South Africa: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in South Africa.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Security may take one of two forms under South African law:

    • a right to have the secured assets applied to the satisfaction of the claim of a creditor to the exclusion of the claims of other creditors – known as real security, created by means of instruments such as a mortgage bond, a pledge, notarial bond, a cession in securitatem debiti, landlord’s hypothec and a lien; or
    • a right to turn to a third party to carry out the debtor’s performance – known as personal security, created by suretyship or guarantee agreements between the creditor and a third party.

    On this basis, the most common forms of security available are:

    • Security over immovable assets:
      • Mortgage bond: This is created by a mortgage bond, but title in the mortgaged property does not transfer to the creditor. The secured creditor has a right to have the property sold in execution (upon the debtor’s default) and thereafter to apply the proceeds to settle the debt.
    • Security over movable assets:
      • Pledge: A pledge is security granted by a debtor (pledgor) in favour of a creditor (pledgee) by delivery of the secured property to the creditor. Title remains with the debtor, but is subject to the creditor’s restricted real right – an exclusive right to enforce the pledged right in the event of non-performance of the principal obligation.
      • Cession: Under a cession a right is transferred from a debtor (cedent) to a creditor (cessionary). A security cession is known as a cession in securitatem debiti (i.e. as security for debt). A right is ceded in security and is pledged to the cessionary, but title remains with the cedent. Until a default occurs, the cedent can exercise all of its rights.
      • Notarial bonds: A notarial bond is registered and physical delivery of assets is not required. A notarial bond can take the form of a special notarial bond or a general notarial bond. The former is a notarial bond over specific and identifiable movable assets and the latter a notarial bond over all the debtor’s movable assets. Once an special notarial bond has been registered it constitutes real security as effectively as if it had been expressly pledged and delivered to the creditor. Under a general notarial bond, the debtor can deal with the assets as they wish, therefor the creditor is not a secured creditor and cannot prevent encumbering of the assets.
      • Landlord’s hypothec: a landlord that is owed rent has security over the tenant’s moveable property on the premises.
      • Liens: A lien arises where the creditor (lienholder) is already in possession of the property of the debtor by virtue of an underlying contract e.g. where the creditor is contracted to do work in relation to the moveable property in is owed money in relation to such services. The lienholder may retain possession until compensated.
    • Personal security:
      • Surety: Under a suretyship contract one party (the surety) undertakes to the other (the creditor) that it will discharge an obligation (the principal debt) owed by another person (the principal debtor), if the principal debtor defaults. This gives rise to a personal right, but is accessory to the principal obligation and generally the release/termination of the principal obligation results in termination/release of the surety.
      • Guarantee: A guarantee creates an obligation on the guarantor to perform on behalf of the debtor if the debtor does not discharge its obligation. A guarantee is an independent, principal obligation which exists separately from the underlying obligations.

    Failing to comply with the formalities set out below will result in the creditor having no security.

    • Mortgage bond: A mortgage bond is created when the parties enter into an agreement and is perfected by its registration at the deeds registry where the relevant immovable property is registered. The mortgage bond document must be:
      • valid and show an intention to grant real security for performance of the principal obligation;
      • prepared by a conveyancer; and
      • executed by a conveyancer in the presence of, and attested to by, a Registrar of Deeds.
    • Pledge: A pledge agreement must be concluded and the pledged property must be delivered to the creditor to perfect it.
    • Cession: There are no formality requirements for the validity and perfection of this form of security as it is created contractually.
    • Notarial bonds: All notarial bonds must be attested to by a notary public and registered, within three months after execution, at the applicable deeds registry. In addition, special notarial bond must meet the requirements set out in the Security by Means of Movable Property Act, 1993, the most important of which is that all assets must be readily recognisable from its description.

      Notarial bonds are perfected once registered, however, the creditor only acquires a right over the bonded property under a general notarial bond upon taking possession of the property.

