The reasonable prospect test in South African business rescue: who proves it, who abuses it and who pays

Introduction

Business rescue came into operation on 1 May 2011 under chapter 6 of the Companies Act 71 of 2008, and plenty of commentators expected it to fail. Their worry was the requirement at its centre, a reasonable prospect of rescuing the company, which looked set to make the new procedure as ineffective as judicial management had been under the 1973 Act (O’Brien and Calitz, 2021). More than a decade later the requirement is still there. It appears in the Act in two different formulations, and the Supreme Court of Appeal has refused to give it a checklist or a template (O’Brien and Calitz, 2021; O’Brien and Calitz, 2022).

This paper argues that the threshold itself is not the main problem. A flexible test is probably the right one for a procedure that has to deal with a distressed retailer one week and a property company the next. The trouble lies in who gets to say the test is met, on what evidence, and who pays when it turns out not to be. Directors can start a rescue by resolution and so hold the first word (Phungula, 2023). Creditors have to vote on information they find hard to test, and practitioners, employees and liquidators carry costs that the Act handles unevenly (Kekana, Pretorius and De Abreu, 2024; Marumoagae and Thambi, 2024). My position is that the better reform is to front-load evidence at the point of entry and to tidy up the cost rules, rather than to tighten the test. The sections below look at how the test works, at entry and abuse, at information and valuation, at the question of who bears the cost, and at a narrower set of changes.

A note on scope. The consolidated Companies Act on SAFLII, updated to 22 May 2026, records two 2024 amending Acts (Republic of South Africa, 2024a; Republic of South Africa, 2024b). Both took effect from 27 December 2024, a further commencement date of 22 May 2026 applies to part of the first, and other provisions of the first were still awaiting proclamation at the date of the consolidation (Republic of South Africa, 2008). I take the business rescue provisions as the case law and the cited literature describe them and do not rest any argument on a change introduced in 2024.

What the test asks and how courts apply it

The statutory pieces are fairly compact. Business rescue is defined as proceedings aimed at the rehabilitation of a financially distressed company through temporary supervision, a temporary moratorium on claims and a rescue plan, and a company is financially distressed when it appears reasonably unlikely to pay its debts as they fall due within the next six months, or reasonably likely to become insolvent in that time (Oakdene Square Properties v Farm Bothasfontein, 2013). Where an affected person applies to court under section 131, the court may order supervision if it is satisfied that the company is distressed and that there is a reasonable prospect of rescuing it. Rescuing the company means reaching one of two goals, either returning it to solvency or producing a better return for creditors or shareholders than immediate liquidation would (Oakdene Square Properties v Farm Bothasfontein, 2013).

In Oakdene, decided in 2013, the Supreme Court of Appeal set the tone that the literature still describes. A reasonable prospect is a lower bar than the reasonable probability needed for judicial management, yet it asks for more than an arguable possibility, and it has to rest on reasonable grounds rather than speculation. The applicant need not put up a detailed plan, because the practitioner can produce that later, but showing only that a plan could be drawn up does not do the job. The court also treated the question as a value judgement with a yes or no answer, which meant an appeal court could substitute its own view (Oakdene Square Properties v Farm Bothasfontein, 2013). On the facts, a company that could not pay a judgement debt to its bank, and whose assets were allegedly being stripped, was better served by liquidation, where a liquidator has investigative powers (Oakdene Square Properties v Farm Bothasfontein, 2013).

O’Brien and Calitz (2021, 2022) read the decade of cases that followed and find the same refusal to systematise. Each case turns on its own merits, the relevant considerations are many and sometimes contradictory, and they must be weighed against each other. They also point out that the Supreme Court of Appeal has recognised two independent objectives, restoring the company or achieving a better return than liquidation even where the business itself does not survive, a reading they describe as a strange one. Two of their observations stay with me. One is that the objective yardstick is the reasonable business person in business rescue and not the reasonable person at large. The other is that judges describing their task as a discretion in the loose sense, or as a value judgement, add confusion more than clarity (O’Brien and Calitz, 2021). I think that is fair, and it makes me less comfortable with the idea that case-by-case flexibility is automatically harmless.

The sharpest point in that scholarship is about who carries the burden. O’Brien and Calitz (2021) argue that courts have not yet faced up to the fact that the burden of showing the presence or absence of a reasonable prospect can fall on people with very different access to knowledge about the company. Lip service is paid to the idea of one test for everyone, but in practice judges appear more lenient towards people with limited access to information and tougher on those with fuller access, particularly those with exclusive knowledge. That seems sensible as a matter of fairness. It also suggests that the test is really an evidential contest in disguise, and the contest is decided by who holds the documents (O’Brien and Calitz, 2021).

