Corona Virus and Business Rescue – A Lifeline for Distressed Companies

/ / 2020, COVID-19, News
  1. As at the 22rd of March 2020, South Africa had officially confirmed 274 cases of SARS COV-2, more commonly termed the Corona virus. With the promulgation of national regulations, the effects of this novel virus are starting to take hold. As a business owner, you may be considering your options and wrestling with the survival of your business.

  1. Section 129 of the Companies Act 71 of 2008 (“the Act”) may present an option to ensure the continuity of one’s enterprise. This affords the board of directors of a company the ability to enter into voluntary business rescue.

  1. An earlier article in this series, by a partner of Schindlers, Paul-Michael Keichel, available here, explains the requirements for a company to enter into the process of voluntary business rescue. As such, these will not be traversed in this article. Rather, this article will focus on the advantages that a business rescue process can offer a financially-distressed business during this unprecedented crisis. The Act defines business rescue as a process to facilitate the rehabilitation of a company by providing for, amongst other things:
    • a temporary moratorium on the rights of claimants against the company in respect of its property;
    • the temporary supervision of the company by a business rescue practitioner; and
    • the development and implementation, if approved, of a business rescue plan, which seeks to rescue the company by restructuring various processes, affairs, property, debt etc. of the company.

  1. The economy as a whole suffers when a company is shut down. However, when a company is successfully turned around, creditors receive payment, jobs are saved and the company is able to pay taxes. The business rescue process can be used to successfully turn around companies that are close to insolvency. This is achieved via two statutorily prescribed advantages that are provided to a financially distressed business, being the temporary moratorium on the rights of claimants against the company in respect of its property, and the temporary supervision of the company by a business rescue practitioner. These measures provide immediate relief to a distressed business.

  2. The temporary moratorium achieves this by affording a distressed company a temporary freeze or stay on legal proceedings against the company. This freeze on legal proceedings includes executions on the company’s property and assets, and the exercise of creditors’ rights against the company (effectively meaning that the creditors may not call in their debt). The Act, in Section 133 (1) (a) & (b), provides that, during business rescue proceedings, no legal proceedings against the company or its property may be commenced or continued, except with the written consent of the business rescue practitioner, or with leave of the Court. The moratorium is effective until the business rescue process ends and, as such, offers effective relief, on a temporary basis, from the inevitable liquidity crunch that some businesses may be facing.

  3. A practical example of the protection a moratorium provides is when one has regard to its effect on sureties, or guarantees, or other security, given by the company. During business rescue proceedings, a guarantee or surety given by the company in favour of any other person/entity may not be enforced against the company, unless the Court so permits. Further, the Court will only allow enforcement on terms that the Court considers to be just and equitable in the circumstances.

  1. The second advantage afforded to the distressed business comes via the guidance and care provided by an appointed business rescue practitioner (“BRP”), who is a seasoned expert in salvaging viable but distressed businesses. The BRP is charged with the significant and pivotal task of overseeing the business rescue process and of turning the company around, by developing a suitable business rescue plan. In order for an individual to serve as a business rescue practitioner, he/she must be member, in good standing, of the legal, accounting or business management professions. This ensures that the BRP has the necessary minimum set of skills to handle the turnaround. The BRP’s duties, functions and responsibilities are regulated by the Act and, as such, many safe guards exist to ensure that the business rescue process proceeds in accordance with its purpose.

  1. Schindlers will be providing regular updates on all aspects of the legal world that it believes are touched by this situation. We work with respected business rescue practitioners and they, too, consider their mandate, during these trying times, to be to operate with the bigger picture in mind. We can and want to help you during these trying times.

  1. Our attorneys will avail themselves to help and advise both individual and corporate clients to navigate through this time, always with the mitigation of overall harm foremost on our minds and the preservation of your business being our top priority.

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