September 2025 | Business Rescue, Insolvency / Liquidation
“If you’re flogging a dead horse, make sure you’re not riding it.” (Josh Stern)
Creditors and company directors alike need to know how best to deal with a company in financial distress. Both should learn to recognise the difference between an enterprise that has failed beyond resuscitation, and one that, given a chance, can be returned to solvency and success.
With that in mind, the law provides you with two main options:
- Liquidation: Liquidation is the winding up of a company that cannot pay its debts. A liquidator is appointed to sell all the assets and to distribute the proceeds to creditors in their order of legal preference. When the business is hopelessly insolvent and has no reasonable chance of recovery, it ensures an orderly closure and fair distribution to creditors. There’s seldom a good outcome for creditors, especially “concurrent creditors” (holding no security or preference) who can generally consider themselves lucky to recover anything more than a few cents in the rand on their claims. Moreover, at the end of the winding-up, the company ceases to exist and is lost to all role-players — employees, creditors, suppliers, the taxman and indeed the economy as a whole.
- Business rescue: This process is designed to rehabilitate distressed companies by protecting them from attack by creditors while a business rescue practitioner (BRP) develops and implements a plan to restructure debts and operations. The idea is to allow the company to continue trading, save as many jobs as possible, and provide a better return to creditors than liquidation would. Critically, however, there must be a realistic prospect of turning the business around and saving the company. If there isn’t, as we shall see below, applying for business rescue can land the applicants in some very hot water.
The dodging debtor and the creditor’s lament
There’s nothing worse for a creditor: after chasing a recalcitrant debtor from pillar to post and finally cornering them, you’re stymied at the last hurdle by the director’s last-ditch application for business rescue.
“Tough”, the director tells you. “That’s the end of your hunt for payment.” When your blood pressure has dropped a bit, you take legal advice — can this really be correct?
In most cases, yes, you are stuck with waiting while a BRP is appointed and a rescue plan formulated and put to you and other role players for consideration. If the application is genuine, you might even recover something worthwhile. At best you could also retain a long-term customer.
But if this is just another debt-dodging or delaying exercise, our courts will come to your rescue. A recent High Court decision not only set aside business rescue proceedings launched in bad faith but also penalised those responsible by hitting them in their own pockets — hard.
A bad faith application backfires, badly
A property-owning company, in a settlement agreement made an order of court, agreed to a creditor selling its property and keeping the proceeds in full and final settlement of its claim. An auction sale was arranged by the creditor, but on the eve of the sale the director of the property company commenced business rescue proceedings and a BRP was appointed.
The BRP sold the property for R3.4m (to the same buyer who’d offered R3.25m at the auction) and prepared a business rescue plan which was duly adopted. The real fly in the ointment was presumably the fact that the plan included remuneration of over R2.2m for the BRP — a sum grossly disproportionate, said the creditor, to the limited scope of her duties.
Having none of that, the creditor applied to the High Court to set aside the business rescue proceedings. The Court was quick to agree to this request, commenting that the company had no operations, income, or employees. There was no viable business to rescue.
More specifically (emphasis supplied): “The business rescue proceedings were accordingly initiated in bad faith, amounting to an abuse of process … the BRP was remunerated extensively without a proper accounting … no reasonable prospect of rescue existed, procedural requirements were ignored, and it is just and equitable to set the resolution aside.”
Punitive costs and a R2.2m fee down the tubes
No wonder, then, that the Court expressed its displeasure at the actions of both the director and the BRP by ordering them to personally pay all costs (jointly with the company itself, for what that’s worth) on the punitive attorney and client scale (much higher and more severe than the normal costs scale). The BRP, in particular, must be mourning the additional loss of her R2.2m fee.
The bottom line
As a creditor, don’t take it lying down if a company tries to dodge or delay paying you through a misuse of the business rescue procedure.
As a director or BRP, be careful never to be seen to abuse the process. It’s not a “get out of jail free” card to delay liquidation or to relieve creditor pressure. As the Supreme Court of Appeal has put it: “Business rescue proceedings are aimed at restoring a company to solvency, and are not to be abused by a company with no prospects of being rescued but mainly to avoid a winding-up or to obtain some respite from creditors.”
