Business Rescue

Question 1

What is business rescue?

Answer 1

Business rescue proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed by providing for:

1) the temporary supervision of the company, and the management of its affairs, business and property by a business rescue practitioner;
2) a temporary moratorium (stay) on the rights of claimants against the company or in respect of property in its possession; and
3) the development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity

Question 2

What is a business rescue plan?

Answer 2

A plan that is developed and, if approved, implemented by the business rescue practitioner, which details the manner in which the practitioner envisages that the company will be rescued. Section 150 of the Act provides a framework for what the business rescue plan should look like. It provides that a business rescue plan must contain sufficient detail to assist affected persons in deciding whether or not they wish to accept or reject the plan.

Question 3

What is the aim of business rescue?

Answer 3

The aim of business rescue is to restructure the affairs of a company in such a way that either maximizes the likelihood of the company continuing in existence on a solvent basis, or results in a better return for the creditors of the company than would ordinarily result from the liquidation of the company.

Question 4

What is a business rescue practitioner?

Answer 4

A business rescue practitioner is a person appointed, or two or more persons jointly appointed, to oversee a company during business rescue. Further, the word “person” in the Act includes a juristic person. It is therefore arguable, although unlikely, that a company can take appointment as a business rescue practitioner. The business rescue practitioner is required, as soon as possible after appointment, to investigate the company’s affairs, business, property and financial situation, and thereafter consider whether there is any reasonable prospect of rescuing the company.

Question 5

What are the powers of the BRP?

Answer 5

The business rescue practitioner has full management and control over the company. He or she may delegate certain functions to a director on the board of the company or to a person who was part of the pre- existing management of the company.

Question 6

What is the situation concerning remuneration for the BRP?

Answer 6

The business rescue practitioner is entitled to charge the company for the remuneration and expenses incurred by the practitioner in accordance with the tariff prescribed by the Act. In addition to the remuneration as determined by the tariff, the business rescue practitioner may also conclude a contingency agreement with the company for further remuneration if the business rescue plan is adopted or if it is adopted within a certain period of time or if any particular result or combination of results is attained. In addition to remuneration, a practitioner is also entitled to be reimbursed for the actual costs of any disbursements incurred by the practitioner, or expenses incurred by the practitioner, to the extent reasonably necessary to carry out the practitioner’s functions and to facilitate the conduct of the company’s business rescue proceedings.

Question 7

What is the liability of the BRP?

Answer 7

Section 140(3) provides that during business rescue the business rescue practitioner –

(a) is an officer of the court and is therefore obligated to report to the court in accordance with any applicable rules or orders;
(b) has the responsibilities, duties and liabilities which are incumbent upon directors, and
(c) will not be liable for any act or omission performed in good faith in the course of the exercise of the powers and during the performance of his functions as a practitioner but may be held liable in terms of any law for any act or omission that amounts to gross negligence.

Question 8

What is an affected person?

Answer 8

Affected persons are important role players in the business rescue process. An affected person is a shareholder, creditor, employee (or their representative) or a registered trade union representing employees of the company. Affected persons have various rights throughout the business rescue process.

Question 9

What is post-commencement finance?

Answer 9

Post-commencement finance is finance provided to the company once business rescue proceedings have commenced, or services have been rendered, or credit provided to, a company during its business rescue. Any finance provided by a post-commencement financier may be secured by utilising any asset of the company to the extent that it is not already encumbered.

Question 10

What is an insolvency practitioner?

Answer 10

Insolvency practitioners and business rescue practitioners are not the same. Each is appointed to fulfill different roles, which can be summarised as follows –
(a) insolvency practitioner – a liquidator in any winding-up must recover and reduce into his possession all the assets and property of the company, movable and immovable, and must apply the proceeds so far as they extend in satisfaction of the costs of the winding-up and the claims of creditors, and shall distribute the balance among those who are entitled thereto (section 391 of the Companies Act 61 of 1973). A business rescue practitioner may not subsequently act as a liquidator.

Question 11

When should a company commence business rescue proceedings?

Answer 11

A company should commence business rescue proceedings at the first signs of it being financially distressed. That is, either when it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months, or when it is likely that the company will become insolvent in the immediately ensuing six months.

Question 12

How is a company placed in business rescue?