Entry by board resolution and the risk of abuse

Business rescue can begin in two ways. An affected person can apply to court under section 131, or the board can resolve to begin the process itself, and Oakdene notes that the court route is closed once a resolution under section 129 has been adopted (Oakdene Square Properties v Farm Bothasfontein, 2013). The voluntary route avoids a court application at the start. It also puts the first judgement about financial distress and rescue prospects in the hands of the people who know most about the company and have the most to lose from a liquidation, namely the directors (Phungula, 2023).

Phungula (2023) argues that this is exactly where abuse creeps in. The starting point is the surge of distress after COVID-19, the looting and unrest in parts of South Africa and the floods, and the claim is that evidence shows companies sometimes resort to business rescue to get refuge from creditors even when the facts do not justify it. In most such cases, Phungula says, directors pass the resolution despite evidence that the company should not commence the proceedings. The article ties that conduct to King IV, whose ethics and good governance principles directors are meant to respect, and concludes that directors should rethink their practices when they decide to go this way. I would add a modest caution. The article is an argument about conduct and governance more than an empirical count of abusive filings, so the scale of the problem is still unmeasured (Phungula, 2023; O’Brien and Calitz, 2022).

Where the entry decision is made by the best-informed party and challenged, if at all, by the worst-informed, the uneven treatment O’Brien and Calitz (2021) describe starts to matter at the very beginning. A creditor who wants to challenge a doubtful resolution has to build a case from whatever it can find outside the company, while a director who knows the books can usually say a prospect exists without handing over anything. Courts being kinder to the limited-knowledge applicant helps, but it is a soft safeguard to rely on at the gate. Oakdene shows what happens when the facts are bad and a court sees them, since the application there failed (Oakdene Square Properties v Farm Bothasfontein, 2013), but not every company has a bank pursuing it for a judgement debt.

Information, valuation and the creditor vote

Once a practitioner is appointed, the reasonable prospect test returns in a different shape as the creditors’ vote on a plan. Kekana, Pretorius and De Abreu (2024) describe South Africa as a creditor-friendly system in which creditors are the most influential stakeholders because of their voting rights, and they call the rescue plan an overlooked and perhaps underdeveloped part of the regime. Their interviews with 14 executives from 10 South African financial institutions found that full disclosure of financial, commercial and legal information was a critical antecedent for decisions, with leadership and social impact information also influencing votes. The study speaks to information asymmetry between practitioners and creditors, and it presents disclosure as a route to accountability from practitioners (Kekana, Pretorius and De Abreu, 2024).

The legal point sits behind that finding. The statutory comparison is between the benefits of the plan and the benefits of immediate liquidation, so everything depends on how the numbers are produced (Oakdene Square Properties v Farm Bothasfontein, 2013). Conradie and Lamprecht (2021) interviewed 11 senior practitioners and found that conventional valuation methods assume a going concern, which a company in business rescue is not necessarily, leaving valuation in a grey area. Where the aim is solvency, practitioners prepare a short-term undiscounted cash flow budget with no terminal value, and where the aim is a better return than liquidation they use an asset-based approach. They also report that the business, digital and relational acumen of the practitioner is a major influence on the value reached. So two competent practitioners could plausibly arrive at different figures for the same company, and creditors who cannot see how the figure was built have little means of testing it.

Put these two studies next to Oakdene and a pattern appears. The court will not insist on a detailed plan at the application stage, and the practitioner will produce one later, and later is when creditors depend on disclosure and valuation choices they cannot easily check (Oakdene Square Properties v Farm Bothasfontein, 2013; Conradie and Lamprecht, 2021). That is acceptable if the plan stage is well policed. The evidence in Kekana, Pretorius and De Abreu (2024) suggests that creditors themselves think the plan stage needs better information, which tells me the policing is thinner than the law assumes. Rejection by a majority of creditors will normally end the matter, as the Supreme Court of Appeal observed, so what goes into that vote is not a side issue (Oakdene Square Properties v Farm Bothasfontein, 2013).

Who pays when rescue fails or drags on

Practitioners are the first group to consider. Section 143(1) of the Companies Act sets their remuneration by a prescribed tariff, and when they regard the tariff as inadequate they may propose additional pay on a contingency basis (Marumoagae and Thambi, 2024). The Act is silent on whether such success fees are lawful, and Marumoagae and Thambi (2024) explain that accepting one could possibly breach a practitioner’s duty to act with the utmost good faith, even though practitioners keep negotiating for them. The article takes the debate to the practitioner’s fiduciary duties. For my argument the relevant observation is that the incentive structure affects the entry test. A practitioner who is paid more for a successful rescue may have reason to see prospects where a neutral observer would not, and creditors who must judge the plan are relying on information supplied by the person who stands to benefit (Marumoagae and Thambi, 2024; Kekana, Pretorius and De Abreu, 2024).

