COVID-19: Business Rescue – Fast Facts

The worldwide COVID-19 pandemic coupled with the recent downgrade of the South – African economy to junk status resulted in many companies facing unprecedented economic strain.  As a consequence of this, many companies may be financially distressed and considering liquidation or the winding – up of the company.  Business rescue however provides companies with an alternative option and an opportunity for the rescue and recovery of the company.  This article thus provides a brief snapshot of the business rescue process, the fundamental considerations and effects thereof.

What is business rescue?

Business Rescue is a statutory created mechanism or process set out in Chapter 6 of the Companies Act 71 of 2008 (“the Act”) the purpose of which is to facilitate the rehabilitation or reorganisation of companies that are financially distressed in order to restore them to profitability and avoid liquidation which is executed through the appointment of a business rescue practitioner who supervises and assumes managerial control of the company.

What is the purpose of business rescue?

The purpose of a business rescue is to prevent a company from going into liquidation (in other words to ‘rescue’ the company) and prevent a loss of jobs and value, based on the premise that a company is worth more as a going concern than if it were to be liquidated and its assets realised in a fragmented manner.  The object is thus to restructure the company’s affairs to ensure its continued existence on a solvent basis or, if that is not possible, to achieve a better return for creditors and / or shareholders than would have been achieved in liquidation.

What is the meaning of “business rescue”?

In terms of section 128 of the Act, ‘business rescue’ is defined as proceedings to facilitate the rehabilitation of a company that is financially distressed providing for:

• the temporary supervision of the company;
• a temporary moratorium on the rights of claimants against the company; and
• the development and implementation (if approved) of a business rescue plan.

When is a company considered to be “financially distressed”?

A company is considered to be ‘financially distressed’ if it appears that:

• the company would be reasonably unlikely to pay all its debts as they become due and payable within the immediately ensuing six months; or
• the company appears to be reasonably likely to become insolvent in the immediately ensuing six months.

How are business rescue proceedings initiated?

Business rescue proceedings can be initiated in one of two ways being either:

• by a resolution of the board of directors of a company to voluntarily commence business rescue proceedings; or
• by an order of court, upon application by an affected person, to place the company under supervision and commence business rescue proceedings.

When may a board of directors pass a resolution that a company begins business rescue proceedings?  

In terms of section 129 of the Act, the board of directors of a company may resolve that the company voluntarily commence business rescue proceedings if the board has reasonable grounds to believe that:

• the company is financially distressed; and
• there appears to be a reasonable prospect of rescuing the company.

What are the remedies of affected persons who object to a resolution to commence business rescue?

Any affected person may apply to court for an order to set aside the board resolution to commence business rescue on the grounds that:

• there is no reasonable basis for the belief that the company is financially distressed;
• there is no reasonable prospect of rescuing the company; or
• the company failed to satisfy any procedural requirements set out in section 129 of the Act.

(“Affected persons” are shareholders or creditors of the company, trade unions representing employees of the company and employees not represented by a trade union.)

When do business rescue proceedings commence?

In terms of section 132 of the Act, business rescue proceedings begin:

• in the case of initiation by a voluntary board resolution, when the resolution is filed with the Companies and Intellectual Property Commission (“CIPC”); or
• in the case of initiation by a court order, when an affected person applies to court; or
• when a court, during liquidation proceedings, makes an order placing the company under supervision.

What is the duration of business rescue proceedings?

The Act contemplates that business rescue proceedings should be finalised within 90 days subject to such extensions of time granted by court upon application by the business rescue practitioner.

What are the legal consequences of business rescue?

The most important consequence of business rescue proceedings is that there is an automatic and general moratorium on legal proceedings or executions against the company, its property and its assets and on the exercise of creditors’ rights against the company.  This allows the company breathing space and an opportunity to reorganise and reschedule its debts and liabilities.  In addition, the company is granted extensive protection against legal proceedings in that no legal proceedings against the company may be commenced or proceeded with except with the written permission of the business rescue practitioner or leave of a court.

How are employment contracts affected by the commencement of business rescue proceedings?

During business rescue proceedings, employees of the company immediately before the commencement of business rescue will continue to be employed on the same terms and conditions.

What are the effects of business rescue on contracts generally?

Section 136 of the Act entitles a business rescue practitioner to suspend (entirely, partially or conditionally) any obligations that arise under an agreement to which the company is a party at the commencement of business rescue proceedings.  It is important to note that a business rescue practitioner can only cancel contracts with the consent of the court.

How are shareholders and directors affected by the commencement of business rescue proceedings?

Shareholders are affected persons and thus entitled to receive notice of court proceedings, meeting and other relevant events occurring in the business rescue process.  Shareholders’ shares in the company are not affected by the commencement of business rescue proceedings.  Directors are not removed from office and continue to exercise their functions as directors but do subject to the authority of the business rescue practitioner.

What are the duties and responsibilities of a business rescue practitioner?

A business rescue practitioner has extensive powers to manage the company’s business and deal with its assets in order to rescue the company.  In addition to a business rescue practitioner’s general duty to rescue the company alternatively secure a better return for creditors or shareholders the business rescue practitioner must, as soon as possible after being appointed, investigate the affairs of the business to consider whether there is a reasonable prospect of rescuing the company.

When will business rescue proceedings end?

Business rescue proceedings will be terminated when:

• a court sets aside the resolution or order that began those proceedings or the court converts the business rescue proceedings to liquidation proceedings; or
• the business rescue practitioner files a notice of termination of the business rescue proceedings with the CIPC; or
• a business rescue plan has –
  • been proposed and rejected and no person has sought to extend the proceedings; or
  • been adopted and the business rescue practitioner filed a notice of substantial implementation of that plan with the CIPC.

As the effect of the COVID-19 pandemic continues to affected companies and businesses, directors should carefully monitor and assess whether a company may be financially distressed.  In doing so directors should consider all the available options such as business rescue to attempt to rescue the company since it does not operate in isolation but is a part of the greater society who are all affected by the COVID-19 pandemic.