Compromise under the Companies Act of 2008 - The Drawbacks | Legal Articles

 

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Compromise under the Companies Act of 2008 - The Drawbacks

The Companies Act 61 of 1973 and the Companies Act 71 of 2008 provide for mechanisms where companies are financially distressed or need to wind up.

Whereas liquidation is prescribed for companies that are insolvent (solvent companies can also liquidate under section 81 of the Companies Act 71 of 2008), business rescue is preferred where there are prospects that the company can be saved from shutdown.

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The Companies Act South Africa

Similarly, the Companies Act provides for another mechanism which is less regulated and informal, called “compromise” to save the company from shutdown if financially distressed.

Compromise is a process whereby provisions are made for the restructuring of the company’s affairs without the appointment of a Practitioner, whether it is financially distressed or not.

This contrasts with business rescue which is implemented when the company is financially distressed.

A detailed Proposal must be developed and provided to the creditors or a class of creditors, with a notice of the meeting where a vote on the Proposal will be conducted.

A threshold of 75% affirmative vote representing the value of creditor claims present is required for the Proposal to be accepted, which is then sanctioned by Court to be binding on all creditors. A copy of the Order is then filed with the CIPC.

Business Compromise and the High Court

There are, however, drawbacks with regards to the process of compromise, which will be discussed hereunder.

Firstly, liquidations and business rescue proceedings are comprehensively regulated by legislation.

The Liquidator and the business rescue practitioner’s conduct are subject to oversight by the Master of the High Court while they have the responsibility to update the CIPC for recording purposes. This cannot be said about compromise, which is not as comprehensively regulated, and the Receiver appointed is not subject to stringent oversight.

Secondly, the provisions of Section 155 of the Companies Act of 2008 are largely formal and procedural relating to the forwarding of a Proposal to creditors.

Should enough threshold of creditors vote for the acceptance of the Compromise Proposal, there is not much room for minority creditors to overturn the decision except through Court.

The compromise must be sanctioned by Court to be binding on all creditors, and the minority creditors can then oppose the granting of the Order on the grounds that it is not equitable and in best interest of the creditors.

This however is difficult to do so as chances are little that enough threshold of creditors would vote to accept the proposal had it not been equitable.

Thirdly, the appointed Receiver’s costs in administering the claims and the process will be the indirect responsibility of the creditors.

Fourth, once creditors vote in favour of accepting the compromise plan, their claims against the company will be compromised and they will have no further claims against the company (though there is provision to go after any surety).

Lastly, creditors can waive their rights to proceed with inquiries and investigations against directors and company office bearers for reckless and negligent trading prior to the compromise.

This right is as per Section 424 of the Companies Act 61 of 1973. This then means a compromise, if not approached diligently by creditors, may be a mechanism to escape liability by directors and office bearers for contravention of the Act while the creditors cannot set aside a transaction which ought to be void.

Should there be enough to substantiate an inquiry for contravention of the Act against the company functionaries, it is advised to vote against the compromise proposal and pursue such investigative rights.

Van Deventer & Van Deventer Incorporated – Attorneys South Africa

We stand to diligently assist and guide creditors who receive compromise proposals so that they weigh their available options with regards thereto. Contact us to speak to one of our attorneys.

 

The information contained in this site is provided for informational purposes only and should not be construed as legal advice on any subject matter. One should not act or refrain from acting based on any content included in this site without seeking legal or other professional advice. The contents of this site contain general information and may not reflect current legal developments or address one’s situation. We disclaim all liability for actions one may take or fail to take based on any content on this site.

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