How Debt Rescue Plans for Distressed Companies Can be Workable Alternatives to Liquidations

Many companies in South Africa have undergone debt rescue procedures. Keep in mind that debt review as a debt rescue means is only suitable for natural persons. As such, companies have to look at other options for debt rescue.


Directors Have No Choice but to Take Action

Indeed, where a firm is in financial trouble, the directors, by law, must take the necessary actions to ensure business rescue. If they do not, they must publish a notice to the effect and provide reasons for not applying for business rescue.


Why Business and Debt Restructuring?

In essence, the restructuring of companies under financial duress is a practice done to protect the interests of creditors, shareholders, and employees. Companies that are near insolvent or likely to become insolvent within the next six months must be placed under business rescue if requirements are met. It is possible for such companies to undergo debt rescue even while liquidation applications are in progress. It is possible to restructure the affairs of the companies to ensure improved return for the creditors as opposed to what the creditors will receive if the companies are liquidated.


How the Process is Overseen

A business rescue practitioner must be appointed. Called the BRP, the practitioner is responsible for reorganising the business to bring it back to a solvent trading state. This must be done in consultation with affected parties, such as creditors, directors, shareholders, and employees.


Can Debt Rescue Work?

Debt rescue plans for companies, which have, due to a range of circumstances and events, become insolvent or near insolvent, provide workable alternatives to business liquidations and thus excessive job losses. As part of the debt rescue process, the BRP restructures the payment arrangements with creditors. This helps to make the repayment of debt more affordable and thus enables ongoing operations while employees keep their jobs.


Staying of Legal Proceedings

The debt rescue for companies also allows for a moratorium on legal proceedings against the companies while under business rescue, though certain proceedings are excluded. Even companies who are already in the process of being liquidated can undergo business rescue. In such instances, the liquidation applications are stayed. Only if the debt rescue orders are not granted can the applications for liquidation of the companies proceed.


Requirements According to the Companies Act

The Companies Act of 2008 stipulates what business rescue is. According to the Act, only companies that are financially distressed can be placed under supervision for management of their affairs. Temporary stay of debt claims against the relevant company or companies in distress helps to give the necessary time to restructure debt payments. It is, however, also applicable to the assets and business operations of companies.


What is Seen as Being Under Financial Duress?

For a company to be financially distressed or under financial duress, it must be unlikely that it would be able to pay all its debts should such become payable immediately or within six months. If the company is reasonably likely to become insolvent within the next six months, then it also qualifies as financially distressed.


Potential of Saving

The debt rescue aims to bring the company back to a reasonable solvent state and where they are able, to trade normally. Many companies in South Africa have already been rescued in this way. However, only companies that have reasonable chances of recovery can undergo such business rescue, which includes restructuring of debt repayments and other affairs of the companies.


How the Business Rescue is Initiated

Companies can be placed under debt rescue when their board of directors commences with the business rescue or when affected persons submit applications to the High Court for placing the relevant companies under business rescue. Affected persons include employees, creditors, shareholders, and trade unions representing employees.


Appointing the Business Rescue Partner

It is the person or persons that are appointed for overseeing the business and deb rescue process. Such a person must be of good standing within their profession. The profession must be regulated.


What Next?

Speak to our team of attorneys about the appointment of the business rescue partner and for assistance with debt rescue plans for companies in South Africa.


Disclaimer: This article is for informational purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.

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