Many South African companies have to close their doors because they have not been able to continue normal operations during the lockdown period. Although liquidation is certainly an option, it also entails large-scale job losses and subsequent financial distress for the employees. Business rescue is an alternative, but to understand whether it can work for a company, it is important that we answer the question: what is business rescue?
What is Business Rescue According to the Companies Act?
It is a process that aims to help a financially distressed company to return to a state of solvency. The company is placed under the supervision of an appropriate business practitioner to help rescue it from having to close doors permanently. The business practitioner only takes management control of the company for a specified period. It is thus a temporary and urgent arrangement.
With business rescue, the legal claims against the company by its creditors are stayed. This means no further legal action can be taken against the company during the development and subsequent implementation of an approved business rescue plan. This is a plan to restructure the debts, liabilities, business relationships, assets, and operations to bring the company out of the financial distress situation.
If the company’s liabilities exceed its assets and the company is unable to pay debts when due, the entity must stop trading and be liquidated. However, if it is possible to rescue the company, it certainly makes sense to apply for business rescue help.
The company can trade while it is insolvent if it is under business rescue. However, if the practitioner’s analysis shows that the firm cannot be brought back to a state of solvency, the practitioner must notify the stakeholders, court, and creditors of the situation.
When Can A Company Apply for Business Rescue in South Africa?
The company cannot use business rescue as a means to avoid paying debts. It must be financially distressed. This means it must be unlikely that the company will be able to keep operations going and pay salaries and debts in the immediate future or over the course of the next six months.
If it is reasonably sure that the company will reach a state of insolvency in the next six months, it also qualifies. However, even if the situation falls within one of the two categories of commercial or factual insolvency, there must be a reasonable chance that the company can return to solvency and thus recover from its financial distress if it enters a business rescue process.
How the Process Is Initiated
The board of directors agrees that the company voluntarily enters business rescue, or one of the affected parties applies to the High Court of the country to have the company placed under business rescue.
Who Qualifies as An Affected Party?
Affected parties are shareholders, stakeholders, creditors, employees, or the representatives of employees, such as registered trade unions. The affected parties have certain rights during the entire process.
More About the Business Practitioner
According to the Companies Act, the business practitioner must have the appropriate qualifications and background to manage the business. The person must:
- Be qualified in the legal, business management, or accounting professions.
- Not have any conflicts of interest with the company.
- Be licensed and accredited to act in the capacity of a business rescue practitioner.
Does the Size of The Company Matter Regarding the Practitioner’s Experience?
Yes. Every company undergoing business rescue falls into one of three categories:
The classification is done in terms of the public interest score. The higher the score, the better qualified and experienced the practitioner must be. The practitioner is also classified in one of the three categories according to the stipulations of the act:
What Does the Practitioner Do?
The main goal of the practitioner is to reduce the company’s debt to an acceptable level with the aim of returning the company to a solvent state where they are thus able to trade. To do so, the practitioner has to assess the financial affairs of the company with consideration of the assets. Once done, the practitioner uses the information to decide whether or not there is a reasonable chance for the company to be rescued.
If it is not reasonably possible, then the practitioner notifies the stakeholders and court. Liquidation proceedings usually follow in this regard.
Where the prospect of rescue is reasonable, the practitioner completes the business rescue plan and submits it to the creditors for a vote. If the creditors agree to the plan, the practitioner implements it to save the financially distressed company.
The Practitioner Must Report Regarding:
- The prospect of rescue once the company’s financial state has been assessed.
- The rescue plan.
- If during rescue, it becomes clear that the business cannot be rescued.
- When there is no longer grounds for the company to be noted as financially distressed.
- Evidence before the rescue proceeds that the company or one or more of the directors failed in the material obligation towards the company. The practitioner must direct the company directors or management to rectify instances of material obligation failures.
- Evidence of fraud by the company or one or more directors.
- Evidence of reckless trading.
- Evidence of any contravention of the law in terms of the Companies Act or any other law that is relevant to the company’s trading. The practitioner must notify the relevant authority and submit the evidence to ensure the matter can be investigated and relevant parties prosecuted.
Appointment of The Practitioner in Relation to The Category of The Distressed Company
In terms of the Companies Act, for a company with a public interest score that falls between 100 and 500 and which is classified as medium, a senior practitioner can be appointed. This is also true for a company with a public interest score of 500 or more and which is classified as large.
An experienced practitioner can be appointed for a small company with a public interest score of less than 100. Such a practitioner is someone who has, before the appointment as practitioner, been actively involved in a business turnaround before the date at which the act became effective or has been a business rescue practitioner according to the definition of the act for a combined period of five or more years. Such an experienced practitioner can also be appointed for a medium company with a public interest score of between 100 and 500. The public interest score calculation method is stipulated in the act.
The practitioner must, within ten days of appointment, hold a meeting with the creditors, as well as a meeting with the employees to inform them about the reasonable prospects of rescuing the distressed company.
The business rescue plan must be published within 25 days of the practitioner’s appointment.
A meeting must be convened with creditors and stakeholders to vote on the plan within ten days of the publication of the plan.
Seek Legal Help
Get in touch with our attorneys for more information on how we can help with business rescue proceedings.
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.