A statutory analysis of business rescue for Small and Medium Enterprises in South Africa

Abstract

Small and Medium Enterprises (SMEs) are contributing positively to South Africa's socio-economic development. They are eradicating poverty by providing skills and job opportunities to the citizens of South Africa. However, these enterprises are often failing, which results in job losses and a lack of skills offerings. The Companies Act 71 of 2008 of South Africa makes provision for two methods that can be used to rescue companies which are in financial distress. These methods are governed by section 128, which follows the formal approach, and section 155, which follows the informal approach. These methods replaced official judicial management found in Companies Act 61 of 1973. Section 128 of the Companies Act 71 of 2008 provides the procedure by which a company in financial distress is placed under the supervision of business rescue practitioners. These practitioners are expected to host a meeting with management and the creditors of the company in question. After that they will draft a plan which will be used to rescue this company, and the creditors are afforded an opportunity to vote on the presented plan. During this procedure the company will be provided with an automatic moratorium to protect it from legal claims until the procedure is complete. However, section 155 of the Companies Act 71 of 2008 provides that any company may make use of this section whether they are financially distressed or not; the board of the company in question may make arrangements with or proposals to its creditors. If the proposal is accepted by creditors, then the new arrangements can be made, and if it is not accepted then the arrangements will not take place. Business rescue not only helps to save jobs but brings good returns for the creditors of the company in question. This mini-dissertation analyses the current business rescue procedure provided for by the Companies Act 71 of 2008, to establish whether it is suitable for SMEs in South Africa.