History of business rescue reform in South Africa

Summary: Past new business rescue legislation initiatives

Two models for business rescue reform were put forward in the last few years.

The Unified Model (see below), which is associated with Prof. David Burdette of University of Pretoria, has a long history of development. The incorporation of business rescue provisions in the Insolvency and Business Recovery Bill was reportedly accepted by the Department of Trade and Industry in 2004.

The Department of Justice, however, in 2003 and 2004 favoured new business rescue legislation as per the Daly Model (see below).

During 2004 the dti and DoJ therefore seemed to duplicate efforts with different models.

It was understood, however, that DoJ and dti achieved convergence of thinking towards the end of 2004.

It is not known how the Ministerial Committee of Enquiry into the Liquidations Industry affected future new business rescue legislation, but an interdepartmental task team evaluated it.

It is understood that in October 2005 a creditor-friendly proposal was made by Professor David Burdette based on the UNCITRAL Legislative Guide and aligned with SA insolvency legislation, but that it was not accepted.

In June 2006 draft new business rescue legislation was distributed for comment to selected parties. It was was debtor-friendly in nature - a "mix of judicial management, Chapter 11 and other".

It appeared in draft from on 12 February 2007 as Chapter 6 of the Companies Bill, 2007 (see business rescue legislation). The public had until 30 March 2007 to comment on it.

New company business rescue legislation and future uniform insolvency legislation

Notice from dti:

During the consultation process, the dti was made aware of proposals within the Department of Justice to develop uniform insolvency legislation which, if brought to fruition, would overlap and may conflict with the regime set out in the current Companies Act for dealing with and winding up insolvent companies.

In order to avoid any future conflict, the dti proposes a transitional arrangement that will retain the current regime, as set out in Chapter 14 of the Companies Act, 1973 without alteration, on an interim basis until such time as any new uniform insolvency law may be enacted and brought into operation.

From Tienie Cronje, Researcher: South African Law Reform Commission, Department of Justice and Constitutional Development

The intention is that the winding-up of insolvent companies should be dealt with in the uniform insolvency legislation (which was approved by Cabinet in 2003 in consultation with the Minister of Trade and Industry).

This legislation was stalled pending a decision on modern business rescue provisions, but a decision has now been taken that the dti will deal with business rescue for companies opening up the way for the legislation to proceed.

However the uniform insolvency legislation must be adapted to fit in with the Companies Bill and business rescue provision for entities other that companies must be developed.

It seems that separate provisions will be enacted for the rescue of other entities such as individuals, trusts and partnerships.

Ministerial Committee of Enquiry into the Liquidations Industry

Justice minister Brigitte Mabandla launched the enquiry on 24th August 2004 (see box on the right). It is chaired by Advocate Seth Ntai of the Pretoria Bar and Advocate Lindiwe Nkosi-Thomas of the Johannesburg Bar. It is understood that the commission added business rescue to its terms of reference.

EXTRACT FROM BUDGET SPEECH BY MS BRIGITTE MABANDLA, MP, MINISTER FOR JUSTICE AND CONSTITUTIONAL DEVELOPMENT, NATIONAL ASSEMBLY, PARLIAMENT20 May 2005

MASTERS’ OFFICES

Madame Speaker,

The Masters’ Offices play an important role in the social and economic lives of our people.

Each year the value of the estates under the supervision of the Masters amounts to approximately R18 billion, which includes about R2,5 billion in the Guardians’ Fund. It is essential that the Masters’ offices are transformed and restructured to ensure that those, who are entitled to this service, receive it without unnecessary delays. This will not only stimulate our economy, but ensure that those who need support receive it promptly. Ways of ensuring that estates, both deceased and insolvent estates, are promptly wound up must be explored.

The ability of the Masters’ offices to render an efficient and effective public service in the national interest must be enhanced.

On 20 July 2004, pursuant to widespread allegations of corruption within the liquidation industry and general inefficiency in the Masters’ Offices, I appointed a Committee of Enquiry. The Committee, co-chaired by Advocates Seth Nthai and Lindi Nkosi-Thomas, was tasked with enquiring into, and investigating the administrative system relating to the appointment of liquidators, and to identify practices which encourage undesirable or illegal practices.

I am pleased to report that the Committee has delivered its final report and has provided me with a comprehensive overview of the problems in the Masters’ Offices and in the liquidation industry. The report also contains recommendations, which have been considered by officials from my Department and departments of Trade and Industry and Treasury. I am in the process of reporting to Cabinet on the Committee’s findings and on the recommendations made by both the Committee and the departmental officials. The report will assist us to achieve our objectives in the Master’s offices.

Although many allegations of corruption were made, the Committee received very few substantiated allegations. In appropriate cases, the allegations were referred to the authorities for investigation. We shall continue our efforts to eradicate corruption completely.

South African Company Law for the 21st century - guidelines for corporate law reform

Tshepo Mongalo

Project Manager: Corporate Law Review

The decision of the Department of Trade and Industry in South Africa (the dti) to review and modernise company law in this country was based on the need to bring our law in line with international trends and to reflect and accommodate the changing environment for business, both in South Africa and globally.

