By Saul Mayers, Associate
1. Introduction
Unforeseeable and unfortunate hardships may befall a company, possibly placing its business in the precarious state known as “financially distressed”. In terms of section 128(1)(f) of the Companies Act No. 71 of 2008 (the “Act”), “financially distressed” in reference to a particular company at any particular time, means 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 6 months. Alternatively, it appears to be reasonably likely that the company will become insolvent (i.e. its liabilities exceeds its assets) within the immediately ensuing 6 months.
The Act offers a remedy to companies that are indeed financially distressed but have the belief that there are reasonable prospects for rescuing the business, via the election to place themselves in voluntary business rescue. By a company electing to pursue the business rescue process, it will galvanise and facilitate the rescuing and rehabilitation of its cash-strapped business.
2. The Business Rescue Plan
Upon the necessary special resolutions being passed and submitted by the company to the Companies and Intellectual Properties Commission, the business rescue proceedings commence with the business appointing a business rescue practitioner, tasked with overseeing the operations of the business and implementing and developing a suitable business rescue plan.
The business rescue plan is submitted to the company’s creditors, which plan will contemplate the likelihood of the business achieving solvency (i.e. meeting its financial obligations as and when they fall, together with having greater assets than the business has liabilities). Alternatively, if achieving financial solvency in unlikely, the business plan will provide the creditors with a blueprint as to how creditors may emerge from the business rescue proceedings in a better position than they would otherwise find themselves had the struggling business been liquidated.
3. Breathing Space
In terms of the Act, to the extent that there are reasonable prospects of rescuing the business, business rescue proceedings afford the struggling company some respite from the obligations owed to its creditors in some of the following ways: –
- Moratorium on legal proceedings against the company – no legal proceedings may be instituted or commenced against the company, its property, or in respect of property lawfully in the company’s possession, during business rescue proceedings. In addition, a guarantee or suretyship by the company in favour of any other person may not be enforced against the company except with the leave of the court, and in accordance with any terms that the court considers just and equitable in the circumstances. The moratorium is, however, subject to certain exceptions.
- Suspension of contracts – during business rescue proceedings, the business rescue practitioner may entirely, partially, or conditionally, suspend, for the duration of the business rescue proceedings, any obligation of the company that arises under an agreement to which the company was a party at the commencement of the business rescue proceedings, and would otherwise become due during the business rescue proceedings. The Act, however, makes it clear than no provision of any contracts of employment may be suspended or nullified during the business rescue proceedings.
- Disposal of property – during the business rescue process, a company may dispose of its property, if the disposal of same is: bone fide; in the ordinary course of its business; or as part of the implementation of the business rescue plan. By way of an illustrative example, the business rescue practitioner might consider it appropriate to consent to a third-party supplier repossessing perishable goods that are in the company’s possession for which the third-party supplier has not yet been paid [1]. The company may not, however, dispose of any property over which another holds security, unless the security holder’s prior consent is obtained, or the proceeds of the sale are paid over to the security holder.
4. Conclusion
In summary, business rescue may be a mutually beneficial process. On the one hand, the company in financial distress may have the opportunity, with the assistance of the business rescue practitioner, to steady the ship and be afforded some desperate reprieve from its creditors and, on the other, there is the potential for the addressing of creditors’ concerns by ensuring that, by virtue of the business rescue proceedings, the creditors will be placed in a more favourable position than they would have been had the business failed in the ordinary course, and subsequently been liquidated.
Note, however, that before business rescue proceedings can commence, the board of a company are encouraged to first propose an arrangement or a compromise of its financial obligations to all of its creditors [2]. The proposal would include (amongst other important aspects) the complete list of the company’s material assets, a list of the company’s creditors, the probable dividend that would be received by the creditors, and the nature and duration of any proposed debt moratorium.
For assistance regarding the commencement of the business rescue proceedings, or the preparation of the proposal to be submitted to a company’s creditors, Schindlers Attorneys have partnered up with experts in the field of business rescue to launch COBRA [3], a pro-bono service to South African businesses in distress, aimed at co-ordinating bank, government and stakeholder support through a structured business rescue process.
[1] J. Rushworth ‘A critical analysis of the business rescue regime in the Companies Act of 2008’ Acta Juridica (2010) pp. 385.
[2] s155 of the Act.
[3] More details regarding COBRA can be found at www.cobra.org.za.
