Business Rescue
Business rescue proceedings commence in South Africa once the company files a resolution with the Commission to place itself under supervision. This may be achieved either in terms of an ordinary resolution of the board, or an ordinary resolution of shareholders. Alternatively the process can be initiated when an “affected person” files an application to the court for an order on the basis that the company has failed to pay over any amount in terms of an obligation or in terms of a public regulation, or contract, with respect to employment related matters; or it is otherwise just an equitable choice to do so for financial reasons, and there is a reasonable prospect of rescuing the company.
The objective of business rescue proceedings is to return the financially distressed company to a solvent position or to achieve a result in which creditors and shareholders receive greater dividends than they would have received had the liquidation proceedings commenced.
In certain scenarios companies lack the capacity to repay their debts due to their creditors. This results in a company’s decline as the claims from creditors begin to stall the company’s business activities. In turn corporate rescue legislation was developed to protect insolvent companies from creditors and allow for the potential rehabilitation of the company so that creditors and stakeholders benefit at a later time. As a result business rescue models can therefore be seen as a process in which “assets and expertise of a business injured by management mistakes or the vagaries of the free market are recapitalized or re-channelled to renewed productivity and social benefit”.
FAQ’s Regarding Business Rescue
What are the benefits of business rescue proceedings being instituted?
The possible result of jobs being saved, debts being paid to a greater extent, investments being protected and the debtors’ business activities being able to continue.
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 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 together with a statement setting out the facts upon which the resolution was founded.
within five business days of filing the Form CoR123.1, resolution and statement, with CIPC, the company must publish notice of the resolution, together with a sworn statement as to the reasons why the company is financially distressed, detailing the prospects of rescuing the company, to all affected persons; and appoint a business rescue practitioner.
How long should a business rescue proceed for?
Business rescue proceedings should ideally last for a period of three months. 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 business rescue plan and thereafter implementing the plan if it is approved in accordance with the Act.
What is the role of the business rescue practitioner?
The business rescue practitioner is required, as soon as possible after appointment, to investigate the company’s affairs, business, property, and financial situation, and thereafter consider whether there is any reasonable prospect of rescuing the company (section 141(2)). If rescue is found to be a probable outcome the business rescue practitioner will commence with structuring a business rescue plan for the company.
Can a company be sued during business rescue?
Section 133 of the Act regulates the institution of legal proceedings against the company and the enforcement of any action against the company during business rescue. This is commonly referred to as the “statutory moratorium” or “stay” that is placed on a company from the moment that business rescue proceedings commence. During business rescue proceedings, no legal proceedings, including enforcement action (execution of a court or other order) against the company or in relation to its property lawfully possessed, may be commenced or proceeded whether it be in a court or arbitral forum.
Business rescue is not always a realistic prospect, with liquidation often being the more beneficial legal proceedings to pursue dependant on the situation and circumstances at hand.