Understanding Business Rescue in South Africa

Understanding Business Rescue in South Africa

The South African economy has been significantly impacted by the Covid-19 pandemic. In the 2021 financial year alone, approximately 400 companies were placed in business rescue. But what is business rescue, and why is it relevant to small business owners and entrepreneurs in South Africa?

What is Business Rescue?

Broadly speaking, business rescue is a legal process aimed at rehabilitating a financially distressed company. According to section 128 of the Companies Act, No. 71 of 2008 (the “Companies Act”), a financially distressed company is one which:

1. Appears unlikely to pay all its debts as they become due within the next six months, or
2. Is likely to become insolvent within the next six months.

The rehabilitation of a financially distressed company involves three main steps:

1. The company, its business, and property, along with the management of its affairs, are placed under the temporary supervision of a business rescue practitioner (BRP).
2. A temporary moratorium (stay) is imposed on the rights of claimants, such as creditors.
3. A business rescue plan is developed and implemented to restructure the company’s business, property, debt, affairs, other liabilities, and/or equity.

The statutory regime governing business rescue and these steps is outlined in Chapter 6 of the Companies Act.

The primary aim of business rescue is to maximize the likelihood of the company continuing to exist on a solvent basis, balancing the rights and interests of all relevant stakeholders. If this is not possible, the secondary aim is to restructure the business in a way that results in a better return for the company’s creditors or shareholders compared to immediate liquidation.

It is crucial to distinguish between liquidation and business rescue. Business rescue focuses on preserving the existence of a company for the benefit of its stakeholders, while liquidation involves winding up an insolvent company, prioritizing creditors' rights and interests.

Commencement of Business Rescue

Business rescue can commence either voluntarily or compulsorily.

Voluntary Commencement If commenced voluntarily, the board of directors of the company resolves to begin the process. The board must have reasonable grounds to believe that the company is financially distressed and that there is a reasonable prospect of rescuing the company. The company must:

• Within five business days of adopting and filing the resolution with the Companies and Intellectual Property Commission (CIPC), publish a notice of the resolution and its effective date to each affected person and appoint a BRP.
• Within two business days of appointing a BRP, file a notice of appointment with the CIPC. Within five business days of filing, the company must publish a notice of appointment to each affected person.

Failure to comply with these steps will result in the resolution lapsing, and the company may not file another resolution for three months unless a court orders otherwise.

Compulsory Commencement If the process is commenced involuntarily, a formal court application is instituted by any “affected person,” including creditors, shareholders, registered trade unions representing employees, or employees not represented by a union. The applicant must serve a copy of the application on the company and the CIPC and notify affected persons.

A court may grant the application if it finds that:

• The company is financially distressed.
• The company has failed to pay an amount in terms of an obligation.
• It is just and equitable to do so.

Additionally, the court must believe there is a reasonable prospect of rescuing the company. If the order is granted, the company must notify each affected person within five business days.

Rights and Participation of Creditors in Business Rescue

The Companies Act provides creditors with certain rights during business rescue:

• Receive notice of court proceedings, decisions, meetings, or other relevant events.
• Participate in court proceedings arising during business rescue.
• Make proposals for a business rescue plan to the BRP.

Creditors have the right to vote on amending, approving, or rejecting a proposed business rescue plan. A creditor’s voting interest is determined by the value of the amount owed to them. Creditors can form a creditors’ committee and be consulted by the BRP during the development of the business rescue plan.

Business Rescue Plan and Its Effect

A business rescue plan, once adopted, is binding on all creditors, regardless of whether they attended the meeting, voted for or against the plan, or proved a claim. Claims may be compromised as per the adopted plan, resulting in the discharge of a creditor’s claim and debt. Creditors who agreed to the discharge of a debt lose the right to enforce it once the plan is implemented. Creditors cannot enforce any pre-existing debt except as provided for in the business rescue plan.

Key Steps in Business Rescue Proceedings

1. First Meeting of Creditors: Must occur within ten business days of the BRP’s appointment. The BRP informs creditors whether there is a reasonable prospect of rescuing the company and receives proof of creditors’ claims. Creditors decide whether to form a creditors’ committee.
2. Business Rescue Plan: The BRP consults with creditors and affected persons, prepares a business rescue plan, and publishes it within twenty-five business days of their appointment. A meeting to consider the plan must occur within ten business days after publication.
3. Meeting to Consider and Vote on the Plan: The BRP introduces the plan, informs the meeting about the prospects of rescuing the company, invites discussion, and conducts votes on amending or adopting the plan. For approval, the plan must be supported by creditors holding at least 75% of the voting interests, with at least 50% from independent creditors. If not approved, the plan is rejected unless a new plan is proposed or the BRP applies to court to set aside the vote.

Once approved, the plan is binding on the company, each creditor, and every security holder.

Concluding Remarks

Business rescue aims to efficiently rescue and recover financially distressed companies, balancing the rights and interests of all stakeholders. Small businesses dealing with companies in business rescue are encouraged to seek legal advice regarding their rights as creditors in these proceedings.