Although the practice of implementing a turnaround strategy (business rescue) has been widely used in South Africa, business rescue was only formalised in Chapter 6 of the “New” Companies Act, Act 71 of 2008 (hereinafter referred to as “the Act”). As business rescue is still a fairly new concept within the South African legal system, it is being developed and redefined on a continual basis.
Unfortunately, given the development of business rescue and the implementation thereof since the inception of the Act, business rescue has become known as a “winding down process” which will inevitably lead to the liquidation of an entity without any actual benefits to creditors and/or any other affected parties.
The question must thus be asked, “To business rescue or not to business rescue?”
This article will hopefully give creditors, affected parties and financially distressed entities a small insight into business rescue, the correct implementation thereof, and highlight that business rescue can be utilised for the benefit of the creditor, other affected parties and the distressed entity.
Firstly, in Section 128(1)(b) of the Act, “business rescue” is defined as follows
‘business rescue’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for-
- The temporary supervision of the company, and of the management of its affairs, business and property;
- A temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
- 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 in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company;
It is thus clear from the above that business rescue must always be implemented to the benefit of creditors and the affected parties.
Unfortunately, this concept has been misconstrued by irresponsible business rescue practitioners who have used the process as a delaying tactic to enrich themselves at the expense of the creditors and the affected parties.
Fortunately, in Diener N.O. v Minister of Justice and Others (926/2016) [2017] ZASCA 180, the Supreme Court of Appeal held that a business rescue practitioner generally enjoys no special preference above secured creditors in relation to his remuneration and expenses when business rescue proceedings were converted into liquidation proceedings.
This will hopefully have the effect that business rescue practitioners will no longer use business rescue as a “winding down process” to enrich themselves at the expense of the creditors and the affected parties and that only entities that can truly be rescued benefit from the process.
Secondly, the director/members of the entity must truly be committed to the business rescue process and must not see the process as a method to protect themselves but rather as a method to rescue the entity for the benefit of the creditors and the affected parties, in accordance with Section 128(1)(b) of the Act, as read with Section 137 of the Act.
Thirdly, one of the critical reasons for the failure of business rescue proceedings is the timing of the start of the business rescue proceedings.
In Section 128(1)(f) of the Act, “financially distressed” is defined as follows:
‘financially distressed’, in reference to a particular company at any particular time, means that –
- It appears to be 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
- It appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months;
It is therefore clear that an entity should not wait until it can no longer pay its creditors before adopting a resolution to commence with the business rescue process, or as a means of avoiding liquidation. Business rescue should thus be considered well in advance.
Remember that in accordance with section 129(7) of the Act, if the board of a company has reason to believe that a company is financially destressed (as defined in section 128(1)(f)) and the board has not adopted a resolution to place the company in business rescue, the board must deliver a written notice to each affected party giving reasons as to why they have not adopted a resolution to start the business rescue process.
The golden rules of business rescue are thus as follows:
- Do a proper financial and business analysis of the entity long in advance;
- The directors/members of the entity must be committed to rescuing the entity; and
- If a resolution is adopted to place the company in business rescue, a business rescue practitioner must be chosen that is committed to rescuing the entity and not just winding it down to enrich themselves at the expense of the creditors and the affected parties.
Business rescue can be successful and to the benefit of creditors, affected parties and the entity itself, if the above principles are followed by the involved parties. Business rescue is a complex process and each instance must be dealt with on its own merits. As such, the above article does not constitute legal advice. Should you as a creditor, affected party or financially destressed entity need more information in regards to business rescue and/or liquidation proceedings please contact us for assistance at Pagel Schulenburg Attorneys.
