The effect of business rescue and the section 133 moratorium on stakeholders

Abstract

Direction: The Act 71 of 2008 introduced a business rescue procedure which provided for the rescue of financially distressed companies. This procedure replaced the then statutory procedure of judicial management introduced by The Act 46 of 1926. The business rescue proceedings kick in with the general moratorium or stay on legal proceedings against the company or its property. This has a consequence that any claims against the company may only be enforced with the consent of the business rescue practitioner or the leave of the court. Research purpose: The research analyses the effect of the moratorium on the rights of claimants, the consequences of such a moratorium and the extend of the rights of those affected. The moratorium has the effect that companies are given temporary “immunity” to actions brought by creditors which would have been due and actionable. The process may be abused by companies who are not in distress but merely institute business rescue proceedings to stall payments of its debts and to evade its obligations towards its stakeholders. The purpose of the research is to highlight rights that may be affected and possible protection of those rights. Motivation for the research: To investigate the research question: ‘whether the avenues put in place by the chapter 6 business rescue proceedings can ensure that all stakeholders benefit and therefore remedy possible misuse?’ Research approach and method: The study will include a minimal comparison of processes of other insolvency laws, for example judicial management; liquidation and common law. The study will also compare other international countries such as the United Kingdom (“UK”) to provide clarity on how the administrator and business rescue practitioner’s roles may affect the rights of creditors, as well as the extent of their powers and possible abuse of the process considering those powers granted by legislation. Main findings: Based on the research done, it is clear that the business rescue process is quite a litigious process and requires a lot of finance to effectively implement. The rescue itself is based on financial distress but the process of rescuing is a financial burden to the already distressed companies. Furthermore, the Business Rescue Practitioner is given discretionary powers in respect of the drafting of a plan which will ultimately affect stakeholder, whether they vote or not.