1. Corporate Rescue in Context
Corporate entities play a central role in national economic development. In Lesotho, as elsewhere, companies not only drive employment and deliver essential goods and services, but also bolster fiscal growth. Recognising this, the Government of Lesotho enacted the Insolvency Act 12 of 2022 to modernise the country’s corporate recovery framework and offer a lifeline to financially distressed companies.
Prior to this development, Lesotho’s Companies Act 18 of 2011 offered limited mechanisms to rescue struggling businesses. Its primary emphasis was on liquidation, particularly in favour of creditor recover, rather than on the restructuring or revival of viable enterprises. Judicial management, as outlined in Part XVII of the Companies Act, provided some relief, but its effectiveness was hampered by procedural burdens and the requirement for court-appointed reports from non-commercial experts such as the court registrar.
2. Limitations of Judicial Management in Lesotho
Under section 125 of the Companies Act, liquidation is available when a company is unable to meet its debts or when 75% of its issued capital is lost. In such cases, attempting judicial management can be counterintuitive. While courts have acknowledged that judicial management aims to preserve companies (see Lesotho Bank v Lesotho Hotels International (Pty) Ltd [1995] LSCA 145), the procedure has remained court-driven and creditor-focused.
The judiciary itself has recognised these constraints. In Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd, the South African court remarked that traditional judicial management presumptively favours liquidation over rehabilitation. Lesotho’s new insolvency framework adopts a different stance: it prioritises business continuity over closure.
3. Introducing the Business Rescue Regime: A Paradigm Shift
The Insolvency Act 2022 introduces corporate rescue proceedings as a key innovation. Companies may voluntarily initiate business rescue if their directors reasonably believe the entity is financially distressed and has a realistic chance of revival. Notably, the process does not require prior court approval, a significant departure from judicial management.
Section 151 of the Act empowers a company’s board to adopt a corporate rescue resolution. This must be presented to shareholders for ratification and subsequently registered with the Registrar of Companies. The Act defines corporate rescue as “proceedings to facilitate the revival of a financially distressed company” (s 149(1)), and it explicitly envisions this process as being self-directed by company stakeholders, not imposed by the judiciary.
This legislative design mirrors global trends. In South Africa, the Companies Act 71 of 2008 introduced Chapter 6 on business rescue with similar objectives. In jurisdictions such as the UK and Australia, the rescue-first approach has gained traction in recognition of the economic damage often caused by insolvency proceedings. As Justice Binns-Ward observed in Koen v Wedgewood Village Golf & Country Estate (Pty) Ltd, business rescue exists to mitigate the socio-economic fallout of liquidation.
4. Understanding Financial Distress and Timing
For a company to qualify for rescue under Lesotho’s new law, it must be “financially distressed” within the meaning of section 149(1), that is, likely to become insolvent or unable to pay debts in the next six months. This approach anticipates financial collapse and aims to intervene early. It is not applicable where insolvency has already occurred; liquidation remains the appropriate recourse in such cases under the Companies Act 2011.
The rationale is rooted in sound business logic. Directors are expected to identify risks early and act proactively. Insolvency is not solely about the value of a company’s assets exceeding liabilities; rather, it includes an inability to meet current financial obligations. Courts in comparable jurisdictions, such as Bank of Australasia v Hall (1907), have long confirmed this commercial reality.
5. The Role of Directors, Shareholders and Creditors in Business Rescue
While the decision to initiate corporate rescue lies with the board, it requires shareholder approval before it can be formalised. Creditors, trade unions, and unrepresented employees, termed “affected persons” in section 149, are also given a voice. They may object to the registration of a corporate rescue resolution under section 152. Unlike South Africa, however, objections in Lesotho are dealt with outside the court system, reinforcing the commercial character of the rescue process.
The UK Supreme Court has provided jurisprudential support for shareholder ratification of board decisions in BTI 2014 LLC v Sequana SA. It affirmed that such ratification makes the decision the act of the company itself, limiting the scope for future challenge.
6. Evaluating the ‘Reasonable Prospect’ Requirement
A critical prerequisite for both voluntary and court-initiated business rescue is a “reasonable prospect” of success. This phrase, although less demanding than the previous “reasonable probability” threshold in older statutes, still calls for more than speculative optimism. The courts have interpreted this requirement to demand objectively verifiable evidence, not mere belief, when a business rescue practitioner submits a rescue plan.
As stated in Southern Palace and reaffirmed in Koen and Propspec, courts expect a cogent plan that addresses the root causes of the company’s difficulties and sets out a sustainable path to solvency. However, at the commencement stage, courts have shown deference to directors’ judgment, provided the belief in potential revival is genuine and supported by commercial rationale.
7. Distinguishing Corporate Rescue from Liquidation
One of the most important distinctions in Lesotho’s insolvency regime is that corporate rescue is designed to rehabilitate, not dismantle the company. This includes restructuring debts, streamlining business operations, and preserving value for shareholders and creditors.
Section 150 of the Insolvency Act lays out the rescue objectives:
- temporary supervision of the company’s affairs,
- a moratorium on legal proceedings, and
- development of a rescue plan that maximises the company’s ability to continue as a solvent going concern.
If survival is not feasible, the rescue process may still yield better returns for creditors than liquidation would.
8. Corporate Rescue Goals: Business vs Company
While Lesotho’s Insolvency Act refers to “company rescue”, section 150 makes it clear that the focus includes rescuing the company’s business. This aligns with international standards. In Australia, for instance, the Corporations Act 2001 allows for either the survival of the company or the continuation of its business, even under different ownership.
In Oakdene Square Properties and Bidald Consulting, South African and Australian courts respectively affirmed that preserving the business, even if the company entity ceases to exist, serves the overarching purpose of rescue law.
9. Clarifying the Statutory Goal of Corporate Rescue
Some debate persists over whether Lesotho’s corporate rescue laws pursue one or two primary goals: revival of the company vs enhanced returns to stakeholders. Drawing from jurisprudence in SARS v Beginsel NO, Oakdene Square, and Taljaard v Land Bank, a consensus is forming that both goals are valid, but they operate sequentially.
The primary aim is to rehabilitate the company as a viable entity. If that proves impossible, the law permits restructuring to ensure creditors and shareholders receive a better outcome than in a formal winding up. As noted by Ingrid Opperman J in Reiscor Two, this alternative becomes central only when rescue efforts cannot restore business continuity.
10. Conclusion: Lesotho’s Progressive Shift Toward Rescue-Oriented Insolvency
The Insolvency Act 2022 marks a significant transformation in Lesotho’s corporate legal framework. By embracing a proactive, business-led approach to insolvency, the country has aligned itself with modern international best practices. Corporate rescue in Lesotho is now not merely a theoretical option but a practical tool for economic stability, value preservation, and employment retention.
Unlike traditional liquidation, which often leads to the irreversible demise of businesses, the business rescue process seeks to salvage viable operations and return companies to financial health. In doing so, Lesotho’s business environment becomes more resilient, investor-friendly, and aligned with global trends in corporate restructuring.