Business Rescue – The alternative to liquidation
At the beginning of April 2020 economists announced a third consecutive negative growth in the South African economy. This already categorised our economy as suffering a recession.
Then we were hit by the Covid-19 pandemic and subsequent lockdown of all but essential business.
Almost immediately Moody’s, a renowned investment rating agency, cut South Africa’s sovereign credit rating to sub-investment grade. This means our country now has a junk status rating from all three major rating agencies in the world.
The forecast is not encouraging. Our own Minister of Finance predicts tough times and negative growth between 2% and 6% lies ahead. Many businesses will close and job losses are a certainty.
This article briefly focuses on an escape available for any size of business, small, medium and large.
It is called Business Rescue.
What is Business Rescue (BR)?
BR is a process regulated by the Companies Act (the Act) in terms of where a business under financial distress may apply to be placed under business rescue to preserve the business and to prevent liquidation.
BR aims to restructure the affairs of the company that is financially distressed to rehabilitate the company finances. It provides a temporary stay of legal proceedings against the company, management of the company’s affairs by a business rescue practitioner and the implementation of a business rescue plan.
This process restructures the company’s debt, property, cash flow, liabilities, tax affairs if necessary, and operation, amongst others. The goal is to keep the boat afloat, to allow the company to continue business in solvent circumstances.
The benefit for creditors is that BR may ensure a better return than what they normally would receive in liquidation.
Who may apply?
The Act applies to all registered companies. Since 2011 the Act, and specifically the portion providing for BR, also applies to Close Corporations. Thus it follows that any Company or Close Corporation under financial distress can apply to be placed under BR.
It is therefore not available for individuals, partnerships or sole proprietors. This last-mentioned category has alternative options for its disposal.
What is Financial Distress?
Financial distress manifests when a business is unable to pay all its obligations as and when they become due and payable in the normal course of business within the next 6 months. It can be the inability to pay rent, or suppliers, taxes or any other expense normally paid.
When you have to arrange with creditors terms such as delayed payment, your business is probably under financial distress.
The Act also defines financial distress as circumstances where it appears reasonable that the company will become insolvent over the next six months.
Our case law dictates further that BR is ”not for the terminally ill close corporations. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.” It is important to consider BR at the first signs of financial difficulty.
What is the process?
The Act provides for two ways to initiate BR. The first is voluntary when the board of directors (or the members of a CC) resolve and lodge a resolution for the business to commence BR proceedings.
Secondly, any affected person may apply to the High Court for an order to place the business under BR. Affected persons are shareholders, employees, creditors or a trade union representing the employees of a company.
Business Rescue vs Liquidation
BR and liquidation of a company have different results in mind. In BR proceedings the aim is to save the company and its business through a restructuring process.
Liquidation aims to gather and realise the assets of the company to pay a dividend to creditors. It means that the company will cease trading.
How long does it take?
The Act makes a provision that BR proceedings should last for three months. However, it is possible to extend this period but it places further obligations and responsibilities upon the BR practitioner, such as reporting to creditors and the Court.
One must be mindful that the aim remains the implementation of a rescue plan which enables the company to continue business without the intervention of the BR practitioner.
It is suggested that the process should be a speedy one and the BR practitioner should hand the business back to the directors as soon as possible. Affected persons must exercise their rights in terms of the Act in this regard.
Conclusion
From the above, it is clear that we should not resort to radical decisions. A careful analysis of your income, expenditure, cash flow, asset register, creditors, debtors etc. is imperative before you decide to close doors. The Business Rescue procedure might just be the alternative to enable you to focus on business whilst the
Business Rescue Practitioner is tasked with admin and creditors.
The sooner Business Rescue proceedings are considered and implemented when a company is in financial distress, the better the chances are to conclude the rescue successfully. Don’t wait until your business is terminally ill before you seek assistance.
Author: Gerrit Kruger
Kruger & Bekker Attorneys
Director Commercial litigation
Disclaimer
This article only outlines certain aspects of business rescue and the Companies Act. It should not be interpreted as comprehensive legal advice.
