BUSINESS RESCUE 101
What is Business Rescue?
Business Rescue is defined by the Companies Act 71 of 2008 as the proceedings initiated to facilitate the rehabilitation of a company that is in financial distress.
The “proceedings” mentioned supra include the following:
- The temporary supervision of the company and the company’s management of its affairs, its business and property.
- A temporary notarium on the rights of claimants against the company or in respect of property in the company’s possession; and
- The development and implementation of a plan to rescue the company by restructuring its affairs, business, property, debts, other liabilities and equity in a manner that maximises the likelihood of the company’s continuous existence on a solvent basis.
If it is, however, impossible for a company to continue on such a solvent basis, the Business Rescue plan should result in a better return for the company’s creditors or shareholders than what would have resulted from the immediate liquidation of such a company.
How is business rescue initiated by a company?
Section 129 of the Companies Act states that the board of a company may resolve that their company voluntarily begin business rescue proceedings and place such a company under supervision.
Voluntary business rescue proceedings may be initiated if such a board has reasonable grounds to believe that the company is financially distressed and that there is a reasonable prospect of rescuing such a company.
It is important to note that a resolution by a company’s directors cannot be adopted if liquidation proceedings have been initiated by or against the company. Furthermore, if the directors wish to initiate business rescue proceedings, such proceedings will have no legal effect unless they are properly filed.
Within five business days after adopting and filing the resolution as outlined, the company must notify all affected parties of the resolution and its effective date. This notice must be accompanied by a sworn statement detailing the facts supporting the resolution. Additionally, the company must appoint a business rescue practitioner who meets the requirements of Section 138 of the Companies Act and has provided written consent to the appointment.
After the appointment of a business rescue practitioner, a company must further ensure that it files a notice of the appointment of a practitioner within two business days after the appointment was made, as well as publish a copy of the notice of the appointment to each person affected, within five business days after the appointment was filed.
It is of paramount importance to a company that the provisions contained in Section 129, subsections (3) and (4), of the Companies Act be complied with, as failure to comply with these will result in the business rescue proceedings and placement under supervision being null. A defaulting company will also be barred from filing a further resolution for a period of three months after the date on which the lapsed resolution was adopted, unless a court approves such further filing on the grounds of good cause shown.
Once a company has successfully adopted a resolution to institute business rescue proceedings, such a company may not simultaneously adopt a resolution to institute liquidation proceedings, unless such business rescue proceedings have ended or lapsed.
How else can business rescue proceedings be initiated?
Business rescue proceedings can also be initiated by means of a court order. Where a company has not adopted a resolution as stated in Section 129 of the Companies Act, an affected person may apply to a court for an order placing a company under supervision and commencing business rescue.
An affected person, wishing to institute business rescue proceedings, must serve a copy of an application to institute such proceedings on the Commission as well as the company. An affected party must further notify each of the other affected parties of the application brought as every affected person has the right to participate in the hearing of the application for business rescue.
After the court has considered an application made by an affected person, such a court may make an order placing the company under supervision and commencing with business rescue proceedings, given that such a court is satisfied that:
- the company is financially distressed;
- the company has failed to pay any amount in terms of an obligation, public regulation or contract with respect to employment-related matters; and
- it is otherwise just and equitable to proceed for financial reasons, and there is a reasonable prospect of rescuing the company.
Business Rescue vs Liquidation
Liquidation of a company results in the following:
- meeting of the creditors and the freezing of the debtor’s estate;
- all civil proceedings are stayed from when a provisional liquidation order is granted until a final liquidator is appointed;
- the transfer of shares and selling of property after proceedings have commenced possibly being declared void;
- the directors of the company ceasing to be in charge of such company
In conclusion, the commencement of business rescue proceedings results in the following outcomes:
- the company’s assets are protected from creditors through a stay of legal proceedings;
- employees remain employed during the business rescue process;
- the business rescue practitioner may suspend most contracts entered into by the company, excluding employment contracts;
- directors may continue to exercise their functions, subject to the authority of the business rescue practitioner;
- the company may dispose of assets, provided the sale is approved as part of the business rescue plan;
- such asset disposals serve as an effective means of settling the company’s outstanding debts
Conclusion
Business rescue proceedings offer an effective alternative to the liquidation of a company. However, it is important to emphasise that business rescue should not be used merely as a strategy to delay the inevitable winding-up of a company. Such misuse may be regarded as an abuse of legal process.
If you require assistance with initiating business rescue proceedings, appointing a business rescue practitioner, or obtaining advice regarding the process, we are here to help.
Written by Liam Treadwell