No business rescue option for financially distressed foreign and external companies

The Companies Act 71 of 2008 (as amended) (Companies Act) introduced an option, other than liquidation, for companies that are financially distressed. This option is ‘business rescue’ and it provides for the temporary supervision of a financially distressed company’s affairs by a business rescue practitioner, and gives the company breathing space by allowing a temporary moratorium (suspension) on claims against the company. During business rescue the company is given an opportunity to restructure its affairs (including liabilities) with the hope that it can turn its business around and operate from a solvent position.

8 Apr 2020 3 min read Dispute Resolution Alert Article

Liquidation, on the other hand, has always had the objective of simply dissolving the company, disposing of its assets and paying the proceeds to creditors. The decision to rescue versus let the company be liquidated has largely been left to companies who made that decision based on an assessment whether there is a reasonable prospect for the company to turn things around. However, a recent High Court judgment has taken this decision out of the hands of external companies as far as South African law is concerned, ruling that the business rescue option does not apply to such companies.

In the case of Cooperative Muratori & Cementisti-CMC Di Ravenna Societi Cooperative A Responsabilita Limitada v Companies and Intellectual Properties Commission 2019 JDR 2263 (GP), the first applicant was CMC, a company duly incorporated in terms of the laws of the Italian Republic, and registered in South Africa as an external company. The board of CMC adopted a resolution to place the company under business rescue. The basis for that decision was that CMC had been awarded multiple large construction contracts and was involved in substantial projects in Italy and South Africa. Based on this, there appeared to be a reasonable prospect of rescuing the company. The Companies and Intellectual Properties Commission of South Africa however declined to confer the ‘under business rescue’ status on CMC for the reason that it was an external company subject to the laws of the jurisdiction within which it was incorporated (Italy) and not the South African Companies Act (save for minimum compliance requirements applicable).

CMC therefore approached the court to ask for a declaration that CMC was validly under business rescue as contemplated under section 129 of the Companies Act.

In making the determination, the court considered the wording of the relevant sections of the Companies Act, including and especially the definition of “company” and “juristic person” in terms of sections 1 and 129.

Section 1 of the Companies Act, in the relevant parts defines “company” as a juristic person incorporated in terms of the Companies Act, a domesticated company, or a juristic person that, immediately before the effective date was registered in terms of the previous Companies Act, 1973, other than as an external company as defined in that Act. The court noted the specific exclusion of external companies and found that there was nothing in the definition of “company” that specifically includes an external company.

Section 129 of the Companies Act deals with business rescue. This section provides that the board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that the company is financially distressed, and there appears to be a reasonable prospect of rescuing the company. Again, the court noted that nothing in this section expressly includes external companies.

Reading the sections together, the court found that since external companies are specifically excluded in the definition of “company”, a foreign or external company (even if such company has operations in South Africa) would not be able to avail itself of the business rescue provisions contained in the Companies Act.

With that decision, the court has put an end to any uncertainty as to which companies operating in South Africa enjoy the protections afforded by the business rescue regime. International companies and their advisors should therefore consider this carefully when deciding how to structure their businesses when operating within South Africa. On the one hand, external and foreign companies are less regulated under the Companies Act and can operate with less red tape from a South African point of view but, on the other hand, they miss out on various benefits of falling under the South African companies legislation which can, in some circumstances, provide assistance in times of financial difficulty.

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