Study Unit 9: Business Rescue Flashcards
The concept of business rescue
Business rescue process:
Temporary supervision of the company and management of its affairs
Temporary moratorium on the rights of claimants against the company
Development and implementation of a business rescue plan
When & Why?
The business rescue provisions apply to ‘financially distressed’ companies
A company is ‘financially distressed’ if it appears to be:
Reasonably unlikely that it will be able to pay all of its debts as they fall due and payable
Reasonably likely that it will become insolvent
…Within the immediately ensuing six months.
Commencement of BR:
Business rescue proceedings may be initiated either by:
A resolution by the board of directors
A court order, on the application of an ‘affected person’.
Business rescue resolution
The board may pass a resolution to begin business rescue proceedings if it has reasonable grounds to believe that:
The company is financially distressed
There appears to be a reasonable prospect of rescuing it from the distress
The resolution becomes effective when it is filed with the Commission
A business rescue resolution may not be adopted in this way if liquidation proceedings have already been initiated.
The company within five business days must notify every ‘affected person’ of the resolution
The company must appoint a business rescue practitioner within five business days
The Commission and affected persons must be so notified
Failure by the company to comply with these requirements renders the business rescue resolution null and void
Commencement of business rescue by court order
If the board does not pass a business rescue resolution, an affected person may apply to court for an order to commence business rescue
All affected persons must be notified and have the right to participate in the hearing
The court may make the order if it is satisfied that:
The company is financially distressed
The company has failed to pay any amount in terms of an obligation under a public regulation, or contract, with respect to employment-related matters
It is just and equitable to do so for financial reasons
and there is a reasonable prospect for rescuing the company
Legal consequences
General moratorium:
General moratorium or stay on civil legal proceedings against the company or its property
Such claims may only be enforced with the consent of the business rescue practitioner or the leave of the court
Protection of property interests:
The power of the company to deal with or dispose of its property is restricted.
Post-commencement finance:
Where a company under business rescue obtains financing, it is permitted to use its assets as security
These creditors (whether secured or unsecured) will have preference over any other unsecured creditors (but not over employment-related payments that became due during business rescue)
Employees and employment contracts:
Employees remain employed on their existing terms and conditions
Employees are preferred unsecured creditors in respect of unpaid remuneration that was already due when business rescue commenced
Other contracts with the company:
The business rescue practitioner may suspend, partially or entirely, almost any other contract of the company
The practitioner may apply to court to cancel, partially or entirely, any agreement to which the company is a party, on terms that are just and reasonable in the circumstances
The other party to the contract may claim damages only, but not specific performance.
Shareholders:
Generally no change in rights
Directors:
Directors continue to hold office and to perform their functions, but under the authority and instructions of the business rescue practitioner
Directors must co-operate with the business rescue practitioner
Directors are excused from certain directors’ duties and liabilities while operating under the instructions of the practitioner
Directors may be removed from office if they fail to co-operate with or they hinder the business rescue practitioner.
Rights of creditors
Right to be notified of and to participate in all stages of the proceedings, including voting on the business rescue plan
Right to form a creditors’ committee to represent their interests and consult with the business rescue practitioner
Voting rights: the voting interest is equal to the value of the creditor’s claim against the company, whether the claim is secured or unsecured.
Business rescue practitioner
Powers and duties:
The practitioner takes over full management of the company, but may delegate to a director or manager
The practitioner must investigate the affairs of the company and decide whether it has a reasonable prospect of being rescued
Where appropriate, possible criminal acts must be investigated
The practitioner must develop and implement a business rescue plan
