Protection provided by Business Rescue

When Business Rescue for a Company or Close Corporation commences (“the company”), either in terms of a resolution by directors filed at the Companies and Intellectual Property Commission in terms of section 129 of the Companies Act, Act 71 of 2008 (“the Act), or in terms of a Court application launched in terms of section 131 of the Act, Section 133 of the Act places a general moratorium on any legal proceedings or execution steps by or against the company.

The effect of the provision supra is that the company is protected against any legal action taken or about to be taken by creditors. The general moratorium even protects the company in circumstances where creditors have obtained judgment against the company and contemplates proceeding with execution steps against the company.  

The general moratorium on legal proceedings and execution steps remains in place for the duration of the business rescue proceedings, save in instances where the business rescue practitioner consents otherwise or the Court grants an order uplifting the moratorium in certain instances.

The legislature’s intention with the general  moratorium is clearly that creditors are prohibited from taking a run on the company’s assets pending the outcome of the business rescue proceedings and that the company is offered a genuine chance of being rescued.  

Further protection is provided for the company against creditors if the business rescue proceedings are successfully implemented and the company continues to return to a viable concern. Section 154 of the Act clearly provides that, in the event that a business rescue plan is adopted and successfully implemented, no creditor that had notice of the proceedings can continue to enforce any rights that he or she had prior to the commencement of business rescue proceedings, save to the extent provided for in the adopted business rescue plan. 

A business rescue plan can provide that obligations towards creditors are restructured or compromised over extended periods, provided that such restructuring or compromise constitutes a beter return for creditors versus the immediate liquidation of that company.

Where obligations towards creditors are restructured or compromised successfully with the adoption of a business rescue plan, and the business rescue proceedings is substantially implemented in that the company is able to comply with such restructured and/or compromised repayments towards creditors, no creditor will be able to enforce the original obligations towards it prior to the business rescue proceedings, save to the extent provided for in the adopted business rescue plan.

Without the protection afforded by the Act a company is never on equal footing with creditors in negotiating the restructuring or the compromise of its obligations. Business rescue proceedings offer a secure environment for the company to negotiate on equal footing with creditors. 

 

When does Business Rescue proceeding end?

When a proposed business rescue plan has been voted in as contemplated in the Act, the business rescue plan is deemed to be adopted. Business rescue proceedings however does not end with the adoption of the business rescue plan, but with the substantial implementation thereof.

Although the Act is not clear on exactly when the implementation of the adopted business rescue plan should occur, it suggests that the business rescue practitioner should implement the business rescue plan once it is satisfied that the company is able to give effect to its obligations in terms of the adopted business rescue plan. In practice this will most likely be of the the company commences with its first payments towards creditors in terms of the business rescue plan.

The business rescue plan is deemed to be substantially implemented once the business rescue practitioner files a prescribed notice of substantial implementation with the Companies and Intellectual Property Commission.

Creditors voting rights

During business rescue proceedings the Act provides for three formal meetings to be arranged and led by the appointed business rescue practitioner. The main purpose of the first meeting of creditors is for the business rescue practitioner to evaluate and receive proof of claims by the creditors of the company. A meeting of employees also needs to be arranged in order to inform such employees of the rights in these proceedings.

After the business rescue practitioner presents the proposed business rescue plan to all affected parties, a second meeting of creditors takes place entertaining discussions on the proposed business rescue plan, possible amendments and the eventual voting on the proposed business rescue plan. If the proposed business rescue plan also contemplates a restructuring that affects the holders of the company’s securities (shareholders), such holders shall also be entitled to vote on the proposed adoption of the business rescue plan.

Essence of a Business Rescue plan

In business rescue proceedings the appointed business rescue practitioner is obligated to formulate a business rescue plan within 25 days from his appointment, setting out, amongst others:

1. Brief description of the financial distress of the company and manner in which the situation will be rectified;
2. The projected income and expenses of the company in the ensuing three years;
3. The projected balance sheet;
4. The current assets and liabilities of the company;
5. The proposed repayment towards creditors, including any compromise contemplated towards any creditors;

Each creditor’s voting right according to its specific claim and class.

As the proposed business rescue plan constitutes projections of the company in the ensuing three years and an opinion of the appointed business rescue practitioner on exactly how the company will be rescued from its current financial duress, each affected party is entitled to propose amendments to the proposed business rescue plan prior to a vote being taken thereon deciding the fate of the company.

Pros & Cons of Business Rescue

Although business rescue in South Africa went off to a rocky start since inception of the act on 1 May 2011, it seems to have become a recognized process as more and more effected parties as well as major financial institutions familiarize themselves with the process. South Africa has furthermore recently seen major enterprises like One Time Airlines and TOP TV undergo the process.

Currently the single most adverse effect of business rescue proceedings is the negative publicity the company undertaking such proceedings undergoes in the financial world. Financial institutions are reluctant to grant post commencement finance for companies under business rescue and in most instances such financial institutions may elect to suspend its facilities with the company pending a renewal application by the business rescue practitioner appointed.

On the other hand business rescue provides a breathing space for companies experiencing financial duress, where creditors are not allowed to proceed with or execute on any legal proceedings pending the outcome of the business rescue proceedings. Business rescue furthermore has a recognized international model whereby the obligations of the company towards its creditors, cannot only be restructured but also compromised over an extended period of time by the appointed business rescue practitioner. When it comes to the restructuring of an entity, business rescue ensures for a regulated environment in which such restructuring can occur.

Even if a company is found to have passed the point of being successfully rescued, business rescue proceedings enable the appointed business rescue practitioner to endeavor a better return for creditors than would be the case in the liquidation of such an entity. No wonder financial institutions are currently electing to forcefully place companies in financial distress under business rescue instead of proceeding with liquidation steps as was the normal practice.

How does a company go under Business Rescue?

Any company or close corporation can be placed under business rescue when the management of such an entity resolves to undergo these proceedings and lodges an appropriate application with the Companies and Intellectual Property Commission.  This application is prohibited if liquidation proceedings are pending against the Company or Close Corporation, but can business rescue in these circumstances still commence if the High Court grants an order to that effect.

This process takes no more than two days from the passing of a resolution by the management of the business to commence with business rescue proceedings. It is therefore a cost effective an simple manner in which the company is placed under supervision and remains protected from any legal steps taken and/or contemplated by creditors or other affected parties against the business.

Section 129(7) actually places an obligation on the management of a business to resolve to undergo business rescue proceedings if the management foresee that the business will not be able to meet its obligations towards creditors in the ensuing six months.  

It is therefore imperative that management of Companies and Close Corporation act proactive in the above mentioned circumstances to remain compliant with the Companies Act.