIC LEVENSTEIN

submitted in accordance with the requirements
for the degree of

DOCTOR OF LAWS (LLD)

IN THE FACULTY OF LAW,
UNIVERSITY OF PRETORIA

DATE: 30 NOVEMBER 2015

Supervisor: Professor Andre Boraine
Co-supervisor: Professor Harry Rajak

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TABLE OF CONTENTS

SUMMARY............................................................................................................................... 8
ACKNOWLEDGEMENTS ..................................................................................................... 9
PREFACE ............................................................................................................................... 11
KEY TERMS .......................................................................................................................... 14
PART 1 – GENERAL INTRODUCTION .............................................................................. 15
CHAPTER 1 : INTRODUCTION ........................................................................................ 15
1.1 BACKGROUND AND OVERVIEW ..................................................................... 15
1.2 RESEARCH QUESTIONS ..................................................................................... 15
1.3 RESEARCH OBJECTIVES ................................................................................... 16
1.4 RESEARCH METHODOLOGY ........................................................................... 17
1.5 OVERVIEW OF CHAPTERS ................................................................................ 18
1.6 SIGNIFICANCE OF STUDY ................................................................................. 20
1.7 LIMITATIONS OF STUDY ................................................................................... 20
1.8 DEFINITIONS A ND REFERENCES .................................................................... 21

CHAPTER 2 : THE DEVELOPMENT OF INSOLVENCY LAW IN SOUTH
AFRICA… A SHIFT FROM A PRO-CREDITOR TO A PRO-DEBTOR
CULTURE? ............................................................................................................................ 23
2.1 INTRODUCTION .................................................................................................... 23
2.2 HISTORY AND BACKGROUND ......................................................................... 24
2.3 ADVANTAGE TO CREDITORS AND ITS INFLUENCE ON THE
DEVELOPMENT OF A PRO-CREDITOR CULTURE ..................................... 26
2.4 THE SOCIO-POLITICAL IMPLICATIONS OF DEBT IN SOUTH
AFRICA AND THE SHIFT FROM A LIQUIDATION (PRO-CREDITOR)
TO A RESCUE (PRO-DEBTOR) CULTURE ...................................................... 45
CHAPTER 3 : THE FAILURE OF JUDICIAL MANAGEMENT, THE
CONTRIBUTION OF INFORMAL CREDITOR WORK-OUTS AND THE NEED
FOR A CORPORATE RESCUE MODEL FOR SOUTH AFRICA, PRIOR TO
THE 2008 COMPANIES ACT ............................................................................................. 53
3.1 INTRODUCTION .................................................................................................... 53
3.2 THE FAILURE OF JUDICIAL MANAGEMENT .............................................. 58
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3.3 INFORMAL CREDITOR WORK-OUTS AND THEIR CONTRIBUTION
TO BUSINESS RESCUE ........................................................................................ 65
3.4 THE NEED FOR A CORPORATE RESCUE MODEL IN SOUTH
AFRICA .................................................................................................................... 71
SYNOPSIS OF PART 1 ......................................................................................................... 76
PART 2 – INTERNATIONAL BEST PRACTICE, RESCUE INSTRUMENTS, THE
DEVELOPMENT OF CORPORATE RESCUE CULTURE AND COMMON
RESCUE THEMES .................................................................................................. 79
CHAPTER 4 : INTERNATIONAL STANDARDS OF BEST PRACTICE AND
INTERNATIONAL INSTRUMENTS USED IN INSOLVENCY AND
CORPORATE RESCUE ....................................................................................................... 79
4.1 INTRODUCTION .................................................................................................... 79
4.2 INTERNATIONAL STANDARDS OF BEST PRACTICE (UNCITRAL
LEGISLATIVE GUIDE ON INSOLVENCY LAW) ........................................... 80
4.3 INTERNATIONAL INSTRUMENTS ................................................................... 85
4.3.1 THE WORLD BANK ..................................................................................... 86
4.3.2 INSOL INTERNATIONAL (INSOL) .......................................................... 89
4.3.3 THE EUROPEAN UNION ............................................................................ 91
4.3.4 THE INTERNATIONAL MONETARY FUND (“IMF”) .......................... 94

