ZAMBIAN OPEN UNIVERSITY

COMPANY LAW
LL324 ASSIGNMENT 1

BANJI KALENGA
21811816
0977335663

March 2021
1. INTRODUCTION

In 2017 the government enacted the Corporate Insolvency Act No. 9 (hereinafter ‘The Act’).
Amongst other things, the Act aimed to provide for business rescue, appointment, duties and
responsibilities of business rescue administrators, rights of affected persons during business
rescue proceedings and business rescue plans.

Business rescue is defined in the act as the rehabilitation of a company that is financially
distressed.

The Act looked to address the unfavorable business conditions in the private sector due to the
contraction of the economy which was leading to increased receiverships and liquidations.

Under business rescue, there is a temporary supervision of the company, and of the
management of its affairs, business and property. During this process there is a temporary
moratorium on the rights of claimants against the company or in respect of the property in its
possession. The development and implementation of a plan to rescue the company by
restructuring its affairs is the ultimate aim. Failing at this leads to liquidation of the company.

This essay delves into the importance of business rescue provisions contained in The Act.

2.0 BUSINESS RESCUE

According to section 21 of The Act, business rescue is be triggered when a company director
asks the board of directors to pass a resolution that the company begins business rescue
proceedings. Section 23 of The Act allows an affected person to trigger business rescue
proceedings. Affected persons are described in The Act as including a regulator,
shareholder, member, director, creditor or an employee, a former employee of a company,
registered trade union representing employees of the company and the Registrar (of
companies).

The business rescue proceeding looks to rescuing the business, but also at getting a better
return for the creditors or shareholders through the proceeding than there would be with an
immediate liquidation of the company.

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In the matter of Chimanga Changa Ltd v Export Trading Ltd1 the court described
commencement of the process as follows:

The starting point is that there must be evidence that the Company is in financial distress
which, if not resolved, would result in defaulting on its debts and ultimately lead to
insolvency.

In the South African case of Welman v Marcelle Props and another2 the court clarified that
“business rescue proceedings are not for terminally ill close corporations. Nor are they for
chronically ill. They are for ailing corporations, which given time will be rescued and
become solvent.” Indeed The Act states in section 21 (2)(a) that business rescue proceedings
cannot be entered into if liquidation proceeding have already been commenced by or against
the company. However, in a case where the business rescue is triggered by affected persons
under section 23, under 23(7), the liquidation shall be suspended until either a court has
decided upon the application or until the business rescue ends. A company placed under
business rescue on the application of an affected person is also not allowed to placed itself
under liquidation.

An example of a company that would be in a position to require business rescue is one which
imports good from a far off place like China by sea and finances the import through a foreign
exchange loan. If such goods arrive at a time when movements in the exchange rate makes it
impossible for the company to sell off the goods in the manner it had planned leading to
delays in accessing liquidity, the firm may find itself unable to pay off the loan and, prior to
The Act, a candidate for insolvency. However under The Act, the company would be able to
apply to go under business rescue with the hope of resuming normal operations after some
time.

The significance of affected persons being able to apply to place a company under business
rescue cannot be over emphasized. A director running the company on a daily basis may be
too busy to realise that the company has gone into financial distress but a supplier that is
failing to collect his payment in a timely manner from the company may realize it. Similarly
employees whose salaries are unable to be paid on time on a regular basis may realise the
company is in financial distress and apply for it to be placed under business rescue
proceedings.
1
[2020] CA 76 at p.J13
2
[2012] ZAGPJHC 32

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Section 22 of The Act allows affected persons to challenge the decision of a Company to
commence business rescue proceedings This significance of this provision is that it affords
affected persons the opportunity to bring a halt to the process if they have strong reasons to
believe the process should not be undertaken.

The Act gives three grounds under which the challenge can be made:

a) That the Company is not financially distressed – this may occur where an affected
person has reason to believe that the Company is not financially distressed. The
matter of Chimanga Changa Ltd v Export Trading Ltd was one where a creditor
challenged the business rescue of its customer as they believed the Company was not
finally distressed but merely wanted to avoid paying its debt to them. The case cited
gives the importance of the existence of this provision in the law.
b) That there is no prospect of rescuing the company – this would occur when an
affected person has reason to believe that the financial distress of the company is so
large that it cannot be salvaged. In the South African Supreme Court case of Oakdene
Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd3 it was held
that held that the company’s proposal that the business rescue administrator rather
than the liquidator should sell the property consisted of no more than an alternative,
informal kind of winding-up of the company. They ruled that business rescue was not
intended to achieve a winding-up of a company to avoid the consequences of
liquidation proceedings. 
c) If a company fails to fulfil any of the procedural undertakings required under section
21 of The Act. The need to follow the law to the letter is that if not followed
important missed steps may cause the whole process to fail to go as planned.

