A company which is in financial trouble has 2 (two) options: 1) liquidation, alternatively, 2) business rescue. A Court will give preference to business rescue over liquidation, but only where there is a genuine attempt to achieve the aims of the Companies Act, 71 of 2008 (“the Act”). 

The Act, more specifically Chapter 6 thereof, deals with the procedures of Business Rescue and defines the purpose of business rescue proceedings as the facilitation and rehabilitation of a financially distressed company by providing for:

(i) the temporary supervision of the company, and of the management of its affairs, business and property (by the appointment of an independent business rescue practitioner);

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

(iii) the development and implementation, if  approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity (known as a business rescue plan) in a manner that maximises the likelihood of the company continuing to exist on a solvent basis or, if it results in a better return for the company’s creditors or shareholders than that which would have resulted from the immediate liquidation of the company. 

Financially distressed, simply put, means that it appears that there is an unlikelihood that the company will be able to pay all of its debts as and when they become due and payable within the immediately ensuing six months; alternatively, it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months. 

Commencement of business rescue proceedings

There are 2 ways in which business rescue proceedings may commence:

  1. A resolution adopted by the company’s board of directors (also known as voluntary business rescue); alternatively
  2. By means of a court order (also known as compulsory business rescue).

Voluntary Business Rescue

Voluntary business rescue may only commence if the board of directors have reasonable grounds to believe that the company is financially distressed, as described hereinabove, and if there appears to be a reasonable prospect of rescuing the company (section 129(1)(a)-(b)) and being able to trade on a solvent basis again. 

However, a resolution to this affect may not be adopted if liquidation proceedings have been initiated by or against the company and the resolution is not effective unless it is filed with the Companies and Intellectual Property Commission through a section 129(7) notice. 

A company must, within 5 (five) business days after it has adopted and filed the aforesaid resolution:

  1. Publish a notice of the resolution, and its effective date, to every affected person (described more fully below), which must include a sworn statement detailing the factual grounds upon which the board resolution was founded; and 
  2. Appoint a business rescue practitioner who satisfies the requirements of section 138 of the Act, and who has consented to such appointment in writing.

Thereafter, and within 2 (two) days, a notice of appointment of the business rescue practitioner must be filed and same must be published and sent to all affected persons within 5 (five) days thereof. 

If a company fails to appoint a business rescue practitioner in the prescribed manner as required, or fails to comply with any of the above filing and notice requirements, the resolution to begin business rescue proceedings lapses and becomes a nullity (section 129(5)(a); Madodza (Pty) Ltd v Absa Bank Limited 2012 JDR 1393 (GNP)). Furthermore, a company may not file another business rescue resolution for a period of 3 (three) months from the date on which the lapsed resolution was adopted unless the court, on good cause shown, orders otherwise (section 129(5)(b)). 

An “affected person” means a shareholder or creditor of the company; any registered trade union representing the employees of the company; and if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives. 

Compulsory Business Rescue 

The Act allows for an affected person to apply to court for an order placing the company under supervision and into business rescue proceedings (section 131(1)). 

If liquidation proceedings have already commenced by or against the company at the time the application for business rescue is made, the application has the effect of suspending the liquidation proceedings until the court has dismissed the business rescue application or, if the court grants the order applied for, until the end of the business rescue proceedings (section 131(6)). 

A company which has been placed into business rescue proceedings by means of a court order, must notify each affected person within 5 (five business days) of the order and may not adopt a resolution placing itself into liquidation until the business rescue proceedings have ended (section131(8)(a)). 

The effect of business rescue proceedings 

When a company commences with business rescue proceedings, same will result in a general moratorium of all legal proceedings against the company. As such, no legal proceeding against the company, or in relation to any property belonging to or in the lawful possession of the company, may commence or be proceeded within any forum, except with the written consent of the practitioner or with the leave of the court and in accordance with such terms the court may consider suitable (section 133(1)(a)-(b)). 

This moratorium gives companies temporary “immunity” to actions which are brought by creditors which would have been due and actionable. However, the process may be abused by companies who are not financially distressed and elect to merely institute business rescue proceedings to stall payments of its debts and to evade its obligations. In order to remedy such a situation, an affected person can apply to court to either convert the business rescue proceedings into liquidation proceedings, alternatively, to apply for the cancellation of the business rescue and force the company to continue trading. 

