Article 1 of 3 in a series of financially distressed companies

BACKGROUND

There is a global increase in companies experiencing financial distress, leaving such companies with no other option but to restructure the company in attempt to prevent liquidation.

Chapter 6 of the Companies Act, 71 of 2008 (hereinafter referred to as “the Act”), introduced business rescue for financially distressed companies in South Africa, thereby giving companies the opportunity to reorganise and restructure.

When a company is placed under business rescue, the company is placed under the temporary supervision of a business rescue practitioner who is responsible for managing the affairs of the company.

The purpose of this article is to assist companies who experience financial distress, by answering frequently asked questions about business rescue.

BUSINESS RESCUE: FREQUENTLY ASKED QUESTIONS

WHAT IS BUSINESS RESCUE?

Business rescue is a procedure aimed at facilitating the rehabilitation of financially distressed companies by providing for the following:

  • A business rescue practitioner is appointed to temporarily supervise the company and the management of its affairs, business and property.
  • There is a temporary stay on the rights of all claimants against the company or in respect of all of its property.
  • A business rescue plan is developed and implemented to rescue the company by restructuring its affairs, which includes the restructuring of the business, its debt, its property, liabilities and equity.

WHAT IS THE PURPOSE OF BUSINESS RESCUE?

The main aim of business rescue is to prevent liquidation by restructuring a company’s affairs in such a way that it allows the company to continue with its operations in the future and to ensure a better return to the creditors of the company.

WHAT IS A BUSINESS RESCUE PRACTITIONER?

A business rescue practitioner is a person, or two or more persons, appointed to oversee a company during business rescue. In terms of the Act, the word “person” includes a juristic person and therefore a company may possibly also be appointed as a business rescue practitioner.

WHO QUALIFIES AS AN AFFECTED PERSON?

An affected person is a person that has various rights throughout the business rescue proceedings and includes shareholders, creditors, employees and trade unions.

WHAT IS MEANT BY FINANCIAL DISTRESS?

A company is in financial distress when there is doubt as to whether or not a company is able to pay all of its debts when they become due and payable within the next six months, or when it appears unlikely that the company will become solvent within the next six months.

CAN ANY BUSINESS ENTITY BE PLACED UNDER BUSINESS RESCUE?

No, not all businesses can apply to be placed under business rescue. Only companies and closed corporations may file for business rescue and therefore trusts and sole proprietors are not entitled to file for business rescue.

WHAT IS THE TEST FOR BUSINESS RESCUE?

The test used to determine whether or not a company may be placed under business rescue depends on whether the company is in financial distress.

The Act defines the words “financially distressed” as follows:

  • It appears 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. This is known as commercial insolvency; or
  • It appears to be unlikely that the company will become solvent within the immediately ensuing six months. This is known as factual insolvency.

HOW IS A COMPANY PLACED IN BUSINESS RESCUE?

It is done by way of a director’s resolution to commence with voluntary business rescue or by way of an application to court brought by an affected party.

There are two main ways in which a company can be placed under business rescue, namely:

When the board of directors of a company resolves that the company voluntarily commences business rescue proceedings and be placed under the supervision of a business rescue practitioner (Section 129 of the Act); and

when an affected person makes a formal application to court for an order placing the company under supervision and commencing business rescue proceedings (Section 131 of the Act), provided that the company has not already been placed under business rescue in terms of Section 129, on the basis 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 with regard to employment related matters; or
  • it is otherwise just an equitable to do so for financial reasons, and there is a reasonable prospect of rescuing the company.

WHO BENEFITS FROM BUSINESS RESCUE?

All affected parties benefit from this process, in that –

  • creditors of the company will receive a better return than what they would receive from the liquidation of the company;
  • the company will continue its existence once the business rescue process is completed, and it is therefore also beneficial to the company’s employees.

For guidance and assistance in these unprecedent economically challenging times, feel free to contact our experienced team of lawyers to assist you in taking the right actions at the right time to protect your company and its directors.

Berna Koch                                   
BCom (Law); LLB
Head of Litigation                           
E-mail: Berna@sstlaw.co.za                        
Phone: 012 361 9823

Etienne Fourie
LLB
Litigation Department
E-mail:  ca1@sstlaw.co.za