The Companies Act 2008 provides in sections 128-155 (Chapter 6) for ‘business rescue and compromise with creditors’, which deals primarily with the ‘business rescue’ of companies. The compromise mechanism, contained in section 155, is distinct from the sections dealing with business rescue, which provide for a fairly comprehensive procedure for ultimately developing and implementing a plan to rescue the company from its financial distress under the supervision of a business rescue practitioner. Section 155, on the other hand, provides for the restructuring of the financial affairs of a company without the involvement of a business rescue practitioner, allowing a company to propose a compromise or arrangement to its creditors in a form that is almost identical to a business rescue plan.

Unlike business rescue, the idea of entering into a compromise or arrangement with creditors is not new to South African company law. The Companies Act 1973 provided for two mechanisms for this kind of informal restructuring – a ‘compromise’ and an ‘arrangement’.  Although the former process had a narrower meaning than the latter technically speaking, the distinction was often blurred when the two were combined in a so-called ‘scheme of arrangement’.  To properly understand the utility of the new section 155 compromise, one must consider the historical background to the concept of compromise in this context, and the way in which both of these two mechanisms were applied under the previous legislation.  Although the Companies Act 2008 does not distinguish the concepts ‘compromise’ and ‘arrangement’, it should not be assumed that the Act intended to change the mechanisms entirely – particularly where they still have practical utility – and furthermore, the objects of the Act require that the new versions of these two creatures be interpreted in a way that achieves ‘the efficient rescue and recovery of financially distressed companies’ (see s 7(k) in particular).

Under section 311 of the Companies Act 1973, it was possible for a company to restructure its financial affairs by way of a compromise or scheme of arrangement with either its creditors or members.  Where a compromise was entered into with creditors, there were numerous applications to court require, and the process thus become both costly and cumbersome in practice.  Since there was no automatic moratorium available under the Companies Act 1973, a moratorium against enforcement of claims would have to have been achieved by obtaining an order of provisional liquidation to hold the creditors at bay while renegotiating contractual obligations.

The Companies Act 2008 still allows for both compromises and ‘arrangements’, but the latter are only possible between the company and holders of any class of securities, and only where the company in question is neither under business rescue or liquidation.  Where a company finds itself in financial distress, therefore, it would seem that it will have only two options: filing for business rescue and appointing a business rescue practitioner, or entering into a restructuring agreement by way of the section 155 compromise with creditors.

The compromise mechanism envisaged provides for what is in substance a business rescue plan to be proposed without by the company itself rather than a business rescue practitioner (as would be the case in ordinary ‘business rescue’).  As a more streamlined procedure that allows the debtor to remain entirely in possessions and not comply with fairly onerous formalities relating to notice periods and calling of meetings, it shows promise in principle, but lacks in certain material respects.

Although it is submitted that separate meetings must be held in respect of each class or creditors when approving the plan, section 155 does not make it clear whether approval must be obtained at a single meeting of creditors, or by separate meetings of each class.  Furthermore, where it is not certain that a 75% majority will support the proposal, it would not be advisable to pursue a section 155 compromise instead of filing for business rescue; this high threshold may obstruct the compromise from achieving the object of successfully rescuing financially distressed companies where relatively few creditors are uncooperative.  A financially distressed company may also prefer to make use of business rescue (rather than enter into a compromise with creditors) would be the fact that section 155 does not provide for a moratorium to protect the company from claims of creditors during the period of renegotiation, and – like under the Companies Act 1973 – the compromise procedure is also  available to a company under liquidation.

For a more comprehensive treatment of this topic, see Hans Klopper & Richard S Bradstreet ‘Averting Liquidations With Business Rescue: Does Section 155 Place The Bar Too High?’ 2014 (3) Stellenbosch Law Review.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.



Part 1 – Finding a trusted adviser

Your relationship with your financial planner is critical to your financial health. Choosing a financial adviser is often difficult and establishing a relationship takes time.

Choose wisely

There are currently over 140 000 so called “financial advisers” in South Africa, of which only approximately 6 000 have the professional designation of being a Certified Financial Planner (CFP®) and who are members of the Financial Planning Institute of South Africa. Choosing a professionally qualified financial planner to look after your financial health is as important as choosing a professionally qualified doctor to look after your physical health. A professionally qualified financial planner is easy distinguishable and has the designation “CFP®” at the end of his name.

Ask penetrating questions

You are entitled to ask penetrating questions pertaining to a financial planner’s tertiary qualifications, experience, contracts and licenses. A client should ask penetrating questions with regards to the advice given and financial products presented. A professional financial planner ought to be able to answer any direct question clearly and coherently. Fuzzy, vague answers to clear questions should be a warning to a client that the experience and/or knowledge level of an adviser is not up to standard.