The rules and process relating to business rescue and liquidation can be complex, but we’re here to help you navigate them if needed.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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July 2025 | Company / Corporate / Compliance, Insolvency / Liquidation
“Diplomats operate through deadlock, which is the way by which two sides can test each other’s determination.” (Henry Kissinger)
Running a business with a partner can work brilliantly – until it doesn’t. When co-directors or shareholders fall out and can no longer see eye to eye, the company can grind to a halt, meaning everyone loses.
If the “deadlock” is just the two sides playing diplomat by testing each other’s determination to fight to the finish, there’s a chance they’ll negotiate a settlement before the company actually fails.
But if you find yourself in a fatal stalemate, you should think of cutting your losses and putting your company out of its misery altogether. A recent High Court decision provides an excellent example of how you can do just that.
The director disputes that destroyed a profitable business
The players in this unhappy saga were the 50/50 shareholders, and co-directors, of a small business importing tents from China.
At first, their arrangement clearly worked well. But as time passed, they fell out badly over disputes relating to the terms on which their own businesses (one in Kenya, the other in South Africa) could buy tents from the importer.
Their own attempts to resolve things failed, and the seriousness of their quarrelling led to allegations of fraud and of unpaid debts, together with threats to have one director declared a delinquent director and attempts to bring a third director into play.
A buyout attempt having failed, one of the directors applied for liquidation of the company. The other director’s fierce opposition rested on him asking for everything to be put on hold while he launched alternative litigation against his opponent.
But can you liquidate a solvent company?
Normally, only insolvent companies face liquidation, but the Companies Act allows courts discretion to order the winding up of a solvent company (a company able to pay its debts) in a range of circumstances. Three of those grounds for liquidation are relevant here:
- There is deadlock between the directors in the management of the company and the shareholders are unable to break the deadlock, resulting in or threatening irreparable injury to the company, or
- The result of the deadlock is that the business of the company cannot be carried on to the advantage of the shareholders generally, or
- It is otherwise “just and equitable” for the company to be wound up.
Past the point of no return
In granting the liquidation order, the Court found that the relationship between the directors had broken down irretrievably, and the resulting deadlock had reached the point of no return. The shareholders would be unable to break the deadlock and that had resulted in irreparable injury to the company. Its business could not be conducted for the advantage of shareholders.
The Court went further, holding that in any event it was just and equitable to order winding up. The mutual trust and confidence between the shareholders had been destroyed, there had been a complete breakdown of relationship between the directors and shareholders, and the company’s “substratum” (fundamental reason for existence) had disappeared.
Prevention is better than cure
When you co-own a company, especially if it’s split 50/50, stalemate is an ever-present risk. If this happens and you can’t agree on how to buy each other out or on how to break the deadlock, you could lose the entire business.
Prevention being better than cure, good planning upfront is essential. So, if you run or plan to start a business with partners, make sure that your shareholders’ agreement and other documentation includes clear and workable mechanisms for avoiding dispute, and for breaking deadlock if it occurs.
Common solutions are:
- As a way of hopefully preventing disagreements from arising, set out in writing clear boundaries as to each party’s contributions to the business, their roles in management and funding, profit sharing, obligations of good faith towards each other and to the company, and so on – every situation will call for different wording.
- Clauses to allow one owner to buy the other’s shares are essential, with a clear process for determining value and resolving any disagreement over price or terms.
- Provide for independent arbitration or mediation to resolve any disputes that may arise generally.
These safeguards are unfortunately no magic bullet, as witnessed by the inability of the directors/shareholders in this case to reach any form of agreement. This despite having deadlock-breaking mechanisms in their shareholders agreement, and despite their attempts at negotiation and mediation.
But safeguards are a lot better than nothing, and they will most definitely reduce the risk of you both ending up in court, paying legal fees and being grilled in witness boxes while your business dies. If that happens, everyone loses.
