What you don’t know about business rescue
7 July 2020 | Stacy Saffy
Business rescue can be defined as “the rehabilitation of a company that is financially distressed or is experiencing financial problems”. When a company is financially distressed it is reasonably unlikely that:
- the company is going to pay all of its debts as they become due and payable within half a year; or
- the company will become insolvent within half a year.
When a company starts to experience financial problems, the directors have to determine whether or not the company should continue operating or whether such operations would be reckless as contemplated in Section 22 of the Companies Act, Act 71 of 2008 (hereinafter referred to as the “Companies Act”). The Companies and Intellectual Property Commission (hereinafter referred to as “CIPC”) delivered a practice note in terms whereof business businesses that continue to operate despite being in financial difficulty due to COVID-19 will not be penalised. This is however a provisional measure and businesses in financial difficulty still need to consider all their options, and ascertain whether business rescue is not a more sustainable solution.
- Once the board of directors have established that the company is financially distressed, they need to determine whether or not there is a reasonable possibility of rescuing the company.
If the directors find that there is a reasonable possibility of rescuing the company, they can resolve that the company voluntarily begin business rescue proceedings and place the company under supervision. The resolution has no force or effect until it has been filed with CIPC. The business rescue proceedings only commence on the date that the resolutions are filed with CIPC.
A resolution as mentioned in paragraph 4 above may not be adopted if liquidation proceedings have been initiated by or against the company.
On the 13th March 2020, CIPC issued a practice note regarding a restructured business rescue filing procedure to be followed when placing a company under business rescue. The practice note took effect from 1 April 2020. The practice note outlines the forms and supportive documents to be submitted to CIPC during the many stages of the business rescue proceedings.
Once business rescue proceedings commence, the appointed business rescue practitioner is given full managerial control of the company in place of the board of directors and pre-existing management. The pre-existing management will continue to function during the process but under the authority of the business rescue practitioner.
The business rescue provisions of the Companies Act do not apply to unincorporated associations or entities such as partnerships, sole traders, co-operatives or business trusts.
Not all companies are fit for business rescue. Depending on the particular circumstances of a company, liquidation will in fact be more beneficial to the shareholders and creditors. Sometimes the sale of the business to a purchaser would be faster and less expensive. Even a negotiation with creditors in terms of Section 155 of the Companies Act can in certain instances would be more suitable than business rescue.