Article 2 of 3 in a series on Financial Distressed Companies

Before a company can be placed under business rescue, there are several procedural requirements that must be complied with. There are two ways in which business rescue proceedings may commence, being by way of a company resolution in terms of Section 129 of the Companies Act or by way of a court order in terms of Section 131 of the Companies  Act.

  1. COMMENCEMENT OF BUSINESS RESCUE PROCEEDINGS
  • VOLUNTARY COMMENCEMENT BY COMPANY RESOLUTION (SECTION 129 OF THE COMPANIES ACT)
  • The Board of the company may resolve that the company voluntarily begins business rescue proceedings if there is reason to believe that the company is financially distressed and that a reasonable prospect of rescuing the company exists. Such resolution may only be adopted on condition that no liquidation proceedings have been initiated by or against the company at the time.
  • In terms of Section 129 of the Companies Act 2008, the company must within 5 business days of adopting and filing the resolution –
    • In the prescribed manner publish a notice of the resolution and its effective date to every affected person. Included in the notice must be a sworn statement of the facts relevant to the grounds on which the resolution was founded;
    • Appoint a business rescue practitioner who qualifies as a business rescue practitioner in terms of the Companies Act and consents to his/her appointment in writing;
    • The above period of 5 days may on good cause shown be extended by the Companies and Intellectual Property Commission on application by the company.
  • As soon as a business rescue practitioner is appointed, the company must –
  • Within 2 business days of appointing the business rescue practitioner, file a notice of appointment as practitioner with the Companies and Intellectual Property Commission;
  • Within 5 business days after filing the notice of appointment as business practitioner, publish a copy of the notice of appointment to each affected person.
    • The failure by a company to comply with the procedural requirements provided for in Section 129 of the Companies Act has the following effect –
      • The resolution to begin business rescue proceedings lapses and is a nullity;
      • The company may not file a further resolution for a period of 3 months after the date on which the lapsed resolution was accepted. The company may however on good cause shown apply to court to approve the filing of a further resolution.
    • COMPULSORY COMMENCEMENT BY COURT ORDER (SECTION 131 OF THE COMPANIES ACT)
    • An affected person can apply to court for an order to place the company under supervision and commencing business rescue proceedings, on condition that the company itself has not already voluntarily done so by way of resolution. A copy of the application must be served on the Companies and Intellectual Property Commission and every affected person must be notified.
    • The court may grant an order for the company to be placed under business rescue proceedings if the court is 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;
    • It is otherwise just and equitable to do so for financial reasons;
    • There is a reasonable prospect of rescuing the company.
    • The court may dismiss the application and make any further necessary and appropriate order, including placing the company under liquidation. A company placed under business rescue proceedings by way of an court order –
    • May not adopt a resolution to place itself in liquidation until the business rescue proceedings have ended;
    • Must notify each affected person of the court order within 5 business days of the order being granted.
  1. POST COMMENCEMENT OF BUSINESS RESCUE PROCEEDINGS
  • DUTIES OF THE BUSINESS RESCUE PRACTITIONER
  • The business rescue practitioner must, as soon as practically possible after appointment –
  • inform all regulatory authorities having authority in respect of the activities of the company, that the company has been placed under business rescue proceedings and of his/her appointment (Section 140 of the Companies Act);
  • investigate the company’s affairs, business, property, and financial situation (Section 141 of the Companies Act).
  • Within 5 business days after the commencement of business rescue proceedings, or such extended period as the practitioner allows, the directors of the company must provide the practitioner with a statement of affairs containing particulars of –
  • Any material transactions involving the company or the assets of the company, and occurring within 12 months immediately before the business rescue proceedings began;
  • Any court, arbitration or administrative proceedings, including pending enforcement involving the company;
  • The assets and liabilities of the company, and its income and expenditure within the immediate preceding 12 months;
  • The number of employees and any collective agreements or other agreements relating to the rights of employees;
  • Any debtors and their obligations to the company;
  • Any creditors and their rights or claims against the company.
  • Within 10 business days after being appointed, the practitioner must convene –
    • A first meeting of creditors where –
  • the practitioner must inform the creditors whether the practitioner believes that there is a reasonable prospect of rescuing the company;
  • the practitioner may receive proof of claims by creditors;
  • the creditors may determine whether or not a committee of creditors should be appointed and, if so, may appoint the members of the committee (Section 147 of the Companies Act);
  • A first meeting of employees’ representatives where –
    • the practitioner must inform the employees’ representatives whether the practitioner believes that there is a reasonable prospect of rescuing the company;
    • the employees’ representatives may determine whether or not a employees’ committee should be appointed and, if so, may appoint the members of the committee (Section 148 of the Companies Act).
  • THE BUSINESS RESCUE PLAN (SECTION 150 OF THE COMPANIES ACT)
  • After consulting with the creditors, other affected persons, and the management of the company, the business rescue practitioner must prepare a business rescue plan for consideration and possible adoption, which must contain the prescribed information as well as any other information needed to assist a person to either accept or reject the plan. The company must publish the business rescue plan within 25 business days after the appointment of the practitioner.
  • With 5 business days’ notice, the practitioner must convene and preside over a meeting of creditors and any other holders of a voting interest that has been called for the purpose of considering the proposed rescue plan within 10 business days after the publication of the plan.
  • The proposed business rescue plan will be approved if it was supported by the holders of more than 75% of the creditors’ voting interests, which includes at least 50% of the independent creditors’ voting interests.
  • If the business rescue plan is adopted, it binds the company, each of its creditors, and every holder of the company’s securities, regardless of whether such a person was present at the meeting, voted in favour of adoption of the plan, or have proven their claims against the company.
  1. TERMINATION OF BUSINESS RESCUE PROCEEDINGS
  • Business rescue proceedings do not automatically terminate through the effluxion of an allocated time period. Section 132(2) does, however, make provision therefor that if business rescue proceedings have not ended within 3 months of their commencement, a monthly progress report must be submitted by the practitioner to the company, court and each affected person.
  • Section 141(2)(a) of the Companies Act provides that should the business rescue practitioner find that there is no reasonable prospect for the company to be rescued, the practitioner must –
  • Inform the court, the company, and all affected persons in the prescribed manner;
  • Apply to court for an order discontinuing the business rescue proceedings and placing the company into liquidation.

For guidance and assistance in these unprecedented 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
SENIOR ASSOCIATE

BCom, LLB

Admitted as Attorney: 2007
Email: berna@sstlaw.co.za
Office: Pretoria
Department: Dispute Resolution

ETIENNE FOURIE
ASSOCIATE

LLB

Email: etienne@sstlaw.co.za
Office: Sasolburg
Department: Dispute Resolution