Corporate Debt, Turnaround & Restructuring

In South Africa, a company that cannot meet its debt obligations is generally regarded as being financially distressed or commercially insolvent. South African law provides a spectrum of options, mainly under the Companies Act 71 of 2008, Chapter 14 of the Companies Act 61 of 1973 and the Insolvency Act 24 of 1936.

Below is an overview of the main options, moving from least to most terminal:

• Informal / Consensual Restructuring (Out of Court) - A negotiated restructuring with key creditors without invoking formal statutory processes. This option is flexible and quick, and causes less reputational damage.  It does, however, require creditor cooperation and, as there is no statutory moratorium, hold‑out creditors can derail the process.
• Business Rescue (Chapter 6, Companies Act 71 of 2008) - A formal, court‑supervised process designed to rescue the company and return it to solvency as a going concern or, if that cannot be achieved, securing a better return for creditors than immediate liquidation. It is available once a company is financially distressed, meaning it is reasonably unlikely to pay its debts or will become insolvent within six months. A major benefit is a the temporary statutory moratorium on creditor enforcement, but management control shifts to a business rescue practitioner who must develop a business rescue plan that must be approved by creditors.  It can become value‑destructive if prolonged.
• Statutory Compromise with Creditors (Section 155, Companies act 71 of 2008) - A statutory compromise of debts between the company and its creditors, that can be negotiated by the company outside of business rescue or the liquidator of a company in provisional or final liquidation proceedings. This compromise will bind dissenting creditors if approved by the requisite majorities or creditors or relevant classes of creditors and once sanctioned by the Court and filed with the Companies and Intellectual Property Commission. There is no automatic statutory protection and, as with informal / consensual restructuring, hold-out creditors can derail the process.
• Liquidation (Voluntary or Compulsory Winding‑Up) – A voluntary winding-up may be initiated by shareholder's special resolution whether the company is solvent or insolvent. Alternatively, a compulsory winding-up may be ordered by a Court, on application by a creditor if the company is commercially insolvent (unable to pay its debts when due).  In either instance, company generally ceases normal trading, a liquidator is appointed and will realise assets and distributes proceeds.  The company is dissolved when the liquidation proceedings end.

Business Rescue is not liquidation and is intended to be rehabilitative, not punitive.  It is a formal statutory process under Chapter 6 of the Companies Act 71 of 2008 designed to assist a company by imposing a moratorium on creditor enforcement, placing it under the temporary supervision of a business rescue practitioner, and facilitating the adoption by creditors (and shareholders, if required) of a business rescue plan aimed at rescuing the company by returning it to solvency as a going concern or, if that cannot be achieved, securing a better return for creditors than immediate liquidation.  

It is designed for companies with underlying viable businesses or assets, but where creditor coordination is needed, and a moratorium is required to stabilise the company.  The company must be financially distressed, in other words, it must be reasonably likely that within the next six months the company will become commercially insolvent, i.e. unable to pay its debts as they fall due.  This is a forward‑looking test and a company does not need to have already defaulted.  Timing is critical, with more successful outcomes, achieved the earlier it is instituted.  In other words, delayed intervention often destroys rescue value and creditor trust.  Business rescue is designed to be preventative, not reactive.

Business rescue proceedings may commence in one of two ways – voluntarily by a resolution of the company's board of directors, or compulsorily by a court order made on application by an “affected person” (creditor, shareholder, employee or trade union). Once commenced, notice must be filed with the CIPC and given to all affected persons.

Once a licensed business rescue practitioner is finally appointed by the company's board or provisionally appointed by court order (and made final once ratified by creditors) , the practitioner assumes full management control, supplanting the board and management, although directors remain in office subject to the practitioner's authority. The quality, experience and independence of the practitioner are often decisive in whether the rescue succeeds.

The practitioner must consult with affected person in the development of a business rescue plan and must be approved by the requisite majority of creditors and, to the extent shareholder's rights are affected by the plan, shareholders too.  Once adopted the plan must be implemented by the practitioner.

If all goes well, the business rescue proceedings will end as soon as the practitioner delivers a notice that the plan is substantially implemented.

A secured creditor’s rights depend on what type of security it holds.  Security holders generally rank ahead of unsecured creditors, but their remedies differ depending on timing and process.

If the borrower is insolvent but no business rescue or liquidation has commenced, a secured creditor may typically enforce their security rights per the underlying agreements and security documents.  However, once liquidation or business rescue begins, enforcement rights are restricted.

Business rescue materially changes recovery strategy as a satutory moratorium applies to court proceedings and enforcement actions against the company and its property.  That is, secured creditors cannot enforce security without either the consent of the business rescue practitioner, or the leave of court.  However, while enforcement is restricted, secured creditors do not lose their security, and their security ranking is preserved.  For example, a practitioner may not sell secured assets without the secured creditors consent, unless the proceeds of such disposal will be applied to settled the secured creditors claim in full.

Liquidation is generally more favourable from a pure enforcement perspective, though not always from a quantum recovery perspective.  In liquidation secured creditors influence timing and method of sale, and paid from the proceeds realised from realising the secured asset after the costs of realisation and liquidation have been settled.  And, If the proceeds are insufficient, the balance may be proved by the secured creditor as a concurrent claim (i.e. an unsecured claim that does not have a statutory preference).

It is important to note that not all types of restructuring proceedings (whether formal or informal) require court intervention. 

For example, an informal / consensual restructuring process is a negotiated out-of-court restructuring agreed with key creditors, without invoking formal statutory processes.  It is governed by the law of contract.  There is no "cram down" of the restructuring deal on a dissenting creditor; if one participating creditor refuses the deal, they can still sue the company or apply for its liquidation.

However, a restructuring pursued through a voluntary business rescue proceeding does not require court involvement either.  Business Rescue is intended to be rehabilitative, not punitive.  It is a formal statutory process under Chapter 6 of the Companies Act 71 of 2008 designed to assist a company by imposing a moratorium on creditor enforcement, placing it under the temporary supervision of a business rescue practitioner, and facilitating the adoption by creditors (and shareholders, if required) of a business rescue plan that restructures the company with the aim of rescuing it by returning it to solvency as a going concern; or, if that cannot be achieved, securing a better return for creditors than immediate liquidation.

Court involvement is required in a formal restructuring pursued by way of a compromise proceeding as set out in section 155 of the Companies Act.  That is, while negotiations are informal, the High Court must eventually sanction the final restructuring proposal, and it must be filed with the Companies and Intellectual Property Commission, to make it legally binding on all creditors (the "cram down" effect).

Cliffe Dekker Hofmeyr supports companies, boards, creditors, and investors across the full distress–recovery spectrum, ranging from informal restructurings to formal proceedings. The firm combines expertise in insolvency, restructuring, dispute resolution, finance, tax, and regulation to achieve practical solutions that best preserve value. We guide clients on stabilising distressed companies, protecting boards, maximising creditor recoveries, and managing litigation risks.