This guide will give you an overview of how business rescue legislation works and how it may be applied to help rescue a company that is in financial distress.
Business rescue came into effect in South Africa in 2011 under chapter 6 of the new Companies Act. The law is in line with global trends which are seeing governments opting to restructure companies that are in trouble rather than letting them collapse.
The law gives financially distressed South African companies a helping hand to stabilise, reorganise and restructure their business and avoid liquidation. The procedure is open to all companies, including public and private companies and close corporations.
In addition to helping rescue ailing businesses, the legislation was also intended to make insolvency less punitive and onerous for debtors, so that if they do survive then they should be in a position to pay their creditors.
Recognising the warning signs
While company founders and directors may be reluctant to accept that their business is in trouble, the reality is that seeking protection under the rescue package may mean the difference between survival and closing down.
Experts advise that help should be sought earlier rather than later so that the company can have access to interim liquidity to fund its operations while a rescue plan is being formulated and implemented. The need to find interim funding is absolutely critical for a business to be rescued.
In terms of the Act, companies should have sufficient liquidity to keep going if they file for business rescue. That’s why it makes sense to do it quickly – if there is no liquidity available at all, the rescue will not be successful.
Defining financial distress
A company is ‘financially distressed’ when it’s unlikely that it will be able to pay all of its debts as they fall due within the immediately ensuing six months, or when it appears likely that the company will become insolvent within six months.
Defining business rescue
The Companies Act defines “business rescue” as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
- The temporary supervision and management of the company by a business rescue practitioner
- A temporary moratorium on the rights of claimants against the company or property in its possession
- The development and implementation of a plan to rescue the company by restructuring its affairs, business, property, debt, other liabilities and equity in a way that maximises the probability of the company continuing to exist on a solvent basis, or provides a better return for the company’s creditors or shareholders than would result from immediate liquidation
How business rescue works
There are two ways of initiating business rescue proceedings:
1. Proceedings initiated by the company
This happens when the directors believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing it. This cannot be done if liquidation proceedings have already been initiated by or against the company.
It takes effect only when it is filed with the Companies and Intellectual Property Commission (CIPC). After adoption of the resolution, the company must publish a notice of the resolution in the prescribed manner to every affected person, appoint a business rescue practitioner and notify the CIPC and those affected of the appointment.
2. Proceedings initiated by the court
If the board of directors does not voluntarily begin business rescue proceedings, an affected person may apply to a court for an order placing the company under supervision and commencing business rescue. A copy of an application brought by an affected party must be served on the company and the CIPC, and each affected person must be notified.
An affected person is a shareholder or creditor of the company, any registered trade union representing employees of the company, and every employee of the company or their representatives (if the employees are not represented by a registered trade union).
Each affected person has the right to participate in the hearing of an application to begin business rescue proceedings.
After considering an application by an affected person, the court may either place the company under supervision and commence business rescue proceedings if there is a reasonable prospect for rescuing the company, or it may dismiss the application.
If the court makes an order placing the company under supervision it must also make a further order appointing an interim practitioner, subject to ratification by the holders of a majority of the independent creditors’ voting interest at the first meeting of creditors.
After the adoption of a resolution by the board to implement business rescue proceedings, but before the adoption of a business rescue plan, an affected person may apply to a court with the requisite jurisdiction for an order setting aside the resolution, setting aside the appointment of the practitioner, or requiring the practitioner to provide security to secure the interests of the company and any affected persons.
Rights of affected persons
- Each creditor is entitled to notice of, and participation in, each court proceeding, decision or meeting. Each creditor also has the right to vote to amend, approve or reject a proposed business rescue plan. If the plan is rejected, they also have the right to either propose an alternative business rescue plan or present an offer to acquire the interests of any of the other creditors (who voted against the approval of the business rescue plan)
- The employee will, in certain circumstances, be a preferred unsecured creditor of the company
- Creditors may form a creditor’s committee and are entitled to consult with the practitioner during the preparation of the business rescue plan.
- Voting by creditors occurs as follows:
- Each shareholder of the company is entitled to receive notice of, and to participate in, each court proceeding, decision or meeting.
- Creditors, employees and recognised trade unions may form committees and are entitled to consult with the practitioner during the preparation of the business rescue plan.
- A secured or unsecured creditor has a voting interest equal to the value of the amount owed
- A concurrent creditor who would be subordinated in a liquidation has a voting interest equal to the amount that the creditor could reasonably expect to receive (the practitioner will request such amount to be independently and expertly appraised and valued)
Making business rescue work
The business rescue practitioner must be given the opportunity to take control of the management of the company with a view to improving its financial standing to the benefit of creditors, employees and all other interested parties.
Because the financial standing of a company cannot reasonably be improved overnight or within a few months, the practitioner must be given a reasonable amount of time in which to successfully implement the business rescue plan. The duration is subjective and tailored to suit the financial situation and potential of the particular company in question.
It would be wrong to apply strict and narrow time frames within which business rescue proceedings should be implemented. By the same token, business rescue proceedings cannot be unlimited. To assist the practitioner, strict controls, measures and forms of accountability need to be kept in place in order to protect the interests of all affected parties.