“The rescue of a business preserves jobs, provides creditors with a greater return based on higher going concern values of the enterprise, potentially produces a return for owners and obtains for the country the fruits of the rehabilitated enterprise” – The World Bank
The COVID-19 pandemic has had a devastating impact on the economy and there is no doubt that most companies have been affected. Whilst some companies have been able to adapt and recover, trade restrictions and significant economic contraction have left many companies facing an insurmountable level of debt. In times of distress directors of companies may find themselves pressured to seek solutions to navigate the challenging economic environment and carry their businesses through these unprecedented times.
Business rescue was introduced by Chapter 6 of the Companies Act 71 of 2008 as a means of facilitating the rehabilitation of a financially distressed company in a manner that balances the rights and interests of creditors, employees and shareholders. Business rescue is defined in section 128(1)(b) of the Companies Act as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.
The aim of business rescue is to restructure a company to either maximise the likelihood of the company continuing in existence on a solvent basis; or to yield a better return for the company’s creditors than would result from the immediate liquidation of the company.
In terms of section 128(1)(f) the Companies Act, a company is regarded as being ‘financially distressed’ if (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall 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 6 months.
However, business rescue is not suitable to companies on the basis of financial distress alone. There must be a reasonable prospect that the company can be rescued and rehabilitated. Thus, companies which are experiencing financial distress directly due to the lockdown may be more suitable for business rescue proceedings than those who were already in financial distress prior to lockdown.
Business rescue proceedings can be instituted in two ways:
- on a voluntary basis, by means of a resolution of the board of directors of the company, or
- on a compulsory basis, by way of an application to court by an ‘affected person’ (a shareholder, creditor, the registered trade union representing employees or any of the employees of the company).
The business rescue process consists of three stages:
- the temporary supervision of the company and of the management of its affairs, business and property;
- a temporary moratorium on the rights of claimants (creditors) against the company or in respect of property in its possession; and
- the development and implementation of a business rescue plan.
During the business rescue proceedings, the practitioner has full management control of the company in substitution for its board and pre-existing management, and may delegate any power or function of the practitioner to a person who was part of the board or pre-existing management of the company. This means that while directors continue to exercise their functions during business rescue proceedings, this will however be subject to the authority of the appointed business rescue practitioner.
The COVID-19 pandemic and resultant economic trading conditions has placed unprecedented pressures on companies. Business rescue may be a means to safeguard business continuity and offer relief to financially distressed companies by affording them the opportunity to restructure in such a way that they are in a better position to navigate the changes which the COVID-19 pandemic has brought upon the economy.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).