What exactly is business rescue? Are you experiencing financial distress, not sure if you’ll be able to pay your debts . . . again? Your business might need rescuing. Avoid unemployment in South Africa.
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Unfortunately this is the reality for many businesses in South Africa that are now faced with going out of business or filing for bankruptcy. If you need help getting your business back to being a profitable entity and avoid liquidation then please continue reading.
What is business rescue?
Business rescue is defined as proceedings to rescue and rehabilitate a financially distressed company. The companies Act No.71 of 2008 aims to provide measurements of relief to companies in South Africa that are heading toward misfortune and only needs some time and skilful intervention to get back into business. This is referred to as business rescue proceedings.
According to Werksman Attorneys, Business rescue proceedings are proceedings aimed to facilitate the rehabilitation and restricting of a company that requires financial management by providing for:
- The temporary supervision of the company, and the management of its affairs, business and property, by a business rescue practitioner.
- Moratorium on legal proceedings: A temporary “stay” on the right of the claimants against the company or in respect of property in its possession. This grants the business rescue practitioner some breathing room while he attempts to rescue the company through the design and implementation of a business rescue plan.
- The development and implementation of a business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity and coming up with a debt management plan.
Due to factors beyond your control, your business might be finding itself with a broken balance sheet or in dire need of financial management. Recognising your business is failing is the first step. Many business owners refuse to acknowledge there is a problem. It is your responsibility to take action.
Business rescue can also occur on the additional ground where it is not possible for a company to recover and continue its existence on a solvent basis, the business rescue will result in creditors and shareholders obtaining a better return than they would from the immediate liquidation of the company.
If your business is financially distressed or trades in insolvent circumstances, you now have the chance to rescue your company without having the stress of creditors knocking on your door insisting on payment.
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All businesses and franchises in South Africa that are financially distressed and want to take a decision to start rescue proceedings can file a notice to start the proceedings with the CIPC (Companies and Intellectual Property Commission).
With business rescue becoming more common in South Africa, there has been increased interest from venture capitalists, private equity funds and foreign investors in the business rescue space. They want to identify liquid assets that are heavily discounted and can be acquired through the business rescue process.
What is the test for business rescue?
To determine if you company is financially distressed either a cash flow or balance sheet test can be applied.
- Cash-flow test: Debts are presently failing due as well as those failing due in the reasonably near future. Reasonable future will depend on all the circumstances including, in particular, the nature of company’s business. This is very speculative and the balance-sheet tests has thus become the sensible test of insolvency.
- Balance sheet test: A company is regarded as technically insolvent (and thus in financial distress) if the liabilities of company exceeds its assets. It is a legal test that requires the court to determine what value to attribute to the prospective and contingent liabilities of a company. The court must compare present assets with present and future liabilities.
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When should a company begin business rescue?
You need to look at your company finances and decide whether it’s worth saving. It may simply be that your business needs a bit of assistance and is in fact healthy.
If you are continually borrowing money to finance your business then your business is in fact failing.
Furthermore, your business must be capable of being rescued. You’ll need to indicate the cause of your demise and provide the makings of a reasonable rescue plan.
In support of this, you would need to provide concrete and objectively ascertainable facts, beyond speculation, indicating that the remedy proposed is reasonable and sustainable.
If you are in constant financial struggle and threat of drowning this may be a warning sign that you need to take action. See a completed list of all the warning signs associated with business distress in the resource section of this article.
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The business rescue process is meant to be used at the earliest moment, when your business is showing signs that it could soon become insolvent but you’ve not yet reached the stage of insolvency. The sooner you company is placed in business rescue, the greater the chance of your company being successfully rehabilitated.
What is the Business Rescue Process in South Africa
There are two methods of commencing business rescue proceedings. Either a company resolution to begin business rescue proceedings in terms of Sec 129 of the Act or a court order placing the company in business rescue in term of Sec 131 of the Act. Business rescue proceedings usually last for a period of three months.
Voluntary board resolution, with a majority vote.
The decision of the board to pass a resolution of business rescue needs to be done urgently to enable the business rescue practitioner to take control for the purposes of having a business rescue plan approved and thereafter implemented.
The board of directors may pass a resolution commencing business rescue proceedings if the board has reasonable grounds to believe that:
- The company is financially distressed.
- There appears to be a reasonable prospect of rescuing the company.
The board may not voluntarily place the company into business rescue if liquidation proceedings have been instituted against the company. The board must give notice to all affected parties (creditors, employees and shareholders) of the decision to enter into business rescue as well as the appointment of the business rescue practitioner.
Directors can be held personally or criminally liable if they do not place the company under business rescue when the company is in financial distress.
Court order to begin business rescue:
Any affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings. Meaning, any creditor, employee or shareholder of the company may apply to court to have the company placed under business rescue.
