Basics of Business Rescue

What is Business Rescue?

Business Rescue Proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed by providing for 

• the temporary supervision of the company, and the management of its affairs, business and property, by a Business Rescue Practitioner; 
• a temporary moratorium (stay) 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 business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity.

What is the aim of Business Rescue? 

The aim of Business Rescue is to restructure the affairs of a company in such a way that either maximises the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company than would ordinarily result from the liquidation of the company.

What is a Business Rescue Practitioner?

A Business Rescue Practitioner is a person appointed to oversee a company during Business Rescue. 

What is the test for Business Rescue?

The test for whether or not the company should be placed in Business Rescue is whether or not the company is financially distressed. The Act defines the "financially distressed" to mean that - 

• 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 (commercial insolvency); or 
• it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months (factual insolvency).

When should a company commence Business Rescue?

The company should commence Business Rescue proceedings at the first signs of it being financially distressed within the meaning of the Act. 

That is either when it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months or when it is likely that the company will become insolvent in the immediately ensuing six months.

What happens if a company does not commence Business Rescue Proceedings when it should?

If a company is financially distressed within the meaning of the Act but the board of directors of the company has not passed a resolution for the commencement of Business Rescue proceedings, then the board must deliver a written notice to each affected person setting out the test for financial distress and the extent to which it applies to the company and the reasons why the board is taking a decision not to pass a resolution for the commencement of Business Rescue proceedings.

A decision to send out the notice must be well considered and exercised with caution, as such a notice advises the world at large that the company is financially distressed and on the verge of insolvency. 

This notice may give rise to a number of unintended consequences both in respect of directors and creditors of the company.

What happens to the directors during Business Rescue?

 The directors of the company remain the directors!

The powers and duties are however constricted in that the Business Rescue Practitioner has full management control over the company in substitution for the board of the company and its pre-existing management.

What effect does Business Rescue have on employees?

Employees who were, immediately prior to the institution of Business Rescue, employees of the company will remain employed by the company on the same terms and conditions on which they were employed prior to the commencement of Business Rescue proceedings except to the extent that changes occur in the ordinary course of attrition or if different terms and conditions are agreed between the employee and the company in accordance with labour laws.

What effect does Business Rescue have on shareholders?

During Business Rescue proceedings, an alteration in the classification or status of any issues securities of a company, other than by way of transfer of securities in the ordinary course of business, is invalid except to the extent that the court, or the Business Rescue plan direct otherwise.

What effect does Business Rescue have on a creditor?

When Business Rescue proceedings commence the company continues to operate as before, but under the supervision of the Business Rescue Practitioner and the creditors will need to comply with their obligations to supply goods or services to the company in the same manner in which they did prior to the commencement of Business Rescue proceedings, unless the agreement between the company and the creditor regulates a relationship between the parties in the event of an insolvency or Business Rescue.

Can a company be sued during Business Rescue?

The Act regulates the institution of legal proceedings against the company and the enforcement of any action against the company during Business Rescue. This is commonly referred to as the "statutory moratorium" or "stay" that is placed on a company from the moment that Business Rescue proceedings commence.

During Business Rescue proceedings no legal proceedings (legal or arbitration proceedings) including enforcement action (execution of a court or other order) against the company or in relation to its property, that belongs to it or which is lawfully in its possession, may be commenced or preceded with in any forum (court or arbital forum).

The above is a simplified summary, or partial answer to some matters related to Business Rescue. It should be noted that these matters are complex and regulated by the Companies Act No. 71 of 2008, and legal advice should be obtained thereto before acting on it.

The experienced professionals at L Erasmus and Associates can advise you in detail on these matters and how it will impact on your business!