South African boards are operating in a climate where volatility has become the norm. Currency swings, subdued growth and global supply chain disruption have made financial distress a recurring feature of the corporate landscape rather than a rare event.
Deloitte Africa’s 2024 Restructuring Survey found that weak board governance ranked as the highest internal factor likely to trigger financial distress in South African companies, ahead of cash management and inadequate financial controls, and 64% of respondents expected a rise in business rescue activity over the coming year. Distress, in other words, is increasingly a governance issue as much as an economic one.
Yet a stubborn cultural habit persists in many boardrooms: treating financial distress as something to be hidden, denied or dealt with only once the company has run out of road. This instinct is understandable, but it is also one of the more serious governance failures directors can commit.
Too often boards treat restructuring as an admission of defeat. In reality it is a disciplined, forward-looking exercise in stewardship. The traditional playbook, in which directors wait for liquidity to be entirely exhausted before acting, has become a liability rather than a safeguard. Delay does not protect a company. It steadily erodes the very value directors have a duty to preserve, and by the time insolvency practitioners are finally called in, there is often very little left to rescue.
The cost of delay is measurable
The evidence goes well beyond intuition. Academic research from the University of Pretoria shows precisely what delays cost a distressed company. A mathematical funding model built to measure the financial impact of delay in a turnaround found that a single period of delay increased the funding required from roughly ZAR2,5 million to ZAR4,3 million, and extended the recovery timeline from six and a half to eight and a half periods. Extended to six periods of delay, the funding requirement grew to ZAR11,7 million and the turnaround stretched to sixteen and a half periods.
Every month a board spends hoping the next quarter will be better is a month that compounds the eventual cost of recovery, assuming recovery remains possible at all.
The Companies and Intellectual Property Commission’s figures show what that compounding looks like at scale. Of 4 305 companies that entered business rescue between 2011 and June 2022, only 19% reached substantial implementation of their rescue plans, while 533 still ended up in liquidation. Practitioners are frequently brought in after the window for a viable turnaround has already closed, at which point rescue becomes a formality rather than a genuine second chance. The gap between companies that enter the process and companies that emerge from it stable is, in large part, a gap created by timing.
Redefining fiduciary duty in distress
Section 128 of the Companies Act sets a precise test for financial distress, asking whether it appears reasonably unlikely that a company will meet its debts within the next six months, or reasonably likely that it will become insolvent within that period. This is a liquidity test, not a solvency test, which means a company can look solvent on paper while already meeting the legal threshold for distress. Directors who wait for a balance sheet crisis before acting are relying on the wrong measure entirely, and by the time solvency itself is in question, the available remedies have already narrowed considerably.
This is where fiduciary duty becomes the operative concept, rather than optics or reputation. Trading while financially distressed without taking corrective action exposes directors to the reckless trading provisions of the Act, and potentially to personal liability for losses suffered by third parties.
True fiduciary duty in a distressed environment requires directors to steer into the problem with transparency and speed, engaging creditors, employees and legal advisors at the first sign the section 128 test is met, rather than waiting for certainty that rarely arrives in time.
The tools available at this stage are more varied, and more sophisticated, than boards often realise. Informal restructuring allows a company to renegotiate terms directly with lenders and major creditors outside of any formal process, adjusting repayment schedules, covenants or interest terms while the underlying business continues to trade normally and without the reputational signal that a formal filing can send. Standstill agreements go a step further, giving the company a negotiated pause during which creditors agree not to enforce claims or accelerate debt while a longerterm solution is worked out, buying time without surrendering control. Formal business rescue under Chapter 6 is the most structured of the three, placing the company under the supervision of a licensed practitioner, triggering a statutory moratorium on legal action, and requiring a published rescue plan that creditors vote on.
Each of these sits on a different point of the same spectrum, and the earlier a board engages with any of them, the more of that spectrum remains open. Used at the right moment, they are what stand between a company in difficulty and one in free fall, and between a workforce that keeps its jobs and one that does not.
From free fall to a proactive culture
The wider argument here is cultural as much as it is legal. South Africa’s insolvency framework, built on the Insolvency Act of 1936, the Companies Act of 2008 and the Close Corporations Act of 1984, was designed to balance the interests of debtors and creditors and to provide a structured alternative to the finality of liquidation. That architecture only delivers value when it is used at the right moment.
A rescue plan drafted with adequate liquidity and time has a genuine chance of preserving jobs, protecting suppliers who depend on the company’s customs and maintaining continuity for customers. A rescue plan drafted after the cash has run out is, in most cases, a formality on the way to winding up.
South African boards should build the section 128 six-month test into ordinary reporting cycles, rather than treating it as a crisis conversation reserved for when the bank calls. Directors who engage in restructuring and legal advice at the first sign of the test being met give their companies, their creditors and their employees a genuinely fair chance. The businesses that weather South Africa’s current economic conditions will be the ones whose boards had the discipline to recognise distress early and the courage to act on it immediately.
Written by Bridget Letsholo, Head of Business Restructuring & Insolvency at CMS South Africa