The general moratorium does not apply to certain proceedings such as the following: 

1. Proceedings instituted as a set-off against any claim made by the company in any legal proceedings, irrespective whether those proceedings commenced before or after the business rescue proceedings began (section 133(1)(c)); 

2. Criminal proceedings against the company or any of its directors or officers (section 133(1)(d)); 

3. Proceedings concerning any property or right over which the company exercises the powers of a trustee (section 133(1)(e)). 

There is also no time limit on the duration of business rescue proceedings, however, should business rescue proceedings run for longer than 3 (three) months, the business rescue practitioner must prepare a progress report, and update it at the end of each subsequent month until the end of those proceedings; and deliver a report and update to each affected person. Business Rescue proceedings generally last 5 – 6 months as the business rescue practitioner would prefer to continue with certain projects in an attempt to obtain income. 

Post Commencement Finance 

Post-commencement finance is finance provided to the company once business rescue proceedings have commenced. 

During business rescue proceedings, a company may obtain financing which may be secured to the lender by utilising any asset of the company to the extent that it is not otherwise encumbered. Such a claim will have preference in the order in which it has been incurred over all unsecured claims against the company. 

First meeting of creditors (section 147) 

A first meeting of all the creditors should be convened and presided over by the business rescue practitioner within 10 (ten) days after the business rescue practitioner’s appointment.

The purpose of this meeting is for the business rescue practitioner to inform the creditors of the likelihood of success of rescuing the company. At this meeting, all creditors are to present their claims to the business recue practitioner together with the necessary proof thereof for approval. 

Each creditor’s claim will be dealt with individually and will rank in the following order of preference and will be paid out according: 

1. Practitioner’s remuneration, expenses and claims arising out of the costs of the business rescue proceedings (section 135(1)); 

2. Remuneration, reimbursement for expenses or other amounts of money relating to employment, due and payable by the company to an employee during business rescue (post-commencement finance); 

3. The claims of secured lenders or creditors before business rescue proceedings commenced; 

4. Secured claims by post-commencement financiers, lenders or creditors in the order in which the claims were incurred (section 135(3)(a)(i)); 

5. Claims in respect of the Insolvency Act 24 of 1936; 

6. Unsecured claims by post commencement financiers, lenders or creditors during business rescue in the order in which they were incurred (section 135(3)(b)); 

7. Remuneration of employees which became due and payable before business rescue proceedings commenced; and 

8. Unsecured claims of lenders or creditors before business rescue proceedings (section 135(3)(a)(ii)). 

Proposal of business rescue plan (section 150) 

Section 150 of the Act deals with the business rescue plan and stipulates that after consultation with all of the creditors, other affected persons and the management of the company, a business rescue practitioner must prepare a business rescue plan. Such business rescue plan must contain all of the information which affected persons may need in order to reach a decision regarding its adoption. This plan must be published within 25 (twenty five) business days after the date on which the practitioner was appointed or such longer time as may be allowed by the court on application. 

A business rescue plan that has been adopted is binding on the company, and on each of the creditors of the company and every holder of the company’s securities, whether or not such a person (section 152(4)): 

1. Was present at the meeting; 

2. Voted in favour of adoption of the plan; or 

3. In the case of creditors, had proven their claims against the company. 

Failure to adopt business rescue plan 

Section 153 of the Act deals with instances whereby a business rescue plan is rejected. If a business rescue plan is rejected, the business rescue practitioner may: 

1. Seek a vote of approval from the holders of voting interests to prepare and publish a revised plan; or 

2. Advise at a meeting that the company will apply to a court to set aside the result of the vote by the holders of voting interests or shareholders, as the case maybe, on the grounds that it was inappropriate. 

Success rates of business rescue proceedings in South Africa 

Whilst business rescue proceedings has an optimistic view in that there is hope and likelihood that a company may be rescued and be able to continue trading on a solvent basis, statistics show that the success rate of business rescue proceedings in South Africa are somewhere between 10% – 12%.