All your big business rescue questions answered
FAQs on this legal remedy that can help get your business back in good health
According to Deloitte, a leading global professional services firm, business rescue in South Africa is still the most sought-after solution for financially distressed business.
A Deloitte Restructuring Survey released in 2014, also found more businesses were turning to business rescue as a result of a stagnating economy that the sector who were most likely to suffer financial distress were manufacturing, retail, resources and construction.
A document by Werkmans Attorneys, a South African corporate and commercial law firm, provides important facts on business rescue as per Chapter 6 of the new Companies Act, No. 71 of 2008 (the Act), and how it affords financially distressed companies the opportunity to reorganise and restructure, as well as the far reaching effects on creditors, financial institutions, shareholders, employees and restructuring specialists.
Authors, Eric Levenstein, director and joint practice area head, and Lauren Becker, senior associate highlight some of the frequently asked questions around business rescue.
What is business rescue?
Business rescue proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed by providing for the temporary supervision of the company, and the management of its affairs, business and property, by a business rescue practitioner; a temporary moratorium (stay) on the rights of claimants against the company or in respect of property in its possession; and the development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity.
What is the aim of business rescue?
The aim of business rescue is to restructure the affairs of a company in such a way that either maximises the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company than would ordinarily result from the liquidation of the company.
Is business rescue suitable for all companies?
Business rescue proceedings are not necessarily suitable for all companies. The type of company for the most part will determine whether or not a company is a suitable candidate for business rescue. For instance, companies that are involved in retail are more suitable for business rescue than companies that have been set up for property investment purposes, as retail companies have a “business” that can be rescued, while property investment companies may not.
What is an affected person?
Affected persons are important role players in the business rescue process. An affected person is a shareholder, creditor, employee (or their
representative) or a registered trade union representing employees of the company. Affected persons have various rights throughout
the business rescue process.
What is the test for business rescue?
The test for whether or not a company should be placed in business rescue is whether or not the company is financially distressed.
The Act defines the words “financially distressed” to mean that – it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months (commercial insolvency); or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months (factual insolvency).
When should a company commence business rescue?
A company should commence business rescue proceedings at the first signs of it being financially distressed, within the meaning of
the Act. That is, either when it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months or when it is likely that the company will become insolvent in the immediately ensuing six months.
How is a company placed in business rescue?
There are two main ways in which a company can be placed in business rescue, namely when the board of directors of a company resolves that the company voluntarily commence business rescue proceedings and be placed under the supervision of a business rescue practitioner (section 129 of the Act); and when an affected person makes a formal application to court for an order placing the company under supervision and commencing business rescue proceedings (section 131 of the Act), provided the company has not already been placed under business rescue in terms of section 129, on the basis that – the company is financially distressed; the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment related matters; or it is otherwise just an equitable to do so for financial reasons, and there is a reasonable prospect of rescuing the, company.
How does a company practically voluntarily commence business rescue proceedings?
The company must file Form CoR123.1 with the Companies and Intellectual Property Commission (CIPC) and this must be accompanied by the resolution of the board of directors of the company (in which it resolves to commence business rescue proceedings, and if it has a business rescue practitioner in mind at the time, to appoint a certain person as the practitioner) together with a statement setting out the facts upon which the resolution was founded. Thereafter, the company must comply with a number of notice and publication requirements prescribed by the Act.
How long do business rescue proceedings last?
Section 132 provides that business rescue proceedings should last for a period of three months.
It is not clear what the words “business rescue proceedings” intend to cover but it is understood that during the three months, the business rescue practitioner must do his job by convening meetings for affected persons, consulting on the the business rescue plan and thereafter implementing the plan if it is approved in accordance with the Act.
How does the business rescue process unfold?
Once a company commences business rescue proceedings either voluntarily (by way of a resolution in terms of section 129) (and in such
a case, the preliminary actions have been taken) or by an order of court (on application by an affected person in terms of section 131), the following actions are prescribed by the Act.
- the practitioner must investigate the affairs of the company as soon as possible after the commencement of business rescue (section 141);
- within ten business days after being appointed, the practitioner must convene a meeting of the creditors and a meeting of the employees and advise the meeting, among other things, of the prospects of rescuing the company (section 147 and 148);
- the business rescue plan must be published by the company within twenty five days after the date on which the business rescue practitioner was appointed (section 150); and
- the business rescue practitioner must convene a meeting of the creditors and any other holders of a voting interest, for the purpose of considering the proposed plan, within ten business days of the publication of the business rescue plan (section 151).
What effect does business rescue have on a creditor?
When business rescue proceedings commence, the company continues to operate as before, but under the supervision of the business rescue practitioner and the creditors will need to comply with their obligations to supply goods or services to the company in the same manner in which they did prior to the commencement of business rescue proceedings, unless the agreement between the company and the creditor regulates the relationship between the parties in the event of an insolvency or business rescue.
However, it is understandable that unsecured creditors and lenders during business rescue would be wary of continuing to service or supply goods to the company on the same basis on which they did prior to a business rescue as their claims will be satisfied last in accordance with the order of preference for the payment of claims prescribed by the Act.