Under section 22, an affected person is allowed to challenge the appointment of a specific
business rescue administrator. The Act gives three reasons under which such an appointment
can be challenged:

a) Where an administrator is not qualified in accordance with The Act - Under Statutory
Instrument (SI) 40 of 2018, the qualifications and experience of the administrator are
prescribed. Should the challenging party be aware of the administrator not satisfying
these qualifications then a valid challenge to the appointment can be challenged.

3
[2013] ZASCA 68

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 Under the SI, an administrator should be a chartered accountant or a legal
administrator who has practised for at least seven years, as defined in the Accountants
Act of 2008 or Legal Administrators Act, respectively.
b) Where the administrator is not independent of the company or its management – Such
a situation leads to bias that may negatively impact the affected persons and is thus
valid ground to challenge the appointment of such an administrator. In the South
African Supreme Court case of African Banking Corporation of Bostwana v Kariba
Furnisher Manufactures and others4 the court established that the business rescue
administrator lacked independence because he acted as a representative of Kariba by
only listening to what Kariba management were telling him and ignoring everything
from the plaintiff bank.
c) Where the administrator lacks the necessary skills, having regard to the company’s
circumstances – This would occur where an affected person is of the belief that the
appointed business rescue administrator’s experience is insufficient to assist in the
rescuing of the company.

All three of the reasons given above have the potential of resulting in an unsuccessful
business rescue process hence the law providing the opportunity to have it rectified.

Section 24(3) of The Act impliedly places a limit of 12 months on business rescue
proceedings. This is because the section states that the administrator is required to prepare a
progress report if the proceedings aren’t concluded after 12 months and update the progress
report every subsequent month thereafter. These reports are also to be delivered to each of the
identified affected persons.

The significance of this provision is that it guards against business rescue proceedings being
carried on indefinitely. It also helps to remove the anxiety from affected persons by ensuring
that they are updated on the progress of the business rescue.

Section 25 of the Act regulates the institution of legal proceedings against the company and
the enforcement of any action against the company during business rescue. The Act refers to
this as a general moratorium on legal proceedings against a company. It is placed on a
company from the moment that business rescue proceedings commence. In the South African
High Court matter of Investec Bank Ltd v Bruyns5 the court described a moratorium as a
4
[2015] ZASCA 69
5
[2011] ZAWCHC 423

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general provision that affords the company protection against legal action on claims in
general.

During business rescue proceedings, no legal proceedings (legal or arbitration proceedings),

including enforcement action (execution of a court or other order) against the company or in
relation to its property, that belongs to it or which is lawfully in its possession, may be
commenced or proceeded with in any forum (court or arbitral forum).

Exceptions to the general moratorium exist when the administrator gives written consent,
with leave of the court, as a set-off against any claim made by the company in any other legal
proceedings, criminal proceedings against any of the company’s directors or officers and
proceedings concerning any property or right over which the company exercises the powers
of a trustee.

This provision of the law ensures that the administrator is able to concentrate all efforts in
rescuing the business without being ambushed by legal challenges that may affect his
operations negatively and delay/fatally affect his exertions.

Section 28(1) of The Act regulates the interests of employees during business rescue. It
provides that employees who were, immediately prior to the institution of business rescue,
employees of the company will remain employed by the company on the same terms and
conditions on which they were employed prior to the commencement of business rescue
proceedings except to the extent that changes occur in the ordinary course of attrition or if
different terms and conditions are agreed between the employee and the company in
accordance with labour laws.

If however, the business rescue leads to redundancies or retrenchments then these must be in
line with the Employment Act, the Constitution and any other applicable employment laws.

This provision is a protection in favour of the interests of employees of the company. It

ensures that if any adverse consequences are to be experienced by the employees then the law
has to be strictly followed to the letter.

Section 28(2) states that contracts concluded with the company prior to the commencement
of business rescue, remain existent. The business rescue administrator may suspend (entirely,
partially or conditionally), any agreement to which the company is party, however, the other

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party to the contract may assert a claim for damages against the company. If the business
rescue administrator wishes to cancel a contract or clauses in the contract, they may only do
so with the sanction of the court.

These provisions are aimed at ensuring that the administrator is able to concentrate his efforts
on activities that are aimed at ensuring the successful rescue of the business.

