By Candidate Attorney
INTRODUCTION
Business rescue was introduced into South African law with the commencement of the new Companies Act No 71 of 2008 (“the Act”), being effective on 1 May 2011. Business rescue enables a company, with minimal or no cash-flow, to restructure, while obtaining some “breathing room”.
Business rescue is a rehabilitation mechanism, through which a business can restructure its business, contracts, debt affairs, other liabilities and assets. The end goal of course being that the business will recover which will be to the benefit of both its creditors and its employees and directors.
FINANCIAL DISTRESS
The test as to whether a company should be placed in business rescue is whether the company is financially distressed.
The Act defines “financially distressed” (section 128(1)(f)) 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).”
BUSINESS RESCUE PRACTITIONER & PLAN
A business rescue practitioner (“BRP”) will be appointed and tasked with compiling a plan with the directors of the company.
The business rescue plan should, inter alia:
- demonstrate why business rescue is the preferable course of action, as opposed to liquidation; and
- balance the rights and interests of all relevant stakeholders.
The business rescue plan must be presented to a meeting of the creditors of the business for approval. If the creditors do not accept the plan then the BRP may apply to the courts for it to be approved, or he may compile another plan for consideration by the creditors, or the business may be placed into liquidation. The vote in favour of the plan needs to be at least 75% of the creditors in value and at least 50% of the vote must consist of independent creditors (not shareholders).
Essentially, the BRP must show to the creditors that they would stand to gain more through business recue proceedings than by liquidation proceedings.
WHAT ARE THE BENEFITS OF BUSINESS RESCUE?
Whilst appointing a BRP may be daunting for many business owners, fearing that the director(s) will lose total control over the company and the day-to-day management of their business, this is not the case.
Business rescue allows a director of a company to continue exercising his duties, whilst under the temporary supervision/guidance of the BRP. The director and BRP are expected to work together in order to revive the company’s unfavourable economic conditions, by implementing a well-developed and sustainable business rescue plan.
Other advantages of business rescue include:
- protection of the company’s assets against creditors, by placing a temporary moratorium (suspension) on all creditor’s claims against the company;
- a temporary moratorium (suspension) on all legal proceedings against the company;
- protection of employees by allowing them to remain employed while the company is restructured;
- enabling the BRP to (entirely, partially or conditionally) suspend contracts entered into by the company for the duration of the business rescue proceedings (with the exception of employment contracts).
EFFECT OF BUSINESS RESCUE PROCEEDINGS ON EXISTING AGREEMENTS OF SALE
In terms of section 136(2) of the Companies Act, the BRP is entitled to entirely, partially or conditionally suspend, for the duration of the business rescue period, any obligations upon the company in terms of an agreement entered into before being placed in business rescue.
Thus, a BRP may suspend the payment of any purchase price or rental amount in terms of an agreement of sale or lease agreement.
The other party to the agreement may then elect to allow the business the indulgence in time regarding its obligations or it may choose to place the other party in breach, cancel the agreement and then record with the BRP its claim against the party along with the other creditors.
A moratorium is placed on parties being able to bring legal proceedings against the company while under business rescue.
SALE OF PROPERTY BY A BUSINESS UNDER BUSINESS RESCUE
A business rescue plan may entail the sale of the business’ immovable property in order to access funds to pay creditors.
Only the BRP may enter into any agreement whereby the entity sells a property. Any agreement signed by any other representative of the company whilst it is under business rescue will not be a valid and binding agreement. The conveyancer will need to be provided proof of the appointment of the BRP and a copy of the business rescue plan to show the sale is in accordance with it.
MUNICIPAL DEBT / BODY CORPORATE LEVIES / HOME OWNERS’ ASSOCAITON LEVIES
The abovementioned bodies are relatively safeguarded in the debts owed to them as they may withhold the certificates that would be required in order for the owner to realise any cash flow from the sale of immovable properties.
MORTGAGE BONDS
In all likelihood, if a purchaser is placed into business rescue after a bond has been approved, but before registration of transfer, the lender would withdraw any loan finance approval
The BRP may attempt to re-apply for loan finance if it deems it suitable to do so and same is approved by the creditors in terms of the business rescue plan.
CONCLUSION
Owing to the complexity and implications of business rescue, readers are encouraged to seek the advice of South Africa’s largest Pro Bono initiative, COBRA (COVID Business Rescue Assistance), who will gladly assist you. The website can be found at: www.cobra.org.za .