Your financial health should be the main topic and focus

An experienced financial planner will always keep his focus on his client’s financial needs. It goes without saying that a thorough discussion of a client’s needs is the starting point of a professional relationship with a financial planner. Your needs ought to be understood and addressed by your financial planner in a clear and direct manner. A financial planner functions in the same way as a doctor making a diagnoses and then formulates a medical solution and prescribing medication and/or rehabilitating conduct.

Regular check-ups

Monitoring your financial plan and financial progress should be done at least annually. You are assisting your financial planner to focus on your needs if you make an appointment with him in the same way you see your dentist or doctor for a check-up.

Be a transparent client

It is easier to help a client when the client is transparent and not secretive. It is a matter of trust. One should be able to trust one’s financial planner with sensitive information as. It is very difficult to advise a client accurately when such a client is secretive. An experienced financial planner who has your best interests at heart will want to know about the details in your will, your monthly cash flow, previous marriages, children from a previous marriage, surities that you signed, elderly parents that are or will become part of your financial concerns, etc. The more your financial planner knows, the more he will be able to be of value to you.

An experienced, knowledgeable financial planner and a transparent, involved client can build a mutually beneficial relationship over time. Trust is earned and forms the basis of all relationships – choose your trusted adviser wisely! 

Louw Venter CFP®
For enquiries please email:

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.



Creditors as parties to litigation often find themselves in a predicament where the individual they have a claim against has assets of insignificant value, but being a trustee of a discretionary trust owning substantial assets.

Creditors are left with little else to do but to ask a court to “go behind the trust” to try and find assets against which it can execute a judgment.

Allegations of a trust being a debtor’s “alter ego” or “a sham” often find their way into pleadings and are often used interchangeably.

Our courts have to date mostly shied away from declaring assets registered in a trust to be regarded as assets falling within the personal estate of one of such trust’s trustees, in the hope of being able to execute a judgment against the assets of such trust, and the recent judgment of VAN ZYL AND ANOTHER NNO v KAYE NO AND OTHERS 2014 (4) SA 452 (WCC) has made it even more difficult to do so.

In the VAN ZYL matter Binns-Ward J had to determine whether two immovable properties, one registered in the name of a trust and the other in the name of a company, must be treated as assets in the insolvent estate of one Mr Kaye.

The trust in question was a family trust of which Kaye, his wife and an attorney were the trustees. The property owned by the trust was used by Kaye and his family as their family home. The beneficiaries of the trust were Kaye, his wife and their descendants.  It appeared from the facts before court that financial transactions might have been recorded in the books of various entities over which Kaye exercised control in a manner that did not represent a correct representation of the flow of funds.

The court clarified the difference between finding that a trust is a sham and going behind a trust.  To hold that a trust is a sham, in other words non-existent, will be a finding of fact inter alia on the basis that the requirements for the establishment of a trust were not met, in which event the “trustees” of the trust acted as agents of Kaye when acquiring the property.

The court found that even a delinquent discharge by trustees of their responsibilities, resulting in only one trustee exercising unfettered de facto control over the trust assets or the maladministration of an asset of the trust is not enough to justify a finding that a trust is a sham, that the trust does not exist or that an asset no longer vests in the trust.  All that it does is call into question the fitness of the trustees to hold office.

Going behind the trust form, on the other hand, entails accepting that the trust exists, but disregarding for given purposes the ordinary consequences of its existence. This might entail, the court found, holding the trustees personally liable for an obligation ostensibly undertaken in their capacity as trustees, or holding the trust bound to transactions seemingly undertaken by the trustees acting outside the limits of their authority or legal capacity or in cases where the trustees treat the property of the trust as if it were their personal property and use the trust essentially as their alter ego.  As this is an equitable remedy, it is a remedy that will generally be given when the trust form is used in a dishonest or unconscionable manner to evade a liability or avoid an obligation and not in a situation where a creditor seeks relief against a debtor who is a trustee of a trust.

The court pronounced that there is nothing untoward in trusts being established for the purposes of holding family homes separately or even for a trustee personally paying the mortgage bond and maintenance expenses in respect of such property.

The court went on to find that even if it were to be accepted that Kaye administered the trust without proper regard to his fiduciary duties and in a sense treated it as his “alter ego“, that does not, in itself, make the trust a sham, nor does it vest ownership of the trust’s assets in the trustees of his insolvent estate.

So what does this all mean?  It appears that this judgment is a further nail in the coffin for creditors trying to recover debs from debtors who as part of their estate planning registered all “their” assets in trusts.

