The COVID 19 Pandemic has had a catastrophic impact on the world’s economy and South Africa is most certainly not exempt therefrom. Coupled with the recent downgrade of South Africa to that of a junk status, the South African economy has received a double blow.
Whilst the world economy and that of South Africa’s will eventually recover, the lag effect of the impact of this corona virus will continue for many, many months if not years. It will not be “business as usual”. The world as we once knew it will be different. Businesses will, now more than ever, need the relief not only as offered to a limited extend to compliant businesses by the South African banks, and to a limited extent by the South African Revenue Services, and more recently by various property organisations, but more so, businesses will need the relief and protection offered from the Business Rescue Proceedings (moratorium on claims) as provided for in our Companies Act 71 of 2008 (“the Act”). For more information contact Mark Poole on 082 881 9115 or MPoole@straussdaly.co.za.
Save for the essential services businesses, every other business, conducted through a company or a close corporation, which has had to close down during this lockdown period, will find some benefit in considering business rescue as an option to follow post the lockdown period. It is inevitable that almost every business so affected by this lockdown, will at some stage not be able to pay all its debts as and when those debts become due and payable. In fact, such businesses will then fall squarely within the definition of “financially distressed”, which then allows such businesses to commence with business rescue proceedings.
Financially distressed as defined in the Act refers to a business (company/close corporation) which appears reasonably unlikely to be able to pay all its debts as such debts become due and payable within the immediately ensuing 6 months, or where it appears that there is a reasonable likelihood of that business becoming insolvent within the immediately ensuing 6 months.
OBJECT OF BUSINESS RESCUE
The object of Business Rescue is to rehabilitate a company (and whilst references in this note is only made to a company, business rescue applies equally to close corporations), that is financially distressed by providing for: –
MORATORIUM AND SUSPENSION OF OBLIGATIONS BENEFIT OF BUSINESS RESCUE
But for the COVID 19 pandemic, every solvent/profitable/valuable company would not have considered themselves as being a candidate for falling within the definition of financially distressed. But now, financially distressed is currently in their contemplation. Those companies ran good businesses, and can become good businesses again. But to get there, those companies are going to need time, they are going to need a break from the monthly commitments, they are going to have to restructure the monthly commitments over a period of time so that they can trade back to being that good/solvent/profitable/valuable business again. Business rescue in general, provides that break/moratorium that may need.
Business rescue not only puts a halt on the institution of any legal proceedings against the company, including any enforcement action against the company or in relation to any assets belonging to the company or against assets lawfully in possession of the company, but also allows a business rescue practitioner (“practitioner”) to suspend any obligation of the company that arises out of an agreement to which the company was party to. This can be a partial, conditional or entire suspension of such obligation.
This moratorium and suspension of obligations commences when the company is placed into business rescue and will end is when the company is taken out of business rescue.
This the suspension of obligations will extend for example to any rental/lease payments, instalment payments for the financing of motor vehicles/equipment and any form of loan repayments and the like. However, the suspension of such obligations does entitle the third party concerned to claim any damages it may have suffered as a result of such suspension. Often, the payments during the suspension period will then be repaid over a period of time once the company is able to afford such payments.
For the business rescue business rescue practitioner to enjoy the benefit of any suspension of obligations, the company must not in arrears with its obligation to the third party which has resulted in a right to cancel any such agreement by the third party concerned. If that is the case, the arrears would have to be brought up to date for the practitioner can invoke suspension provisions.
HOW TO COMMENCE WITH BUSINESS RESCUE
DUTIES OF A BUSINESS RESCUE BUSINESS RESCUE PRACTITIONER
In summary, the business rescue business rescue practioner has the full management and control of the company during the business rescue proceedings. He must develop a plan to be considered by affected persons and implement the plan if such has been adopted. If at any time the business rescue practitioner concludes that there is no reasonable prospect for the company to be rescued, the practitioner may apply to court for an order terminating business rescue proceedings and placing the company into liquidation or file for notice of termination of the business rescue proceedings;
RIGHTS OF EMPLOYEES AND CREDITORS DURING BUSINESS RESCUE PROCEEDINGS
Employees continue to be employed by the company on the same terms and conditions as they were prior to the company being placed in business rescue and any retrenchment of the employees must take place in accordance with the respective provisions of the Labour Relations Act. Employees are entitled to be consulted with throughout the business rescue proceedings and afforded sufficient opportunity to make submissions towards the rescue of the company.
To the extent that there are any monies due to the employees at the date of commencement of business rescue, such employee is entitled to submit a claim for payment which claim will be treated as a preferential claim. Employees are entitled to vote at any meeting and their voting interest is calculated in accordance with the extent of their claim as against the company at date of Business Rescue.
Creditors may make proposals formally or informally in regard to the development of a plan.
Creditors are entitled to vote to amend, approve or reject a plan or propose a development of an alternative plan. A creditor’s voting interest is based on what the creditor’s claim amount is as at date of commencement of business rescue
BUSINESS RESCUE PLAN
After consultation with creditors and other affected persons, the business rescue practitioner must prepare a plan for consideration and possible adoption at a meeting convened specifically for the consideration of the plan. The structure of the plan will include:
Assumptions and Conditions
MEETING TO CONSIDER THE PLAN
BINDING NATURE OF AN ADOPTED PLAN
Once a plan has been adopted, it is binding on the company and on each of the creditors of the company and every holder of the company’s securities (shareholders), whether or not such person was present at the meeting or voted in favour or against the adoption of the plan.
FAILURE TO ADOPT A PLAN
In the event of the plan is rejected by the majority of the creditors, the practioner or if the practioner fails to take the following steps, any affected person present at the meeting may: initiate a vote requiring the practitioner to prepare and publish a revised plan, or apply to the court to set-aside the result of the vote, or making a binding offer purchase the voting interest of the party opposing the adoption of the plan. Should the above not be possible the practitioner is obligated to apply for termination of business rescue proceedings and file for liquidation of the company.
POTENTIAL IMPACTS OF AN ADOPTED BUSINESS RESCUE PLAN
A plan may provide that a creditor, who has agreed to the discharge or reduction of the debt owing to such creditor, will lose the right to enforce the relevant debt or part of it. If a plan is approved and implemented in accordance with the provisions of the Act, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of business rescue proceedings, except as provided for in the plan.
For more information contact Mark Poole on 082 881 9115 or MPoole@straussdaly.co.za