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Business Rescue – The Effects.

What are the legal implications of business rescue on a company?  It comes without saying that when a company has the need for business rescue, it is financially distressed and need “breathing space” to get back on its feet.  Company activities, stakeholders, including creditors and employees, will be affected by business rescue proceedings.  The aim with these proceedings is to protect the company while the business rescue practitioner aims to get the company to a feasible position.

We will now discuss the four primary effects of business rescue proceedings on stakeholders:

  1. Suspension of Civil Legal Proceedings

In terms of Section 133(1) of the Companies Act, no legal proceedings, including enforcement action, may be commenced or continued with in any forum against the company, or in relation to any property belonging to the company, or lawfully in its possession, during business rescue proceedings.

The main reason for this suspension is to allow for the business rescue practitioner to rescue and restructure the company by way of a business rescue plan.  In short, it creates breathing space and time.

  1. Restriction on the disposal of company property

A company may only sell its property if such sale is:

  • In the ordinary course of its business
  • Bona fide for a fair value approved by the business rescue practitioner.
  • Part of an approved business plan

In terms of section 134(1)(c) of the Companies Act, no person may exercise any right in connection with any property that is in the lawful possession of the company, irrespective of whether the company is the owner of the property, unless the business rescue practitioner has given his/her written consent.

The main aim of this provision is to ensure that the company will be able to hold its assets and equipment for the successful continuation of the company’s business.

If a company do intend to sell property over which a creditor hold security or holds an interest, the following requirements should be met:

  • Written approval by that creditor, unless the creditors debt will be settled in full if the property is sold;
  • The creditor must be settled immediately once to proceeds of the sale has been received;
  • Security for the proceeds must be provided to the creditor.
  1. Employees of the Company

It comes without saying that, dealing with employees during business rescue proceedings, will  always be a sensitive issue and one which should be treated carefully.

In terms of section 136(1)(a) of the Companies Act, during business rescue, employees who were employed before the commencement of business rescue proceedings, continue to be employed on the same terms and conditions subject to:

(i)         changes occurring in the ordinary course of attrition; or

(ii)        the employees and the company agreeing different terms which complies with the applicable labour laws.

In terms of section 136(1)(b) of the Companies Act, any retrenchments in terms of any business rescue plan, must be conducted in terms of section 189 or 189A of the Labour Relations Act 66 of 1995, and other applicable employment related legislation.

An employee will be treated as a preferred unsecured creditor for any monies owing to such employee which became due and payable to an employee before business rescue commenced and had not been paid to that employee before the commencement of business rescue. (Section 144 of the Companies Act)

  1. Company Contracts

Section 136(2) of the Companies Act provides that during business rescue proceedings, the business rescue practitioner may cancel or suspend entirely, partially or conditionally any provision of any agreement to which the company is a party at the commencement of the business rescue proceedings.

Section 136(2)(a) is used very effectively by practitioners in the business rescue process. Lease agreements with very high rentals, loan agreements with excessive interest payment terms, supply agreements with unfair pricing arrangements, service or maintenance agreements, and the like, are all possible subjects of suspension during the course of the business rescue proceedings.

As stated in Section 136(2) above, the obligations suspended must arise from a contract which was concluded before the business rescue proceedings commenced and must fall due during the business rescue proceedings.

The effect of these provisions on third parties who have contracted with a distressed company, which is subsequently placed into business rescue, will be as follow:

  • Where a business rescue practitioner has suspended a contractual obligation in terms of section 136(2)(a), the company will not be in breach of the contract for failing to deliver on that obligation for the duration of the business rescue proceedings and the third party will not be able to cancel the contract on this basis.
  • Where a company failed to deliver on a contractual obligation before business rescue proceedings commenced, the third party, subject to South Africa’s law of contract, retains the right to cancel the contract.

Suspension of contractual obligations in terms of section 136(2)(a) of the Act occurs through the issuing of a letter of suspension by the business rescue practitioner. This letter will be sent directly to parties contractually bound to the distressed company and will set out which obligations are suspended.

Business rescue practitioners will consider which obligations ought to be suspended as a matter of priority in order to afford the distressed company the breathing space that has become synonymous with business rescue proceedings.