Insight
May 27, 2026
Business Rescue, established under Chapter 6 of the Companies Act 71 of 2008, aims to provide financially distressed companies with an opportunity to restructure and avoid liquidation. Mergers and acquisitions (“M&A”) can play a significant role in this process by facilitating the rehabilitation of such companies.
Legal Framework Governing Business Rescue
Chapter 6 of the Companies Act provides the foundation for business rescue proceedings, which include temporary supervision of the company by a business rescue practitioner (“BRP”), imposing a moratorium on creditor claims, and the development of a business rescue plan. The plan may involve restructuring the company’s affairs, operations, property, debt and equity to maximise the likelihood of continued solvency or achieve a better return for creditors than liquidation. M&A transactions are explicitly recognised as potential tools within the business rescue process, often taking the form of a sale of the company or its business as part of the rescue plan.
Role of Mergers and Acquisitions in Business Rescue
M&A transactions can be used to facilitate the rescue of distressed companies by enabling the transfer of assets or shares to a new owner or acquiring entity. This process can involve negotiating with prospective buyers, either prior to or following the appointment of a BRP. Such transactions are typically contingent on the approval of a business rescue plan by creditors. For example, in some instances, the business rescue plan may provide for the amalgamation of companies to simplify corporate structures and enhance operational efficiency, such as where two companies under business rescue merge to form a single entity.
Practical Implementation of Mergers and Acquisitions in Business Rescue
The implementation of M&A transactions during business rescue typically involves a range of restructuring steps, including issuing of new shares, dilution of existing shares, or executing schemes of arrangement under section 114 of the Companies Act. These steps may require shareholder approval, compliance with solvency and liquidity tests, and registration with the Companies and Intellectual Property Commission (“CIPC”). In addition, post-commencement finance is often critical to sustain the ongoing operations of the distressed company throughout the M&A process. This type of funding may be secured against unencumbered assets and enjoys preferential ranking over pre-commencement creditors.
Benefits and Challenges of Mergers and Acquisitions in Business Rescue
M&A transactions present several benefits in the business rescue context, such as safeguarding employment, continuation of viable businesses, and improving the prospects of creditors receiving better returns than they would in a liquidation scenario. However, challenges include the need for creditor buy-in, overcoming the stigma associated with financial distress, and managing the complexities of negotiating and implementing M&A transactions within the constraints of business rescue processes. In addition, the ranking of claims, particularly the priority afforded to PCF over secured creditors, may influence the willingness of stakeholders to support the rescue process.
Conclusion
M&A transactions are integral to the business rescue framework under South African law, serving as a tool to restructure financially distressed companies and achieve better outcomes for stakeholders. Although the process offers significant benefits, it also produces challenges that must be carefully managed by BRP’s, creditors and other stakeholders. The success of M&A transactions in the context of business rescue depends on effective planning, collaboration among stakeholders and strict compliance with the legal framework established by chapter 6 of the Companies Act.
