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What is Business Rescue?

Since the inception of the South African Lockdown as a result of Covid-19, many businesses were placed under financial distress and required to be “rescued”.  Although the phrase “Business Rescue” is quite well known by now, it is so that not all parties are informed as to what exactly business rescue entails and how it works.  The purposes of this article will be to explain the meaning of the business rescue, its purpose and process.

Business rescue provides a company with breathing space to restructure its affairs under the management of a business rescue practitioner and for a business rescue plan to be prepared to take the business forward. When a company is placed under business rescue, it should not be seen as the failure of the company, but rather as an opportunity to restructure and shape the company’s affairs.

 

“Business Rescue” is defined in section 128(1)(b) of the Companies Act 71 of 2008 (Companies Act) as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.  In terms of section 128(1)(b)(iii) of the Companies Act, business rescue has one of the following two objectives:

 

  1. to restructure the affairs of the company in an attempt to ensure that the company continues in existence on a solvent basis; or
  2. if it is not possible for the company to so continue in existence, that the business rescue results in a better return for the company’s creditors and shareholders than would ordinarily result from the immediate liquidation of the company.

 

In order to achieve these objectives, Chapter 6 of the Companies Act provides the following tools:

 

  • the temporary supervision of the company, and the management of its affairs, business and property, by a business rescue practitioner (BRP);
  • a temporary suspension on the rights of claimants against the company or in respect of property belonging to the company or lawfully in the possession of the company; and
  • the development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its affairs.

 

There exists to ways for a company to be placed under business rescue, namely:

 

  1. Voluntary business rescue proceedings, and
  2. Compulsory business rescue proceedings.

 

Voluntary business rescue proceedings will occur when a company’s board of directors passes a resolution to place the company under business rescue proceedings. This process is regulated by Section 129 of the Companies Act in terms of which the directors resolve to place the company under business rescue if:

 

  1. The company is financially distressed; and
  2. There is a reasonable prospect of rescuing the company.

 

In terms of Section 128(1)(f) of the Companies Act, a company will be financially distressed if:

 

  • It appears to be reasonably unlikely that the company will be able to pay all of its debts as and when they become due and payable within the immediately ensuing 6 months (commercial insolvency); or
  • if its liabilities will exceed its assets within the ensuing six months (factual or balance sheet insolvency).

 

Compulsory business rescue proceedings on the other hand occurs when an application is made to court by an affected person to place the company under business rescue. This process is regulated by Section 131 of the Companies Act.  Section 131 states that that unless a company has adopted a resolution

contemplated in section 129 of the Companies Act, an affected person may apply to a court at any time for an order placing a company under supervision and commencing business rescue proceedings. 

 

An “affected person” is defined in section 128(1)(a) of the Companies Act as:

 

  • A shareholder or creditor of the company;
  • Any registered trade union representing employees of the company; and
  • If any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives.

 

In order to succeed with an application to place a company under compulsory business rescue, the “affected person” must satisfy the court that there is a reasonable prospect of rescuing the company and that:

 

  • the company is financially distressed; or
  • 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; or
  • it is otherwise just and equitable to do so for financial reasons.

 

The business rescue proceedings will commence as soon as the business rescue order is granted by the court.