Business rescue is a formal process under the Companies Act for a company that is financially distressed but may still be viable. A business rescue practitioner takes over management, a moratorium stops legal proceedings against the company, and a rescue plan is developed and voted on by creditors. The company enters it either by a board resolution or by court order. Directors of a distressed company have a duty to consider it — and continuing to trade recklessly instead is precisely what creates personal liability.
The decision is not really "rescue or liquidation". It is whether you deal with distress deliberately or let it deal with you.
What "financially distressed" means
The Act defines it, and the definition matters because it triggers obligations.
Broadly, a company is financially distressed if, within the immediately ensuing six months:
it appears reasonably unlikely that the company will be able to pay all of its debts as they fall due, or
it appears reasonably likely that the company will become insolvent
Note the forward-looking six-month window. You do not have to be unable to pay today. A company that can see the wall coming is already financially distressed, and the obligations start then, not when the wall arrives.
This is the part directors get wrong. The instinct is to trade through it quietly and hope the big invoice lands. The Act asks you to assess the position honestly, six months ahead.
What the process does
A business rescue practitioner is appointed and takes over the management of the company. The directors continue in office but act under the practitioner's authority.
A moratorium applies. Legal proceedings against the company are generally suspended, which is the point — it creates breathing room to develop a plan rather than being dismantled by the first creditor to move.
A rescue plan is developed setting out how the company will be rehabilitated, or, failing that, how creditors would achieve a better return than in liquidation.
Creditors vote on the plan. If it is adopted, it binds them.
Employees are protected to a greater degree than in liquidation, and employment contracts generally continue.
Two entry routes:
| Board resolution | Court order | |
|---|---|---|
| Who initiates | The board | An affected person — creditor, shareholder, employee or trade union |
| When | The company is financially distressed and there is a reasonable prospect of rescue | On application, with the court satisfied of the grounds |
| Control of timing | Yours | Someone else's |
The first route is far better than the second. A board that acts early chooses the practitioner and the timing. A board that waits gets both chosen for it.
The duty on directors
Where a company is financially distressed and the board does not resolve to begin business rescue, it must deliver a written notice to every affected person setting out the criteria that are met and the reasons for not adopting a resolution.
In other words, you cannot simply not decide. Either you begin rescue, or you formally explain why not.
And the alternative is worse. A company must not carry on business recklessly, with gross negligence, or with intent to defraud. Continuing to incur credit you have no reasonable basis to believe you can repay is the textbook case of reckless trading, and where a director knowingly participates they can be held personally liable for the resulting loss and declared delinquent.
Taking a customer deposit for work you know you cannot fund is where this turns from optimism into exposure. See a director's duties under the Companies Act.
When rescue is worth it
There is a viable business under the debt. Real customers, real margins, a solvable cash problem — a business that would work if the historic debt were restructured.
The distress has a specific cause you can name and address. A single bad contract, a customer that failed, a project that overran.
Creditors would do better than in liquidation. This is the practical test the plan has to satisfy.
You have acted early enough that there is something left to rescue.
When it is not
There is no viable business. Where the model does not work at any level of debt, rescue delays liquidation at cost.
You have left it too late. Rescue needs working capital and creditor patience. A company with neither has run out of options.
The numbers do not support a plan. A practitioner cannot produce a plan creditors will vote for out of nothing.
Where rescue is not viable, liquidation is the honest route. See liquidation vs deregistration.
What a director should actually do when distress appears
1. Get current, accurate numbers. You cannot assess distress on a feeling. Management accounts, a debtors and creditors ageing, and a cash forecast. If those do not exist, that is the first problem.
2. Apply both tests. Can the company pay its debts as they fall due over the next six months? Will liabilities exceed assets?
3. Stop incurring credit you cannot justify. New supplier accounts, customer deposits, personal sureties — each one deepens the exposure.
4. Watch the tax. PAYE and VAT withheld from others attract particular scrutiny, and directors can be held personally liable for certain outstanding taxes. Using tax money as working capital during distress is one of the worst decisions available.
5. Take advice immediately — an attorney, and a business rescue practitioner if the position warrants it.
6. Document everything. The board's assessment, the information relied on, the decisions taken and why. If this is examined later, that file is the difference between a defensible judgement and reckless trading.
7. Decide, formally. Resolve to begin rescue, or deliver the notice explaining why not. Do not let the question stay open.
Frequently asked questions
What is business rescue in South Africa? A formal process under the Companies Act for a financially distressed but potentially viable company. A business rescue practitioner takes over management, a moratorium suspends legal proceedings, and a rescue plan is developed and voted on by creditors.
What does financially distressed mean? Broadly, that within the immediately ensuing six months it appears reasonably unlikely the company will be able to pay all its debts as they fall due, or reasonably likely that it will become insolvent. The test is forward-looking — a company can be distressed before it misses a payment.
How does a company enter business rescue? Either by a board resolution where the company is financially distressed and there is a reasonable prospect of rescue, or by court order on application by an affected person such as a creditor, shareholder, employee or trade union.
What is the difference between business rescue and liquidation? Business rescue aims to rehabilitate the company and preserve the business, with a moratorium on claims while a plan is developed. Liquidation winds the company up, realises its assets and distributes to creditors in order of preference.
Do directors have to consider business rescue? Where a company is financially distressed and the board does not resolve to begin rescue, it must deliver written notice to every affected person setting out the criteria met and why rescue was not adopted. You cannot simply leave the question undecided.
Can directors be personally liable for trading through distress? Yes. Carrying on business recklessly, with gross negligence or with intent to defraud can make a director who knowingly participates personally liable for the resulting loss, and a court can declare them delinquent.
What happens to employees in business rescue? Employees are protected to a greater degree than in liquidation and employment contracts generally continue, which is one of the reasons rescue is preferred where the business is viable.
Deal with distress deliberately
The directors who end up personally exposed are rarely dishonest. They are optimistic, they trade through it quietly, and they cannot afterwards produce evidence that they assessed the position properly.
Smartbook produces the management accounts and cash forecasts directors need to assess distress honestly, and will tell you plainly when the position calls for an attorney rather than an accountant.
Last reviewed: 1 August 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Business rescue, reckless trading and director liability are legal matters governed by the Companies Act 71 of 2008 — where your company is in financial distress, take legal advice immediately. General guidance, not legal advice.
Primary sources: Companies Act 71 of 2008, Chapter 6 · CIPC · SARS