(Old Companies Act – Still active as of Monday 11 Oct 2010)
Definition:
“Judicial Management is a vehicle created by the legislator (Section 427 – 440 of the Companies Act of 1973), whereby a company is afforded an opportunity to overcome its financial problems.”
Maybe somebody else can handle it?
NOTE: Judicial Management is totally underutilized in South Africa. Many companies that could have been saved are placed in liquidation without even having considered the possibility of Judicial Management. Judicial Management differs principally from liquidation in the sense that liquidation brings about the disolvement of the company whilst judicial management intends to save the company
Q: What is the aim of Judicial Management?
The aim of Judicial Management is to, where a company has suffered a temporarily financial setback, to overcome its financial problems and eventually go back to “business as normal”.
Q: What are the effects of judicial management?
The main effect of Judicial Management is to place a moratorium on debt payments. Another effect is that a manager is appointed who must oversee the business of the company.
Q: Which legal entities qualify to be placed under judicial management?
A: Companies only. We sometimes, when a Close Corporation which is salvable finds itself in financial difficulty, convert the Close Corporation to a Company, where after we bring an Application for Judicial Management.
Q: What is the attitude of the Courts towards applications for Judicial Management?
A: Our Courts are very pro saving of companies. If a reasonable probability exists that the company will overcome its financial problems our Courts will rather prefer to place the company under Judicial Management than to give a Liquidation Order.
Q: Who may apply for Judicial Management?
A: Mainly the shareholders, creditors, employees or other persons with a vested interest in the company. This category of persons is listed under Section 103 of the Companies Act.
Q: Will the Judicial Manager “chase me of the premises” and run my company?
A: Although the Companies Act does not distinguish between a “friendly” and “hostile” process, in practice we distinguish between these two categories.
Q: What is a “hostile” Judicial Management Application?
A: When the shareholders via their appointed directors mismanage a company and the Application is brought by for example the creditors or the employees a Judicial Manager will take full control of the company and he may prohibit the people who have mismanaged the company to partake in the management of the company.
Q: How does “friendly” Judicial Management work?
A: If the company is in financial difficulty because of factors not related to mismanagement, the Judicial Manager will oversee the management of the company whilst the day to day management is still in the hands of the Directors. In this instance there is a team effort between the Directors and the Judicial Management by which they bring ideas and plans to the table in an effort to save the company.
Q: Which companies qualify for Judicial Management?
A: The company must be unable to pay its debts or meet its obligations and thus be prevented from becoming “or staying” a successful business. When the Application for Judicial Management is brought to Court it must be proven that a reasonable probability that the company will become successful again must exist. It must be proven that the company will within a reasonable time be able to pay off its debts or resume the contractual scheduled debt payments and it will again become effective to carry on its operations in accordance with its main object and healed a return to its shareholders.
Q: What is the function of the Judicial Management and who appoints him?
A: The function of the Judicial Manager is to stand in the shoes of the Directors. The Judicial Manager is appointed by the Master of the High Court. In practice the Master unfortunately does not have the practical ability to source the Judicial Manager, ensure that he has the proper qualifications etc. We therefore request the Judge who presides over the Application for Judicial Management to request the Master to appoint a Judicial Manager which we have suggested in the Court Application. In practice a Jude will always, if he is convinced that the Judicial Manager has the appropriate experience and skills, request the Master to appoint a certain nominated Judicial Manager. The Master is not bound by this request but it will be an insult to the Judge if the Master does not follow the judge’s request. In my experience the Master always appoints the Judicial Manager so nominated by the Judge.
They have got nothing to do with judicial management – we are just trying to keep your attention
Q: How does the Judicial Management process work?
A: After consultation with your attorneys a Court Application is drawn up and is placed on the unopposed motion Court Role. The implication of placing the Application on the unopposed Court Role is that the Application can be brought before Court within a very short time span. The Court then makes an Order by which the company is placed under Judicial Management for a period of three months or longer. We normally request an initial period of at least five months. After the expiry of the initial period the company must approach the Court and request the Court to eitherextend the Order for a longer period (in instances where the financial instances does not have problems being surmounted,
- take the company out of Judicial Management (where the problems have been overcome);
- give a final Judicial Order (in the instance for example where you have a mining operation which will take a few years to overcome its problems;
- ask for a Order whereby the company is liquidated.
Q: What is the position of creditors in a Judicial Management Application?
A: A business has mainly three types of creditors namely:
- trade creditors (suppliers etc),
- long term creditors (bonds over immovable property) and
- medium term creditors (such as financiers of vehicles and equipments)
In my experience the Courts prefer Judicial Management Orders in instances where the trade creditors will be paid in full during the period of Judicial Management.
Q: Can a company which is under Judicial Management borrow money?
A: Yes, the creditors who provide credit during the period whilst the company is under Judicial Management have preference for payment above the “old” creditors. Should the Judicial Manager decide to borrow money, the creditor has to be convinced and such a creditor may ask for security, such as a session of the debtor’s book of the work in process.
Q: What are the positive aspects of Judicial Management?
A: There is a moratorium over debt payment and unsympathetic creditors are forced to consult with the Judicial Manger.
Q: What legal recourse do creditors have against a company which is under Judicial Management?
A: The creditor can’t execute against the assets of the company, even if such a creditor has judgment against the company. The creditor may however approach the Court and ask the Court for an Order in terms whereof the Judicial Management is terminated or extended. The creditor may also apply to court for a Liquidation Order. The court will however normally take a dim view on an Application for Liquidation if the court is convinced that the company has a reasonable probability of overcoming its problems.
Q: Is the company’s credit rating affected by the fact that it is under Judicial Management?
A: Unfortunately – yes!
Q: What is the position of the Directors/shareholders/persons who have signed surety for the debt of the company?
A: It is an open question which, to the best of my knowledge, has not been answered by Court. There are two different opinions on this. At the one hand there is a legal rule which says “cessante rationis legis, cessat et ipsa lex”. This is a rule which comes from the old Romans which simply means that if the reason for a rule does not exist anymore, the rule itself falls away. When this rule is applied to the sureties, it would mean that the fact that the creditor can’t execute against the company, he can therefore not execute against the surety either. The other opinion is that once the surety has signed a “co-principal debtor” then the creditor can act against such a surety irrespective of the legal position of the company. In my experience I have never seen creditors acting against a surety of a company while the company is under Judicial Management.
Q: What are the duties of the Judicial Manager?
A: The Judicial Managers duties are fully stipulated in Section 433(1) of the Companies Act. In layman’s terms the Judicial Manager fills the shoes of the Directors. He must also send compile and send reports to the creditors. On the return day (when the Court is approached for the second time to extend, “ophef” of the Order etc) he must submit a report to Court.
Q: On the return day, what factors does the Court consider?
A: The opinion and wishes of the creditors and members, the Judicial Manger’s report, the Masters report, the Registrar of Companies report, the number and value of creditors who did not proof claims, as well as the amount and nature of their claims