A business rescue model for unincorporated business entities in South Africa
Loading...
Files
Date
2022
Authors
Mpofu, Kudzai
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
The significance of small and medium enterprises in promoting economic growth has received sufficient academic and legislative attention. However, little attention has been paid towards promoting and promulgating legislation that oversees the recovery of small enterprises in financial distress. The study compares business rescue schemes applicable to sole proprietorships and partnerships to draw lessons for the legislature and policymakers in South Africa. The current legislation on business rescue and debt review intentionally exclude sole proprietorships and partnerships mainly because of their legal personality. The Companies Act of 2008 only admits incorporated companies to business rescue. Furthermore, the National Credit Act 2005 excludes partnerships from debt review because the legislature classified them as juristic persons. For this reason, sole proprietorships and partnerships in financial distress cannot depend on the current legislation to facilitate restructuring proceedings. Therefore, the study identifies the key elements of an effective business rescue scheme which may apply to unincorporated business entities. Through a comparative assessment of different rescue regimes, it was concluded that an efficient rescue scheme must consist of an eligibility criterion, a procedural framework consisting of a step-by-step rescue process and an institutional framework with already pre-determined role players. The main conclusions from the study are that the eligibility criterion must only admit business debtors to the business rescue process. On that note, it was observed that it would be necessary to regulate the liability of sole proprietorships and partnerships during the rescue process. This may be achieved by recognising them (sole proprietorships and partnerships) as legal persons for purposes of business rescue. The study shows that the step-by-step procedure should include a commencement procedure that allows owners of sole proprietorships and partners in a partnership to apply for business rescue. As soon as the procedure commences, a moratorium on creditors' rights must be automatically activated. The stay should protect the business, the owners, and the codebtors. While the moratorium is the operation, the business rescue practitioner must prepare a business rescue plan that includes the treatment of secured and unsecured creditors. More so, consideration must be made on the possibility of selling parts of the business, merging the business with other successful businesses or incorporating the business. The study revealed that it may be necessary for the legislature to allow the debtor to continue borrowing during the business rescue process. However, the rescue process is terminated if the business rescue plan is fully implemented or the debtor faces unforeseen economic hardships. The effect of termination is that the debtor is discharged. The study indicates that the institutional structure should include the debtor, the business rescue practitioner and a specialised judge. The success of business rescue depends on the honesty and cooperation of the debtor. It was concluded that to reduce the cost of business, rescue the debtor may remain in control of its business but must be monitored regularly by appointing a state-sponsored business rescue practitioner who reports to the creditors. In the event that the creditors have reason to mistrust the debtor's honesty, they may choose to appoint and pay for a private business rescue practitioner jointly. In that case, the debtor must cooperate with the business rescue practitioner who oversees or monitors the rescue process. The business rescue practitioner must regularly report to the creditors and the court about the success or failures of the debtor. Since business rescue involves different areas of study, including business, law and financing, it was concluded that South Africa might need a specialised court system. Establishing an administrative institution akin to the Office of the official receiver would also be necessary to oversee the rescue process. Such an institution may be subsidised by the state to reduce the cost of business rescue. Generally, most of the observations made during the study were included in the recommendation to the legislature.
Description
Thesis (LL.D. (Laws))--University of the Free State, 2022
Keywords
Business rescue process, financial distress, business debtors, unincorporated business entities, moratorium, post-commencement finance, discharge, rehabilitation, business rescue practitioner, specialised judges