When thousands of South African companies shut their doors on 26 March, the sad reality was that many that would never open again. As the economic effects of the measures imposed to curb the spread of COVID-19 are being felt across the board, companies in financial distress are forced to examine their options. Chapter 6 of the Companies Act provides for a company or close corporation to enter into business rescue as an alternative to liquidation.
Business rescue is a process of facilitating financial rehabilitation of a company, and can be commenced either voluntarily (by way of filing a board resolution to place the company in business rescue with CIPC) or by way of a court order. In a nutshell, the overarching requirements are:
- that the company must be in financial distress, i.e. 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, and
- that there must be a reasonable prospect of rescuing the company.
The Act makes provision for an affected person to apply to court, once the company has been placed in business rescue, to have the rescue set aside on certain specific grounds, including where the company does not meet the aforementioned requirements.
If the business rescue proceedings are commenced, as in most cases, by way of a board resolution, notice must be given within five days of filing the resolution with CIPC to every person affected by the decision. This includes shareholders, creditors and employees (through a registered trade union or representative). The board must also appoint a business rescue practitioner, who will supervise the management of the company. While the directors are not removed or replaced, they are subjected to the authority of the practitioner, whose primary function is to draft and implement a rescue plan. Such plan will have to be approved by 75% of the company’s creditors voting on the plan, which must include at least 50% of the so-called independent creditors’ voting interests.
One of the major consequences of being in business rescue is that the company gets a temporary moratorium on legal proceedings and the practitioner can suspend certain contracts, which is intended to provide a breathing space wherein the company through the practitioner can reorganise its affairs to become viable again. After the business rescue plan has been implemented to completion, the business rescue is terminated via filing of a notice of completion to CIPC.
For advice on any of the aspects discussed herein and to obtain assistance in initiating and implementing business rescue proceedings, please contact our commercial department.