Bottom line? Disputes happen, but they don’t have to kill your business. Speak to us if you’d like advice on your company’s structure, and for help in drafting a shareholders’ agreement that protects you both if things turn sour.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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February 2024 | General Interest, Insolvency / Liquidation
“MTl’s business clearly amounted to an unlawful ponzi-scheme, i.e. a fraudulent investing scam promising high rates of return to investors and generating returns for earlier investors with investments taken from later investors.” (Extract from the MTI judgment)
Recent media reports of the MTI (Mirror Trading International) liquidators making repayment demands of investors highlight once again the dangers of falling for “too good to be true” investment schemes.
The problem is that by their very nature, all pyramid schemes (including “ponzi” schemes) eventually fail, leaving the vast majority of investors with nothing but the hope of being awarded a partial dividend on their claims when the holding entity is eventually liquidated.
But what if an investor is one of the “lucky early birds” who got paid out before the scheme’s collapse?
Debunking the “early bird investor catches the worm” myth
A common myth is that the only losers in a collapsed pyramid scheme are those investors who didn’t get their money out in time, and that the “early birds” who did act quickly are winners in the equation.
The problem for them is that liquidators have wide powers to reclaim payouts made to investors (as creditors) before liquidation. The idea is that payouts by definition come from new money paid in by new investors, and that to be fair to them it is necessary to put everything back into the pot for all investors and other creditors to share according to their claims. But of course they only share in what’s left after all the liquidation costs and fees have been settled, and in a large and complex liquidation like MTI’s those costs will be particularly substantial.
The practical issue is that whatever was paid out to investors/creditors – both by way of the original investment and the “profit” on it – is likely to be claimed back by the liquidator. And the investor forced to repay everything is left with nothing but a concurrent claim in the liquidation.
Of course a liquidator’s prospects of recovery will be boosted if they can obtain a court declaration of unlawfulness of the scheme and invalidity of the investment contracts (as has already happened in the MTI liquidation), but let’s see how that could then play out in practice.
The liquidator’s options for recovery
To summarise the options available to a liquidator in recovering payouts made before liquidation –
Even worse, could investors lose a lot more than they put in?
Media reports suggest that an MTI investor, who invested R20,000 and was paid out R21,000 shortly before liquidation, received a demand from the liquidators to repay not just his initial investment and profit, but for 600% of what he put in. The sum claimed (at date of writing) is R122,000, that being the current value of the bitcoin he initially invested – the argument being presumably that what was disposed of was “property” (bitcoin), in which case the liquidators would be entitled to reclaim either the bitcoin or its value at the date the disposition is set aside. The justification will no doubt be that that is what the company and its creditors as a whole have actually lost as a result of the disposition. If our courts agree with that view, being sued for a great deal more than the original investment will be a particular risk when the investment is a volatile asset like bitcoin.
The High Court has previously declared MTI an illegal and unlawful scheme and all agreements between it and investors unlawful and void, but that of course is only the first step for the liquidators in proving their claims against investors. Media reports suggest that many investors are lawyering up to oppose the claims so we must wait and see how it all plays out in the courts.
Regardless, the risk of not only losing the original investment but then also having to cough up a great deal more over and above that certainly does fire yet another warning shot across the bows of anyone tempted to invest in any scheme promising unrealistic returns. Prospective investors shouldn’t part with a cent until they confirm that the scheme is actually legitimate.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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September 2022 | Debt Recovery, Insolvency / Liquidation
You should always take as much security for your claims as you possibly can before advancing credit or lending money to a debtor. That’s because if your debtor fails and is “liquidated” (if a corporate) or “sequestrated” (if an individual), without security you will have only a concurrent claim in the estate.
And with a concurrent claim, you will be lucky to get back more than a few cents in the Rand, because you will rank right at the bottom of the ladder after both secured creditors and preferent creditors (employees, SARS etc).
So, first prize is always to hold security for your claim
Having a “secured claim” greatly increases your chances of being paid out a decent amount (hopefully your claim in full), because the proceeds of the asset/s subject to your security are earmarked (after payment of some estate costs and the like) to paying out the claims of the “secured creditors” holding security over each particular asset.