As this avenue has now become more difficult to explore parties to transactions will have to be more astute to ensure they have sufficient security in place in respect of debts due to them, in the form of suretyships or security bonds.

Lucinde Rhoode – Director-Dispute Resolution – Cliffe Dekker Hofmeyr Inc – Cape Town

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.



When companies are placed in business rescue Section 135 of the Companies Act 71 of 2008 (“the Act”) provides for a very innovative manner in which the company under business rescue may obtain new finance and credit. This is called post-commencement finance (“PCF”). However, banks and other financial institutions would thus far appear to have been reluctant to get involved and it would appear that they do not necessarily believe that a company under financial distress and under business rescue could present an investment opportunity. It is furthermore not sure as to whether commercial banks in South Africa are prepared to take over the security of another bank and to further get control by advancing PCF.

Historically, before the Act came into law, financial institutions and creditors who have had dealings with liquidators of liquidated companies clearly understood the notion of “costs of administration in the winding-up process. This simply meant that any goods supplied to or services rendered to a company in liquidation must be paid first as a cost of administration and only once such costs were paid in full may any distribution be made to the company’s creditors on their claims that existed upon the commencement of winding up proceedings from the proceeds of the assets realised in the liquidation process.

Often liquidators require financial assistance in the winding up process and may, upon their powers having been extended as such by the High Court, obtain a loan subsequent to the date of provisional liquidation. Such loans are also, at all times, payable as a “cost of administration” in the winding up process in preference to creditors in the winding-up process.

Akin to the loans so being advanced to liquidators of companies in liquidation and ranking ahead of creditors PCF under business rescue also, by statute, enjoys such a “super-preferent” status.

The process of procuring PCF is however much less cumbersome under business rescue in that there is no need to approach the High Court for such funding.

In addition, the Act provides that, should the enticement of this super preferent status fail to be of interest to financiers that the business rescue practitioner may obtain finance secured by assets of the company.  It is even possible to provide already encumbered assets as security to PCF lenders where the value of the asset so encumbered is such that it protects the interests of existing secured creditors.

The most fundamental aspect of PCF and the role of the business rescue practitioner is the issue of cash-flow forecasting. In most business rescue cases the company will only have the cash to survive from day to day. Daily cash-flows and forecasts are under these circumstances maintained by the business rescue practitioner because he has no choice other than to do so in order to assess the performance of the business. However, in many cases, the business rescue practitioner, upon his arrival on the scene at the company, find that there was no pre-existing cash flow forecasting done by the company.

The return negotiated by prospective lenders on PCF loans may be very attractive to such lenders because there is perception of high risk attached to such loans compared to normal commercial loans. The truth is however that, by virtue of the super preferent nature of such loans, the extra security that may be provided by the business rescue practitioners and the statutory protection afforded, PCF lenders often enjoy better protection under business rescue than “normal” lenders. For the past almost four decades providers of debtor in possession (DIP) facilities under Chapter 11 of the American Bankruptcy Code have been investing as distressed lenders and enjoyed good returns.

The assessment of a company’s post commencement financial requirements and the amount of PCF needed during the business rescue period would require a detailed cash-flow forecast. The business rescue practitioner needs to understand the sensitivities relating to the cash flow based on the history of the business and the impact of a possible liquidation on the PCF. The business rescue practitioner needs to assess the terms in the PCF compared to the terms of commercial loans, if available.

The loan agreement will have deal with the duration and pricing and fees relating to the loan which by its very nature may be substantially more onerous than run of the mill loan agreements.  Variances need to be expected and the reporting thereon is crucial

The notion of so-called “vulture funding” and the concept of “loan to loan” are well established in other jurisdictions such as the USA where distressed investors earn above average returns and often take control of the equity in distressed companies by virtue of the funding provided.

It is time that South African entrepreneurs become aware of these opportunities.

SOURCE: Debtor-in-possession Financing – American Bankruptcy Institute

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.


Now that the Holiday Season is a thing of the past, the New Year promises a fresh start for all of us.  Some of us made new resolutions to stay fit, eat healthy or stay active.  Whatever your resolutions may be, we hope that you have a prosperous and successful 2015!

This issue contains informative information regarding trusts and financial planning.  Furthermore it contains articles on the objectives of business rescue and the opportunity for lenders to invest in companies which are placed under business rescue.

L.M. Montgomery states: “Isn’t it nice to think tomorrow is a new day with no mistakes in it yet?   Likewise, it is comforting that this is a new year with no mistakes in it yet!

Hillary Plaatjies