Restructuring of companies in financial distress is on the increase globally. In line with this trend, Chapter 6 of the new Companies Act, No 71 of 2008 (the Act) introduced business rescue to the South African business landscape. Business rescue proceedings are defined by the Act as proceedings to facilitate the rehabilitation of a company that is financially distressed, i.e. a company which is unlikely to pay its debt as it becomes due within the immediate ensuing six months, or a company that is likely to become insolvent within that time.

Business rescue proceedings are therefore primarily aimed at “rescuing” a company that is in a grim financial position by:
1.    placing the company in the hands of a business rescue practitioner to take over the day to day management of the company and to take control over its related assets;
2.    prohibiting creditors from enforcing claims against the company during the course of business rescue proceedings;
3.    allowing the business rescue practitioner to develop and implement a business rescue plan in terms of which the company may effectively trade itself out of the financial position it finds itself in.

In practice, the board of directors of the company will pass a resolution to apply for business rescue, after which a business rescue practitioner is appointed. Alternatively, an affected person, (per definition includes shareholders, creditors and employees and/or employees’ trade unions), may also apply to the High Court for the company to be placed under business rescue. 

Once in business rescue, the business rescue practitioner will take control of the company for the duration of the business rescue proceedings and will then proceed to:
1.    investigate the affairs of the company;
2.    conduct meetings with creditors and;
3.    propose a business rescue plan, which, if accepted, will enable the company to continue trading and pay off its debts.

Employees who were employed by the company prior to the institution of business rescue will, in accordance with Section 136 of the Companies Act, remain employed by the company except to the extent that the changes occur in the ordinary course of attrition or if the employees of the company, in accordance with the applicable Labour Laws, agree to different terms and conditions. In any event, any retrenchment of any such employees which may be contemplated in the company’s business rescue plan is subject to the Labour Relations Act.
The main focus of business rescue proceedings is to enable a company to continue trading without the risk of creditors enforcing claims for payment of debts and, in certain circumstances, apply for the liquidation of the company.

Business owners often wait too long to exercise the more desirable option of business rescue, or the business is not able to trade itself out of trouble. In both instances it is likely that liquidation proceedings will be instituted against them. It must be noted that it is possible for a company that has been originally finally liquidated, to obtain relief in the form that the liquidation may be suspended and the company be placed under business rescue.

For more information on this topic, feel free to contact Danie Acker or Basson Piek of Rauch Gertenbach Attorneys at 044 601 9900, , .