The other end of the process produces a different cost problem. A practitioner who concludes that there is no longer a reasonable prospect must apply for liquidation, and by then is probably a creditor for unpaid fees and expenses. A creditor who brings a liquidation application may have to contribute to liquidation costs if the sale of assets leaves too little free residue, which raises the question whether the practitioner must pay personally (O’Brien and Calitz, 2023). The authors read the Insolvency Act of 1936, the Companies Act of 1973 and the Companies Act of 2008 together, note that the provisions are not aligned, and conclude that a practitioner applying in that capacity does not have to make the contribution, because the practitioner is performing a statutory obligation. That outcome seems right to me. If practitioners faced personal costs for doing what the Act requires, they would have a reason to delay the honest conclusion that rescue is not possible, and delay is exactly what makes failed rescues expensive (O’Brien and Calitz, 2023).

Employees carry the third set of costs. Loubser and Garbers (2021) compare how the law protects job security in retrenchment, transfer of a business, business rescue and winding up. They find room for companies to circumvent the protection and say that, where it applies, employees find it hard to challenge the substance of decisions that hurt them, since the main protection is procedural, in rights to be informed and consulted. Business rescue is, in their view, the most employee-friendly of these processes, although employees’ participation needs a fine balance because it can be self-defeating and lead to winding up and permanent job losses (Loubser and Garbers, 2021).

Two further studies show where that balance is hard to strike. Marumoagae and Phiri (2021) note that the business rescue procedure has not been adequately tested against the Constitution, and that courts generally treat the chapter 6 moratorium as broad enough to cover employment-related disputes, so employees may not litigate against their employer during rescue. They question whether that restriction is legitimate and reasonable when set against rights such as fair labour practices and social security, and ask for clarity from courts or the legislature. Phungula (2024) looks at section 136(1)(a), under which existing employment contracts continue on the same terms except for changes in the ordinary course of attrition or by agreement under labour law, and describes the tension between a practitioner’s duty to rescue and employees who want their terms preserved. Taken with Loubser and Garbers (2021), these studies suggest employees are protected mostly by process and are, in practice, asked to wait.

A narrower reform agenda

If the threshold is not the problem, what should change? First, entry should come with evidence. I would require a board resolution to be accompanied by a short statement of the grounds for believing that financial distress exists and that a reasonable prospect of rescue exists, with the key figures, filed so that affected persons can see it. Nothing in the sources I have read shows that the Act demands this at present, and I do not claim it does. The point is that Phungula’s (2023) concern about unjustified resolutions and O’Brien and Calitz’s (2021) concern about unequal access to knowledge both point to the same cure, which is to put some of the knowledge in front of creditors on day one.

Second, the plan stage needs standard disclosure. Kekana, Pretorius and De Abreu (2024) show what creditors want, namely financial, commercial and legal information. Conradie and Lamprecht (2021) show that the valuation approach changes with the objective and with the practitioner. A plan that states which objective it pursues, which valuation method it used and why would let creditors compare the rescue case against liquidation properly, which is what the statute asks them to do. Third, the costs rules should be settled. Marumoagae and Thambi (2024) point to the Act’s silence on success fees, and O’Brien and Calitz (2023) show a gap in the statutory fit on liquidation costs. Both are drafting problems that a legislator can fix without disturbing the test.

Fourth, employees’ position needs clarity, as Marumoagae and Phiri (2021) say, because the moratorium and section 136 as read by the courts leave them with process rights and long waits (Loubser and Garbers, 2021; Phungula, 2024). I do not claim these changes would be cheap or free of side effects. More upfront paperwork could slow a rescue that depends on speed, and a standard format could harden into box ticking. Still, a flexible test is easier to live with when the people applying it can see the evidence, and that seems a better bet than moving the threshold.

Conclusion

The reasonable prospect requirement has survived its early critics, and the Supreme Court of Appeal’s refusal to reduce it to a checklist is defensible (Oakdene Square Properties v Farm Bothasfontein, 2013; O’Brien and Calitz, 2022). What the case law and scholarship show is that flexibility moves the work elsewhere, to evidence, information and costs. Directors hold the first word and sometimes abuse it, creditors vote on information they find hard to test, practitioners are paid by a tariff and sometimes by success fees, and employees mostly wait (Phungula, 2023; Conradie and Lamprecht, 2021).