4.3.5 THE EURO PEAN BANK FOR RECONSTRUCTION AND
DEVELOPMENT ........................................................................................... 97
CHAPTER 5 : COMPARATIVE CORPORATE RESCUE CULTURE AND
COMMON RESCUE THEMES ......................................................................................... 100
5.1 INTRODUCTION .................................................................................................. 100
5.2 MODERN RESCUE REGIMES .......................................................................... 103
5.2.1 THE UNITED KINGDOM .......................................................................... 103
5.2.2 THE UNITED STATES ............................................................................... 109
5.2.3 CANADA ....................................................................................................... 112
5.2.4 AUSTRALIA ................................................................................................. 114
5.3 INTERNATIONAL CORPORATE RESCUE CULTURE ............................... 116
5.4 CREDITORS AND THE COMPROMISE OF DEBT ....................................... 131
5.5 COMMON RESCUE THEMES ........................................................................... 138
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5.5.1 ELIGIBILITY FOR, ENTRY INTO AND DURATION OF THE
RESCUE PROCESS..................................................................................... 139
5.5.2 MORATORIUM: THE STAY OF CLAIMS ............................................. 152
5.5.3 MANAGEMENT OF THE COMPANY IN THE RESCUE PROCESS. 160
5.5.3.1 THE SUPERVISOR............................................................................ 160
5.5.3.2 DEBTOR .............................................................................................. 171
5.5.3.3 COURTS .............................................................................................. 188
5.5.4 TREATMENT OF CREDITORS, CONTRACTS AND
EMPLOYEES ............................................................................................... 193
5.5.4.1 CREDITORS ....................................................................................... 193
5.5.4.2 CONTRACTS (EMPLOYEES) ......................................................... 196
5.5.5 FINANCING THE RESCUE ...................................................................... 205
5.5.6 THE BUSINESS RESCUE PLAN AND THE ABILITY TO CRAM
DOWN ON DISSENTING CREDITORS .................................................. 220
5.5.7 DISCHARGE OF CREDITORS’ CLAIMS .............................................. 242
SYNOPSIS OF PART 2 ....................................................................................................... 247
PART 3 – SOUTH AFRICA’S BUSINESS RESCUE REGIME ....................................... 261

CHAPTER 6 : THE EST ABLISHMENT OF A BUSINESS RESCUE REGIME
FOR SOUTH AFRICA ........................................................................................................ 261
6.1 THE RECOGNITION OF THE FAILURE OF CORPORATE RESCUE
IN SOUTH AFRICA .............................................................................................. 261
6.2 THE LAW REFORM PROCESS IN ITS POLITICAL CONTEXT ............... 265
6.3 THE DEVELOPMENT OF A SOUTH AFRICAN CORPORATE
RESCUE CULTURE ............................................................................................. 268
CHAPTER 7 : THE NEW SOUTH AFRICAN RESCUE REGIME – A LEGAL
ANALYSIS OF CHAPTER 6 OF THE ACT .................................................................... 276
7.1 INTRODUCTION .................................................................................................. 276
7.2 CHAPTER 6 OF THE COMPANIES ACT 73 OF 2008 .................................... 281
7.2.1 SOME IMPORTANT CONCEPTUAL DEFINITIONS .......................... 282
7.2.1.1 DEFINITION OF “AFFECTED PERSONS” .................................. 282
7.2.1.2 DEFINITION OF “BUSINESS RESCUE” ...................................... 283
7.2.1.3 DEFINITION OF “COURT”............................................................. 293
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7.2.1.4 DEFINITION OF “FINANCIALLY DISTRESSED” ..................... 296
7.2.1.5 DEFINITION OF “INDEPENDENT CREDITOR” ....................... 305
7.2.1.6 DEFINITION OF “VOTING INTEREST”...................................... 307
7.3 ELIGIBILITY, ENTRY AND DURATION OF BUSINESS RESCUE............ 307
7.3.1 VOLUNTARY COMMENCEMENT ......................................................... 307
7.3.2 OBJECTION TO COMPANY RESOLUTION ........................................ 325
7.3.3 COMPULSORY COMMENCEMENT ...................................................... 334
7.3.4 DURATION OF BUSINESS RESCUE PROCEEDINGS ........................ 365
7.4 GENERAL MORATORIUM ON LEGAL PROCEEDINGS ........................... 377
7.5 MANAGEMENT OF THE COMPANY IN THE RESCUE PROCESS –
THE BUSINESS RESCUE PRACTITIONER ................................................... 394
7.5.1 QUALIFICATIONS ..................................................................................... 396
7.5.2 REMOVAL AND REPLACEMENT.......................................................... 403
7.5.3 POWERS AND DUTIES ............................................................................. 406
7.5.4 INVESTIGATIVE POWERS ...................................................................... 412
7.5.5 DIRECTORS AND COOPERATION WITH THE BUSINESS

