Business rescue is a formal process intended to help a financially distressed company restructure its affairs under the supervision of a business rescue practitioner.
Business rescue is designed for a company that is in financial difficulty but may still have a reasonable prospect of being rescued.
Once business rescue begins, the company is placed under the supervision of a business rescue practitioner, most legal enforcement against the company is temporarily restricted or suspended, and a business rescue plan is developed for consideration by creditors and, where relevant, shareholders.
The objective is either to restore the company to a solvent and viable basis or, if that cannot be achieved, to obtain a better return for creditors or shareholders than immediate liquidation would probably produce.
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ASSESSING FINANCIAL DISTRESS AND CHOOSING THE CORRECT ROUTE
Business rescue is the formal process created by Chapter 6 of the Companies Act 71 of 2008 for the rehabilitation of a company that is financially distressed.
The process places the company under temporary supervision, creates a temporary moratorium on most legal proceedings against the company, and allows a business rescue plan to be developed and considered.
The aim is to restructure the company so that it can continue trading on a solvent basis or, if that is not possible, to achieve a better return for creditors or shareholders than immediate liquidation would probably produce.
Once liquidation begins, a liquidator is appointed to secure and realise the company’s assets, investigate its financial affairs where necessary, deal with creditor claims, and distribute available funds in the order prescribed by law.
Section 128(1)(f) of the Companies Act 71 of 2008 defines a company as financially distressed if it appears reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, or if it appears reasonably likely that the company will become insolvent within the immediately ensuing six months.
The assessment is forward-looking. Directors should therefore consider cash flow, debts falling due, contingent liabilities, access to funding, the value and liquidity of assets, and the company’s realistic trading prospects rather than waiting until the company has already stopped paying creditors.
Financial distress by itself is not enough for business rescue. There must also be a reasonable prospect that the process can achieve one of the statutory rescue outcomes.
A reasonable prospect does not require a guaranteed rescue, but there must be a sensible and fact-based basis for believing that a workable restructuring, funding solution, sale of the business, compromise with creditors, or other rescue proposal can produce the required outcome. A vague hope that circumstances may improve is not sufficient.
Directors should consider business rescue as soon as there are reasonable grounds to believe that the company is financially distressed. Early assessment is important because the available options usually narrow as unpaid debts, enforcement action and cash-flow pressure increase.
If the board has reasonable grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing it, section 129(1) permits the board to resolve that the company voluntarily begin business rescue proceedings and be placed under supervision.
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Section 129(7) requires the board, if it has reasonable grounds to believe that the company is financially distressed but does not adopt a business rescue resolution, to deliver a written notice to each affected person. The notice must set out the relevant criteria of financial distress and explain why the board has not adopted a business rescue resolution.
This requirement is important for directors because it creates a formal record of the board’s assessment and decision at a time when the company is already showing signs of financial distress.
Business rescue is primarily a rehabilitation and restructuring process. Liquidation is a winding-up process in which control of the company passes into the liquidation regime, assets are realised and the proceeds are distributed to creditors in the order prescribed by law.
Business rescue is appropriate only where there is a reasonable prospect of achieving a rescue outcome. If there is no realistic rescue proposal, no viable funding, or continued trading is likely to worsen the position of creditors, liquidation may be the more appropriate process.
An affected person includes a shareholder or creditor of the company, a registered trade union representing employees of the company, and, if employees are not represented by a registered trade union, the employees themselves or their representatives.
Affected persons have important participation rights during business rescue. Depending on the issue, these may include receiving notices, participating in court proceedings, attending meetings, voting on a rescue plan, challenging decisions, and applying to court for specified relief.
Voluntary business rescue begins when the board adopts and files a resolution under section 129, provided the statutory requirements are met. This route is initiated by the company itself.
Court-ordered business rescue is initiated by an affected person through an application under section 131. The court may place the company under supervision if the statutory grounds are established and there is a reasonable prospect of rescuing the company.
Yes. A creditor is an affected person and may apply to the High Court under section 131 for an order placing the company under supervision and commencing business rescue proceedings.
The application must establish a recognised statutory basis for the order and a reasonable prospect of rescuing the company. The company and affected persons must receive the notices required by the Act and are entitled to participate in the application.
No. Section 129(2) prevents the board from adopting a voluntary business rescue resolution if liquidation proceedings have already been initiated by or against the company.
An affected person may, however, consider a court application under section 131. If liquidation proceedings are already underway when a section 131 application is made,
section 131(6) provides for the liquidation proceedings to be suspended while the business rescue application is determined and, if business rescue is ordered, while the rescue proceedings continue. The timing and procedural position should be considered carefully in each case.
1. The board considers the company’s financial position and records the factual basis for concluding that the company is financially distressed and that there appears to be a reasonable prospect of rescuing it.
2. The board adopts a resolution under section 129(1) placing the company into business rescue and under supervision.
3. The resolution, together with a sworn statement, is filed with CIPC in the prescribed manner. A section 129 resolution has no force or effect until it has been
filed.
