Many companies find themselves under financial pressure in today’s challenging and complex economic and trading environment. It is imperative that directors of enterprises immediately take appropriate action and decisions when it comes to light that their business is in financial distress. This allows for expert knowledge and advice to be obtained in time for a rescue plan to be implemented in order to avoid the termination of the business through liquidation.
Restructuring of firms in financial distress is increasing worldwide. In line with this trend, Chapter 6 of the Companies Act, No. 71 of 2008 (the Act) has 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 in financial distress, i.e. a company that probably cannot pay its debts as they fall due, within the immediately ensuing six months or a company which in all probability will become insolvent within that same period.
Business rescue proceedings therefore begin in the first instance for the purpose of “rescuing” a company in a difficult financial position by means of:
placing the company in the hands of a business rescue practitioner to take over the day-to-day management of the company independently or in conjunction with existing management, as well as to take control of the company’s related assets;
prohibiting creditors from enforcing claims against the company during the business rescue proceedings;
the business rescue practitioner developing and implementing a business rescue plan according to which the company will trade and thereby get itself out of the financial position it finds itself in.
In practice, the director or board of directors of the company will draft a resolution to file with CIPC (Companies and Intellectual Property Commission) for business rescue, after which a business rescue practitioner may be appointed by the directors. Alternatively, an affected person (by definition includes shareholders, creditors and employees and / or trade unions to which the employees belong) may also apply to the High Court to place the company in business rescue.
As soon as business rescue proceedings begin, the business rescue practitioner will take control of the company for the duration of the business rescue proceedings and will continue to:
investigate the affairs of the company;
institute meetings with creditors and other affected persons;
draw up a business rescue plan that, if accepted by the affected persons, is implemented to enable the company to continue to trade and pay off its debts.
Employees employed by the company prior to the commencement of the business rescue will remain in the service of the company in accordance with Section 136 of the Companies Act, except in cases where natural staff reduction occurs or where employees of the company, in accordance with applicable labour legislation, agree to different terms and conditions. Any retrenchment of such employees that may be envisaged in the business rescue plan will in any case be subject to the Labour Relations Act.
The main focus at the onset of business rescue proceedings is to enable a company to continue operating its business for a period without the risk and pressure of creditors wishing to enforce the payment of debt and wishing to file an application for the liquidation of the company. Business owners often wait too long to exercise the more desirable option of business rescue, or sometimes the business is unable to trade itself out of trouble. In both cases, liquidation proceedings are likely to be instituted against them.
It is also important to know that a company that has been finally liquidated may under certain circumstances obtain relief from the High Court to suspend the liquidation proceedings and to place the company under business rescue.
For more information on this topic, please contact Danie Acker or Basson Piek of Rauch Gertenbach Attorneys at 044 601 9900 / firstname.lastname@example.org / www.rgprok.co.za .