BUSINESS RESCUE – AN INTRODUCTION TO THE PROCESS

Restructuring of companies in financial distress is on the increase globally. In line with this trend, Chapter 6 of the new Companies Act, No. 71 of 2008 introduces business rescue to the South African business landscape. South African companies that are financially distressed in South Africa now have an opportunity to reorganize and restructure. This has far-reaching effects on creditors, financial institutions, shareholders, employees and restructuring specialists.

The application of business rescue is well underway and becoming common practice in South Africa.Companies that have a reasonable prospect of being rescued, despite their distressed financial position, are seriously considering the option of business rescue as an alternative to liquidation.

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 (section 128(1)(b)).

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 maximizes the likelihood of the company continuing in existence on a solvent basis, or results in a better return for the creditors or shareholders of the company than would ordinarily result from the liquidation of the company (section 128(1)(b)(iii)).

WHAT IS A BUSINESS RESCUE PRACTITIONER?

A business rescue practitioner is a person appointed, or two or more persons jointly appointed, to oversee a company during business rescue. While the Act defines a business rescue practitioner as one or more persons, the business rescue provisions of the Act do not necessarily refer to or support joint appointments. Further, the word “person” in the Act includes a juristic person. It is therefore arguable, although unlikely, that a company can take appointment as a business rescue practitioner (section 128(1)(d)).

 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.

In a decision of the South Gauteng High Court, in the case of Welman vs. Marcelle Props cc vs. Investec Bank Ltd (Case No 33958/2011), the court stated that “business rescue proceedings are neither for terminally-ill nor for chronically ill close corporations. They are for ailing corporations, which, given time, will be rescued and become solvent”. This statement supports the contention that at the first signs of financial distress, a company should apply for business rescue. Once a company is more than “financially distressed”, options other than business rescue become more attractive for ailing companies, such as liquidations.

 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). 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 nominate a certain person as the practitioner in the resolution) 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 DOES THE BUSINESS RESCUE PROCESS UNFOLD?

Once a company commences business rescue proceedings either voluntarily (section 129) or by an order of court (on application by an affected person) 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.

Within 10 business days after being appointed, the practitioner must convene a meeting of the creditors and a meeting of the employees and advise them of the prospects of rescuing the company.

The business rescue plan, as proposed by the practitioner, must be published by the company within 25 days after the date on which the business rescue practitioner was appointed.

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.

This serves to emphasize that business rescue is an urgent process, even though leeway is granted by the courts on these reporting periods, depending on the size and complexity of a business.

If you are finding yourself in this situation and unsure as to how to proceed

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Remember above all else that you are not alone out there. Contact OUDS directly for more information on Business Rescue and how we can put you in touch with a reputable Business Rescue Practitioner, OR any of our other offered Phalanx© services.