A better regime would leave the test alone and demand more at the door (Phungula, 2023), standardise what a plan has to disclose (Kekana, Pretorius and De Abreu, 2024), and fix the cost rules that currently leave practitioners and creditors guessing (Marumoagae and Thambi, 2024; O’Brien and Calitz, 2023). The evidence base is modest, a handful of interview studies and doctrinal analyses, and nobody has counted abusive filings. Even so, the pattern across these sources is consistent enough to say where reform should start.

Reference list

Conradie, S. and Lamprecht, C. (2021) Valuation practices under business rescue circumstances in South Africa. South African Journal of Economic and Management Sciences, 24(1), article a3721. doi:https://doi.org/10.4102/sajems.v24i1.3721

Kekana, M.K., Pretorius, M. and De Abreu, N.V.A. (2024) Enhancing creditor decision-making in South African business rescue proceedings: a comprehensive analysis of information requirements in business rescue plans. International Journal of Law and Management, 66(5), pp. 555-577. doi:https://doi.org/10.1108/IJLMA-10-2023-0234

Loubser, M.E. and Garbers, C. (2021) The job security of employees of financially distressed companies. South African Mercantile Law Journal, 33(2), pp. 200-237. doi:https://doi.org/10.47348/SAMLJ/v33/i2a3

Marumoagae, C. and Phiri, S. (2021) Potential constitutional concerns regarding employees’ rights during business rescue proceedings. Stellenbosch Law Review, 2021(3), pp. 496-517. doi:https://doi.org/10.47348/SLR/2021/i3a7

Marumoagae, M.C. and Thambi, K. (2024) Should payment of additional remuneration to business rescue practitioners outside section 143 of the Companies Act be prohibited? South African Mercantile Law Journal, 36(3), pp. 378-397. doi:https://doi.org/10.47348/SAMLJ/v36/i3a2

O’Brien, P. and Calitz, J. (2021) A reasonable prospect for rescuing a company as a requirement for business rescue: a decade later. Tydskrif vir die Suid-Afrikaanse Reg, 2021(4), pp. 688-717. doi:https://doi.org/10.47348/TSAR/2021/i4a3

O’Brien, P. and Calitz, J. (2022) Considerations that inform the view of whether there is a reasonable prospect of rescuing a company: a decade of legal precedent. Tydskrif vir die Suid-Afrikaanse Reg, 2022(1), pp. 25-49. doi:https://doi.org/10.47348/TSAR/2022/i1a2

O’Brien, P. and Calitz, J. (2023) Caveat petitor. Must a business rescue practitioner pay costs of liquidation de bonis propriis? Tydskrif vir die Suid-Afrikaanse Reg, 2023(2), pp. 249-269. doi:https://doi.org/10.47348/TSAR/2023/i2a4

Phungula, S.P. (2023) Abusing business rescue proceedings by a director and its impact on King IV ethics of good corporate governance. Journal of Corporate and Commercial Law and Practice, 9(1), pp. 25-42. doi:https://doi.org/10.47348/JCCL/v9/i1a2

Phungula, S.P. (2024) Interpreting the continued terms and conditions of employment contracts and their exceptions during business rescue proceedings: a critical analysis of s 136(1)(a) of the Companies Act 71 of 2008. Journal of Corporate and Commercial Law and Practice, 10(2), pp. 29-47. doi:https://doi.org/10.47348/JCCL/v10/i2a2

Legislation and case law

Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others [2013] ZASCA 68; 2013 (4) SA 539 (SCA) (27 May 2013). Available at: https://www.saflii.org/za/cases/ZASCA/2013/68.html (Accessed: 18 October 2026). Cited in text as Oakdene Square Properties v Farm Bothasfontein (2013).

Republic of South Africa (2008) Companies Act 71 of 2008. Consolidated text, updated to 22 May 2026. Available at: https://www.saflii.org/za/legis/consol_act/ca2008107/index.html (Accessed: 18 October 2026).

Republic of South Africa (2024a) Companies Amendment Act 16 of 2024, Government Gazette 50991. Available at: https://www.saflii.org/za/legis/num_act/caa16o202450991212 (Accessed: 18 October 2026).

Republic of South Africa (2024b) Companies Second Amendment Act 17 of 2024, Government Gazette 50992. Available at: https://www.saflii.org/za/legis/num_act/csaa17o202450992266 (Accessed: 18 October 2026).