Of particular interest is Chapter 4.6 of the Company Law Policy Document: Insolvency and Corporate Rescue on page 43.

The dti will liaise closely with the Department of Justice about the proposed company law reform and the introduction of the proposed new Insolvency and Business Administration Act.

A radically new rescue provision should provide a mechanism under which a specified majority of creditors can approve a plan under which the debtor may emerge from protection and resume normal commercial dealings. This recommendation will be taken into consideration in the law review process in order to create a system of corporate rescue appropriate to the needs of a modern South African economy. In particular, the provisions of the US Chapter 11 will be considered. It must further be tested against the work already done by the Department of Justice in the proposed Insolvency and Business Administration Act.

The dti in 2004 held a series of consulting workshops across the country in this regard.

The dti's way forward

The dti envisages that Company Law Reform will proceed through three separate stages:

Consultation and finalisation of a policy framework
The preparation and review of a drafter’s memorandum based upon the policy document
The drafting, publication and consultation on new company law.

This policy document will be presented to a range of stakeholders, first internally in government, and then externally to stakeholders and customers. In addition, the policy document will be debated at Nedlac.

Concurrent with public consultation on the policy framework, the dti, with the assistance of local and international experts, will prepare a drafter’s memorandum, which will inform the new legislation. In preparing such a memorandum, current legislation, as well as international practice and legislative provisions will be studied. The final document will draw together all the necessary research documents, will clearly outline the thinking, and will be consistent with the policy framework. It is expected that this process will be completed by December 2004.

The final stage in arriving at new company law will be the process of drafting the new law. This process will be based on the drafter’s memorandum, giving effect to the policy. Once the new law has been drafted, both the legislation and the drafter’s memorandum will be made public and extensive consultation on the new law will occur. It is anticipated that the new legislation will be made public by December 2005. Given the nature of the topic and its potential impact on business, it is imperative that the process is transparent and consultative and that all outputs of the process are widely publicised. The process outlined below seeks to address these principles.

A concurrent and equally important process is the establishment of the institutional framework. This will involve as a first step the transformation of CIPRO into an efficient, sustainable and service oriented company registration office. A fundamental transformation of the systems, processes and organisational orientation will be necessary. Steps will be taken to ensure that the institutional framework envisaged in this policy framework is fully operational when the law comes into effect.

Due to the extensive nature of the proposed reform, an interim review of current legislation will be performed to deal with problematic provisions, provided that any amendments are in line with the philosophy outlined in this policy framework.

Legislation Report From The Office Of The Chief State Law Advisor

Enver Daniels

Chief State Law Advisor

It is not clear what exactly the status of bills are. Below follows the last information drawn from DoJ records.

Insolvency and Business Recovery Bill

Legislation Report - 16 February 2007:

Received: -
State Law Advisors: T. Hercules R. Mosiane.
Progress: Busy perusing inputs received from the Department.

Business Administration Act (Old Name: Business Rescue Bill)

The last Legislation Report - 9 July 2004 in which it was referred to called it the Business Administration Bill. In prior reports it was called the Business Rescue Bill. It has not appeared in reports subsequent to 9 July 2004 since it has reportedly been submitted to the Minister of Justice and Constitutional Development for consideration.

Received: 10/05/04
State Law Advisors: H. Smuts, R. Mosiane, A. Johaar
Progress: Busy drafting.

The Unified Model

The development of the Unified Model, championed by Prof. David Burdette of University of Pretoria, has a long history and did much to both raise the awareness of business rescue in South Africa, and to increase the body of knowledge regarding business rescue best practice.

South Africa presently has separate statutes regulating corporate and individual insolvency. The Insolvency and Business Recovery Bill is meant to unify them. You can access the draft bill in Appendix E of the Annexures of Prof. Burdette's doctoral thesis.

From Financial Mail 18th June 2004: Rescue Remedy:

... Burdette, after consulting a wide range of players, is calling for a revamp of the entire system. He has consolidated insolvency laws scattered across the Companies Act, the Insolvency Act and the Close Corporations Act, in a unified Insolvency & Business Recovery Bill.

"We've managed to reduce more than 1 000 sections across different acts into a single piece of legislation with 192 sections," says Burdette.

He says insolvency and business rescue go hand in hand and the new unified act has been designed to accommodate a new business-rescue model. Most players support a consolidated approach to insolvency, but some feel it is unworkable.

... Burdette says the new act changes little of the substantive law of insolvency that has been built up by statute and common law over the decades. Instead, it focuses on making insolvency law more user-friendly.

"Ironically, it's the fact we have fragmented insolvency legislation that gives rise to interpretation problems."

