With the promulgation of the New Companies Act and more specifically Chapter 6 (the replacement of judicial management) a new era has been introduced. It encapsulates a shift from creditor’s interests to a broader range of interests. The purpose of this is to allow financially distressed companies to file for business rescue and obtain assistance from a duly appointed practitioner who manages and supervises the company by restructuring the affairs in a manner that maximises the likelihood of the company continuing on a solvent basis, or if not possible a better result for creditors than immediate liquidation.
One of the major advantages of this Act is that it offers a ‘moratorium’ against all legal proceedings including enforcement action. The moratorium envisaged by Section 133 is in place for the duration of the business rescue proceedings. In essence this affords a company to buy time against pursuing creditors. This has far reaching effects on creditors, financial institutions, shareholders, employees and restructuring specialists. This moratorium offers critical breathing space to business rescue practitioners, allowing them to investigate the affairs of a distressed company and to develop an adequate business rescue plan.
It is a precondition to analyse the financial position of a company to determine whether business rescue is a viable option, this can be established by assessing the financial records of a company. Cash flow, or lack of it, is very often at the base of a business that is in trouble, the effect of even one major bad debt can have a domino effect in a company, affecting its ability to function properly. Unfortunately, a deteriorating financial situation in a company is something that is often not fully addressed until the cracks have opened wide.
In a decision on of the South Gauteng High Court, in the case of
Welman v Marcelle Props, the court stated that “business rescue
proceedings are neither for terminally-ill nor for chronically ill
close corporations. They are for ailing corporations, which
given time will be rescued and become solvent”. This statement
supports the contention that at the first signs of financial
distress, a company should apply for business rescue. Once a
company is more than “financially distressed”, options other than
business rescue become more attractive for ailing companies,
such as liquidations.
Should business rescue be an option then the correct procedure must be followed in order to commence such proceedings. There are two methods in which business rescue proceedings can be commenced; the first being a resolution in terms of Section 129 of the Act, or in terms of Section 133 by way of approaching the court. In terms of Section 129 the directors or members of a company can voluntarily file for business rescue in the form of resolutions should there be no liquidation proceedings instituted at the time of filing the application. In the event that liquidation proceedings already been instituted at the time of application, then the court must be approached by way of an application for business rescue in terms of Section 133, which in turn will suspend the liquidation proceedings. In addition, an affected person may apply to court in terms of this section for an order placing the company in business rescue.
Once the resolutions have been filed or the order has been made an order of court, the business rescue practitioner will step into the shoes of the directors or members and manage and restructure the affairs of the company. The practitioner must convene and preside over the First Meeting of Creditors and Employees which must take place within 10 days from the date of appointment, the main purpose of these meetings is to inform creditors whether there is a reasonable prospect of rescuing the company and to prove claims. After consulting with affected persons the practitioner together with the management of the company must prepare a plan for consideration and adoption at a meeting held in terms of section 151. The business rescue plan must be published within 25 days from date of appointment or such longer time as may be allowed by the court or the holders of a majority of creditors voting interest. The plan must contain all the relevant information to facilitate affected persons in deciding whether to accept or reject the plan at the said meeting. In order for the plan to be accepted on a preliminary basis it must be supported by holders of more than 75% of the creditors voting interests. Once a plan has been accepted it is binding on all creditors and security holders.
In the event that the plan was rejected, a revised plan can be prepared upon the approval of the affected persons, or an order to set aside the vote on the grounds that it was in appropriate. If none of these actions are taken the practitioner must promptly file a notice of termination.
Business Rescue has evolved internationally as a professional discipline capable of saving companies and in the process saving jobs and re-setting the course of thousands of companies’ future growth.
By: Stacy Saffy (LL.B; AIPSA Ins law)