Section 32 of The Act lists the powers and duties of the administrator. It gives the
administrator full management and control over the company. They may delegate certain
functions to a director on the board of the company or to a person who was part of the pre-
existing management of the company. The administrator may also remove any person who
formed part of the pre-existing management of the company from its office or appoint a
person (who does not have any other relationship with the company that would lead a
reasonable and informed third party to conclude that the integrity, impartiality or objectivity
of that person is compromised by that relationship, or is related to a person who has such a
relationship) as part of the management of a company. In some instances the administrator
will need to obtain the approval of the court for an appointment.

The administrator’s most important role, stated in section 32(1)(d), is to develop a business
rescue plan that is acceptable to the affected parties and to implement it.

The significance of Section 32 is that it gives the administrator adequate power and control
over the undertaking to allow him to do his utmost to ensure the company succeeds in the
process.

In accordance with section 33, the administrator is required, as soon as is practically possible
after appointment, to investigate the company’s affairs, business, property and financial
situation, and thereafter consider whether there is any reasonable prospect of rescuing the
company.

The administrator is required to end the business rescue proceedings if he either finds that the
company is incapable of being rescued or if he finds that the company is not financially
distressed.

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In the performance of his duties, the administrator is required to notify the court and affected
parties if he finds evidence of the presence, prior to the commencement of business rescue,
of:

a) voidable transactions or a failure by the company or any director to perform any

material obligation relating to the company and the administrator must direct the
management of the company to take steps to rectify the problem; or
b) reckless trading, fraud or other contravention of any law relating to the company. The
administrator must forward the evidence to the appropriate authority for further
investigation and possible prosecution and direct the management to take any
necessary steps to rectify the matter (including recovering any misappropriated assets
of the company).

Section 33 is the provision that guides the administrator to fully investigate the affairs of the
company and understand its financial health; an extremely crucial step in the process.

Under section 34 of The Act, directors of the company are mandated to cooperate with the
administrator and provide to him all necessary company information as prescribed in The
Act. Failure to provide the administrator with all the necessary information is met with a
criminal sanction against the offending party.

In the absence of this provision of the law, directors would be at liberty to ignore the business
rescue process altogether. An administrator would be at sixes and sevens were that to occur
and there would be little hope of success as it would be almost impossible to even understand
the magnitude of the task at hand.

Section 43 of The Act describes how the business rescue process culminates in the
preparation of a business rescue plan by the business rescue administrator. The administrator
will consult with all affected persons, creditors and the management of the company when
preparing the plan. The plan will set out details relating to the background of the company,
any proposal made for the rescue or rehabilitation of the company and any assumptions or
conditions upon which the plan is based. The plan will also include how the assets, liabilities,
contracts and employees will be treated following the adoption of the plan.

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The business rescue administrator must convene and preside over a meeting of the creditors
within 21 business days of the publication of the plan (section 42). At this meeting, the plan
must be introduced. The administrator will then procure a vote for the approval of the plan.

A plan will be accepted with the favourable vote of at least 75% of the affected persons, of
which at least 50% must be creditors. If the plan affects the rights of shareholders or
securities holders, a separate vote of the shareholders or securities holders affected is
procured. A simple majority vote is required for a plan to be supported by shareholders
and/or securities holders.

If a plan is rejected, affected persons or the administrator himself can take steps to implement
the plan (i.e., apply to court to disregard the vote on a plan or procure a vote from creditors to
draft a revised plan) failing which the plan will be held to have been rejected (Section 44).

Once the business rescue plan has been approved, it is binding on all creditors whether or not
the creditors were present at the meeting, voted in favour or against the plan or abstained
from voting.

The business rescue administrator must file a notice of substantial implementation of the plan
with the companies’ office once the plan has been substantially implemented.

Section 45 provides that if a business rescue plan that is approved by creditors and
shareholders, if need be, compromises the claims of creditors, such creditors are not entitled
to enforce the remainder of their claims against the company unless the business rescue plan
provides otherwise. In such an instance, the company will continue to trade with a “clean bill
of health”. This provision means that the company is able to then proceed in its new phase
without having to relive anything it passed through during the business rescue process.

3.0 CONCLUSION

The business rescue process is a great innovation of the legislature that provides the
opportunity for businesses to continue operating after undergoing financial distress. This
gives the opportunity to companies to continue operating where in the past they would have
ended up in receivership or liquidation.

BIBLIOGRAPHY

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CASES

Chimanga Changa Ltd v Export Trading Ltd [2020] CA 76

Welman v Marcelle Props and another [2012] ZAGPJHC 32

Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd
[2013] ZASCA 68

African Banking Corporation of Bostwana v Kariba Furnisher Manufactures and

others [2015] ZASCA 69

Investec Bank Ltd v Bruyns [2011] ZAWCHC 423

STATUTES

The Corporate Insolvency Act No 9 of 2017

SI 40 of 2018