(in terms of section 155 of the Companies Act)
Introduction – Purpose
The purpose of this section of the Companies Act (Act 71 of 2008) is to allow for a company to make an agreement of compromise with its creditors without going into liquidation or being wound up or as an alternative to, or in addition to, business rescue. Unlike business rescue, the Act specifically states there is no requirement that the company must be in ‘financial distress’ unless the company is already in business rescue.[1]
A compromise is an agreement between a company and its creditors (or a class of creditors) that terminates a dispute over the rights of parties (which are to be compromised) or their enforcement. It is appropriate in circumstances where it is difficult to come to an agreement with creditors or a class of creditors. An example of this would be where there are issues of practicality, such as where it is unfeasible for a company to contact large numbers of creditors to obtain their individual consent or where a small number of creditors may try to be obstructive towards a scheme which would be beneficial to the rest of the company’s creditors.
Unlike a business rescue, the initiation of the compromise process does not lead to a moratorium of claims against the company. The compromise process can be halted by an application to place the company in business rescue but it can continue if a company is placed in liquidation, in which case the compromise agreement would be binding on the liquidator.
Compromise Proposal
In terms of section 155(2) of the Companies Act, the board of a company, or its liquidator (if it is being wound up), may propose an arrangement of a compromise of its financial obligations to all of its creditors or to the members of any class of its creditors.[2] A company’s board of directors and its liquidators are accordingly the only people who have locus standi to propose a compromise.
A copy of the proposal setting out how the compromise will work together with notice of the meeting which will be called to consider the proposal must be delivered to every creditor of the company or of the relevant class of creditors whose name or address is known to, or can reasonably be obtained by, the Company and to the Companies and Intellectual Properties Commission (“CIPC”).[3]
The proposal, which must set out all of the information reasonably required to allow creditors to decide whether or not to accept or reject the proposal, must be divided into three Parts[4]:
· A complete list of all the material assets of the company and which assets are held as security by creditors;
· A complete list of the creditors of the company and an indication as to which creditors would be secured, statutory preferent and concurrent as well as which creditors have proved their claims (in respect of a liquidation);
· The probably dividend that would be received by each class of creditors if the company were to be placed in liquidation;
· A complete list of the holders of the company’s issued securities and an indication of what effect the proposed compromise would have on them (if any); and
· Whether the proposal includes a proposal made informally by a creditor of the company.
· The nature and duration of any proposed debt moratorium
· The extent to which the company is to be released from payment of its debts and to which any debt is proposed to be converted into equity;
· The treatment of contracts and ongoing role of the company;
· The property of the company that is proposed to be made available to pay creditors’ claims;
· The order of preference in which the proceeds of the proposed sale of the company’s property will be applied to pay creditors if the proposal is adopted; and
· The benefits of adopting the proposal as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation.
· A statement of the conditions that must be satisfied (if any) for the proposal to come into operation and to be fully implemented;
· The effect, if any, that the plan will have on the number of employees and their terms and conditions of employment; and
· A projected balance sheet for the company and statement of income and expenses for the next three years, prepared on the assumption that the proposal is accepted.
o The projected balance sheet and statement must include notice of any significant assumptions on which the projections are based and may include alternative projections based on different assumptions and contingencies.
In addition to Part A, B and C set out above, the proposal must also include a certificate[8] by an authorised director or prescribed officer of the company stating that any factual information provided appears to be accurate, complete and up to date and that the projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement.
Adoption of the Compromise Proposal
In order for the proposal to be adopted[9] (either by all of the creditors or the members of a class of creditors), it has to be supported by a majority representing at least 75% in value of those creditors or members of a class of creditors present and voting (either in person or by proxy) at a meeting called for that purpose. This means that it does not only have to be approved by a majority of creditors attending but the majority must hold at least 75% in value of all of the claims of creditors (whether calculated of all claims against the company or only those held by that class of creditors).
If the proposal is adopted, the company may choose to apply to the court for an order approving the proposal[10]. Note that, unlike the provisions in the Companies Act 61 of 1973 where a compromise or arrangement was not binding unless it was sanctioned by the court, that the company is not required to get the court’s approval of the proposal. If the company chooses to make an application to the court in terms of section 155(7), the court may sanction the compromise as set out in the proposal if it considers it just and equitable to do so, having regard to factors such as the number of creditors who voted in favour of the proposal and, in the case of a liquidation, the view of the Master of the High Court.[11] It appears from recent case law that all creditors who would be affected by the order should receive a copy of this application even if they voted in support of the compromise.[12]
A copy of an order of the court sanctioning the compromise must be filed with CIPC within 5 business days of receipt and attached to each copy of the Company’s Memorandum of Incorporation stored at its registered office.[13] The compromise is then final and binding on all of the company’s creditors or all of the members of the relevant class of creditors, as the case may be, as of the date on which it is filed.[14] This provision implies that companies should apply to court for the compromise to be sanctioned so that they are able to enforce the agreement with all of those creditors affected by the compromise.
It is worth noting that the Companies Act specifically provides that a compromise entered into in this way does not affect the liability of any person who has signed surety for the company’s debts.[15]
[1] Section 155(1) [2] Section 155(2) [3] Section 155(2)(a) and (b) [4] Section 155(3) [5] Section 155(3)(a) [6] Section 155(3)(b) [7] Section 155(3)(c) [8] Section 155(5) [9] Section 155(6) [10] Section 155(7)(a) [11] Section 155(7)(b) [12] See Commissioner of the South African Revenue Services v Cross Atlantic Properties (Pty} Ltd and Others (43580/2015) [2017] ZAGPPHC 554 (4 August 2017) and Commissioner for the South African Revenue Service v Logikal Consulting (Pty) Ltd (96768/2016) [2018] GNP (29 March 2018) [13] Section 155(8)(a) and (b) [14] Section 155(7)(c) [15] Section 155(8)