Will there be a need for informal loan workouts? A question from Chapter 6 of the new Companies Act

Abstract

South Africa has recently introduced into law a new Companies Act that has, amongst other changes, a segment dubbed „Chapter 6‟, which specifically focuses on distressed companies and their rescue/resolution. While past Acts in South Africa have had sections on distressed companies, none has positioned financial distress resolution as prominently within the Act as Chapter 6 has done. This hitherto lack of formalized focus of on business rescue in past Acts, made informal loan workouts the de facto mainstay for distressed business resolution in South Africa. It is therefore considered worthwhile that an investigation be undertaken to ascertain whether or not the newly legislated formal processes for rescuing distressed businesses will change the culture and/or overall view on the effectiveness of rescuing distressed businesses in South Africa. An online questionnaire of 17 questions sent to 5 different occupation categories generated 61 responses, which were around four coherent themes. From the analysis of the responses it was found that the inclusion of Chapter 6 (formalized business rescue legislation) in the new Companies Act was a welcome legislation with clear value-additions to company law in South Africa. The results also indicated that there is a level of uncertainty with regard to this legislation; thus, suggesting it is likely that informal loan workouts will remain a real option for some businesses in distress.