    • Liens: There are no formality requirements for the validity and perfection of this form of security and it arises by operation of law.
    • Surety: In order to be valid, a surety must be recorded in writing and signed by the surety.
    • Guarantee: There are no formality requirements for the validity and perfection of this form of security as it is created contractually.
  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Prior to liquidation:

    • In case of real security (e.g. a mortgage bond, pledge, notarial bond, cession in security, landlord’s hypothec or liens), a secured creditor is entitled to enforce its security against the relevant assets if the debtor defaults. The creditor can procure the sale of the secured assets and apply the proceeds to satisfy the principal obligation.
    • For general notarial bonds, before exercising the creditor’s rights, the security must first be perfected by taking possession of the assets, usually by way of attachment by the sheriff of the High Court of South Africa, under a court order.
    • With special notarial bonds, provided that they are correctly registered and the property specifically described, the bond is deemed to have been pledged to the mortgagee as it had been pledged and delivered to the mortgagee which greatly assists the mortgagee in enforcing his rights upon a default.
    • Security under a pledge can be enforced without a court order, and the secured creditor can simply agree with the debtor that the secured assets may be sold without the need for judicial execution (in terms of a parate executie or summary execution provision).
    • Cessions in security, sureties and guarantees are enforced in accordance with contract, but should the security giver fail to perform, court involvement will be required.
    • In general, court involvement in the enforcement of security may subject creditors to long, expensive and delayed processes of litigation due to the court’s capacity and stipulated procedural time periods.

    Post liquidation:

    • In liquidation proceedings, the assets subject to security continue to vest in the liquidated debtor. The liquidator will then realise the security and pay the proceeds to creditors in the applicable order (see question 5 on the ranking of creditors).
  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    In is important to understand that the term “sequestration” refers to the insolvency process relating to natural persons and partnerships whereas “winding-up” and “liquidation” refers to the insolvency process relating to companies and other legal entities. For a sequestration to be initiated, the test is whether the debtor’s liabilities exceeds its assets (known as factual insolvency). For the winding-up of a company, it is sufficient to show that the entity is unable to pay its debts (commercial insolvency).

    Directors’ obligations regarding financial distress:
    Financial distress in reference to a company, means that it appears to be reasonably:

    • unlikely that the company will be able to pay its debts as they fall due and payable within the immediately ensuing six months; or
    • likely that the company will become factually insolvent within the immediately ensuing six months.

    If a company is financially distressed the directors may put it into business rescue (see below) and if the directors decide not to place it into business rescue, directors are under a statutory obligation to deliver a written notice to each affected person (i.e. creditor, shareholder, registered trade unions and employees), confirming that the company is financially distressed and is not being placed into business rescue and providing reasons for this.

    Directors’ obligations regarding insolvency:
    If a debtor is insolvent and unable to pay its debts, the company cannot continue to trade and the director may have to wind the company up or place it into business rescue. The Companies Act provides that a company may not carry on its business recklessly, with gross negligence, or with the with intent to defraud creditors. If the directors incur debt when there is no reasonable prospect of creditors receiving payment when due, the company will be trading recklessly. If a company trades recklessly, the following consequences may follow:

    • directors may be:
      • guilty of a criminal offence and liable to a fine or imprisonment for a period not exceeding 10 years, or both;
      • held civilly liable for damages to any person as a result of trading recklessly;
      • held liable for any loss, damages or costs of the company; and/or
      • declared delinquent;
    • the Companies and Intellectual Property Commission may issue a compliance notice requiring the company to cease carrying on its business. Failing to comply with the notice, entitles the Companies and Intellectual Property Commission to apply to court for the imposition of an administrative fine or refer the matter for prosecution as an offence.

    Considering the prohibition on reckless trading, a director has a duty to pass a resolution for a company’s business rescue or alternatively resolve to liquidate the company as soon as he becomes aware that the company is either financially distressed or is trading in insolvent circumstances (factually and commercially).

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    The insolvency procedures relating to corporations are the winding-up of companies (and close corporations). As stated above, the terms ‘winding up’ and ‘liquidation’ are used in South African law to refer to a company or other corporate entity that has been placed into liquidation. A company may be wound up (1) compulsory by an order of the High Court on application to the court, usually brought by creditors in relation to an insolvent company or by shareholders in relation to a solvent company or (2) voluntarily by way of the passing and filing of a special resolution by the shareholders.

    From the commencement of winding-up all the powers of directors cease, except in voluntary liquidation, if their continuance is sanctioned by the liquidator, creditors (in creditor’s winding-up) or shareholders (in a shareholders’ winding-up).

    A company in liquidation is subject to supervision by the liquidator.

