Section 128(1)(b) of the Companies Act, 71 of 2008 (“the Act”) defines business rescue as proceedings to facilitate the rehabilitation of a company that is financially distressed. This can be achieved by providing for:
• The temporary supervision of the company, and the management of its affairs, business and property, by a business rescue practitioner (“the BRP”);
• A temporary moratorium on the rights of claimants against the company or in respect of property belonging to the company or lawfully in the possession of the company; and
• The development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its affairs, business, property, debt, and other liabilities.
The Primary Objective of Business Rescue
In accordance with section 128(1)(b)(iii) of the Act, the objectives of business rescue are twofold, namely:
• to restructure the affairs of the company to ensure that the company continues in existence on a solvent basis; or
• if it is not possible for the company to so continue in existence, that the business rescue results in a better return for the company’s creditors and shareholders than would ordinarily result from the immediate liquidation of the company.
Commencement of Business Rescue
It is important to note the distinction between the two ways in which a company may be placed under business rescue:
Voluntary Business Rescue: Section 129 of the Act provides that a company or close corporation can be placed in business rescue voluntarily by the board of directors adopting and filing a resolution to commence business rescue proceedings and to place the company under the supervision of a BRP.
In this instance, the board must have reasonable grounds to believe that the company is financially distressed and that there are reasonable prospects of rescuing the company. The resolution referred to herein must be lodged with the Companies and Intellectual Properties Commission (“CIPC”) and within 5 days of having filed the resolution, the company must, firstly, publish a notice of the resolution and its effective date to every affected person and secondly, appoint a BRP.
Compulsory Business Rescue: In accordance with the provisions of section 131 of the Act, a formal application can also be made to court by affected persons (such as creditors, employees, shareholders) to place a company in business rescue.
A court may make an order placing the company in business rescue if it is satisfied that the company is financially distressed and has failed to pay its debts; or it is just and equitable for financial reasons and there are reasonable prospects for rescuing the company.
Once the company is placed under business rescue, the order of the court must be provided to all affected persons notifying them of the commencement of business rescue proceedings. A voluntary business rescue application cannot be filed if a compulsory business rescue application has been initiated or if liquidation proceedings have been instituted.
Legal Effects of Business Rescue Proceedings
General Moratorium on Legal Proceedings Against the Company: Section 133 of the Act regulates the institution of legal proceedings against the company and the enforcement of any action against the company during the business rescue process. This section accordingly provides that, during business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum.
Protection of Property Interests: During the business rescue proceedings, a company has restricted power to deal with its property. The company may dispose, or agree to dispose, of property only in three (3) instances:
• in the ordinary course of its business;
• in a bona fide transaction at arm’s length for fair value approved in advance and in writing by the BRP; or
• in a transaction contemplated within, and undertaken as part of the implementation of, a business rescue plan that has been approved in terms of section 152 of the Act.
If, during business rescue, the company wants to sell any property over which a creditor has security or title interest, the company must:
• obtain the prior consent of that creditor, unless the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by that creditor’s security or title interest; and
• promptly pay to that creditor the sale proceeds attributable to that property up to the amount of the company’s indebtedness to that creditor; or
• provide security for the amount of those proceeds to the reasonable satisfaction of that creditor.
Effect of Business Rescue on Employees: Section 136(1)(a) of the Act provides that during business rescue, employees who were employed before the commencement of the business rescue proceedings, continue to be employed on the same terms and conditions subject to: (1) changes occurring in the ordinary course of attrition; or (2) the employees and the company agreeing on different terms which comply with the applicable labour laws.
Section 136(1)(a) further provides that any retrenchments in terms of any business rescue plan, must be subject to section 189 or 189A of the Labour Relations Act, 66 of 1995, and other applicable employment related legislation.
Effect of Business Rescue on Contracts: Section 136(2) provides that the BRP may, during business rescue proceedings, and despite any provision to the contrary in an agreement:
• Suspend (entirely, partially or conditionally) 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
• Apply to court to cancel any obligation of the company arising under an agreement to which the company was a party to at the commencement of business rescue proceedings and which would otherwise become due during those proceedings.
Effect of Business Rescue on Shareholders and Directors: In accordance with section 137 of the Act, during business rescue proceedings an alteration in the classification or status of any issued securities of a company, other than by way of a transfer of securities in the ordinary course of business, is invalid except to the extent that the court otherwise directs; or contemplated in an approved business rescue plan.
South African companies that find themselves in financial disarray and distress as a result of the wreck caused by the Covid-19 pandemic, or otherwise may use business rescue as an opportunity to reorganise and restructure. This process has far reaching effects on creditors, financial institutions, shareholders and employees. Further, before a company can enter business into rescue, it is important to determine whether it meets the requirements of financial distress.
Author: Mihlali Mzileni