4. Within five business days after adopting and filing the resolution, the company publishes notice of the resolution and its effective date to every affected person and appoints a business rescue practitioner who satisfies the statutory requirements and has consented in writing to act.
5. Within two business days after the practitioner is appointed, the company files notice of the appointment with CIPC.
6. Within five business days after filing the notice of appointment, the company publishes a copy of that notice to every affected person.
If the company fails to comply with the time-sensitive requirements in section 129(3) or (4), section 129(5) provides that the resolution lapses and becomes a nullity. A further resolution generally cannot be filed for three months unless a court allows otherwise on good cause shown.
Section 132 distinguishes between the different commencement routes.
Voluntary business rescue begins when the company files the section 129 resolution.
Court-initiated business rescue begins when an affected person applies to court for an order under section 131.
Business rescue may also begin when a court makes an order placing the company under supervision in the circumstances contemplated by section 132.
The commencement date matters because important statutory consequences, including the moratorium on most legal proceedings and the business rescue framework for management and creditor rights, operate from the commencement date.
1. The affected person prepares a High Court application supported by evidence showing the statutory ground/s relied upon and the reasonable prospect of
rescuing the company.
2. A copy of the application is served on the company and CIPC, and each affected person is notified in the prescribed manner.
3. Affected persons are entitled to participate in the hearing of the application in accordance with section 131.
4. The court considers whether one of the statutory grounds exists and whether there is a reasonable prospect of rescuing the company.
5. If the court grants the order, the company is placed under supervision and the court may make the further orders required by section 131 concerning the
practitioner and the commencement of the rescue process.
The statutory grounds include financial distress, certain failures to pay employmentrelated amounts, and circumstances in which it is otherwise just and equitable for financial reasons to place the company under supervision, together with a reasonable prospect of rescue.
If liquidation proceedings have already been commenced when a section 131 application is made, section 131(6) provides that the liquidation proceedings are suspended until the court has adjudicated the business rescue application or, if business rescue is ordered, until the business rescue proceedings end.
The interaction between liquidation and business rescue can be procedurally complex, particularly where provisional or final winding-up orders, appeals or urgent applications are involved.
The business rescue practitioner is an independent professional who supervises the company during business rescue.
Under section 140, the practitioner has full management control of the company in substitution for its board and pre-existing management, but the directors remain in office and continue to exercise their functions subject to the practitioner’s authority.
The practitioner investigates the company’s affairs, convenes statutory meetings, consults affected persons, develops the business rescue plan, manages the voting process and, if the plan is adopted, oversees its implementation.
As soon as practicable after appointment, the practitioner must investigate the company’s affairs, business, property and financial situation and consider whether there is a reasonable prospect of rescuing the company.
If the practitioner concludes that there is no reasonable prospect of rescue, section 141 requires the practitioner to inform the court, the company and affected persons and to apply to court for an order discontinuing business rescue and placing the company into liquidation.
If the practitioner concludes that the company is no longer financially distressed, the Act provides a procedure for terminating the rescue proceedings.
Section 133 creates a general moratorium during business rescue.
In broad terms, legal proceedings and enforcement action against the company, or in relation to property belonging to the company or lawfully in its possession, may not be commenced or continued except in the limited circumstances permitted by the Act.
Important exceptions include proceedings with the practitioner’s written consent or with the leave of the court.
Because the moratorium can affect litigation, execution, arbitration and enforcement of security, the specific nature of the proposed proceeding should be considered before action is taken.
Business rescue does not automatically remove the directors from office. Directors continue to exercise their functions, but they do so subject to the authority of the practitioner and must cooperate with and assist the practitioner.
A director may not take material management decisions without the practitioner’s approval where the Act requires it.
Directors also have duties to provide information, books and records and to assist the practitioner with the investigation and administration of the company.
Employees who were employed immediately before business rescue generally continue to be employed on the same terms and conditions, subject to ordinary changes occurring through lawful mechanisms.
Any retrenchment contemplated in the business rescue plan must be dealt with in accordance with the applicable labour legislation, including sections 189 and 189A of the Labour Relations Act where applicable. Employees and trade unions also have specific participation and notice rights in the business rescue process.
Section 136 gives the practitioner important powers in relation to certain pre-existing contractual obligations. Subject to the exclusions and requirements in the Act, the practitioner may suspend, for the duration of the proceedings, obligations of the company that would otherwise become due during business rescue.
Cancellation is different. Where the practitioner seeks to cancel an obligation under a preexisting agreement, court approval is generally required on terms that are just and reasonable. Employment agreements are subject to the separate protections in section 136(1).
Yes. Section 135 regulates post-commencement finance and gives specified postcommencement claims statutory preferences.
This can allow a company to obtain funding, goods, services or other credit needed to continue operating while a rescue plan is developed and implemented.
The ranking and security of post-commencement finance can materially affect existing creditors. The terms should therefore be considered carefully before funding is advanced or security is granted.