    Court and stakeholder roles:

    • Applicants: Creditors, shareholders, the company, a business rescue practitioner or the Companies and Intellectual Property Commission may bring an application for compulsory winding-up.
    • High Court: The court’s involvement is required in respect of the initiation of compulsory liquidations. The courts will in addition play a role in the winding-up process (compulsory or voluntary) where the debtor was involved in pre-liquidation litigation proceedings, or if the liquidator needs to recover assets under clawback actions.
    • Affected persons: When an application is presented to the court, the applicant must furnish a copy of the application, and later of the winding-up order,¬ to (1) trade unions representing employees; (2) employees of the debtor; (3) the South African Revenue Service and (4) the debtor (if the application is not made by the debtor itself).
    • Master of the High Court: The Master fulfils an important administrative role in insolvency matters. The custody and administration of all documentation involving insolvency matters in the responsibility of the Master from the beginning of the application up to rehabilitation of the individual or deregistration of the legal entity. Furthermore, the Master plays an administrative role in the liquidation proceedings regarding, for example, the appointment and removal of the liquidator and giving directions to the liquidator if requested to do so.
    • Liquidator: After the winding up order has been made, the Master appoints a provisional liquidator of the debtor and he will hold office until the appointment of the liquidator. The primary task of the provisional liquidator will be to convene the first creditors meeting. The Master will appoint the person nominated at the first creditors meeting and shareholders meeting as the liquidator of the debtor. If these meetings appoint different persons the Master must decide whether to appoint one or both. A liquidator shall proceed to recover and reduce into possession all the assets and property of the company, apply the same so far as they extend in satisfaction of the costs of the winding-up and the claims of creditors.
    • Companies and Intellectual Property Commission: Voluntary winding-up is initiated by the passing and filing of a special resolution with the Companies and Intellectual Property Commission. It also plays a role in the deregistration of a company pursuant to liquidation.

    The liquidator must within three months of being appointed, submit a report to the general meeting of creditors dealing with specific financial and corporate matters relating to the debtor.

    Within six months of his appointment, the liquidator must prepare and lodge with the Master a liquidation and distribution account (provided that the liquidator may also apply for an extension in this regard from the Master).

    Once the liquidation and distribution account has lain open for the prescribed time and objections have been dealt within the prescribed manner, it is considered final and the liquidator must distribute the estate and any assets remaining thereafter must be distributed to the shareholders in accordance with their shareholding.

    Liquidation normally takes between six to twenty four months (or longer). The exact length of the process depends on the nature of the matter, size of the estate, stakeholders involved etc.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    Ranking and particular priorities:
    There are three classes of creditors who rank in the following order of priority:

    • secured creditors: these are creditors who have a preferential right by virtue of holding real security, namely, a mortgage bond, special notarial bond, general notarial bond (only where the creditor has taken possession of the property subject to the bond before the debtor’s liquidation), pledge, cession by way of pledge, landlord’s hypothec or lien. There is no special priority between secured creditors, since each creditor has a secured claim on a particular asset, however, if different creditors hold security over the same asset, the secured creditor that took security earlier in time will have preference. It is possible for creditors to agree to rank equally (pari passu) in which case they will be paid out proportionally. Where a secured creditor’s claim is not satisfied in full, the unpaid balance is considered a concurrent claim;
    • preferential creditors: these are creditors that do not hold security for their debts, but in terms of insolvency laws, are entitled to rank before the concurrent creditors. These include employees’ remuneration and other employee related claims (e.g. pension liabilities), the South African Revenue Service and the holders of general notarial bonds (where the creditor has not taken possession of the property); and
    • concurrent, or unsecured, creditors: these are creditors that do not hold security for their debts and they share in the free residue of the estate (i.e. after all secured creditors, preferential creditors and the costs of administration have been paid). Concurrent creditors are paid in proportion to the amounts owing to them.

    Any proceeds remaining after the payment of concurrent creditors, must be used to satisfy the interest on concurrent claims. If all creditors are paid in full, any remaining amounts must be distributed among the shareholders pro rata their shareholdings in the company. Where shareholders are creditors by means of loan accounts, they are treated like any other creditor – secured or concurrent.