RESCUE PRACTITIONER ........................................................................ 417

7.5.6 REMUNERATION ...................................................................................... 423
7.5.7 PROTECTION OF PROPERTY INTERESTS ........................................ 425
7.5.8 MANAGING SHAREHOLDERS AND HOLDERS OF COMPANY
SECURITIES ................................................................................................ 436
7.6 TREATMENT OF CREDITORS, EMPLOYEES AND CONTRACTS .......... 441
7.6.1 CREDITORS ................................................................................................ 441
7.6.2 EMPLOYEES ............................................................................................... 455
7.6.3 CONTRACTS ............................................................................................... 468
7.7 FINANCING THE RESCUE – POST-COMMENCEMENT FINANCE ........ 474
7.8 THE BUSINESS RESCUE PLAN ........................................................................ 497
7.8.1 CONSIDERATION OF AND VOTING ON THE PLAN ........................ 505
7.8.2 FAILURE TO ADOPT THE BUSINESS RESCUE PLAN ..................... 519
7.9 DISCHARGE OF DEBTS AND CLAIMS .......................................................... 538
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SYNOPSIS OF PART 3 ....................................................................................................... 550
PART 4 – APPRAISAL, RECOMMENDATIONS AND CONCLUSION ......................... 554
CHAPTER 8 : AN APPRAISAL OF THE NEW BUSINESS RESCUE REGIME,
RECOMMENDATIONS FOR FURTHER REFORM AND CONCLUSION .............. 554
8.1 COMPARISON WITH INTERNATIONAL RESCUE PRINCIPLES,
BEST PRACTICE AND COMMON RESCUE THEMES ................................ 554
8.1.1 GATEWAY INTO RESCUE ....................................................................... 563
8.1.2 MORATORIUM/STAY ............................................................................... 565
8.1.3 SUPERVISION/MANAGEMENT.............................................................. 566
8.1.4 COURTS........................................................................................................ 567
8.1.5 CREDITORS ................................................................................................ 569
8.1.6 CONTRACTS (EMPLOYEES) .................................................................. 571
8.1.7 RESCUE FINANCE ..................................................................................... 574
8.1.8 THE RESCUE PLAN ................................................................................... 576
8.1.9 CRAM-DOWN.............................................................................................. 577
8.1.10 DISCHARGE ................................................................................................ 579

8.2 SHIFT FROM A PRO-CREDITOR TO A PRO-DEBTOR RESCUE
CULTURE? ...... ...................................................................................................... 582
8.3 APPRAISAL OF CHAPTER 6 OF THE 2008 COMPANIES ACT ................. 585
8.3.1 WEAKNESSES AND CRITICISMS .......................................................... 585
8.3.1.1 DIRECTORS ROLE ........................................................................... 586
8.3.1.2 IMPACT OF THE BANKS/FINANCIAL INSTITUTIONS
ON BUSINESS RESCUE ................................................................... 587
8.3.1.3 SHAREHOLDERS ROLE ................................................................. 588
8.3.1.4 SET-OFF OF CLAIMS ...................................................................... 588
8.3.1.5 CONTENT OF THE BUSINESS RESCUE PLAN .......................... 588
8.3.1.6 EMPLOYEES’ ROLE ........................................................................ 589
8.3.1.7 SECURED CREDITORS ................................................................... 589
8.3.1.8 SPECIALISED COURTS .................................................................. 590
8.3.1.9 ACCREDITATION OF BUSINESS RESCUE
PRACTITIONERS ............................................................................. 591
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8.3.1.10 TIME LINES ....................................................................................... 594
8.3.1.11 NUMBER OF BUSINESS RESCUE APPOINTMENTS ................ 595
8.3.1.12 INVESTIGATIVE POWERS ............................................................ 597
8.3.1.13 SUPERVISION OF WINDING UP PROCESS ............................... 598
8.3.1.14 RANKING OF POST-COMMENCEMENT FINANCE
CLAIMS ............................................................................................... 598
8.3.1.15 CIPC ROLE ......................................................................................... 599
8.3.1.16 REASONABLE PROSPECT ............................................................. 601
8.3.1.17 INAPPROPRIATE VOTE ................................................................. 601
8.3.1.18 LIQUIDATION PROCEEDINGS ..................................................... 602
8.3.1.19 BINDING OFFER ............................................................................... 602
8.3.1.20 COMMENCEMENT OF BUSINESS RESCUE .............................. 602
8.3.1.21 GENERAL ISSUES ............................................................................ 603
8.3.2 SUCCESS OF BUSINESS RESCUE IN SOUTH AFRICA ..................... 607
8.3.3 STATISTICS ................................................................................................. 615
8.4 RECOMMENDATIONS FOR FURTHER REFORM AND CONCLUSION 622

