Creditors: Know Your Rights In A Business Rescue  

 Why Business Rescue?

 The new business rescue provisions in the Companies Act are aimed at – 

  • Saving companies in financial distress from liquidation, and restoring them (completely or partially) to commercial viability, and 
  • If rescue is impossible, at least giving stakeholders (such as creditors, employees and shareholders) a better return than liquidation would produce.

The process, and the danger of abuse


Rescue will always be considered preferable to liquidation where it is “reasonably possible”. The test, per two recent High Court decisions, is that there must be a “reasonable prospect” of rescuing the company. 

Creditors have the right to participate in the process by forming a creditors’ committee (to be consulted by the business rescue practitioner during the development of a business rescue plan), to vote on any proposed rescue plan, and to propose an alternative plan.


But beware – directors or other stakeholders may decide to abuse the process as a delaying tactic for their own ends. Because the idea is to give the company a breathing space whilst a business rescue plan is formulated and implemented, the company is immune from attack by creditors – all enforcement of claims and other legal proceedings are automatically suspended, whilst contracts may be suspended (sometimes cancelled).


So creditors are effectively left in limbo. But, if you believe that business rescue proceedings are being abused, there is a remedy.


Your remedy 

  • If the proceedings were started by the company itself via a board resolution, you can apply to court to set the resolution aside. You can also apply for removal of the business rescue practitioner appointed by the company, on the grounds of lack of independence, skill or qualification.
  • Alternatively where business rescue is applied for via a court application, you must be given prior notification thereof, and can oppose it.

Clearly, our courts will only grant business rescue applications where they are properly formulated and supported.


In both High Court cases, the business rescue applications were refused. As the Court in one of the cases commented: “Whilst every case must be considered on its own merits, it is difficult to conceive of a rescue plan in a given case that will have a reasonable prospect of success of the company concerned continuing on a solvent basis unless it addresses the cause of the demise or failure of the company’s business, and offers a remedy therefore that has a reasonable prospect of being sustainable.” “Mere speculation” will not suffice – the applicant must give “concrete and objectively ascertainable details” to enable the Court to reach a decision.


Thus in the second case (a stalled golf course development), an offer was to be obtained from a “mystery potential investor” to provide funding. But in the absence of detail as to the identity of the potential investor, its means, and the terms and conditions of the investment proposal, the Court declined to give any weight to the “optimistic” view of an estate agent as to the prospect of successful completion of the development. 


Don’t forget the sureties


If you hold personal suretyships for your claims, a third High Court decision has just opened up an additional recovery option for you. The Court held that the business rescue moratorium applies only to the company itself – you are still free to pursue your claims against sureties. (The other side of the coin of course is that sureties need to be aware of that danger when they apply for business rescue.)


“Post-commencement finance” – should you provide it?


Don’t provide funding (either as a financier or as a trade creditor) without first taking advice on – 

  1. Where your new claim will rank for payment, and 

Whether you should take security for it over any unencumbered assets. 

Property Buyers – Protect Your Deposit!


When you buy a property you will commonly have to pay a deposit of part of the purchase price, the balance to be paid on transfer.


Make sure that the “deposit clause” is properly drawn to protect your interests. A recent Supreme Court of Appeal decision highlights the dangers of not doing so.


The facts 

1.  A farming trust put its business, incorporating 3 farms, up for auction 

2.  The successful buyer paid a 20% deposit of R900,000 to the auctioneer 

3.  The auctioneer paid out the deposit to the trust’s creditors on confirmation of the sale 

4.  The buyer became aware of a land claim against the farms, cancelled the sale and sued for return of his deposit 

5.  Judgment was granted in favour of the buyer for return of his deposit, but the trust was sequestrated and he was left with a concurrent claim against the trust 

6.  This left the buyer with a substantial loss (over R700,000) and he sued the auctioneers and their representative in an attempt to recover it. 

The buyer takes a big hit

The buyer lost, the Court holding that the auctioneer had acted correctly in paying out the deposit.


Critically, the conditions of the auction sale as drawn did not specify that the deposit had to be held in trust pending transfer, and the Court’s interpretation of the contract as a whole was that it obliged the auctioneer to pay the deposit out to the seller before transfer.


So, how do you protect your deposit? 

  • Don’t sign anything until your attorney has checked it. 
  • Insist that the sale agreement provides for the deposit to be paid into a trust account (the transferring attorney’s trust account is normally specified, but you and the seller can agree otherwise), pending transfer. 

Note that the monies held in trust should generally be invested, with interest accruing for your benefit. 

Armed Robbery! Suing Your Security Company


“Quis custodiet ipsos custodes? Who will guard the guards themselves?” (Juvenal, Roman poet)


The blue light, the SAPS imposters, and the armed robbery


This is the unfortunate tale of a family – mother, father and young children – who, having been previously subjected to the trauma of violent crime, once again fell victim to it in their own home. This despite having protected themselves with an extremely comprehensive security system that included multiple alarm systems, beams, electric fencing, intercom systems, closed circuit television, and a 24 hour security guard in a guardhouse fortified with bullet-proof glass.

A gang of armed robbers, driving a white BMW with a blue light and posing as SAPS officers gained access to the premises via a pedestrian gate. The security guard had simply unlocked the pedestrian gate for the “police” without first taking reasonable steps to properly identify them as genuine officers on legitimate business. 


The family and their staff were held at gunpoint for several hours and robbed of over R11m worth of valuables.


Holding the security company liable for the family’s losses, the High Court found that it and the security guard had acted negligently and in breach of their contractual obligations.


So what exactly is required of a security guard?

The Court held that the requirements of a security guard (in the position of the guard in this case) are, amongst others: –

1.  Honesty, integrity and loyalty to both employer and the persons and property being guarded, 

2.  The ability to receive instruction and act in accordance therewith, 

3.  Wakefulness and alertness during the hours of a shift, 

4.  Mindfulness of the responsibilities of guarding the post which entails watchfulness, wariness and lack of gullibility, 

5.  Physical mobility and the ability to respond appropriately, 

6.  Visibility.

Take action if your security services provider doesn’t match up to that list in any respect!