    Notwithstanding the ranking as set out above, the ranking of claims under business rescue (see question paragraph 9) remains in force and effect if business rescue proceedings are superseded by liquidation.

    Subordination is only possible by agreement. It can be achieved by agreement either between the debtor and the creditors, or between the creditors. If the claim is subordinated the subordinated creditor’s claim will effectively be excluded as it is a term of subordination that the claim will only be paid if all other creditors are paid in full.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    Yes, it can. South African courts are empowered to set aside, at the insistence of the liquidator, certain transactions entered into, or dispositions (transfer or abandonment of rights to property) made, by an insolvent debtor prior to its liquidation (known as impeachable dispositions), in the following cases:

    • dispositions not for value - dispositions of property made:
      • more than two years before the liquidation of the insolvent debtors estate were made where (i) immediately following the disposition, the liabilities of the insolvent debtor exceeded its assets; and (ii) the disposition was not made for value; or
      • within two years of the liquidation which were not for value;
    • voidable preferences - disposition:
      • made by an insolvent debtor within six months of the date of liquidation;
      • that in fact prefers one creditor over another;
      • where, immediately after, the liabilities of the insolvent debtor exceeded its assets; and
      • where the debtor’s estate is subsequently liquidated;
    • undue preferences - disposition:
      • made by an insolvent debtor at any time before the date of liquidation;
      • with the intention to prefer one creditor over another;
      • where, immediately after, the liabilities of the insolvent debtor exceeded its assets; and
      • where the debtor’s estate is subsequently liquidated;
    • collusive dealings - disposition where the insolvent debtor, in collusion with another person, disposed of its assets in a manner prejudicing creditors or preferring one over another; and
    • fraudulent dispositions –disposition prior to liquidation, if the insolvent and the recipient had the common intention of prejudicing other creditors.

    All of the above transactions are voidable by the liquidator but, until the transactions are set aside by the court they stand.

    Third party acquirors may lose their rights to property obtained as a result of the impeachable disposition.

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?

    Legal proceedings moratoria:
    At any time after the presentation of an application for winding-up and before a winding-up order has been made, the debtor or any creditor or shareholder may:

    • where any action or proceeding by or against the company is pending in any court in South Africa, apply to such court for a stay of the proceedings; and
    • where any other action or proceeding is being or about to be instituted against the company, apply to court for an order restraining further proceedings in the action or proceeding.

    When the court has made an order for the winding-up of a company or a special resolution for the voluntary winding-up of a company has been registered with the Companies and Intellectual Property Commission:

    • all civil proceedings by or against the debtor shall be suspended until the appointment of a liquidator; and
    • any attachment or execution put in force against the estate or assets of the company after commencement shall be void.

    At the commencement of insolvency proceedings, a moratorium is placed on the enforcement of security against the insolvent debtor and accordingly a secured creditor may not realise that security itself, but must deliver it to the liquidator for realisation.

    The stay or moratorium will not have extraterritorial effect.

    In what circumstances may creditors benefit from any exceptions to such stay or moratorium:
    Every person who, having instituted legal proceedings against a company which were suspended by a winding-up, intends to continue the same, and every person who intends to institute legal proceedings for the purpose of enforcing any claim against the company which arose before the commencement of the winding-up, shall within three weeks after the first creditors committee give notice to the liquidator that the proceedings will continue.

    If notice is not given the proceedings shall be considered to be abandoned unless the court otherwise directs.

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    There are two restructuring options, i.e. business rescue or a compromise with creditors.

    Business rescue:

    • Business rescue entails a process aimed at facilitating the financial rehabilitation and ultimate rescue of a company that is “financially distressed” (see question 3).
    • In order to qualify for business rescue the entity must (1) be financially distressed and (2) there must appear to be a reasonable prospect of rescue.
    • The process is begun by:
      • by the directors resolving that the company voluntarily commence proceedings; (not if in liquidation already); or
      • any creditor, shareholder, registered trade union or employee not represented by a trade union (“Affected Person/s”), applying to the High Court (can be done after the commencement of liquidation proceedings, such proceedings will automatically be suspended).
    • Once a company is placed in business rescue, a business rescue practitioner is appointed to manage the company and the process. The practitioner has full management control of the company in substitution for its board and management, however, the board of directors stay in office throughout the business rescue period; must continue to exercise the functions of directors, subject to the practitioner’s authority; must exercise any management functions at the instruction of the practitioner.
    • During business rescue employees, creditors and shareholders are entitled to notice of proceedings and are entitled to participate in any proceedings. Employees and creditors are entitled to be present and make submissions at meetings but employees have no voting rights. A business rescue plan must be prepared by the practitioner and voted on by creditors. It is approved by 75% of creditors, of which at least 50% must be independent creditors, i.e. creditors who are neither controlling shareholders nor directors of the company. Shareholders may only vote on a proposed plan if it proposes to alter the rights associated with their shares.
    • The business rescue process is not court driven and the court only plays a supervisory role in the proceedings in, for example, the initiation of the proceedings (compulsory commencement); objections to company resolutions to commence proceedings; applications for leave to institute legal proceedings against companies in business rescue; and the removal and replacement of a business rescue practitioner.


    • A compromise:
      • is an arrangement or a compromise of the financial obligations of the company;
      • is an agreement between a company and its creditors, or certain classes of creditors, in terms of which the creditors may for instance agree to accept a certain portion of their claim and agrees that the remaining portion will be written off; and
      • may be proposed by the board of a company (if is not in business rescue) or a liquidator (where the company is in liquidation) to all of its creditors, or to all of the members of any class.
    • The proposal will be adopted if it is supported by a majority in number and at least 75% in value of the creditors or class who are present and voting.
    • If a proposal is adopted, the company may apply to the court to sanction the compromise (this being the only role of the court in the compromise process itself). The order sanctioning an arrangement or compromise has no effect until it has been filed with the Companies and Intellectual Property Commission.
    • A company may (but is not obliged to) have a receiver appointed to perform particular functions in the implementation process (e.g. to accept or reject claims and make distributions of payments to creditors). Management continues to operate the business, however, if the compromise or arrangement is proposed while the company is in liquidation, the liquidator operates the business.
  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    Yes. To enable a debtor to continue to trade after the institution of rescue proceedings, provision is made for post-commencement finance and for an order of preference to such financiers (only ranking behind costs of business rescue and post-commencement employees, but before pre-commencement secured creditors, employees and unsecured creditors).

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

    Claims under guarantee or surety:
    A surety’s liability for a company under a compromise with creditors is not affected.
    Sureties are released automatically if the underlying debt is compromised in the business rescue proceedings (due to its accessory nature), unless the surety wording specifically records that the obligation of the surety will remain in place notwithstanding business rescue and any possible compromises thereunder.

    Guarantors are not automatically released unless the guarantee or business rescue plan wording specifically records that the obligation will be extinguished.

    As for claims against directors:
    Directors will remain liable for any claims against directors for their actions prior to business rescue. Insofar as conduct during business rescue proceedings are concerned, to the extent that directors act in accordance with the instructions of the practitioner, they are released from incurring liability save for specific instances, e.g. having been party to a fraudulent act.

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?

    Yes. In business rescue, creditors are entitled to form creditors’ committees which the practitioner would consult during the development of the rescue plan.

    Committees are permitted to retain advisors, the costs of which can be considered as costs of the proceedings if dealt with as such in the rescue plan, paid in the order of priority set out in question 9.

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    Are the parties obliged to continue to perform their obligations and is there an ability for either party to disclaim the contract

    • Restructuring: Employees continue to be employed on the same terms, subject only to the extent that changes occur in the ordinary course of attrition, or the employees and the practitioner agree, in accordance with applicable labour law.

      Contracts concluded prior to business rescue continue subject to the following. The practitioner may entirely, partially or conditionally suspend, for the duration of the proceedings, any obligation of the company under rescue that arises under an agreement (other than employment agreements) to which the company was a party at the commencement of the business rescue proceedings and would otherwise become due during such time. Subject to an order of court, the practitioner may further entirely, partially or conditionally, cancel, on any terms that are just and equitable, any obligation of the company arising under an agreement to which the company was a party at the commencement of the rescue proceedings.

      In case of a suspension or cancellation, the counterparty may only assert a claim for damages against the company and where the contract is reciprocal, the other party is entitled to rely on the principle of reciprocity and withhold performance.

    • Insolvency: Employee contracts are suspended with effect from the date of granting of a winding-up order, unless a liquidator and an employee have agreed to continue.

