What is a debt restructuring and compromise agreement?
Is a debt restructuring or compromise agreement binding in South Africa?
“A proposal … will have been adopted … if it is supported by a majority in number, representing at least 75% in value of the creditors or class … present and voting … the court … may sanction the compromise … if it considers it just and equitable to do so … [and the order] is final and binding on all of the company’s creditors or all of members of the relevant class of creditors.”
“An arrangement or a compromise contemplated in this section does not affect the liability of any person who is a surety of the company.”
“To sum up, when the parties to litigation confirm that they have reached a compromise, a court has no power or jurisdiction to embark upon an enquiry as to whether the compromise was justified on the merits of the matter or was validly concluded.”
When you need a Debt Restructuring & Compromise
- A company can pay its creditors something but not everything, and wants to reschedule, reduce or partly write off its debt to keep trading instead of being liquidated — and to bind hold-out creditors, it considers a section 155 compromise rather than a private deal.
- A creditor and debtor are in dispute about how much is actually owed, and they want to settle that dispute finally — a common-law compromise records the agreed figure and shuts the door on re-litigation (res judicata).
- A solvent company wants to reorganise its balance sheet — for example converting debt to equity or extending payment terms — without entering business rescue, using section 155 (which does not require financial distress).
- A lender is restructuring a facility (a payment holiday, lower rate, or extended term) and needs a written variation that protects its security, sureties and ranking while giving the borrower breathing room.
- Directors facing creditor pressure want a court-sanctioned, all-creditor outcome that is cheaper and faster than full business rescue or liquidation, with a clear "just and equitable" approval gate.
What a Debt Restructuring & Compromise should contain
The restructured debt and concession (the compromise)
The core term: a clear statement of the original debt, the new amount or terms, and exactly what each side concedes — a reduced balance, a longer period, a lower rate, or debt converted to equity. Because a compromise settles a disputed or uncertain obligation, the variation must be unambiguous; vagueness invites later disputes about what was actually agreed.
Debt moratorium / payment holiday
A suspension of payments (or of enforcement) for a defined period to let the debtor stabilise. State its nature and duration precisely. Section 155 expressly contemplates a "debt moratorium" as part of a statutory proposal, and the same device is common in private restructurings.
Release and "full and final settlement"
Records the extent to which the company is released from paying its debts and that the compromise is in full and final settlement of the relevant claims. This clause is what triggers the res judicata effect — without a clear release (and an express reservation of any rights the creditor wants to keep), the parties may argue later about whether the old claim survived.
No-novation (security preserved)
Confirms that the restructuring varies but does not novate (replace) the original debt, so existing mortgage bonds, notarial bonds, cessions and pledges securing the debt stay alive. South African law presumes against novation, but an express clause removes the argument and protects the creditor’s ranking.
Sureties and co-debtors preserved
States that the compromise does not release any surety, guarantor or co-principal debtor. This mirrors section 155(9), under which a statutory compromise does not affect a surety’s liability — but in a private compromise a careless release can discharge the surety, so the position must be spelled out.
Class definition and voting (section 155 proposals)
For a statutory compromise, the proposal must identify the creditors or class addressed and the prescribed Part A/B/C content, and record the 75%-in-value, majority-in-number approval at a properly convened meeting. Getting the "class" wrong is fatal — creditors with materially different rights should not be lumped together (Trevo v Steinhoff).
Conditions precedent and court sanction
Lists what must happen before the deal operates — for a section 155 compromise, court sanction on a "just and equitable" basis and filing of the order; for a private deal, conditions such as new funding, consents or security registration. The agreement should state that it only becomes binding once those conditions are met.
Default and reinstatement of original terms
A clause providing that if the debtor breaches the restructured terms, the concession falls away and the creditor may enforce the full original debt (often with an acceleration provision). Without it, a creditor who compromised may find it has surrendered the original claim and can only sue on the (smaller) restructured one.
Common-law compromise vs section 155 compromise vs business rescue in South Africa
| Feature | Common-law compromise | Section 155 compromise | Business rescue (Chapter 6) |
|---|---|---|---|
| Legal basis | Common law (transactio) — private contract | Section 155, Companies Act 71 of 2008 | Chapter 6, Companies Act 71 of 2008 |
| Who is bound | Only the creditors who sign | All creditors / the class once sanctioned, incl. dissenters | All creditors bound by an adopted plan |
| Financial distress required | No | No — available to a solvent company too | Yes — company must be financially distressed |
| Court / approval gate | None (just a valid contract) | 75% in value + majority in number, then court sanction | Resolution or court order; plan adopted by creditors |
| Moratorium on legal proceedings | No automatic moratorium | No general statutory moratorium | Yes — general moratorium while in rescue |
| Effect on sureties | May release a surety if not preserved — draft carefully | Does not affect a surety’s liability (s 155(9)) | Plan may compromise claims; sureties depend on terms |
Common South African pitfalls
- Assuming a private compromise binds every creditor. A common-law compromise binds only the creditors who sign it; a single hold-out can still sue or apply to liquidate. To bind dissenting creditors you need the statutory section 155 route, with its 75%-in-value approval and court sanction.