Within ten business days after appointment, the practitioner must convene and preside over the first meeting of creditors and a separate first meeting of employees’ representatives.
At the first creditors’ meeting, the practitioner must inform creditors whether the practitioner believes there is a reasonable prospect of rescuing the company. Creditors may also determine whether a creditors’ committee should be appointed.
The employees’ meeting gives employees or their representatives an early opportunity to engage with the process and the practitioner.
The business rescue plan is the formal proposal prepared by the practitioner after consultation with creditors, other affected persons and management. It explains the company’s position, the proposed restructuring and the expected outcome if the plan is adopted.
Section 150 requires the plan to contain detailed information under three broad parts:
– background information,
– the practitioner’s proposals, and
– the assumptions and conditions on which the plan is based.
Among other things, the plan should enable creditors to compare the proposed rescue outcome with the likely outcome if the company were immediately liquidated.
The practitioner must publish the business rescue plan within 25 business days after appointment unless the court allows a longer period or a majority of creditors’ voting interests approve an extension.
The publication deadline is therefore not necessarily the date on which a plan must be voted on. Once the plan has been published, the practitioner must convene the meeting contemplated in section 151 within ten business days for the plan to be considered.
At the section 151 meeting, the practitioner introduces the plan, informs the meeting whether the practitioner continues to believe there is a reasonable prospect of rescuing the company, allows representatives of employees to address the meeting, and invites discussion of the plan.
The plan may be amended in the circumstances permitted by the Act and is then put to a vote. Creditors exercise voting interests determined in accordance with Chapter 6.
A proposed plan is approved on a preliminary basis if it is supported by more than 75% of the creditors’ voting interests that were voted and those supporting votes include at least 50% of the independent creditors’ voting interests that were voted, if there are any independent creditors.
If the plan does not alter the rights associated with any class of the company’s securities, preliminary approval becomes final adoption. If the plan alters the rights of a class of securities, the affected class must also approve the plan in the manner required by section 152.
Yes. Once a business rescue plan has been adopted, section 152(4) makes it binding on the company, every creditor and every holder of the company’s securities, whether or not that person was present at the meeting, voted in favour of the plan or proved a claim.
This binding effect is one of the most important consequences of adoption and is why creditors should understand both the proposed treatment of their claims and the voting and challenge mechanisms before the plan is approved.
Rejection of the plan does not always end business rescue immediately.
Section 153 creates further options that may be pursued at the meeting or through court proceedings.
Depending on the circumstances, the practitioner may seek a vote to prepare and publish a revised plan or may apply to court to set aside the result of the vote on the ground that it was inappropriate.
An affected person may also seek to propose an alternative plan, apply to court in the circumstances permitted by section 153, or make an offer to acquire the voting interests of persons who opposed adoption of the plan.
If no permitted further step is taken after rejection, the practitioner must promptly file a notice terminating the business rescue proceedings.
After adoption, the practitioner must take the steps required to satisfy any conditions on which the plan depends and must implement the plan in accordance with its terms.
The plan may restructure payment terms, compromise claims, dispose of assets or businesses, obtain new funding, alter operational arrangements or provide for another agreed rescue mechanism. The exact effect depends on the terms of the adopted plan and the rights created or altered by it.
Section 154 limits the enforcement of debts owed by the company before business rescue. Where a creditor has accepted a discharge of the debt as part of an adopted plan, or the plan otherwise deals with the creditor’s claim, enforcement is governed by the statutory effect and terms of the adopted plan.
Creditors should therefore read the plan carefully to understand whether a claim is deferred, compromised, converted, paid from a particular source, or otherwise restructured.
The Companies Act does not impose an automatic three-month cut-off.
If business rescue proceedings have not ended within three months after commencement, section 132 requires the practitioner to prepare a progress report and update it monthly until the proceedings end.
The report must be delivered to each affected person and to the court if the proceedings were court-ordered, or otherwise to CIPC. The fact that a rescue has continued beyond three months does not by itself terminate the process.
Business rescue can end in several ways under section 132.
The court may set aside the resolution or order that started the proceedings; the court may convert the proceedings to liquidation; the practitioner may file a notice terminating business rescue where the Act permits; a rescue plan may be rejected without further action under section 153; or an adopted plan may be substantially implemented and the practitioner may file the prescribed notice of substantial implementation.
If the practitioner concludes that there is no reasonable prospect of rescuing the company, the practitioner must not allow the process simply to continue indefinitely.
Section 141 requires the practitioner to inform the relevant parties and apply to court for an order discontinuing business rescue and placing the company into liquidation.
Once the business rescue plan has been substantially implemented, the practitioner files the prescribed notice of substantial implementation and the business rescue proceedings end.
The company then continues outside business rescue subject to the rights, compromises, payment arrangements and other consequences created by the adopted plan.
Any obligations that remain to be performed after substantial implementation are governed by the plan and the applicable law.
