Regulation 127(1)(b) promulgated under the Companies Act 71 of
2008 (the Act) states that companies which are undergoing business
rescue proceedings are classified into three groups, namely, large,
medium and small companies. A "small company" is set out
as being, "any company, other than a state owned or public
company, whose most recent public interest score, as calculated in
terms of regulation 26(2), is less than 100". Regulation 26(2)
then goes on to state that at the end of each financial year, every
company must calculate its "public interest score",
taking into account various factors, inter alia the average number
of employees of the company during the financial year, the amount
of rands which the company has in third party liability and
turnover during the year, calculated as one point for each R1
million or portion thereof. These provisions apply equally to both
companies and close corporations.
The Act therefore sets out a method of calculating whether a
business is classified as a small business or not.
Business rescue and various alternative options
The question which now arises is whether certain small
businesses that are financially distressed should be placed under
business rescue, or whether the company should simply be liquidated
without going through the process of business rescue first. In
assessing this question it is important to consider what the Act
sets out as the purpose of business rescue. This is stated in
section 128(1)(b) where it says that business rescue should create
a plan to rescue the company through a restructuring of certain
elements so as to maximise the likelihood of the company continuing
to exist on a solvent basis or, if this is not possible, to result
in a better return for the company's creditors or shareholders
than what would result from the immediate liquidation of the
company.
These two alternative purposes are what should be considered by the
board of a small company or by an affected person of the small
company when deciding whether to place the company under business
rescue in terms of section 129 and section 131 respectively. The
reason for considering these two purposes is because business
rescue proceedings can be expensive and if they do not result in
either of the above purposes being achieved and the company is
subsequently placed under liquidation, then the costs incurred will
be in addition to those incurred for the liquidation, thus
resulting in creditors or shareholders receiving a much smaller sum
of money than they would have received if business rescue had not
been pursued and the company had immediately been placed under
liquidation.
When deciding whether to place a small company under business
rescue there are various other options that should also be
considered. Firstly, section 155 of the Act allows a company,
whether financially distressed or not, to propose an arrangement or
compromise of its financial obligations to its creditors in
accordance with the requirements of the section. This procedure
should be seen as an alternative to placing the company under
business rescue, and has many advantages. For example, the board of
the company remains in charge and thus there would be no additional
costs in having to pay a person external to the company to
administer the process. It has been suggested though that due to
the requirement that the company will in addition to obtaining the
creditors' support, have to make an application to court for
the court's approval of the proposal, small businesses will
probably not find a compromise with creditors to be a viable
alternative to business rescue.
A second alternative that could be considered are the various
options that are available to a consumer in terms of the National
Credit Act 34 of 2005. This Act will only apply to juristic persons
whose asset value or annual turnover, together with the combined
asset value or annual turnover of all related juristic persons at
the time the credit agreement is concluded, is less than the
current threshold determined by the Minister, being R1 million. If
the small business falls within this category, then this Act will
apply to it and its management will have various alternatives to
business rescue available. These are referring the credit agreement
to a debt counsellor, alternative dispute resolution agent,
consumer court or ombud with jurisdiction. The purpose behind any
of these options is for the parties to resolve any dispute under
the agreement or to develop and agree on a plan to bring the
payments under the agreement up to date.
A further alternative available to a very small business is that of
an administration order in terms of section 74 of the
Magistrates' Court Act 32 of 1944. It has been said that this
type of order is the predecessor of debt counselling as provided
for in the National Credit Act. Despite its antecedents the section
74 administration procedure has not yet been done away with. As the
Magistrates' Court Act specifically refers to a
"debtor" and does not classify such, it can be presumed
that so long as the small business's debts do not exceed the
R50 000 threshold that has been determined by the Minister, this
procedure may be applied as an alternative to business rescue. Two
of the main differences between an administration order and debt
counselling are that under debt review, the creditors are paid a
sum on a monthly basis, whereas under an administration order,
payments to creditors are only made every three months. Further, a
clearance certificate will be issued once the debt has been paid
off under debt review, but no certificate is issued under an
administration order.
Small businesses and the possibility of thresholds in relation to business rescue
The question arises whether financial thresholds should be set,
analogous to those in the Competition Act 89 of 1998, below which
small businesses will not be allowed to enter into business rescue
proceedings. The problem with creating a set turnover and/or asset
value threshold is that contrary to the thresholds created for
distinguishing mergers in competition law, which were created
solely for the purposes of notification and adjudication, the
thresholds created for business rescue would be used to determine a
much more substantial result, namely whether a company will be
allowed to attempt to continue trading or not. In addition, the Act
provides for the court to have a discretion as to whether or not to
allow a company to enter into business rescue. The importance of
this is that the court will be in a position to take the
circumstances of each individual case into account. Imposing
monetary thresholds may cause the process to become too objective
and could result in the subjective factors relating to the
company's unique circumstances being overlooked –
essentially fettering the discretion of the board of directors and
of the court. There is in any event a backstop – an
affected person can apply to court to set aside either a resolution
or a court order of business rescue, in terms of sections 130 and
131 respectively.
In the recent reportable judgment of Swart v Beagles Run
Investments 25 (Pty) Ltd and others (26597/2011) [2011] ZAGPPHC 103
(30 May 2011), the Honourable Makgoba J stated that when an
application for business rescue entails the weighing-up of the
interests of the creditors and the company, the interests of the
creditors should prevail. This statement specifically lends itself
to the writer's view that there is no need for specific
thresholds to be created. The court is in a much better position to
consider the two purposes of business rescue as set out in section
128, one of which was specifically referred to by Makgoba J, while
at the same time taking into account both the creditors and the
company's circumstances when deciding whether it is a viable
option for a small business to enter into business rescue instead
of being liquidated immediately.
Thus, it is extremely important for the directors or members of a
small business to exercise care when considering whether to enter
into business rescue or not. They should consider all of the other
various options available to them, the fact that there could be
legal costs incurred as a result of an objection in terms of
section 130, and whether the high costs of business rescue are
actually worth the risk that if business rescue should fail and the
company is placed into liquidation, both the costs of the failed
business rescue and the liquidation costs will have to be paid to
the detriment of creditors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.