The court may put the company under business rescue when it is satisfied that the company is indeed financially distressed, the company has failed to pay over any amount owning in terms of any obligation to do so, it is just and equitable to do so and the court is satisfied that there is a reasonable prospect of the company to rescue.
Such an applicant must then serve a copy of the application on the company and the commission and notify each affected person of the application. If the court grants an application for business rescue the court may further appoint a business rescue practitioner.
With regard the voluntary business rescue, if a company fails to comply with the provisions set out in the act, the resolution lapses and is a nullity and the company may not file a further resolution for at least three months after which the resolution was adopted.
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After the adoption of the business rescue resolution an affected person can object or oppose the resolution by applying to court for an order:
Setting aside the resolution on the grounds that:
- There is no reasonable basis for believing the company is financially distressed.
- There is no reasonable prospect for rescuing the company.
- The company has failed to satisfy the procedural requirement.
Setting aside the appointment of the practitioner on the grounds that:
- The practitioner does not satisfy the requirements.
- Is not independent of the company.
- Lacks the necessary skills.
- Requiring the practitioner to provide security.
Any affected person opposing a business rescue may either request the court to dismiss the application together with any other appropriate order, including an order placing the company under liquidation.
What does business rescue practitioner do?
By placing a company under business rescue, a business rescue practitioner must be appointed. A business rescue practitioner (BRP) must be member in good standing of a legal, accounting or business management profession accredited by the Commission or must be licensed by the Commission.
The BRP has the following powers and duties:
- Full management control of the company
- May delegate any power or function to a person who was part of the board or pre-existing management of the company.
- Remove from office any person who forms part of the pre-existing management.
- Appoint a person as part of the management of the company.
- Develop a business rescue plan to be considered by affected persons, this should include a debt management plan.
- Implement any business rescue plan that has been adopted.
- The BRP is an officer of the court and thus has the responsibility, duties and liabilities of a director of the company.
As soon as practical after being appointed, the business rescue practitioner must investigate the company’s affairs, business, property, and financial situation. After this the BRP must consider whether there is reasonable prospect of the company being rescued.
Business rescue plan
The key to business rescue will be the successful development and implementation, if approved by creditors, of a business rescue plan to rescue the company by restructuring it affairs, business, property, debt, other liabilities and equity.
If a business plan is rejected by the creditors the practitioner may either seek approval from the relevant meeting to prepare a revised plan, or inform them that the company will apply to court to have the results of their vote set aside on the grounds that the majority decision was inappropriate.
Once the plan is approved, the plan is implemented by the business rescue practitioner. The plan will provide:
- Material assets of the company.
- Indication of possible dividend that creditors might receive.
- List of holders of the company’s issued securities.
- Copy of the written agreement of the BRP remuneration.
- Statement on whether or not the plan includes any proposals informally made by the creditor of the company.
- Details of the manner in which the BRP envisages that the company will be rescued:
- Nature and duration of the moratorium
- Ongoing role of the company
- Effect the plan will have on the holders
- Assumptions and conditions that must be fulfilled for the plan to be implemented.
- Effect of the plan on employees.
- Circumstances under which the plan will come to an end.
- Projected balance sheet.
- Statement of income and expenses for the next three years.
- Proposal of third party acquirer of the shares or liquid assets of the business.
Effects of the business rescue plan on others:
Employees of the company will continue to be employed on the same terms and conditions in accordance with the applicable labour laws. If retrenchments are contemplated as part of the business rescue plan it must be carried out in accordance of the Labour Relations Act.
The directors must continue to exercise their functions as directors, but subject to the authority of the business rescue practitioner.
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A creditor, who has agreed to the discharge of the debt owed to that creditor, will lose the right to enforce the relevant debt or part of it and cannot upon rehabilitation claim the discharge debt.
A gain is made by the debtor if a debt owed by the debtor to a creditor is reduced or discharged for no consideration or for a consideration that is less than the amount by which the face value of the debt has been charged.
Post-commencement finance is finance provided to the company once the business rescue proceedings have been commenced. Creditors would be reluctant to finance a company that is placed under business rescue.
For this reason acompany may obtain financing that is unrelated to employment, this financing may be secured by the lender by utilising any unencumbered asset of the company and will be paid in the order of preference as determined in section 135(3)(b).
Funding for small businesses may be generated from:
- Loans from stakeholders.
- Funding from current financiers or lenders of the company.
- New funding from new financiers or lenders.
- New funding from services rendered by current employees or suppliers of the company during the company’s business rescue.
Business rescue can be used to rehabilitate your failing company and save your from bankruptcy, but speed is of the essence. If your company is on the brink of becoming insolvent, business rescue can helpyou return to profitabilityby utilising the Business Rescue procedures in the Act and assist yourcompany turnaround.
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
Business rescue legislation