Business Rescue Proceedings

Written by Monica Louro.

Business Rescue is the proceedings to rescue and rehabilitate a financially distressed company.

Section 128 (1) of the Company’s Act 71 of 2008 (The Act) defines business rescue as:
” proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for
i. the temporary supervision of the company, and of the management of its affairs, business and property;

ii. a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

iii. 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 in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company;”

and the term financially distressed means that:

"i. it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or

ii. it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.”

The procedure to commence business rescue proceedings is through a resolution by the board of directors. This will happen when the board of directors has reasonable grounds to belief that the company is financially distressed and that there appears a reasonable prospect that the company may be rescued. The board may then take a formal decision to place the company under business rescue. If liquidation proceedings have commenced a business rescue resolution cannot be adopted. The business rescue resolution becomes effective as soon as it has been filed by the Companies and Intellectual Property Commission (the Commission).

Business rescue can also commence when an order of court has been granted. In this case an affected person may apply to court for the company to be placed under business rescue.

An “affected person”, in relation to a company, could be any of the following people:

"i. a shareholder or creditor of the company;

ii. any registered trade union representing employees of the company; and

iii. if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives;”

As soon as the business rescue resolution has been filed notice of the business rescue proceedings must be given to all affected persons. The company will also need to appoint a business rescue practitioner to manage the affairs of the company.

The company must appoint a business rescue practitioner after filing of the business rescue resolution. Section 138 of the Act states that a person who is a member in good standing of a legal, accounting or business management profession accredited by the Commission may be appointed as business rescue practitioner. The Act also makes provision for the appointment of other persons as a business rescue practitioner.

The powers and duties of the business rescue practitioner can be found in section 140 of the Act. In short the powers and duties are as follows:
1. The business rescue practitioner must take full responsibility of the management of the company;
2. Investigate and monitor the company’s affairs;
3. Develop and implement a business rescue plan; and
4. Accepting responsibilities of his duties.

The business rescue practitioner cannot to be appointed as the liquidator of the company should the business rescue proceedings fail. Remuneration of the practitioner is prescribed by the Minister alternatively the parties can enter into an agreement for an additional fee. A business rescue practitioner can be removed from office by an order of court due to negligence, unethical or illegal conduct, incompetence or failure to perform his/her duties.

The legal consequences of business rescue proceedings are as follows:
1. Most civil legal proceedings are stayed;
2. Restriction on the disposal of company property (exceptions do exist see section 134 (1) of the Act);
3. Re-financing of the company is facilitated by allowing company assets to be used to secure loans;
4. Employment contacts are protected;
5. Other contracts can be suspended or cancelled;
6. The states of issued shares may not be altered and shareholders can only participate in decisions about business rescue if their interests are affected; and
7. Directors must comply with the business rescue practitioner.

Business rescue proceedings may be set aside by applying to court. The court will only grant such an application if there are reasonable grounds to believe that the business rescue proceedings should be set aside. Some examples are that the company is not financially distressed, the company will not be rescued or the company failed to comply with certain procedures as prescribed in the act.

The business rescue practitioner prepares a business rescue plan. The plan should contain all relevant information that affected people need to know in order to decide whether to accept or reject the plan. The business rescue practitioner will first have to consult with creditors, shareholders and other affected persons and the management of the company to obtain the necessary information. The plan is then prepared and divided in 3 parts:
1. Part 1 – Background to business rescue plan
2. Part 2 – Proposals
3. Part 3 - Assumptions and conditions

The company’s creditors must consider the rescue plan that the practitioner prepared at a meeting. All affected persons, including those who do not have a right to attend or vote at the meeting, must be notified of the meeting.

The business rescue practitioner must explain the plan at the meeting and inform the meeting whether he/she believes that there is a reasonable prospect of the company being rescued. If the plan is supported by more than 75% in value of the creditors who vote and at least 50% in value of independent creditors who voted, and no right of shareholders of any class are altered, the plan is regarded as being approved. As soon as the plan is approved it is binding on the company and all its creditors. The business rescue practitioner must now take all the necessary steps to give effect to the rescue plan.

If a plan is rejected by creditors the business rescue practitioner may seek approval form the meeting to prepare a revised plan or inform the people present at the meeting that the company will apply to court to have the result of their votes set aside. The business rescue proceedings will be completed when the company has been rescued.

The proceedings should be completed as soon as possible and according to the Companies Act the business rescue proceedings must not take longer than 3 months. If it cannot be completed within 3 months the business rescue practitioner can apply to court for an extension of time. The business rescue practitioner will then have to deliver monthly reports on the progress of the proceedings to each affected person and to the court or the Commission as the case may be, until the business rescue proceedings have been terminated.

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