Business Financially Distressed?
Business Rescue under the Companies Act, 2008 may assist!

A provision in the Companies Act, 2008 (the Act) offers assistance to companies that are financially distressed. Under the provisions of the Act, those companies facing financial hardship can apply to be placed under what is termed “business rescue”. In this process, companies are provided with a limited breather to seek an avenue to financial well-being.

Given the current economic realities faced by most businesses, this may be an option to explore for some companies.

What is Business Rescue? 

In terms of the Act, business rescue is defined as:

business rescue” means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

  • the temporary supervision of the company, and of 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; and 
  • the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

What is a Financially Distressed Company?

The first qualifying criteria for a company to benefit from business rescue proceedings is that the company must be under “financial distress” which is defined in the Act to mean:

financially distressed“, in reference to a particular company at any particular time, means that:

  • it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
  • it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

How Does a Company Apply?

There are two avenues to access the business rescue process.

Firstly, a company can voluntarily seek to place itself in business rescue. This is done by the board of the company passing a resolution in which it believes that:

  • the company is financially distressed; and
  • there appears to be a reasonable prospect of rescuing the company.

The board resolution must be filed with the Companies and Intellectual Property Commission. 

Secondly, an application can be made at the High Court by any affected person, requesting the court for an order placing the company under supervision and commencing with business rescue proceedings.

The court must however be satisfied that:

  • the company is financially distressed;
  • the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment-related matters; or
  • it is otherwise just and equitable to do so for financial reasons,

         and there is a reasonable prospect for rescuing the company.

What is the Effect of Business Rescue on a Company? 

Entering into business rescue has a direct effect on the operations of the company, some of which are set out below. 

Firstly, the affairs of the company are placed in the hands of a business rescue practitioner who is tasked with putting together a plan to take the company forward. Directors must assist in the process and must continue to perform their duties subject to the authority of the business rescue practitioner. Directors are further required to provide the practitioner with any information related to the company’s affairs as requested by the practitioner.

Secondly, there is a general moratorium on legal proceedings against the company. There are exceptions to this moratorium for example that a court or business rescue practitioner may give permission that legal processes against the company should continue. Furthermore, criminal proceedings are not stayed during this process.

Thirdly, the business rescue practitioner may, subject to certain exceptions and procedural requirements set by the Act, entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any contractual obligation of the company.

Fourthly, a company’s right to dispose or agree to dispose of its property and the right to dispose of the shares of the company are limited whilst in the process of Business Rescue.

A final aspect is that employees who are employed at the time of the entering into business rescue remain employed on the same terms and conditions subject to changes thereto being made in line with applicable legislation and the employees agreeing to such changes. The retrenchment provisions of the labour relations Act, 1995 also continue to be applicable to any process requiring the reduction of staffing numbers.

Conclusion 

Business rescue is not for the faint-hearted and is sometimes a difficult pill for company owners to swallow. In effect, control of the company is handed over to a business rescue practitioner with the aim of finding solutions to the financial challenges faced by the company.

It can however have the desired result and provide an avenue, in difficult times, for companies to rehabilitate and once again proceed into the future on a sure financial footing.

Should you require any further information around business rescue please contact the DMR team.

Fred Joubert
fred@dmrlaw.co.za 

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