Understanding the Business Rescue Process in South Africa

The business rescue process in South Africa is a crucial legal mechanism aimed at rehabilitating financially distressed companies. Governed by Chapter 6 of the Companies Act 71 of 2008, business rescue provides companies with an opportunity to restructure their affairs, debts, and operations to either restore solvency or achieve a better return for creditors and shareholders than immediate liquidation would allow.

When Does Business Rescue Apply?

Business rescue applies when a company is financially distressed, meaning:

• The company is unlikely to pay its debts as they fall due (commercial insolvency), or
• The company’s liabilities exceed its assets (factual or balance sheet insolvency).

The process can be initiated voluntarily by the company’s board of directors or through a court application by an affected person, such as a creditor, shareholder, or employee.

How is Business Rescue Initiated?

There are two ways to commence business rescue:

1. Voluntary Resolution by the Board

• The board of directors resolves that the company is financially distressed, and that business rescue has a reasonable prospect of success.
• The resolution is filed with the Companies and Intellectual Property Commission (CIPC), and all affected persons (creditors, employees, shareholders) are notified.
• Business rescue officially begins once the resolution is filed with the CIPC.
• The board nominates a business rescue practitioner (BRP), who is then appointed by
  the CIPC.

2. Court Application

• An affected person (creditor, shareholder, or employee) can apply to court for an order placing the company under business rescue.
• The applicant must prove that the company is financially distressed and that there is a reasonable prospect of rescue.
• If the court grants the order, the company is placed under business rescue, and a nominated BRP is appointed.

Appointment of a Business Rescue Practitioner (BRP)

A BRP is a licensed professional responsible for overseeing the business rescue process.

The BRP:

• Takes full management control of the company.
• Has authority to replace or remove directors, managers, and employees as necessary.

Moratorium on Legal Proceedings

Once business rescue begins, a moratorium (stay) is placed on all legal proceedings against the company, including:

• Claims by creditors.
• Enforcement of security (such as asset repossession).
• Liquidation proceedings.

This legal protection gives the company breathing space to restructure without creditor pressure.

Development of a Business Rescue Plan

The BRP must prepare a business rescue plan within 25 business days (this period can be extended with court approval). The plan outlines how the company will be restructured, including:

• Proposals to restructure debt.
• Measures to improve cash flow and operations.
• Possible sale of assets or equity.
• Treatment of creditors and shareholders.

The plan must be fair and equitable to all affected parties.

Consultation with Affected Parties

The BRP consults with affected parties (creditors, employees, shareholders) throughout the process. A creditors’ meeting is held to discuss and vote on the plan, which is adopted if approved by:

• A majority of creditors (by number), and
• Creditors holding at least 75% of the total value of claims.

Implementation of the Plan

Once adopted, the BRP oversees implementation, including:

• Restructuring debt.
• Selling assets if necessary.
• Raising new financing.
• Negotiating with creditors and other stakeholders.

Conclusion of Business Rescue

Business rescue concludes in one of the following ways:

• Successful Rescue: The company is restored to solvency and resumes normal or partial operations.
• Liquidation: If rescue is not feasible, the BRP may recommend liquidation.
• Termination by Court or CIPC: If the plan cannot be implemented, the process may be terminated.

Key Benefits of Business Rescue

• Preservation of Jobs: Business rescue aims to save jobs by keeping the company operational.
• Better Returns for Creditors: Creditors often receive a better return than they would in liquidation.
• Continuity of Business: The company can continue trading while restructuring.
• Protection from Creditors: The moratorium on legal proceedings provides temporary
  relief from creditor pressure.

Challenges in Business Rescue

• Time Constraints: The process is time-sensitive, and delays can undermine its success.
• Funding: Securing funding during business rescue can be difficult.
• Creditor Cooperation: Disputes may arise if creditors disagree with the proposed
  plan.
• BRP Expertise: The success of the process heavily depends on the skill and
  experience of the BRP.

Legal Framework

The business rescue process is governed by:

• Companies Act 71 of 2008 (Chapter 6).
• Companies Regulations, 2011.
• Relevant case law interpreting the Act.

Conclusion

Business rescue is a powerful tool for rehabilitating financially distressed companies in South Africa. It provides a structured framework for restructuring and recovery, balancing the interests of all stakeholders. However, its success depends on timely action, effective leadership by the BRP, and cooperation from creditors and other affected parties.

If your company is facing financial distress, expert legal and financial guidance is essential. For more information on business rescue and how it applies to your circumstances, contact George De Beer, our subject matter expert at BDP Attorneys.

Contact: George de Beer

Cell: 083 450 4514

Email: george@bdplaw.co.za

Website: www.bdplaw.co.za