In a climate where many South African firms are feeling a knock-on effect from business closures, alternatives to liquidation may be welcome – and business rescue should be considered.
What is business rescue, and how can it affect – or assist – a company in financial distress? Gareth Cremen, partner at Ramsay Webber Attorneys, talks about what business rescue is and when it can be implemented.
Business rescue is a fairly new concept in South African Law and was introduced through the enactment of the Companies Act 71 of 2008 (the Act). One of the main purposes of the Act as encapsulated in Sec 7 of the Act is to “provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders” (Sec 7(k) of the Act). Chapter 6 of the Act governs the process of business rescue.
Business rescue is defined in Sec 128 of the Act as proceedings 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; a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if that is not possible; and a plan that would achieve a better a better return for the company’s creditors than the payment they would have received if the company had been liquidated immediately.
What is clear from the definition of business rescue is that only a company that is “financially distressed” can be placed under business rescue. To determine whether a company is financially distressed either a cash flow or a balance sheet test can be applied.
The business rescue process is meant to be used at the earliest moment, when a company is showing signs that it could soon become insolvent but where it has not yet reached the stage of insolvency. The sooner a company is placed in business rescue, the greater the chance of the company being successfully rehabilitated.
Because business rescue is a new creature in South African Law, many of the provisions of Chapter 6 of the Act have not yet been tested by our courts, and uncertainty still abounds regarding many of the provisions contained in Chapter 6. What has become clear is that the courts favour business rescue to liquidation, and the limited jurisprudence there is on the subject has shown that the courts will nearly always interpret the provisions of the Act so as to make business rescue work and to give substance to the purpose of Business Rescue and the Act itself.
Entering business rescue
There are two ways in which a company can be placed in business rescue: either by a company resolution to begin business rescue proceedings in terms of Sec 129 of the Act; or a court order placing the company is business rescue in terms if Sec 131 of the Act.
Company resolution to begin business rescue
Sec 129 of the Act provides that the board of a company may resolve that the company voluntarily begin business rescue proceedings, if the board has reasonable grounds to believe the company is financially distressed and that there appears to be a reasonable prospect of the company being rescued. The board may not voluntarily place the company into business rescue if liquidation proceedings have been instituted against the company.
Section 129 imposes certain obligations on the board and there are very stringent notices periods that the board must follow. The board must give notice to all affected parties (creditors, employees, shareholders) of the decision to enter in to business rescue as well as the appointment of a business rescue practitioner.
Should the board fail to comply with the various notices periods, then the resolution to place the company into business rescue lapses and is a nullity, the board is also prohibited from filing another resolution to voluntarily begin business rescue for a period of three months.
In terms of Sec 130 of the Act any affected person parties (creditors, employees, shareholders) can apply to court to set aside the resolution to commence business rescue on the grounds that there is no basis to believe the company is financially distressed, that there is no reasonable possibility that the company can be rescued or that the procedures in terms of Sec 129 have not been complied with. Sec 130 also allows an affected party to set aside the appointment of the business rescue practitioner if it can be established that he does not meet the requirements of the Act, or if he is not sufficiently independent of the company or its management or board.
The purpose of Sec 130 is to give affected parties the right to approach the courts for protection in circumstances when the provisions of Sec 129 have been abused by the board to the detriment of affected parties.
Court order to begin business rescue
Section 131 of the Act makes provision for a company to be placed under business rescue proceedings on a compulsory basis by the court upon application by an affected person. In effect this means that any creditor, employee, shareholder of the company may apply to court to have the company placed under business rescue.
A court may only put a company into business rescue in terms of Sec 131 if it is satisfied that the company is financially distressed, the company has failed to pay over any amount owing 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 being rescued.
In granting an application for Business Rescue in terms of Sec 131 the court may further appoint a business rescue practitioner that fulfils the requirements of the act and which was nominated by the affected person who brought the application for business rescue, subject to the business rescue practitioner being ratified at the first meeting of creditors.
Moratorium on legal proceedings
Sec 133 of the Act makes provision for a general moratorium on legal proceedings, including any enforcement action, against a company, or any property belonging to a company or lawfully in its possession, while the company is subject to business rescue proceedings. This moratorium is in order to grant the business rescue practitioner some breathing room while he attempts to rescue the company through the design and implementation of a business rescue plan.