8.4.1 RECOMM ENDATIONS FOR FURTHER REFORM............................. 622
8.4.2 CONCLUSION ............................................................................................. 633
BIBLIOGRAPHY ................................................................................................................ 651
CASE LAW ........................................................................................................................... 676
LEGISLATION .................................................................................................................... 684

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SUMMARY

Introduced into our law in 2011, Chapter 6 of the Companies Act 71 of 2008 allows for the
restructuring of companies that are reasonably unlikely to be able to pay all of its debts as they
become due and payable or where it appears to be reasonably likely that the company will
become insolvent, within the immediately ensuing six month period.
The legislation contemplates the appointment of a business rescue practitioner who is obligated to
supervise the ongoing business of the company, together with its board of directors, by way of
the implementation of a business rescue plan, where the practitioner can “rescue” the company
and achieve a position where the company can continue to trade on a solvent basis into the future.
If this is not possible, the practitioner must deliver to creditors and shareholders a better dividend
than would result from the immediate liquidation of the company.
Some four years after implementation, this study analyses the history of the development of
insolvency law in South Africa with a focus on the shift from a pro-creditor to a pro-debtor
rescue culture, the failure of judicial management and the urgent need for the establishment of a
viable and effective restr ucturing mechanism for financially distressed companies in South

Africa. A brief overview of international standards of best practice in insolvency and corporate
rescue models applicable in jurisdictions such as the US, the UK, Canada and Australia serves to
set the bench mark for the establishment of a workable business rescue regime for corporate
South Africa.
An appraisal of the South African business rescue legislation with an eye on international
corporate rescue themes and international best practice is undertaken to establish if the South
African business rescue model “stacks up” with those applicable in international jurisdictions.
Several shortfalls and weaknesses in the new rescue procedures are identified and certain
recommendations for improvements are made.
The study concludes with views on the efficiency and effectiveness of the South African business
rescue model and what the future holds for South African restructuring practice in the years
ahead.

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ACKNOWLEDGEMENTS

“Sometimes a scream is better than a thesis.”
– Manfred Eigen
When I started this journey in January 2011, I really did not have a full appreciation of the time,
effort and dedication that would be required to complete a study of this nature. Balancing heavy
work commitments in my practice with writing a thesis has not been easy.
Of course, practising in the field of insolvency and business rescue makes the topic part and
parcel of my everyday working life. Keeping up to date with the latest case law precedent,
developments in the law and legal opinion is par for the course. But putting it all down on paper,
compiling one’s thoughts, doing the research, has been daunting, challenging and stimulating.
Professor André Boraine, my supervisor at the University of Pretoria, has been my guiding light,
mentor and friend. We go back a long way and have presented together in many insolvency
forums and seminars over the years, both locally and internationally. Together with Professor
Harry Rajak, whose enthusiasm and energy has kept me on track for the last four years, I thank

both of them for their interest, dedication and detailed contributions in getting me through this

exercise.
My colleagues, librarians and secretarial staff at my firm Werksmans, have been supportive,
dedicated and most helpful in assisting me along the way.
Last but not least, to my long-suffering wife, Mireille – my best friend and partner in life and in
thesis. The long weekends and nights spent slaving away, while she sat up waiting for me will
never be forgotten, and her immense support has been incredible. To my two sons Michael and
Daniel, who had to cope with a “student father” for four years, I thank them for their patience and
for putting up with their father’s grumpiness.

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Lastly, to my Standard Six Grade teacher, who told me that I would never get to see the hallowed
halls of a University, there is nothing like throwing down a challenge to a Durban surfer who
dreamed of bigger things!

Eric Levenstein
Sandton, Gauteng, South Africa
30 November 2015

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