Following the commencement of the Companies Act 71 of 2008 (hereafter referred to as the “Act”), Business Rescue Proceedings have been introduced as a mechanism to assist with the rescue and recovery of financially distressed companies in such a manner that it balances the rights and interests of all relevant stakeholders. The purpose of this article is to introduce Business Rescue Proceedings and demonstrate the practical steps involved in the commencement thereof.
Business Rescue can be briefly defined as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for: a) the temporary supervision of the company, and for the management of its affairs, business and property; b) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and c) for the development and implementation, if approved, of a Business Rescue Plan. The temporary moratorium means 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, except in certain instances.”
Whilst rehabilitation is not specifically defined in the Act, a company that is financially distressed is a defined term and means a company which appears to be reasonably unlikely to be in a position to be able to pay all of its debts as they become due and payable within the immediately ensuing six months after Business Rescue Proceedings commence, or if it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months after Business Rescue Proceedings commence. The Act further provides that if a company’s Business Rescue Proceedings have not ended within three months after the start of Business Rescue Proceedings, the Business Rescue Practitioner is obliged to apply to court for an extension of the proceedings.
During Business Rescue Proceedings, a Business Rescue Practitioner is appointed, or two or more persons appointed jointly, to oversee the financially distressed company. This may entail amongst other things the restructuring of the company’s affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing its existence on a solvent basis. In essence, a Business Rescue Practitioner is an independent professional person with accounting, legal or business experience. Section 140(1) of the Act sets out the powers and duties of the Business Rescue Practitioners, which included the delegation of any power or function of the practitioner to a person who was part of the board or pre-existing management of the company. The Business Rescue Practitioner may remove from office any person who forms part of the pre-existing management of the company, or appoint a person as part of the management of a company, whether to fill a vacancy or not. This means that the practitioner may appoint a person as part of the management of a company regardless of whether a vacancy exists. The Business Rescue Practitioner is further responsible for the development of a Business Rescue Plan to be considered and adopted by affected persons and implementation of any plan that has already been adopted. An affected person in relation to a company means a creditor, shareholder, employer and/or a registered trade union. It is noteworthy to mention that the functions and powers of the practitioner is not a closed list and that Business Rescue Practitioners receive a remuneration in accordance with the prescribed tariff in the Act.
In the case of Booysen v Jonkheer Boerewynmakery (Pty) Ltd and Another  1 All SA 862 (WCC), the court held that the Business Rescue Practitioner cannot reserve the right (or be granted such in terms of the Business Rescue Plan) to unilaterally amend the Business Rescue Plan. The rationale behind this is that the development and implementation of the Business Rescue Plan takes place on a just and equitable basis in regard to all the stakeholders. In short, the Business Rescue Practitioner after consulting with the creditors, other affected persons, and the management of the company, must prepare a Business Rescue Plan for consideration and possible adoption at a meeting to determine the future of the company. This Business Rescue Plan must contain all the information reasonably required to facilitate affected persons in deciding whether or not to accept or reject the plan.
Implementation of Business Rescue Proceedings
The practical steps involved in commencing Business Rescue Proceedings will be discussed below. Business Rescue Proceedings commence in the following two instances: –
- The board of directors resolve the commencement of voluntary Business Rescue Proceedings and file the resolution with the CIPC; or
- An affected person makes an Application to court and is granted an order to commence compulsory Business Rescue Proceedings.
Voluntary Business Rescue Proceedings
The board of directors of the company may resolve that voluntary business rescue proceedings may commence and place the company under supervision, provided that a resolution has not already been adopted to initiate liquidation proceedings by or against the company. Section 129(1) of the Act has the effect of the board of directors adopting a resolution for voluntary Business Rescue Proceedings if they have reason to believe on objective grounds that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company. Business Rescue Proceedings will only commence upon the resolution being filed with the Companies and Intellectual Properties Commission (CIPC). Within five business days after a company has adopted and filed its resolution, the company must publish a notice of the resolution (and its effective date in the prescribed manner to every affected person included with the notice a sworn statement of the facts relevant to the grounds on which the board resolution was founded) and appoint a Business Rescue Practitioner. We reiterate that the company is obliged to file the standard document of the Notice to commence Business Rescue Proceedings and supporting documentation with the CIPC within five business days, failing to comply with the prescribed time limits results in the resolution to commence Business Rescue Proceedings and place the company under supervision lapsing and becoming a nullity. After appointing a practitioner, the company must file a notice of the appointment of the practitioner within two business days after making the appointment, and bring it to the attention to each affected person and produce a copy of the notice of appointment to each affected person within five business days after the notice was filed. If the company fails to adhere to any of the abovementioned steps including the prescribed time limits, the company may not file a further resolution for the period of three months after the date on which the lapsed resolution was adopted, unless the practitioner makes an Application to court showing good cause for the company to file a further resolution.
Compulsory Business Rescue Proceedings:
Section 131 of the Act provides that unless a company has adopted a resolution as set out in voluntary Business Rescue Proceedings, an affected person may apply to court at any time for an order placing the company under supervision and commencing Business Rescue Proceedings. An applicant must serve a copy of the Application for Business Rescue Proceedings on the company and the Commission, and must notify each affected person of the Application in the prescribed manner. The court will only grant an order if the Application meets the following criteria as provided for in Section 131(4)(a) of the Act: “the company is financially distressed; the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment related matters; or it is otherwise just and equitable to do so for financial reasons, and there is a reasonable prospect for rescuing the company.” A court that makes an order to commence compulsory Business Rescue Proceedings, may make a further order to appoint an interim Business Rescue Practitioner. The appointment of the interim practitioner is subject to the ratification by the holders of the majority of the independent creditors’ voting interests at the first meeting of creditors.
Overall, it may be said that Business Rescue Proceedings should only be commenced for the purpose of rehabilitating companies which are “financially distressed” and are capable of being restored financially.