In recent years, South Africa’s economy has faced sluggish, and at times negative, growth. The situation worsened significantly during the COVID-19 pandemic when the South African government imposed a nationwide lockdown, halting all business activities except for “essential services.” This disruption placed severe financial strain on many companies—a challenge that continues to persist.
Since the implementation of the Companies Act, business rescue has emerged as a vital mechanism to assist financially distressed companies. Under the Act, a company is considered financially distressed if it appears likely that it will be unable to meet its financial obligations as they fall due within the next six months. Additionally, financial distress includes circumstances where it is reasonably foreseeable that the company will become insolvent within the same period.
However, for a company to qualify for business rescue, it must also demonstrate a reasonable prospect of being rescued. While the fact that a company is in financial distress is often undisputed, the critical issue typically revolves around whether it has shown credible evidence that it can be rescued. Failing this, the company may face liquidation.
In the Oakdene Properties – case the court emphasized that the prospects of rescue must be grounded in reasonable and objective evidence rather than speculative or optimistic suggestions. Similarly, the court in the Welman – case stated that business rescue is not intended for terminally ill companies, nor for those with chronic, irreparable issues. Instead, it is aimed at ailing companies that, with appropriate intervention and time, can recover and regain solvency.
Thus, a company that was already insolvent or in financial distress prior to the pandemic, and whose situation has worsened due to the economic downturn, is unlikely to be a suitable candidate for business rescue. Such a company, deemed “terminally ill,” is more appropriately placed into liquidation.
Disclaimer: The content and information provided above are general in nature and should not be considered legal advice.