Companies attempting to misuse South Africa’s business rescue legislation as a strategy to delay paying outstanding debts are facing increased scrutiny from the judiciary. The courts have become increasingly aware of such practices and are beginning to adopt a firmer stance against this misuse, which threatens the proper functioning of the insolvency framework. This growing trend is being interpreted as a deliberate tactic to buy time and frustrate creditors, raising serious concerns over the integrity of the business rescue system.
Key Takeaways
- Courts Clamp Down on Abuse: South African courts are adopting a stricter approach toward companies misusing business rescue provisions to delay liquidation without genuine intent to restructure.
- Ulterior Motives Won’t Halt Liquidation: A recent High Court ruling—backed by Supreme Court of Appeal precedent—confirms that business rescue applications filed in bad faith will not suspend liquidation proceedings under section 131(6).
- Personal Liability for Abusive Filings: Individuals responsible for misusing the business rescue process may be held personally liable for legal costs, highlighting the risks of procedural manipulation.
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Concerns Raised by Legal Professionals
Legal practitioners from the prominent South African law firm Webber Wentzel have expressed growing concern over the rising number of companies that initiate business rescue proceedings with motives that appear to lack genuine intent. These proceedings are frequently presented as legitimate attempts to rehabilitate a business but, in reality, serve to obstruct or delay liquidation actions. Legal experts Julian Jones (Partner), Caellyn Eedes (Senior Associate), and Liso Potwana (Candidate Attorney) have all indicated that this trend is becoming a significant issue in the context of South African insolvency law. They argue that these so-called rescue efforts are increasingly being used as weapons by failing businesses to stall legal action, derail creditors’ efforts, and exploit procedural gaps in the system.
Business Rescue Law: A Misused Tool
Business rescue provisions were introduced as part of the Companies Act, 2008, with the intention of providing financially distressed companies a fair opportunity to restructure and recover, thereby avoiding liquidation. This legislative framework was meant to serve as a constructive alternative to winding-up proceedings. However, increasing numbers of businesses appear to be exploiting these laws as a mechanism to stall proceedings brought by creditors, undermining the legislation’s original purpose.
Instead of engaging in transparent restructuring processes or presenting viable rescue plans, many companies now resort to last-minute filings designed purely to delay liquidation and frustrate creditor rights.
Courts are now encountering more cases where companies file business rescue applications not with the intent to restore financial viability but to avoid or delay their legal obligations. Webber Wentzel has noted that this trend is undermining confidence in the legal system, prompting judges to respond more assertively to such tactics. A recent court decision has brought renewed attention to the matter, underscoring the judiciary’s growing unwillingness to tolerate this form of legal manipulation. Judges are now calling out these practices for what they are: a cynical misuse of legislation designed to protect—not shield—companies from accountability.
December 2021 Case Illustrates Judicial Response
A notable example occurred in December 2021, when a creditor sought to liquidate a financially distressed company under section 346 of the Companies Act, 1973. The proceedings were met with repeated delays, including a notably late filing of an answering affidavit. The court observed that this delay appeared to be a deliberate tactic aimed at frustrating the adjudication of the liquidation request. This drawn-out strategy reflected a growing trend of respondents dragging out proceedings to the last possible moment, fully aware that time favours the debtor in procedural delays.
In a further attempt to derail the process, the company in question filed a business rescue application shortly before the scheduled court hearing. Under section 131(6) of the Companies Act, 2008, such an application typically suspends any ongoing liquidation efforts until the court has reviewed the matter. This raised the question of whether the application was genuinely intended to save the business or merely served as a stalling measure to avoid imminent liquidation. The court recognised this manoeuvre as part of a pattern in which companies invoke business rescue not to rehabilitate operations but to exploit statutory protections for strategic advantage.
Courts Drawing on Precedents to Clarify the Law
To determine how to proceed, the Johannesburg High Court considered a 2024 ruling by the Supreme Court of Appeal (SCA), which had previously addressed similar issues. In that judgment, the SCA held that business rescue applications brought with ulterior motives—such as obstructing liquidation—do not benefit from the protective suspension afforded by section 131(6).
This interpretation effectively permits courts to disregard business rescue filings if they are made without substantive merit or in bad faith. Drawing on this precedent, the High Court in the 2021 case undertook a thorough examination of the business’s conduct throughout the proceedings, along with the content of its business rescue application.
The court concluded that the company had no viable grounds to oppose the liquidation. It also determined that the timing and nature of the business rescue application pointed to a clear intent to delay the inevitable. As such, the court ruled that the application constituted an abuse of legal process and declined to halt the liquidation proceedings on its account.
The judge emphasised that the courts would no longer tolerate tactical abuse disguised as compliance, particularly where the application was a transparent attempt to frustrate justice.
Following this assessment, the court proceeded to dismiss the respondent’s business rescue application and allowed the liquidation process to continue without further delay. The decision signalled a strong stance against attempts to use the business rescue mechanism as a shield against lawful creditor actions. This ruling reflects a growing resolve within the judiciary to curb procedural gamesmanship and restore the credibility of the business rescue regime.
Legal Clarity on Liquidation and Business Rescue Interactions
Webber Wentzel has pointed out that this ruling brings much-needed clarity to a long-standing point of ambiguity within section 131(6)—specifically, what is covered under the term “liquidation proceedings.” The court confirmed that this includes both the filing of an application to liquidate and the steps taken to wind up a company thereafter. Consequently, any business rescue application must be supported by sincere intent and a plausible plan for recovery if it is to temporarily suspend a liquidation process. The days of filing a last-minute affidavit with no restructuring plan, no creditor communication, and no operational roadmap are numbered.
Consequences for Misuse of Business Rescue
In addition to dismissing the application, the court imposed further consequences on the individual responsible for initiating the abusive business rescue filing. It ordered that this person—not only the company—be held personally liable for the legal costs incurred. This decision marks a firm warning to those considering similar tactics that such misuse of legal provisions will not only be rejected but may also result in personal financial penalties. This personal cost order sends a chilling warning to directors and executives who assume they can hide behind their companies while engaging in procedural abuse.
Webber Wentzel has indicated that this case sets a significant precedent for future insolvency-related disputes. It reinforces the judiciary’s role in maintaining the integrity of South Africa’s corporate legal framework and ensures that the business rescue process remains a legitimate tool for genuine financial rehabilitation—not a mechanism for evasion or delay. Creditors, legal practitioners, and financially distressed companies alike are being reminded that the courts are prepared to act decisively against the manipulation of legal processes.
Conclusion
The recent ruling signals a turning point in South Africa’s approach to corporate insolvency, where the courts are reinforcing the principle that business rescue laws must be used in good faith and for their intended rehabilitative purpose. Companies that file rescue applications to dodge accountability or delay liquidation now risk swift dismissal, reputational damage, and even personal financial penalties for those responsible. This case sets a strong precedent that will likely influence how business rescue matters are handled going forward, restoring confidence in the integrity of the country’s insolvency system.
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