Business Rescue proceedings entail the process of attempting to rehabilitate financially distressed companies, and find their legislative authority in Chapter 6 of the Companies Act No. 71 of 2008 (“the Act”).
Business Rescue is therefore an alternative legal route for a financially distressed company, as opposed to liquidation proceedings in which the company is liquidated and ceases trading, its assets then being sold and distributed to creditors following an order of preference. So while liquidation aims to secure an orderly and equitable outcome for the highest number of creditors, Business Rescue seeks to save distressed companies from financial ruin and ultimately closure.
Liquidators administer liquidations under the authority of the Master’s Office while Business Rescues are administered by Business Rescue Practitioners (“BRP”) under the authority of the Companies and Intellectual Property Commission.
The Act, as per Section 7(k), provide(s) for “the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.” Therefore, courts will generally give preference to Business Rescue over liquidation proceedings so long as such proceedings are not being abused or used to gain a respite from creditors (Southern Palace Investments 264 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC).
Section 128(1)(b) of the Act defines the purpose of Business Rescue proceedings as threefold:
- “The temporary supervision of the management of the affairs, business and property of the company;
- a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
- The development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity”
Business Rescue proceedings may be commenced in three ways:
- a company resolution (known as a voluntary Business Rescue); or
- in terms of a court order in an application brought by “an affected person” (Defined in the Act as a shareholder, Creditor or trade union(s) representing employees of the company); or
- by order of court during liquidation proceedings.
( 2 and 3 above are known as a compulsory Business Rescue).
Importantly, if such proceedings have commenced by company resolution, the Act allows an affected person to apply to court and have the resolution set aside. Once Business Rescue proceedings have commenced voluntarily and are objection free, the company is obliged to appoint a BRP who satisfies the requirements set out by the Act.
Alternatively, in instances of compulsory Business Rescue a court may appoint an interim BRP and in cases where a court orders a removal of the BRP, the court must appoint an alternate BRP. However, in both of the above instances, such appointment is subject to ratification by “affected persons” or persons with a majority of the independent creditors voting interests.
An “affected person” may also apply to have the BRP removed or be the person that applies to court in a case of compulsory Business Rescue (Section 131(5) of the Act ).
The test of whether a company should be placed under Business Rescue is whether or not the company is:
- financially distressed according to its ability to meet its obligations; and
- whether there is a reasonable prospect of rescuing the company.
Importantly from a creditor’s perspective, Business Rescue has the effect of placing a general moratorium on legal proceedings against the company (Section 133 of the Act).
Once appointed, a BRP is under strict time constraints to put together a Business Rescue Plan which aims to save the ailing company and the BRP is therefore granted powers to take control and management of the company and its assets, as well as to make business decisions for the company and to suspend or abide by the companies general contractual obligations (Which do not include employment contracts and Section 35A and 35B transactions in terms of the Insolvency Act No. 24 of 1936)
Directors of the company are obliged to co-operate and assist the BRP in their functions and therefore may not conduct themselves in a manner that impedes the BRPs duties (Section 142 of the Act). BRPs are further entitled to be remunerated for their services, subject to certain prescripts (Section 143 of the Act).
If implemented competently and in the best interests of the company, Business Rescue Proceedings may therefore provide a lifeline to distressed companies and help secure their futures from the brink of liquidation. Keeping in mind the purposes of the Act, wherever practical and possible, it is also preferable to attempt Business Rescue over a quick resort to liquidation. However, it must be kept in mind that such proceedings must serve their purpose and flow from a plan that can actually achieve the goals contemplated by such proceedings. If not, such plans are simply, “…unlikely to achieve anything more than to prolong the agony…” (Southern Palace Investments at para 24)