Business Rescue Explained

Two years of a pandemic has dealt extreme disruption to businesses worldwide. Ultimately, these disruptions have impacted entities' financial performance, which may give rise to serious solvency concerns and financial distress in the worst case.

Key indicators of financial distress include:-

• A significant decline in turnover and profitability;
• Poor cashflow projections;
• A deterioration of key liquidity ratios such as working capital, liquidity, and receivables turnover.
  

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When in financial distress, entities have limited options, such as restructuring, business rescue, or liquidating.  

Data indicates that from January to December 2021, there were 1,932 reported liquidations and 1,658 active business rescue proceedings in South Africa.    

In this article, we will explore the aspect of business rescue proceedings, which is one of the mechanisms at companies' disposal to weather the storm.

The business rescue was introduced in South Africa as a cost-effective and flexible restructuring tool for a struggling business. The purpose of business rescue proceedings is to preserve the business and allow the company to avoid entering into liquidation by coming to an informal, but binding agreement with all affected parties dealing with the company, which includes creditors, shareholders, employees, and trade unions ("the affected parties").  

One of the key benefits of business rescue is that it shields the company from creditor pressure and allows the company breathing space to restructure its affairs and continue trade in the long run on a profitable basis.

The procedure for implementing business rescue proceedings is relatively straightforward. Firstly, the company's directors adopt the business rescue process by filing a resolution and a form "COR123.1" with CIPC. Secondly, the directors then appoint a business rescue practitioner to review the entity's finances and identify whether business rescue proceedings are likely to preserve the business.

After their appointment, the business rescue practitioner must convene a meeting of creditors.    During the initial meeting, the practitioner must inform creditors of the prospects of rescuing the company, and creditors will also be requested to present proof of their claims against the company. In addition, other administrative aspects are canvassed, such as forming an independent creditors committee, which may receive and consider reports relating to the business rescue plan on behalf of the general body of creditors.  

After the initial meeting, the practitioner must then prepare the business rescue plan, which invariably is due within 25 business days after the date on which the directors appointed the practitioner.     The plan's primary purpose would be to convince the creditors (or at least enough of them) that there is good business that can continue and pay its debts in the future.  

After the plan's publication, the business rescue practitioner will then convene a second meeting with the creditors to consider the proposed business rescue plan. During the second meeting, and after considering the proposed plan, each creditor will cast their vote insofar as the plan's adoption is concerned, with reference to their independent voting rights.   

A creditor's voting right is determined as a percentage of the creditors' total claim against the company compared to the total value of all other creditors. For instance, if the total creditors amounts to R10 000 000.00, and the creditors' claim is R500 000.00, the creditor will have a 5% voting right.   Key to the plan's adoption is the approval of at least 75% 

of the value of the creditors of the company concerned, agreeing to the proposal.  

The adopted plan binds the company and creditors, irrespective of a creditors attendance of meeting or voted in favour thereof.   

Should the plan contain a compromise with the creditors (such as the release of payments, extinguishing of securities, etc.), and the plan is adopted, the parties affected by the compromise will not be entitled to claim the balance of their claim against the company, even after the business rescue process terminates, and the company is trading as a solvent company again.

If suretyships remain unaffected by the adoption and implementation of the plan, creditors may then pursue the sureties for any shortfall.

The current economic climate in South Africa, primarily attributed to state capture, civil unrest, and the COVID-19 pandemic, significantly increases the risk of financial instability and the survival of businesses.    Boards and their advisors should be cognisant of the indicators of financial distress and their duties regarding continued trade while insolvent.  

Implemented correctly, the business rescue process can represent a very tool to avoid the detrimental consequences of a formal insolvency process.