Warning to struggling businesses in South Africa

Companies considering using business rescue laws to delay paying debts have been warned that the courts are aware of this tactic and are clamping down on the practice.

According to legal experts from Webber Wentzel, these ulterior motives disguised as good faith business rescue proceedings are becoming an increasing concern in South African insolvency law.

The experts include Julian Jones (Partner), Caellyn Eedes (Senior Associate), and Liso Potwana (Candidate Attorney) at Webber Wentzel.

Companies are abusing the business rescue process to delay or obstruct liquidation proceedings, undermining the integrity of the legal framework designed to assist financially distressed businesses.

They explained that the Companies Act was introduced to provide an alternative to liquidation, encouraging business rescue to rehabilitate struggling enterprises.

However, as Webber Wentzel points out, the courts are now seeing a troubling rise in cases where business rescue applications are filed not to genuinely save a business but rather to stall or evade creditors.

A recent ruling highlighted the judiciary’s growing intolerance for these tactics.

In December 2021, a creditor asked the court to close down a company that could not pay its debts under section 346 of the Companies Act, 1973 (1973 Act).

The case was repeatedly delayed, and the court noted that the respondent’s late answering of the affidavit was “cynically designed to delay the adjudication of the liquidation application.”

Just before the court hearing, the company being sued tried to delay things again by filing a business rescue application.

Normally, under section 131(6) of the Companies Act, 2008 (2008 Act), when a business rescue application is filed, any liquidation (or company closure) process is paused until the court makes a decision.

The question before the court was whether this business rescue attempt was a real effort to save the company or just a way to buy time and avoid liquidation.

To make a ruling, Webber Wentzel noted that the Johannesburg High Court leaned heavily on a 2024 Supreme Court of Appeal (SCA) ruling.

In that case, the SCA held that business rescue applications filed for ulterior motives do not trigger the suspension of liquidation proceedings under section 131(6).

This means courts can ignore business rescue applications if they are made for the wrong reasons.

In the aforementioned case, the High Court meticulously reviewed the respondent’s business rescue application and its conduct throughout the case.

The court found that the company had no real defence against liquidation. It also said the business rescue application was filed at the last minute to delay the case.

The court ruled that the application was an abuse of the system and refused to let it pause the liquidation process.

Having found the business rescue application to be an abuse of process, the court dismissed the respondent’s attempt to delay the winding-up proceedings.

According to Webber Wentzel, this ruling confirms that section 131(6) does not protect applications that lack genuine intent or substance.

The judgment also resolves longstanding uncertainty around the definition of “liquidation proceedings” in section 131(6).

The court decided that both the application to close a company and the process of winding it up are covered. So, unless a business rescue application is made honestly and correctly, it cannot block the liquidation process.

Webber Wentzel stressed that the ruling sends a clear message that courts will not tolerate manipulating business rescue laws to obstruct legitimate creditor claims.

The court also took strong action against the person responsible for the abusive business rescue application. It ordered that this person—not just the company—had to pay the legal costs personally.

“For businesses, creditors, and legal practitioners, this ruling sets a clear precedent and reinforces the court’s role in safeguarding South Africa’s insolvency framework,” said Webber Wentzel.