Answer 12

There are two main ways in which a company can be placed in business rescue, namely:

(a) when the board of directors of a company resolves by a simple majority that the company voluntarily commence business rescue proceedings and be placed under the supervision of a business rescue practitioner; or
(b) when an affected person makes a formal application to court for an order placing the company under supervision and commencing business rescue proceedings, provided the company has not already been placed under business rescue, on the basis that:
(i) the company is financially distressed;
(ii) the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment related matters; or
(iii) it is otherwise just and equitable to do so for financial reasons.

Question 13

How does a company apply to be placed in business rescue?

Answer 13

Evidence must be placed before a court in order to ensure that an applicant indicates that there is a reasonable prospect that the company can be rescued and to ensure that an application for business rescue is successful.

The applicant must deal with “concrete and objectively ascertainable details in support of business rescue and which facts are beyond mere speculation”.
These facts should include –
(a) “the likely costs of rendering the company able to commence with its intended business or to resume the conduct of its core business”;
(b) the availability of “cash resources” to enable the company to meet its daily expenses and the nature of the funding on which the company will rely;
(c) “the availability of any other necessary resources, such as raw materials and human capital”; and
(d) “the reasons why the proposed business rescue plan will have a reasonable prospect of success”.

Question 14

Can an application for business rescue be opposed?

Answer 14

Business rescue proceedings are generally launched on an urgent basis and thus the time periods ordinarily applicable to applications will generally not apply. Any affected person on whom an application for business rescue has been served, may oppose such application in the manner in which any other application is ordinarily opposed by serving and filing a notice of intention to oppose the application and thereafter serving an answering affidavit on the applicant in accordance with the time periods set out in the notice of motion. Any affected person opposing a business rescue may either request the court to dismiss the application together with any other appropriate order, including an order placing the company under liquidation.

Question 15

How long is a company placed under business rescue for?

Answer 15

3 months or longer upon authorisation from the court.

Question 16

Which companies are suitable for business rescue?

Answer 16

Business rescue proceedings are not necessarily suitable for all companies. The type of company is for the most part determinative as to whether or not a company is a suitable candidate for business rescue. For instance, companies that are involved in retail are more suitable for business rescue than companies that have been set up for property investment purposes, as retail companies have a “business” that can be rescued, while property investment companies may not.

Question 17

What is the effect of business rescue on directors?

Answer 17

The directors of the company remain the directors. However, their powers and duties are constricted in that the business rescue practitioner has full management control over the company in substitution for the board of the company and its pre-existing management.

Question 18

What is the effect of business rescue on employees?

Answer 18

Section 136 of the Act regulates the interests of employees during business rescue. It provides that employees who were, immediately prior to the institution of business rescue, employees of the company will remain employed by the company on the same terms and conditions on which they were employed prior to the commencement of business rescue proceedings except to the extent that changes occur in the ordinary course of attrition or if different terms and conditions are agreed between the employee and the company in accordance with labour laws.

Question 19

What is the effect of business rescue on shareholders?

Answer 19

During business rescue proceedings, an alteration in the classification or status of any issued securities of a company, other than by way of a transfer of securities in the ordinary course of business, is invalid except to the extent that the court, or the business rescue plan, directs otherwise.

Question 20

What is the effect of business rescue on creditors?

Answer 20

The creditors will need to comply with their obligations to supply goods or services to the company in the same manner in which they did prior to the commencement of business rescue proceedings, unless the agreement between the company and the creditor regulates the relationship between the parties in the event of an insolvency or business rescue.

Question 21

What is the effect of business rescue on legal proceedings against the company?

Answer 21

During business rescue proceedings, no legal proceedings (legal or arbitration proceedings), including enforcement action (execution of a court, or other, order) against the company or in relation to its property, that belongs to it or which is lawfully in its possession, may be commenced or proceeded with in any forum (court or arbitral forum).

Question 22

What is the effect of business rescue on contracts?

Answer 22

Section 136(2) provides that the business rescue practitioner may, during business rescue proceedings, and despite any provision to the contrary in an agreement,

(a) entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company under an agreement; or
(b) apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated above.

Section 136(3) provides that any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, may assert a claim against the company for damages.

Question 23

What is the effect of business rescue on liquidation?

Answer 23

There has been a move away from a culture of liquidation to a culture of rescue, in that if a company is not able to be restored to a position of solvency, then the next best option is for it to at least achieve a better result for the creditors than would arise from liquidation. Liquidation is still an option, but it is the last resort.