Various Aspects to Consider with Regard to Special Insolvency Rules for Small and Medium‐Sized Enterprises in South Africa

• Author: Jani Wyk,André Boraine
• Date: 01 March 2016
• DOI: http://doi.org/10.1002/iir.1243
• Published date: 01 March 2016

Various Aspects to Consider with Regard

to Special Insolvency Rules for Small and

Medium-Sized Enterprises in South Africa

André Boraine

1

*

,†

and Jani van Wyk

2,‡

1

Faculty of Law, University of Pretoria, Pretoria, South Africa

2

University of Pretoria, Pretoria, South Africa

Part 2

(3) The South African legislative framework:

In South Africa, the Department of Trade and Industry is responsible for substantive

small, medium and micro-enterprise development,

1

whilst the procedural aspects of

enterprise insolvency are shared with the Department of Justice and Constitutional De-

velopment, depending on the type of enterprise.

2

The Department of Trade and In-

dustry primarily oversees aspects relating to the Companies Act 71 of 2008 and the

Close Corporations Act 69 of 1984.

3

In this regard, the Department of Trade and In-

dustry is also responsible for the National Small Enterprise Act 102 of 1996, as

amended, and the Co-operatives Act 14 of 2005.

4

The Department of Justice and

Constitutional Development oversees the Insolvency Act 24 of 1936,

5

which is applica-

ble to natural persons or enterprises that would fall under the ambit of the term

‘debtor’

6

and as opposed to the ambit of the term ‘juristic person’, which is colloquially

applicable where corporate legislation is applicable. The Department of Trade and In-

dustry remains the governing department for the Chapter 6 Business Rescue Proce-

dure set out in the Companies Act 71 of 2008 and as applicable to juristic persons

that fall under the ambit of this Act and procedure.

7

The Department of Justice and

Constitutional Development is further responsible for the administration of the courts

*E-mail: Andre.Boraine@up.ac.za

†

André Boraine is a Professor of Law, Dean of the

Faculty of Law, University of Pretoria, South Africa

[BIur LLB (Pret) LLM (Wits) LLD (Pret)].

‡

Jani van Wyk is a doctoral student under the auspices

of the ABSA Chair in Banking Law in Africa, Univer-

sity of Pretoria, South Africa [LLB, LLM (Pret)].

1. The Department of Trade and Industry ‘Small Me-

dium Micro Enterprise Development’(n 2). See also

the reference to the Ministry of Small Business supra al-

though its establishment is very recent. There seems to

be some overlapping with regard to small businesses –

see ‘SMEs vital for jobs and growth, Zuma told’(n 9),

which refers to the Ministry of Finance in addition to

the Ministry of Trade and Industry.

2. See the Department of Trade and Industry ‘Legislation and

Business Regulation’(n 9) and Department of Justice and

Constitutional Development <http://www.justice.gov.za/

legislation/acts/acts_full.html>and <http://www.jus-

tice.gov.za/index.html>(sites last accessed 9 April 2014).

3. Department of Trade and Industry ‘Legislation and

Business Regulation’(n 9).

4. Ibid.

5. See Department of Justice and Constitutional Develop-

ment <http://www.justice.gov.za/legislation/acts/dojcd-

acts-administered.pdf>(site last accessed 10 April 2015).

6. See section 2 of the Insolvency Act.

7. Department of Trade and Industry ‘Legislation and

Business Regulation’(n 9).

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 25: 3–35 (2016)

Published online 23 December 2015 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1243

of law, which involves the latter by necessity in each case relating to the insolvency of

an enterprise where recourse is taken to a court.

8

(4) The South African mechanisms available to deal with financial difficulties experi-

enced by debtors

In South Africa, the options available to a business or businessman in financial distress are

dependent on the nature of the person involved, thus whether the distressed can be clas-

sified as a natural or juristic person and whether the focus is on rehabilitation or liquida-

tion/sequestration of the distressed.

9

Theoptionsarebriefly set out hereafter, focusing on

the following five aspects: the scope of the application in respect of the type of debtor; the

initiator of the process and court involvement (if any); the purpose and outcome of the

procedure and whether any reference is made to the business or trade of the debtor.

The first two options pertain to liquidation and distribution of the assets of the debtor,

a natural and juristic person, respectively, in the traditional insolvency procedure.

10

8. See inter alia Department of Justice and Constitutional

Development <http://www.justice.gov.za/legislation/acts/dojcd-

acts-administered.pdf>(site last accessed10 April 2015).

