|| Heading for a wipeout? Business Rescue 101 || BR#1

By Mark JG Taylor and Alex Elliot

29 July 2024

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Have you wondered how business rescue works?

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Health Warning

This is directed at non-business rescue practitioners.? There are numerous great online resources on business rescue (“BR”) in SA, and I am not going to try and outdo these.? The BR framework can be found in Chapter 6 of the Companies Act (the Act was amended as recently as 26 July 2024).

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Act Promptly

When a business is moving into distress but has prospects of survival, the board or a creditor should promptly seek the appointment of a business rescue practitioner (“BRP”).? The BRP is an independent person who assumes control of the business with a view to stabilising it and developing a plan for its rescue so that it either (1) continues in business (a turnaround), or (2) achieves a better result for creditors and shareholders (typically through the sale of the business or its assets) than liquidation.

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Gazumping Liquidation

A company which enters BR is protected against all “pre-commencement” claims (ie, those which arose before the BR started) – these claimants may not exercise their rights or execute against the company’s assets.? For this reason, the successful commencement of BR also suspends any liquidation proceedings. ?This moratorium against creditors gives the company much-needed breathing space to reorganize its affairs under supervision of the BRP.

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“Commencement”

The difference between the “pre-commencement” period and the “post-commencement” period is like night and day because the business is not protected from post-commencement creditors which the BRP incurs after their appointment in order to keep the business running.? “PCF”, or Post-Commencement Finance, is funding provided, by way of cash injected or goods or services supplied on credit, to help support the business after it has gone into BR.

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Choose Wisely

The BRP’s powers are immense and it’s enormously difficult to remove a BRP, so the initial choice of BRP is very important.? As an officer of the High Court, the BRP must prioritise the interests of creditors, followed by staff, followed by shareholders.? Creditors enjoy primacy, and the BRP must treat all creditors fairly.? Importantly, the BRP is independent and does not operate at the appointing party’s behest and owes them no fealty.? Therefore, do some background checks to make sure your intended BRP has a reputation for fair play and competence.

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The Power of BR

The BRP has the legal right to suspend any or all contractual obligations owed by the company – including payment obligations. The BRP can also apply to Court to cancel onerous contractual obligations. ?These powers give the BRP tremendous leverage to renegotiate or terminate contracts which have been prejudicing the company’s ability to survive and thrive.

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Communicate with Care

The BRP is obliged to communicate with all “Affected Parties” (creditors, staff/unions, shareholders and directors) through a series of prescribed meetings and processes. ?A good BRP communicates as much and as often as possible with Affected Parties. Transparency is a powerful disinfectant in a distressed situation, but the BRP must trade this off against dealing with delicate matters which are best resolved in private.

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The BR Plan is Divine Law

The BRP must make a diligent effort to identify and communicate with all creditors.? Once the business rescue plan (“Plan”) has been presented by the BRP and approved by creditors, it has the legal effect of binding the company and all creditors to the Plan, even those who did not vote for the Plan.? The Plan is therefore a crucial document because of its far-reaching legal implications.

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Here Be Dragons

There are some parties which cannot be ignored:

(1)?? ??Any financiers which can pull your overdraft or prevent your access to cash flow.

(2)?? ??Suppliers, especially critical suppliers, who will be unlikely to grant you further credit.

(3)?? ??Your staff, without whom you typically cannot run a business, and who enjoy special protections during BR.

(4)?? ??SARS.? SARS “pre-commencement” claims do not enjoy the preference it gets in liquidation.? SARS has significant exposure which it needs to protect on behalf of all taxpayers.? SARS is able to be business-like in dealing with BRPs provided that full disclosure is made.

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Shot Across the Bow

A “red flag” for directors should be the practice by many distressed businesses of deferring payments to SARS in the expectation that their cash flow will enable them to make up the next month.? Many companies never escape this cycle and the directors risk trading in insolvent circumstances and becoming personally liable to SARS, or other creditors.

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Hope is not a strategy

Many directors leave it too late to apply for business rescue, thereby leaving the company with limited prospects of being saved.? If you are a director and unsure about your prospects to raise capital, contact your lawyer, accountant, or get Cala Capital Africa to conduct its “Investor-Readiness Health Check” for your business.

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Thanks to Alex Eliott of BlackBoxLaw for contributing to this article.? Alex is a prominent legal expert in business restructuring, business rescue and insolvency with many palmares in this field to his credit.

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Mark Taylor is the CEO of Cala Capital Africa , a leading capital matcher which connects qualified global and domestic investors to vetted African businesses seeking $10m to $100m+ in growth capital.