- Getting the "class" of creditors wrong in a section 155 proposal. Creditors with materially different rights or rankings should not be grouped into one class — merely being "preferent" does not make creditors a single class. A defective class can see the whole compromise challenged or set aside (Trevo v Steinhoff).
- Forgetting that sureties are not released. Section 155(9) says a statutory compromise does not affect a surety’s liability, so a company can be released while its directors’ personal suretyships remain fully enforceable. In a private compromise the opposite risk applies: a careless release can accidentally discharge the surety.
- Letting the compromise novate the debt and kill the security. If the restructuring is found to replace (novate) the original debt rather than vary it, accessory security such as bonds and cessions can fall away. Include an express no-novation clause and preserve the existing security in writing.
- Skipping the procedural and notice requirements of section 155. The proposal must contain the prescribed Part A/B/C content, all creditors must be notified, and the sanctioning order must be filed within five business days. Failing to notify or serve creditors — even those who voted in favour — puts the sanctioned compromise at risk of being set aside.
- Not reserving the right to enforce the full debt on default. If the debtor breaches the new terms, a creditor who has compromised may be left suing only on the reduced amount unless the agreement says the original debt revives on default.
Frequently asked questions
Is a debt compromise agreement legally binding in South Africa?
Yes. A voluntary compromise is a binding contract that settles the dispute and operates as res judicata, so the matter cannot be re-litigated. A statutory section 155 compromise goes further: once 75% in value of creditors approve it and a court sanctions it, the filed order binds every creditor in the class, including those who voted against it.
What is a section 155 compromise under the Companies Act?
It is a statutory arrangement under section 155 of the Companies Act 71 of 2008 in which a company’s board (or liquidator) proposes a compromise of its debts to all creditors or a class of creditors. If supported by a majority in number representing at least 75% in value of creditors present and voting, and then sanctioned by a court as just and equitable, it becomes binding on every creditor in that class.
Does a section 155 compromise require the company to be in financial distress?
No. Unlike business rescue under Chapter 6, section 155 applies whether or not the company is financially distressed, unless it is already in business rescue. A solvent company can use it to reorganise its balance sheet — for example to convert debt to equity or extend payment terms — without entering rescue or liquidation.
How is a debt compromise different from business rescue?
Business rescue is a court- or board-driven Chapter 6 process for a financially distressed company, run by a business rescue practitioner with a general moratorium on legal proceedings. A section 155 compromise is narrower and cheaper: it just restructures the debt, needs no practitioner and no distress, but offers no general moratorium. Many companies use a compromise as a faster alternative to rescue or liquidation.
Does a compromise release sureties or guarantors?
Not under section 155. Section 155(9) states that a statutory compromise does not affect the liability of any surety of the company, so directors’ personal suretyships remain enforceable even after the company is released. In a private common-law compromise, however, an unclear release can discharge a surety, so the agreement must expressly preserve surety and co-debtor liability.
Can a compromise bind a creditor who votes against it?
Only a statutory section 155 compromise can. Once it is approved by a majority in number representing at least 75% in value of the class and sanctioned by the court, the filed order is final and binding on all creditors in that class, including dissenters. A private (common-law) compromise binds only the creditors who actually sign it.
Does a compromise revive or write off the original debt?
A compromise settles the original obligation — to the extent the debtor is released, that part of the debt is extinguished and the matter is res judicata. Whether the original debt can revive on a later default depends on the wording: a well-drafted restructuring keeps the original claim alive and enforceable in full if the debtor breaches the new terms.
Do I need a court order for a debt restructuring agreement?
Not for a private, voluntary compromise — it is binding as a contract once signed. A court order is required only for a statutory section 155 compromise, where the court must sanction the adopted proposal as just and equitable before it binds dissenting creditors. Bespoke drafting or review of either type is available from us as a fixed-fee service.
Sources & authority
- Companies Act 71 of 2008, s 155 (consolidated text, LawLibrary) — compromise between company and creditors
- Companies Act 71 of 2008 (LawLibrary canonical text)
- Road Accident Fund v Taylor and other matters [2023] ZASCA 64; 2023 (5) SA 147 (SCA)
- Trevo Capital Ltd and Others v Steinhoff International Holdings (Pty) Ltd and Others (2833/2021) [2021] ZAWCHC 123; 2021 (6) SA 260 (WCC)
- Road Accident Fund v Taylor and other matters [2023] ZASCA 64; 2023 (5) SA 147 (SCA) — nature of a compromise (transactio)
This guide is general information, not legal advice. It reflects the law as at June 2026.