9. The options set out hereunder are currently availableun-

der the South Africanlegal regime. Some reference is made

to the former judicial management procedure under the

Companies Act 61 of 1973, whichhas been repealed by the

Companies Act 71 of 2008. In addition, special insolvency

measures (i.e. winding-up/sequestration/business rescue/cu-

ratorship) mentionedin sections 100 to 103 of the Financial

Markets Act 19 of 2012, which applies to ‘regulated person

[s]’as definedin section 1 of that Act (such as ‘licensed central

securities depositor[ies]; …licensed clearing house[s]; …li-

censed exchange[s]; …licensed trade repositor[ies]; …

authorised user[s]; …clearing member[s]; …nominee[s];

…participant[s]’etc.and potential options such as the pre-

liquidation composition procedure set out in the proposed

section 118 of the Unified Insolvency Bill of 2003 (available

at <http://www.justi ce.gov.za/master /m_docs/insolve- uni-

fied-insolvency-bill-july2003.pdf>(site last accessed 7 April

2014) will not be discussed in depth. See also Chiwete (n 8)

in general, Boraine (n 37) 217, 228–230, Melanie Roestoff

and Hermie Coetz ee, ‘Consumerdebt relief in South Africa;

lessons from America and England; and suggestions for the

way forward,’2012 (24) SAMercLJ 53, 70–71; Boraine and

Roestoff ‘Part 2’(n 26) 527, 527–528 for commentary on

the pre-liquidationcomposition in terms of the DraftUnified

InsolvencyBill. An updated version has been circulatedas an

unofficial (2015) version. The pre-liquidation composition is

not discussed in depth; however, for sake of completion, the

basic eligibility criteria for the proposed section 118-proce-

dure as setout the 2015 version is noted. Theseare the nature

of the debtor(‘any debtor’although companiesand close cor-

porationsare explicitly excludedfrom the ambit of this proce-

dure) and the amountof debt (‘less than R200 000’)–see the

proposed section118(1). See also paragraph 1 supra.

10. Only selected aspects are reiterated in the discussionhereaf-

ter –for a comprehensive discussion on these aspects and their

shortcomings, see e.g. PM Meskin (with contributions by B

Galgut, PAM Magid, JA Kunst, A Boraine, DA Burdette)

Meskin insolvency law (last updated November 2014 (updated to

October 2014) –service issue 43) LexisNexis, electronic version

available at <http://0-www.mylexisnexis.co.za.innopac.up.ac.

za/Index.aspx>(site last accessed 8 April 2015); see e.g.

chapter 1 ‘Law applicable’; chapter 2 ‘Compulsory Sequestra-

tion of Debtor’sEstate’; chapter 3 ‘Voluntary surrender of

Debtor’sEstate’; chapter 13 ‘Compositions’;chapter14‘Reha-

bilitation’and chapter 18 ‘Business Rescue’;Eberhard

Bertelsmann et al.,Mars The Law of Insolvency in South Africa

2008 9

th

ednJuta&CompanyLtd:CapeTown;Robert

Sharrock, Kathleen van der Linde and Alastair Smith, Hockly’s

Insolvency Law 9

th

edn 2012 Juta & Co Ltd: Cape Town; Piet

Delport and Quintus Vorster (with contributions from David

Burdette, Irene-Marie Esser and Sulette Lombard) Henochsberg

on the Companies Act 71 of 2008, Volumes 1 & 2 (Last updated

October 2014 –service issue 9) LexisNexis, electronic version

available at <http://0-www.mylexisnexis.co.za.innopac.up.ac.

za/Index.aspx>(site last accessed 8 April 2015), see e.g. com-

mentary on sections 79–83, 224 and item 9 of schedule 5;

ewinding-up of companies and liquidation of insolvent compa-

nies as well as commentary on chapter 6 in respect of business

rescue; Henning and Pretorius (n 2) in respect of close corpora-

tions in general and in respect of business rescue and winding-

up proceedings; JJ Henning and JT Pretorius (with specialist

contributors A du Plessis, JA Henning, PS Brits and JH vd V

Nel) Close Corporations and Companies Service Volume 2 (last updated

September 2014 –service issue 43) LexisNexis: Durban, in

respect of close companies in general and in respect of business

rescue and winding-up proceedings,electronic version available

at <http://0-www.mylexisnexis.co.za.innopac.up.ac.za/Index.

aspx>(site last accessed 8 April 2015); Corlia van Heerden

‘Chapter 14. A practical discussion of the debt-counselling pro-

cess’in JW Scholtz (ed) Guide to the National Credit Act (last up-

dated May 2014 –service issue 6) LexisNexis; André Boraine

and Melanie Roestoff, ‘The treatment of insolvency of natural

persons: An appeal for a balanced and integrated approach in

South African Law’2014 (5) The World Bank Legal Review 91;

Anneli Loubser, ‘The business rescue proceedings in the Com-

panies Act of 2008: C oncerns and questions’Part12010(3)

TSAR 501;AnneliLoubser,‘The business rescue proceedings

in the Companies Act of 2008: Concerns and questions’Part 2

2010 (4) TSAR 689; Roestoff and Coetzee (n 117) 53; Hermie

Coetzee and Melanie Roestoff, ‘Consumer debt relief in South

Africa –Should the insolvency system provide for NINA

debtors? Lessons from New Zealand’2013 (22) INSOL Interna-

tional Insolvency Review 188; Boraine and Roestoff ‘Part 1’(n 53)

351 and Boraine and Roestoff ‘Part 2’(n 26) 527.