If your debtor owns immovable property, registering a mortgage bond over it will generally give you a very strong security, whilst with movable property you have various options. There are many options here, applicable to various types of claim in various circumstances – liens, cessions, tacit hypothecs, rights of retention and so on – but for the moment let’s have a look at the more general concepts of pledge and notarial bonds.
One of the strongest options with movables is to take a pledge over them, but that will require you to actually hold the movables in your possession. And of course it’s not always viable for a debtor to give you that possession – a much more likely scenario with most business debtors is that they need to keep possession and use their assets (machinery, fittings, vehicles, stock etc) to carry on trading. So what are your options in that situation?
The two types of notarial bond
In that case – where you cannot take actual possession of the movables – consider registering a notarial bond over them. There are two types of notarial bond, both requiring registration in the Deeds Office –
- Your first and best option is a special notarial bond. This gives you substantial security, in the form of a “deemed pledge”. You now have first bite at the cherry over any movable asset listed in the bond, even though you don’t have possession. Note that these assets need to be clearly identified in the bond (“….specified and described in the bond in a manner which renders it readily recognisable…”) so list full descriptions, models, serial numbers, and the like for every asset.
- Secondly, take a general notarial bond over all the debtor’s movable assets generally. That will bring into your net those assets which are not individually identifiable, such as stock, building materials and so on. The bad news is that a general notarial bond in itself gives you only a weak preference on liquidation, but the good news is that you can convert that into full, “real”, security if you move quickly enough.
How do you convert a General Notarial Bond into full security?
Provided you seek legal assistance quickly at the first sign of financial distress in your debtor, you may well have time to “perfect” the bond into full security by way of a court order prior to liquidation. Armed with the court order you take possession of all the debtor’s movables and hey presto you have a “real” security over them.
Let’s look at a recent example –
- A supermarket group, owed over R2m by a trading store, held two general notarial bonds over its movable assets (presumably shop fittings, fixtures, equipment, stock etc).
- Fearing that the store’s owner (a company) was trading in insolvent circumstances and would be liquidated, the creditor applied for an urgent High Court order allowing it to perfect its security.
- The debtor opposed the application, asking the Court to exercise its discretion not to grant a perfection order. But the Court refused to do so, and granted the perfection order, on the basis that the creditor had no other remedy available to it (such as a damages claim). The Court was equally unimpressed with the debtor’s argument that the terms of the bonds were “unconscionable and contra bonos mores [offensive to conscience]”.
That’s clear judicial confirmation of the strong position you are likely to find yourself in where you hold properly drawn and registered general notarial bonds, and act quickly to perfect them in appropriate circumstances.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© LawDotNews
February 2022 | Debt Recovery, Insolvency / Liquidation
“When debtors once have borrowed all we have to lend, they are very apt to grow shy of their creditors’ company” (John Vanbrugh)
Bad debt is a major issue for many businesses in these hard economic times – not taking robust steps to collect it could be fatal to your own financial position.
So if you are being given the run-around by a recalcitrant corporate debtor, take advice on whether an appropriate and cost-effective remedy for you might be an application for the company’s liquidation (“winding-up”).
Cynical misuse of the liquidation process as a debt collection tool or to avoid any genuine disputes over liability is likely to end badly for you (you risk a heavy costs order for “abuse of process”). Be aware also that if your application is successful and a liquidation order is granted, you might be in for more than your own legal costs (ask for advice on the “danger of contribution” in winding-up matters).
But properly used, a liquidation application will certainly get your debtor’s attention very effectively. It’s often the only strategy that has any effect on a “dodging debtor”. The threat of a liquidator knocking at the door to take over control of the company is a great motivator to actually do something – pay up, or make a genuine settlement offer, or at least disclose whether something is in dispute so you can deal with it.
The practical challenge can however be in proving that the debtor is actually financially unable to pay its debts. That’s often not easy, and mere failure by the debtor to pay the debt is not sufficient.
The “section 345 demand” shortcut
However there is a shortcut – serve on the company’s registered office a demand for the debt. You may hear it referred to as a “section 345 letter”, that being the section of the Companies Act which makes this all possible. If the debt is not paid (or secured or resolved by agreement) within three weeks, the company is deemed to be unable to pay its debts, making a liquidation application much easier to support.
