COVID-19 has had disastrous consequences on businesses globally, with many being left in significant financial distress. Chapter 6 of the Companies Act No 71 of 2008 introduced a remedy for businesses when in financial distress before placing a company into liquidation. This remedy is known as business rescue proceedings.
What is business rescue?
By implementing business rescue proceedings, a company can restructure its business to improve its financial affairs. Business rescue aims to either ensure that the company continues to trade or, should the proceedings fail, that the creditors receive a higher return than what they would have received had the company been placed under liquidation. The commencement of business rescue proceedings provides for the following:
The temporary supervision of the company and management of its affairs by a business rescue practitioner.
A temporary moratorium on the rights of claimants against the company.
The development and implementation of a business rescue plan that aims to restructure the company in its entirety.
Thus, business rescue is seen as a last-ditch attempt at turning the company around before instituting liquidation proceedings.
So how do you know whether your company can be placed under business rescue?
A company may be placed under business rescue if it is financially distressed. In terms of the Companies Act, a company is deemed to be financially distressed when:
It appears that the company is reasonably unlikely to be able to pay all of its debts as and when they become due and payable, within the immediately ensuing six months after the determination; or
It appears that the company is reasonably likely to become insolvent within the immediately ensuing six months.
When is a company placed under business rescue?
There are two instances where a company has been placed under business rescue. The first instance is when the company’s board of directors has resolved that the company voluntarily institute the proceedings. The second instance is when an affected person (as defined by the Act) makes a formal application to the court to place the company under business rescue. Once the company has been placed under business rescue proceedings, the appointed business rescue practitioner must investigate the company’s affairs and convene a meeting of the creditors and employees within ten days after having been appointed. The business rescue practitioner must also ensure that the business rescue plan is published within twenty-five days after appointment.
Business rescue proceedings are often the more desired approach for companies, as they would prefer to make every attempt at saving the company before it is wound up. However, it is essential to consider whether the proceedings are likely to succeed. Careful consideration must be given to the nature of the company. Should it appear that the same result is expected to be achieved by placing the company in liquidation, it is advisable not to proceed with business rescue proceedings. If the nature of your company’s business is such that a restructure will yield a turn in the company’s solvency and yield a higher result for your creditors, then these proceedings are advisable.