INSOL International Insolvency Review4

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 25: 3–35 (2016)

DOI: 10.1002/iir

The options discussed thereafter include an element of repayment restructur ing

through a schedule of reimbursement of creditors.

(iii) Seque stration: Sequestration in terms of the Insolvency Act 24 of 1936 ap-

plies first and foremost to a natural person defined as a ‘debtor’in section 2

of the Act.

11

In this context, the estate of a sole proprietor will thus be eligible

for sequestration. The definition includes a partnership as well as a ‘business’

trust and therefore small businesses operated as sole proprietorships, partner-

shipsorbusinesstrustswillbesubjecttothisprocess.

The process of sequestration can be initiated either by the debtor self, termed

‘voluntary surrender of the debtor’s estate’,

12

or by a creditor of the debtor, termed

‘compulsory sequestration’,

13

but necessitates court involvement in all instances.

14

The commencement of sequestration proceedings has the effect of initiating a stay

of proceedings on civil collection of debts.

15

The debtor has to show to the satisfaction of the court that there ‘will be [an]

advantage to the creditors’of the estate if the sequestration proceeds.

16

In a similar fash-

ion, in cases of compulsory sequestration, the creditor petitioning the court for an order

sequestrating the debtor has to show that ‘there is reason to believe’that the sequestra-

tion ‘will be to the advantage of creditors’.

17

In instances where the debtor requests an

order of sequestration from the court, the debtor needs to indicate that there will be

adequate funds available in the free residue of the insolvent estate to settle the costs

of sequestration.

18

Notice further needs to be given to employees or relevant trade

unions, the South African Revenue Service and the debtor, as and when applicable.

19

The outcome of a successful petition for sequestration is that the debtor is

divested of his estate,

20

the contents of which is liquidated and distributed amongst

the creditors of the estate,

21

save for selected exempted property.

22

In respect of

11. Section 2 in respect of the meaning of ‘debtor’for

purposes of ‘sequestration of the debtor’s estate’reads

as follows: ‘A person or a partnership or the estate of a

personor partnership whichis a debtor in the usualsense

of the word, except a body corporate or a company or

other association of persons which may beplaced in liq-

uidation under the law relating to Companies’.Herein

referred to as the IA.

12. Section 3 of the IA.

13. See section 9 of the IA.

14. See sections3 and 6 of the IA. For a summary of the

requirementsto be satisfied and discretionary powersof

the court in respectof voluntary surrender and compul-

sory sequestration, see also André Boraine and Corlia

Van Heerden, ‘To sequestrate or not to sequestrate in

view of the National Credit Act 34 of 2005: A tale of

two judgments’2010 13(3) PELJ 84, 86–92.

15. Section 20(1)(b) of the IA.

16. Section 6(1) of the IA.

17. Section 10(c) of the IA. See also Boraine and Van

Heerden (n 123) 84, 88 where the authors refer to

the higher evidentiary threshold placed upon a

debtor petitioning the court for voluntary surrender

as opposed to compulsory sequestration. In the first

instance the debtor has to show genuine advantage

to creditors as opposed to the second instance where

an allegation of reasonable belief of an advantage is

sufficient (see 88). The authors further mention at

89 that the severity of sequestration may cause a

court to revert to a potential substitute process such

as debt restructuring where advantage to creditors

is taken into account.

18. Section 6(1) of the IA.

19. Sections 4(2) and 9(4A) of the IA. Notice of a volun-

tary surrender also needs to be given in a local newspa-

per, Government Gazette and to the Master of the

High Court in terms of section 4(1) of the IA. Here

the Act makes a distinction in respect of the area in

which notice must be given in the newspaper, in effect,

where the debtor resides or, in the case of the debtor

being a trader, in the area where the main place of

business can be found. The concept of ‘trader’is de-

fined in section 2 of the Act.

20. Section 20(1)(a) of the IA.

21. See e.g. section 91 of the IA.

22. Section 23(1) of the IA, section 67 of the Magis-

trates’Courts Act 32 of 1944 and section 45 of the Su-

perior Courts Act 10 of 2013. This also includes

certain apparatus necessary for the debtor to continue

with his profession, if applicable.

Insolvency Rules for SMEs in South Africa 5

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 25: 3–35 (2016)

DOI: 10.1002/iir