, PLEASE USE THIS DOCUMENT AS A GUIDE ONLY
Question 1
1.1 The criteria that is used to determine whether a company is financially distressed for
purposes of the Companies Act 71 of 2008 and the grounds on which the board may voluntarily
place Viljoen Blankets Ltd under business rescue.
The Criteria for Financial Distress
A company is defined as "financially distressed" in section 128(1)(f) of the Act if it meets either of
the following two criteria:¹
Commercial Insolvency (Liquidity Test): It appears to be reasonably unlikely that the company
will be able to pay all of its debts as they become due and payable within the immediately
ensuing six months.² The focus is on the company's liquidity and its ability to meet current
obligations in the short term.³
Factual (Technical) Insolvency (Balance Sheet Test): It appears to be reasonably likely that the
company will become insolvent within the immediately ensuing six months.⁴ This test looks at
whether the company's liabilities will exceed its assets within that period.
The Grounds for Voluntary Business Rescue
In terms of section 129(1) of the Act, the board of directors may resolve that the company
voluntarily begins business rescue proceedings if and only if the board has reasonable grounds to
believe that both of the following requirements are met:⁵
The company is "financially distressed" as defined above in section 128(1)(f); and
There appears to be a reasonable prospect of rescuing the company.⁶
The requirement that there must be a "reasonable prospect of rescuing the company" ensures that
companies that are not economically viable are not placed under business rescue but are instead
liquidated.⁷
Application to Viljoen Blankets Ltd
It is highly likely that Viljoen Blankets Ltd is "financially distressed". The company is experiencing
cash flow problems, has significant debts, and one creditor has already instituted legal action to
recover a substantial secured loan of R75 million. This situation strongly suggests the company may
be commercially insolvent, i.e., unable to pay its debts as they fall due. The board's belief that
restructuring and investment will lead to a return to profitability could establish the "reasonable
prospect of rescuing the company" required by the Act, provided this belief is based on objectively
reasonable grounds.⁸ Mere speculative suggestions would not suffice.
¹ Section 128(1)(f) of the Companies Act 71 of 2008.
² Section 128(1)(f)(i) of the Companies Act 71 of 2008.
³ Farouk HI Cassim, 'Business rescue and compromises' in Farouk HI Cassim et al, The Law of Business Structures 2nd ed (Juta, 2022)
549.
⁴ Section 128(1)(f)(ii) of the Companies Act 71 of 2008.
⁵ Section 129(1) of the Companies Act 71 of 2008.
⁶ Section 129(1)(b) of the Companies Act 71 of 2008.
⁷ Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC).
⁸ Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC).
Question 1
1.1 The criteria that is used to determine whether a company is financially distressed for
purposes of the Companies Act 71 of 2008 and the grounds on which the board may voluntarily
place Viljoen Blankets Ltd under business rescue.
The Criteria for Financial Distress
A company is defined as "financially distressed" in section 128(1)(f) of the Act if it meets either of
the following two criteria:¹
Commercial Insolvency (Liquidity Test): It appears to be reasonably unlikely that the company
will be able to pay all of its debts as they become due and payable within the immediately
ensuing six months.² The focus is on the company's liquidity and its ability to meet current
obligations in the short term.³
Factual (Technical) Insolvency (Balance Sheet Test): It appears to be reasonably likely that the
company will become insolvent within the immediately ensuing six months.⁴ This test looks at
whether the company's liabilities will exceed its assets within that period.
The Grounds for Voluntary Business Rescue
In terms of section 129(1) of the Act, the board of directors may resolve that the company
voluntarily begins business rescue proceedings if and only if the board has reasonable grounds to
believe that both of the following requirements are met:⁵
The company is "financially distressed" as defined above in section 128(1)(f); and
There appears to be a reasonable prospect of rescuing the company.⁶
The requirement that there must be a "reasonable prospect of rescuing the company" ensures that
companies that are not economically viable are not placed under business rescue but are instead
liquidated.⁷
Application to Viljoen Blankets Ltd
It is highly likely that Viljoen Blankets Ltd is "financially distressed". The company is experiencing
cash flow problems, has significant debts, and one creditor has already instituted legal action to
recover a substantial secured loan of R75 million. This situation strongly suggests the company may
be commercially insolvent, i.e., unable to pay its debts as they fall due. The board's belief that
restructuring and investment will lead to a return to profitability could establish the "reasonable
prospect of rescuing the company" required by the Act, provided this belief is based on objectively
reasonable grounds.⁸ Mere speculative suggestions would not suffice.
¹ Section 128(1)(f) of the Companies Act 71 of 2008.
² Section 128(1)(f)(i) of the Companies Act 71 of 2008.
³ Farouk HI Cassim, 'Business rescue and compromises' in Farouk HI Cassim et al, The Law of Business Structures 2nd ed (Juta, 2022)
549.
⁴ Section 128(1)(f)(ii) of the Companies Act 71 of 2008.
⁵ Section 129(1) of the Companies Act 71 of 2008.
⁶ Section 129(1)(b) of the Companies Act 71 of 2008.
⁷ Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC).
⁸ Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC).