      General commercial contracts are not suspended or terminated. However, the liquidator has the option to elect to perform in terms of a contract or not (i.e. to repudiate).

    Will termination, retention of title and set-off provisions in these contracts remain enforceable
    Insolvency: A clause reserving ownership until payment is received is effective to prevent the goods from vesting in the debtor’s estate. A clause providing for termination upon liquidation is not effective as it deprives the liquidator of his powers to liquidate the estate effectively. A set-off clause in favour of the solvent party is not valid as it enables the relevant creditor to receive payment in preference to other concurrent creditors.

    Restructuring: A clause reserving ownership until payment is received is effective to prevent the goods from vesting in the debtor’s estate. However the owner will need the written consent of the practitioner to deal with the property in question.

    There are no specific legislative provisions providing for termination or set-off clauses in favour of the solvent party. However the courts will likely follow the decisions in relation to insolvency as the same considerations apply.

  13. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

    Insolvency: Assets are sold in order to satisfy costs of liquidation and creditors’ claims. The liquidator is obliged to realise the assets in a manner and upon conditions directed by creditors, but if creditors do not give directions, he must sell the property by public auction or public tender.

    Restructuring: During business rescue a company may only dispose of property if (1) it is in the ordinary course of its business; or (2) a bona fide transaction at arm’s length for fair value, that has been approved in advance and in writing by the practitioner; or (3) in a transaction that is part of an approved business rescue plan.

    Under (1) and (2) assets are mostly sold in the ordinary course, on negotiation with the purchaser. When sold in accordance with a business rescue plan (under (3) above), assets are sold as contemplated in the business rescue plan pursuant to a bidding process. The business rescue process is more appropriate to accommodate the sale of the entire business as a going concern and the Companies Act makes specific provision for this under the chapter for Fundamental Transactions.

    Does the purchaser acquire the assets “free and clear” of claims and liabilities
    Insolvency: The liquidator acts with the authority granted by meetings of creditors and shareholders or on the directions of the Master and has wide ranging powers. There is no general rule that the purchaser acquire the assets “free and clear” of claims and liabilities and there are no specific legislative requirements. Generally they are acquired as is.

    Restructuring: There is no general rule that the purchaser acquire the assets “free and clear” of claims and liabilities and there are no specific legislative requirements. The business rescue practitioner will have greater freedom to negotiate with bidders and it can be agreed that the purchaser acquire the assets “free and clear” of claims and liabilities, subject to the proviso that this is ultimately accepted in a finalized business rescue plan.

    Can security be released without creditor consent:
    Insolvency: Generally, once a principal obligation of a debtor is discharged, the security accessory to the principal obligation is automatically released, i.e. without the creditor’s consent. Further formalities depend on the type of security. Certain forms of security require further acts to release the security, for example, the cancellation of a mortgage bond at the deeds registry and ultimately the agreement of the creditor. Parties can also enter into a release agreement to govern the release of security.

    Restructuring: Before a company disposes of any property over which a third party has any security or title interest, it must obtain the prior consent of the third party, unless the proceeds of such disposal will be sufficient to fully discharge the amount of the third party's secured or protected claim or title interest. Essentially, if the company disposes of property over which a secured creditor holds security, it may dispense with the consent of the creditor, provided that the proceeds of the disposal are sufficient to pay the creditor in full and the company promptly so pays the creditor or, alternatively, the company provides security for the amount of those proceeds to the reasonable satisfaction of the creditor.

    Is credit bidding permitted.
    Insolvency: Allowing a secured creditor to bid in the sale of its secured asset for the amount of its debt - as a credit bid - is not specifically regulated. The procedure is that the secured creditor must deliver the property to the liquidator and prove his claim, placing a value on the property. The trustee may then, if authorised by the creditors, take over the property at the value placed on it by the creditor. He must do so within three months and if he does not take over the property within this period he must realise it for the benefit of all creditors whose claims are secured by it, according to their respective rights.

    Restructuring: There is no general rule relating to credit bidding. The business rescue practitioner will have greater freedom to negotiate with bidders and it can be agreed that credit bidding takes place, subject to the proviso that this is ultimately accepted in a finalized business rescue plan.

