Advantages of Corporate Business Rescue
As a result of financial difficulties experienced during the South African lockdown period, many companies are at the crossroads of having to choose between liquidation and business rescue. Some are still able to function but are likely to become factually and commercially insolvent within the next six months. Deciding whether or not to apply for business rescue can be a difficult task. To help you make an informed decision, we look at the advantages of corporate business rescue and consider a few important factors below.
An important factor to consider is whether the company is in financial distress or whether it is just an attempt to stay legal proceedings against it. As such, before a company can enter business rescue, it is important to determine whether it meets the requirements of financial distress.
Who Can Apply for Corporate Business Rescue?
Any affected person or the board of directors can apply. An affected person is a creditor, employee, shareholder, or an employee representative, such as a registered and recognised trade union. It can thus be a voluntary process or one for which a court judgment has been granted and thus compulsory rescue.
Can A Company Be Liquidated While Undergoing Corporate Business Rescue?
Although legal proceedings regarding claims by creditors against a company are temporary stayed as part of the rescue proceedings, a company can still be liquidated if it comes to light that it is not possible to bring it back to a state of solvency. The practitioner reports on the findings of the initial investigation or can, during the rescue proceedings, find that the company can no longer be saved. In this instance, the practitioner must inform the affected persons and the court to ensure liquidation can proceed.
Advantages in Terms of The Purpose of Corporate Business Rescue
The main purpose of the rescue proceedings is to rehabilitate a company that is in financial distress. Such a company is unable to pay debts due or is likely to become unable to pay debts within six months from the date of the investigation. Its liabilities exceed its assets or are likely to do so within the next six months.
Only in the instance where a company can be rehabilitated is corporate business rescue recommended. The process entails a thorough analysis of the company’s financial state, its affairs, debts, assets, and operations. The company is brought under temporary supervision of a qualified and experienced business rescue practitioner who oversees the process of bringing the company back to a state in which it can trade and fulfil its obligations.
The Process Has the Following Advantages:
- The company’s assets are protected against claims from creditors for the period of the corporate business rescue.
- Employees can keep on working according to the stipulations of their work contracts, except for where new terms are agreed upon.
- Where remuneration is outstanding, such employees become preferred creditors and thus have higher priority in claims should the company be liquidated.
- Contracts entered by the company before the proceedings can be suspended by the practitioner or cancelled if the application is approved by the court. The parties to the cancelled or suspended contracts become claimants for losses suffered as the result.
- Directors can continue to fulfil their duties but under the supervision of the business rescue practitioner.
- Guarantees given by the company are no longer enforceable.
- The company can take possession of the property of another party under the terms of an agreement entered into before the corporate rescue process commenced.
- The company can dispose of the mentioned property if done so as part of the ordinary course of its business at a reasonable value if the disposal has been approved as part of the corporate rescue plan.
- It is a reasonable alternative to liquidation where a corporate entity has a temporary cash-flow problem.
- The majority (75%) of the creditor voting interests must accept the rescue plan, giving the creditors a reasonable stake in the plan to ensure their claims are protected.
- At least 50% of the independent creditors’ voting interests must approve the rescue plan.
If the corporate rescue plan is approved, then the company, the security holders, and the creditors are bound by the stipulations of the plan. An important consideration of the plan is that it must enable the distressed company to generate a better return for the creditors than would have been the case with the liquidation of the company.
The rescue plan can include the significant restructuring of the corporate entity’s debts, affairs, and assets to ensure the company can trade on a solvent basis. Instead of the company having to close its doors with many employees being left without jobs, it is possible to rescue jobs.
Although the employees are preferential creditors when a company is liquidated, they only get part of the money owed to them. In some instances, this may result in as little as 22 cents out of the rand.
With corporate business rescue, the employees and other affected parties have an improved chance of getting paid what is due.
Since the practitioner must report on evidence of fraud, contravention of laws relevant to the company, or the misappropriation of funds, parties that have defrauded the company can be prosecuted.
The practitioner must also instruct members of the management team to meet their material obligations to the company where the practitioner’s assessment brings to light that the said members have failed in their material obligations to the firm. As such, the structuring and addressing of problems that may have led to the company’s financial distress can rectify issues in the company to the benefit of affected parties.
Business rescue has certain time limits. It is an urgent process. The affected parties can thus expect to see and experience the positive benefits of the corporate rescue within a short period. Should the plan succeed, then the company can keep its place in the economy. It thus remains:
- An employer, able to pay salaries.
- A tax contributor, and thus plays a contributing role to the South African economy.
- A solvent company, able to pay its debts due.
Affected persons and the public thus benefit if the corporate rescue succeeds. The firm may perform an essential service to the public, such as providing aviation, road, sea, or rail transportation services. It may be an essential medical service provider or an important food processing company. If it is liquidated, the public loses a valuable service or product.
The firm may be a large employer in, for instance, the fuel sector. Without it, large-scale unemployment may be the result. This will then place a larger burden on the government, economy, and taxpayers.
An unforeseen economic crisis, as brought about through the health crisis and lockdown period, may have caused the financial distress. In such an instance, corporate business rescue is a viable alternative to liquidation to help a company regain its financial composure and thus role in the South African economy.
Holiday resorts, restaurants, retail centres, and tour operators are among the many companies that face the potential of closure because of limited operations possible during the lockdown. Corporate business rescue is thus a lifeline for such companies.
If your firm fits the profile, get legal help to determine whether it can experience the advantages of corporate business rescue. Call on our attorneys for more information.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.