From "The development of a modern and effective business rescue model for South Africa" (see box on the right):

During the late 1980s the South African Law Reform Commission (SALRC) undertook an initiative to totally review the Insolvency Act 24 of 1936. At the initial stages of the review process the Standing Advisory Committee on Company Law, resorting under the auspices of the Department of Trade and Industry, was requested to simultaneously look at the reform of the winding-up provisions of the Companies Act 61 of 1973 and the Close Corporations Act 69 of 1984 (however, nothing was done in this regard until 1998). The SALRC published numerous research papers before being requested, during the mid 1990s, to hasten the project and to publish a Draft Insolvency Bill. The SALRC's Draft Insolvency Bill was eventually published in 1996.

In the meantime the CACIL (University of Pretoria) had offered to assist the Standing Advisory Committee on Company Law in bringing about the desired amendments also to the Companies Act and the Close Corporations Act. The suggestion was that the CACIL would attempt to unify the winding-up provisions of the Companies Act and the Close Corporations Act with those of the Draft Insolvency Bill published by the SALRC in 1996. In doing so the CACIL used the SALRC's Draft Insolvency Law as a point of departure, and a working document appeared in October 1998. This working document was subsequently discussed at a national symposium, attended by over 200 delegates from all disciplines of the insolvency profession. The overwhelming majority of the delegates were in favour of a unified Insolvency Act, but felt that some major amendments had to be made to the initial draft included in the working document. In order to achieve the necessary changes a series of workshops were held at the University of Pretoria during December 1998.

In October 1999 a new version of the Unified Insolvency Act was discussed at length at a technical conference. The delegates at this conference approved the new version of the Draft Unified Insolvency Bill with a few minor amendments. The final version of the Draft Unified Insolvency Bill, reflecting the sum total of the research conducted by the SALRC and the CACIL, was eventually presented to the SALRC in January 2000.

On 5 March 2003 the Cabinet of the South African government approved the introduction of the Draft Insolvency and Business Recovery Bill, the name given to the unified version of the new Insolvency Act.

The Bill was subsequently referred to the state law advisers.

The Daly Model

Patrick Daly of Daly Incorporated, supported by the Banking Council, proposed new business rescue legislation instead of business rescue embodied in the Unified Model. New rather than unified legislation was, for instance, the route taken by Australia to address business rescue legislation. He proposed an interim model for rescue utilising current legislation until a new rescue bill has been drafted.

From Financial Mail 18th June 2004: Rescue Remedy:

Daly says: "Our insolvency law, save for the absence of business-rescue provisions, is among the best in the world. Almost every clause has been interpreted and precedents have been set. A rewritten insolvency act would introduce great uncertainty about interpretation."

Daly has for years been frustrated frustrated with the way clients short-circuited the legal process of debt recovery by going straight to liquidation proceedings. However, he felt that an outright rewrite of the legislation would take years. As a result, rom July 2003, he began studying business rescue models of other countries.

From Finance Week 16 June 2004: Dawn of a new industry:

Daly decided to look at what could be done with existing legislation - and made a stunning discovery... On studying the objectives of our insolvency law, with its more recent amendments, we realised that the intention of the legislation was in fact business rescue before liquidation. It had simply become practiced in a different manner.

SA law in fact only needed a little tinkering to achieve this objective of business rescue. Daly Inc drafted a formal proposal for business rescue that would utilise the current legislation - albeit clumsily - with minor amendments.

Mostly if would require a change in mind set from one of liquidation to one of recovery. It wasn't flawless but it was workable as an interim measure and, more importantly, wouldn't take years to achieve.

We began discussions with various role-players - financial institutions, liquidators, chambers of commerce, several Government departments, the SA Revenue Service and Government ministers.

However, Daly initially encountered powerful vested interests within the private sector and his firm became fiercely unpopular, both with liquidators, who saw his crusade as an attack on their livelihood, and with some bank officials, who saw it as an indictment of their debt recovery practices. No matter Government's sympathy for the concept the idea of business rescue would get nowhere without the active participation of the business sector.

A turnaround point came last year when - after a presentation of the reasoning behind the proposal by Daly - the Banking Council appointed a task team to study the Daly model. The council endorsed it - with a few minor recommendations - as an interim measure only and insisted (quite rightly) that they wanted legislation separate from the Insolvency Act to protect themselves. They then began lobbying Government with much more authority than Daly Inc could alone.

From the Government's side the response was inclusively sympathetic, with State law advisor Enver Daniels taking an active and positive role in the process.

Daniels proved to be enthusiastic and a two-fold strategy was set in motion: the Daly model was to be implemented as an interim measure and a task team appointed to draft the new legislation, with Daly Inc on the team, and part of the drafting process.

Just before the April election a meeting of the liquidation industry was called. By then all opposition had melted away: the model was unanimously endorsed. The interim model should be in place shortly and work on the final legislation has already begun. Daniels, who has taken up the standard as the driving force, has promised a draft of the business rescue legislation before year-end.

ABASA - Association of Business Administrators of South Africa

In parallel to the dti and DoJ initiatives, and on request from government individuals, the South African industry formed the Task Group for Organising the Turnaround and Business Rescue Industries.

As a result, ABASA - Association of Business Administrators of South Africa - was formed.

ABASA will apply for legislation to give it regulatory powers over Business Administrators. ABASA will set criteria for membership and have the power to discipline members.