    Are pre-packaged sales possible
    Insolvency: Legislative insolvency provisions do not provide for pre-packaged sales, and the process in insolvency is not well suited thereto.

    Restructuring: As stated above, business rescue may, but does not necessarily, involve the sale of the distressed business. The current regime provides for preparation of a rescue plan after business rescue is initiated. But the process may well involve the preparation of a business rescue plan “in principle” and in advance of the company being placed under supervision, and the negotiation of that draft plan with major creditors to establish its acceptability to them.

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

    Directors have a duty not to trade in insolvent circumstances. See question 3 for directors’ duties and liabilities in this regard. Once the company is in liquidation, the directors’ duties, powers and rights cease and they no longer act in such capacity.

    With business rescue, the management remains intact, subject to the authority and directions of the business rescue practitioner. Directors are thus not relieved of all their statutory and fiduciary duties (see question 10) and will have to comply, or face the consequences – see question 3.

    Sureties and guarantors may incur liability for the debts of the debtor (subject to the release/non-release treatment of such security – see question 10). But generally shareholders and lenders will not incur liability for the debts of an insolvent debtor.

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    No. Directors will remain liable for any claims against directors for their actions prior to insolvency or restructuring proceedings.

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?

    Enforcement of foreign judgments:
    South Africa is not currently a signatory to a general treaty on the enforcement of foreign judgments, but an applicant may apply to court for recognition of a foreign court order (such as orders regarding restructuring or insolvency proceedings).

    A foreign judgment constitutes a cause of action that will be enforced by the South African courts provided that it satisfies certain relevant requirements, such as not being against public policy.

    Cross-border insolvency:
    The Cross-Border Insolvency Act 42 of 2000 came into force on 28 November 2003. It is based on the UNCITRAL Model Law on Cross-Border Insolvency. This notwithstanding, South Africa has no cross-border insolvency treaty with any other states and for all intents and purposes the Cross-Border Insolvency Act is not yet operational given that the Minister of Justice is still to designate the foreign jurisdictions to which this Act is to apply.

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    No, as the laws applicable to foreign debtors are the laws of the jurisdiction in which they are incorporated and registered.

  18. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    Under South African law, each company is a separate legal entity with its own legal personality. However there is nothing preventing a group of companies to be entered into insolvency or restructuring processes at the same time under combined supervision, so there is scope for cooperation between office holders in that way.

  19. Is it a debtor or creditor friendly jurisdiction?

    Both. The liquidation process is creditor friendly and the restructuring processes, debtor friendly.

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    The greatest factor that plays a role in insolvencies and restructurings is employment, or rather unemployment. Employees enjoy a preference in insolvency and restructuring proceedings and employees and registered trade unions have participating rights in business rescue, and may even initiate it. This is due to the low employment rate and the effect that an insolvency or restructuring can have on these numbers. Employment laws are strict in this regard and provide for specific procedures to be followed in respect of, e.g. retrenchments etc.

    The state does play a role, for instance in its involvement through the courts and the Master in liquidation proceedings and does sometimes provide indirect funding through institutions such as the Industrial Development Corporation to failing businesses. It will also provide direct support to the state’s own entities (i.e. state owned entities such as South African Airways) that are in distress.

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    • The insolvency laws of South Africa are outdated and insolvency legislation is interspersed among a number of Amendments Acts.
    • Raising financing in restructuring proceedings have proven difficult due to the lack of protection or certainty offered to financiers.
    • Court/departmental (i.e. Master (department of justice) involvement cause delays in executing proceedings due to court capacity, efficiency and competency to deal with the proceedings.

    Following reports by the South African Law Reform Commission in February 2000 and the Standing Advisory Committee on Company Law in October 2000, a draft Insolvency and Business Recovery Bill (the Bill), was drafted and submitted to the Cabinet.

    The amendments in the Bill are based on the premise that it is possible to have one Act dealing with all insolvency provisions. Although in March 2003 the Cabinet approved the submission of the Bill to Parliament for consideration, this was delayed pending a decision on modern provisions for business rescue. Since March 2003, the Bill has been revised in light of scrutiny from various task teams and ministerial committees, but never taken up.

    The provisions relating to business rescue were subsequently included in the Companies Act of 2008 and this has resulted in a somewhat “disjointed” regime.