C&A Friedlander Attorneys

What is business rescue?

Business Rescue was introduced to South Africa through the Companies Act in 2008. It was aimed at finding a solution for companies in financial distress, returning them as a stable and profitable entity. The programme allows a shift in focus from protecting the creditors of a company to protecting the company itself – a chance to hit the reset button on their failings as an entity and allowing them a stop at the “last chance saloon”.

It is a procedure which aims to alleviate the position of financially distressed companies and serves as an alternative to liquidation. In contrast to liquidation, the going concern of the company is kept alive and the entity is not dissolved as it would have been in liquidation. This is aimed at keeping the existing employees and client base intact for as long as reasonably possible.

The courts have the duty to determine whether business rescue is a viable option and that there is a reasonable prospect of saving the company, or whether it should simply be liquidated and the creditors be given what is due to them, in preferential sequence.

Business rescue facilitates the recovery of a company, providing temporary supervision of the company as well as placing a temporary moratorium on the rights of creditors against the company, while the development and implementation of a plan to rescue the company are decided upon, providing a better return option for creditors than liquidation.

The term “financially distressed” refers to the situation where it becomes increasingly unlikely that a company will be able to pay all of its debts as they fall due or within the immediately ensuing six months (commercial insolvency), or when it becomes likely that the company will become insolvent within the immediately ensuing six months (factual insolvency).

Business rescue can succeed with the appointment of an appropriate business rescue practitioner.  A business practitioner must be a member of good standing in a legal, accounting or business management profession, and should have a strong financial background, while displaying no conflicts of interest with the business.  The practitioner is there to advise and enable the burden on the business to be reduced, while finding viable solutions to enable the company to continue trading in the interim as they consider whether there is any reasonable prospect of rescuing the company.

The practitioner is responsible for creating a plan voted on by the creditors. Once successfully voted in, the business rescue practitioner must implement and oversee the business rescue plan in an attempt to save the company.

A company can be placed into business rescue voluntarily through a resolution of the company, as the board may resolve to enter business rescue if it has reasonable grounds to believe that company is financially distressed, or through an application brought by an affected person to have the court declare that the company should enter into business rescue.

An “affected person” can be either:

  • a shareholder of the company
  • a creditor of the company
  • any registered trade union representing the employees of the company
  • the employees themselves

Financing is of paramount importance for the business rescue plan to succeed, however this may reduce and even compromise the debts of creditors, including secured creditors. Post-commencement finance is needed in order to save a company and breathe life into the debtor company with fresh finance. The risk of the new creditors investing post-commencement need to be managed, while also keeping in mind the interests of creditors which were secured pre-commencement. If the business has no unencumbered assets, there can be no new secured finance.

It is vital to find the perfect business rescue practitioner. At C & A Friedlander, our years of experience allows us to guide and help save your company from liquidation, allowing you another chance to reinvent the wheel.

Reece Maharage & Brett Cotterell

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).