The 2021 High Court case of a municipality struggling to recover debts due to it by two property companies provides a good example of this letter of demand process in action…
Letters of demand sink two property companies
- Two related companies, one a property-owner and the other a tenant, owed the local municipality for unpaid rates, service charges, and electricity accounts.
- The municipality served the appropriate letters of demand on the companies’ registered offices, but still they failed to pay up. Their attempts to settle with the municipality having failed, the municipality applied to the High Court for liquidation.
- The High Court duly granted provisional liquidation orders against both companies, finding on the facts that they had failed to rebut the presumption that they were unable to pay the debts. Nor were they able to convince the Court to exercise its discretion to refuse the liquidation orders.
As an end note, it is essential that your letter of demand is correctly drawn and correctly served. If it isn’t, your application is headed for failure – and that can be a very expensive exercise.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© LawDotNews
July 2021 | Company / Corporate / Compliance, Insolvency / Liquidation, Litigation
“Creditors have better memories than debtors” (Benjamin Franklin)
In these hard times of pandemic and economically destructive unrest, an unfortunate number of businesses face collapse, and many will opt for the “first aid for companies” option of business rescue.
Creditors coming out of that process with a shortfall (only the luckiest creditors are likely to emerge with full settlement) will naturally look to any personal suretyships they hold to cover that shortfall.
A recent SCA (Supreme Court of Appeal) decision has brought welcome clarity to the question of whether – and in what circumstances – such personal suretyships will survive the business rescue process.
Both directors and creditors need to understand the outcome, and to act accordingly.
Sued for R6m, a CEO’s defence crumbles
- A company CEO (Chief Executive Officer) signed a personal suretyship in favour of a creditor supplying the company with petroleum products.
- When the company fell upon hard times it was placed into business rescue. Eventually a business rescue plan was adopted, the rescue process was terminated, and the creditor sued the CEO for the shortfall on its claim of just over R6m.
- The CEO’s main defence was that his liability as surety was an “accessory obligation” – in other words, if the creditor’s claim against the principal debtor (the company) fell away, he should be released from his liability as surety.
- But, held the Court, although a principal debtor’s discharge from liability does indeed ordinarily release the surety, our law allows the creditor and the surety to agree otherwise.
- And the suretyship agreement in this case did just that. It contained “unobjectionable” and “standard” terms which included a specific agreement by the surety that he would remain liable even if the creditor “compounded with” the company by accepting a reduced amount in settlement of its claim. Nor was there any mention in the business rescue plan of its effect on creditor claims against sureties (it could, for example, have provided specifically for sureties to remain on the hook, or to be released). But the deciding factor remained that the wording of the suretyship was such that the creditor did not abandon its claim against the surety by supporting the business rescue plan.
- Bottom line – the CEO goes down over R6m, and the creditor has another shot at emerging unscathed from the mess.
Heed these lessons from the judgment!
The SCA in its judgment undertook a comprehensive interpretation of the terms of the deed of suretyship, of the business rescue plan, and of the relevant legislation. Although the detail will be of more interest to lawyers and academics than it will be to the average director or creditor, it did bring welcome clarity to an issue of great practical importance, and the valuable lessons therein should be heeded –
Directors: As always, think twice before signing any personal suretyship, and if you absolutely have no alternative, at least understand fully what you are letting yourself in for both legally and practically. Equally, ensure that the business rescue plan lets you fully off the hook as regards any possible personal liability; you may be advised to go further and have a separate release agreement with any creditor/s holding your surety. Although not directly relevant to this article, think also of managing any risk of personal liability beyond suretyship, such as allegations of reckless trading and the like.
Creditors: You on the other hand should always try for watertight and upfront suretyships from directors and others with attachable assets (again not directly relevant to this article, but also take whatever security you can over company assets such as debtors, fixed property etc). And when it comes to the business rescue plan, make sure that it leaves your claim against sureties unaffected.
Upfront professional advice and assistance is a real no-brainer here!
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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