BUSINESS RESCUE - FREQUENTLY ASKED QUESTIONS
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 (section 128(1)(b)).
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 (section 128(1)(b)(iii)).
WHAT IS A BUSINESS RESCUE PRACTITIONER?
A business rescue practitioner is a person appointed, or two or more persons jointly appointed, to oversee a company during business rescue. While the Act defines a business rescue practitioner as one or more persons, the business rescue provisions of the Act do not necessarily refer to or support joint appointment. Further, the word “person” in the Act includes a juristic person. It is therefore arguable that a company can take appointment as a business rescues practitioner (section 128(1)(d)).
WHEN SHOULD A COMPANY COMMENCE BUSINESS RESCUE?
A 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.
In a recent decision of the South Gauteng High Court, in the case of Welman v Marcelle Props 193 CC JDR 0408 (GST), the court stated that “business rescue proceedings are not for terminally ill close corporations. Nor are they for chronically ill. They are for ailing corporations, which given time will be rescued and become solvent”. This statement supports the contention that at the first signs of financial distress, a company should apply for business rescue. Once a company is more than “financially distressed”, options other than business rescue become more attractive for ailing companies, such as liquidations or compromises.
HOW IS A COMPANY PLACED UNDER BUSINESS RESCUE?
There are two main ways in which a company can be placed in business rescue;
when the board of directors of a company resolves that the company voluntarily commence business rescue proceedings and be placed under the supervision of a business rescue practitioner (section 129 of the Act); and
when an affected person makes a formal application to court for an order placing the company under supervision and commencing business rescue proceedings (section 131 of the Act), provided the company has not already been placed under business rescue in terms of section 129, on the basis that –
the company is financially distressed;
the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment related matters; or
it is otherwise just an equitable to do so for financial reasons, and there is a reasonable prospect of rescuing the company.
HOW LONG DO THE PROCEEDINGS LAST?
Section 132 provides that business rescue proceedings should last for a period of three months. It is not clear what the words “business rescue proceedings” intend to cover but it is understood that during the three months, the business rescue practitioner must do his job by convening meetings for affected persons, consulting on the business rescue plan and thereafter implementing the plan if it is approved in accordance with the Act.
If business rescue proceedings have not ended within three months after the start of those proceedings, or such longer time as the court, on application by the practitioner, may allow, the practitioner must –
prepare a report on the progress of the business rescue proceedings, and update it at the end of each subsequent month until the end of those proceedings; and
deliver a report and each update in the prescribed manner to each affected person and to (i) the court (if the proceedings have been the subject of a court order); or (ii) CIPC, in any other case.
The reporting requirements that come with extending the time frames are burdensome. These provisions provide business rescue practitioners with an incentive for conducting the process and implementing the plan, in the shortest possible time, but in any event within the three month period.
WHEN DOES BUSINESS RESCUE BEGIN?
In terms of section 132 of the Act business rescue proceedings commence when –
the company (i) files a resolution to place itself under supervision in terms of section 129 of the Act; or (ii) applies to court for consent to file a resolution in terms of section 129(5)(b) (i.e. if a company fails to comply with the provisions of subsections (3) and (4) it must approach the court for leave to file another resolution if it wishes to do so within the three month restricted period); or
a person applies to court for an order placing the company under supervision in terms of section 131(1); or
a court makes an order placing a company under supervision during the course of liquidation proceedings or proceedings to enforce a security interest (section 131(7)).
EFFECT OF BUSINESS RESCUE ON LIQUIDATION?
If liquidation proceedings have already commenced, an application to court for business rescue will suspend the liquidation proceedings until the court has adjudicated on the application or when business rescue proceedings end when the court grants an order applied for (section 131(6)).
Further, the Act provides that a court may grant an order placing a company under business rescue at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company (section 131(7)). This section has given rise to some debate. It seems to suggest that even a company that has been liquidated, may subsequently be placed under business rescue. It has been suggested that compelling reasons would need to be placed before a court before such extreme action is taken.
If business rescue proceedings have commenced by way of an application to court, the company may not adopt a resolution for its liquidation until business rescue proceedings have terminated. The company must notify all affected persons of the order of the court within five business days of the date of the order (section 131(8)).