Navigating the Complexities of Business Rescue Proceedings in South Africa

According to Businesstech, between January – April of this year, 513 companies were liquidated. Two well-known South African companies, Ellies and West Pack are in business rescue, with the likes of Pick ‘n Pay and Multichoice facing uncertain futures.

Pick n Pays latest financials reveal a drastic swing from a R1.17 billion profit to a R3.2 billion loss over the last year alone. For the first time in Pick n Pay’s listed history, it has become technically insolvent, with total liabilities exceeding its total assets by R183 million.

Multichoice over the last financial year recorded a R4.1 billion loss and also became technically insolvent.

The changing business environment, poor economic conditions, and poor business decisions have resulted in many businesses – both small and large – facing dire financial situations, uncertain futures, and real fears over whether or not their businesses will be running this time next year.

Luckily for the financially vulnerable business, the Companies Act 71 of 2008 (the “Act”) at Chapter 6 deals with business rescue which can provide relief to businesses that are struggling financially.

All about “Business Rescue”

Section 128(1)(b) of the Act defines “Business Rescue” as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

Business Rescue enables a company which is in financial distress, to reorganise and restructure its affairs, assets, equity, debts, property, and liabilities.

The objectives of business rescue

Section 128(1)(b)(iii) of the Act, sets out the following two objectives of Business Rescue:

• to restructure the company’s affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis; or
• if it is not possible for the company to so continue in existence, that the business rescue results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

How to achieve the business rescue objectives

Chapter 6 of the Act at Section 128(1)(b)(i)-(iii) provides the following tools to achieve the objectives:

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

How to commence business rescue proceedings

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

Voluntary business rescue proceedings 

Under Section 129 of the Act the board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that- (a) the company is financially distressed; and (b) there appears to be a reasonable prospect of rescuing the company.

A company will be financially distressed in terms of Section 128(1)(f) of the Act if:

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

Compulsory business rescue proceedings 

Under Section 131 of the Act, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings. (2) An applicant in terms of subsection (1) must- (a) serve a copy of the application on the company and the Commission; and (b) notify each affected person of the application in the prescribed manner.

An “affected person” is defined in Section 128(1)(a) of the Act as:

(i)                           a shareholder or creditor of the company;

(ii)                        any registered trade union representing employees of the company; and

(iii)                      if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives;

Under Section 131(4)(a) and in order to succeed with an application to place a company under compulsory business rescue, the affected person must satisfy the court 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,

and there is a reasonable prospect for rescuing the company; or

(b) dismissing the application, together with any further necessary and appropriate order, including an order placing the company under liquidation.

The business rescue proceedings will commence as soon as the business rescue order is granted by the court.

Appointment of the Business Rescue Practitioner (BRP)

Section 128(1)(d) defines a BRP as “a person appointed, or two or more persons appointed jointly, in terms of this Chapter to oversee a company during business rescue proceedings and “practitioner‟ has a corresponding meaning”.

Voluntary business rescue proceedings 

Under Section 129(3) and within five business days after a company has adopted and filed a resolution, as contemplated in subsection (1), or such longer time as the Commission, on application by the company, may allow appoint a business rescue practitioner who satisfies the requirements of section 138, and who has consented in writing to accept the appointment.

Section 138 sets out the qualifications required in order to be a BRP -

(a)      is a member in good standing of a legal, accounting or business management profession accredited by the Commission;

(b)     has been licensed as such by the Commission in terms of subsection (2);

(c)      is not subject to an order of probation in terms of section 162(7);

(d)     would not be disqualified from acting as a director of the company in terms of section 69(8);

(e)      does not have any other relationship with the company such as would lead a reasonable and informed third party to conclude that the integrity, impartiality, or objectivity of that person is compromised by that relationship; and

(f)        is not related to a person who has a relationship contemplated in paragraph (d).

Compulsory business rescue proceedings 

According to Section 131(5) “If the court makes an order in terms of subsection (4)(a), the court may make a further order appointing as interim practitioner a person who satisfies the requirements of section 138, and who has been nominated by the affected person who applied in terms of subsection (1), subject to ratification by the holders of a majority of the independent creditors‟voting interests at the first meeting of creditors, as contemplated in section 147.”

General powers and duties of the BRP

Section 140 of the Act sets out that during a company’s business rescue proceedings, the practitioner is granted the following powers and duties:

(a)      has full management control of the company in substitution for its board and pre-existing management;

(b)     may delegate any power or function of the practitioner to a person who was part of the board or pre-existing management of the company;

(c)      may-

(i)                 remove from office any person who forms part of the pre-existing management of the company; or

(ii)              appoint a person as part of the management of a company, whether to fill a vacancy or not, subject to subsection (2); and

(d)     is responsible to-

1. develop a business rescue plan to be considered by affected persons, in accordance with Part D of this Chapter; and
2. implement any business rescue plan that has been adopted in accordance with Part D of this Chapter.

If a BRP fails to fulfil his/her duties as set out above, an affected person can approach the courts to have the BRP removed as the practitioner in that Business Rescue.

The Business Rescue Plan (the Plan)

Under Section 150(1), the practitioner, after consulting the creditors, other affected persons, and the management of the company, must prepare a plan for consideration and possible adoption at a meeting held in terms of section 151 (meeting to determine the future of the company).

The plan must set out the manner in which it’s envisaged that the company will be rescued. The plan must deal with, inter alia, the background of the company (Section 150(2)(a)), proposals on how the company will be rescued (Section 150(2)(b)), and assumptions or conditions, if there are any, upon which the plan is based (Section 150(2)(c)).

Section 150(5) states that the plan must be published by the company within 25 business days after the date on which the practitioner was appointed, or such longer time as may be allowed by-

1. the court, on application by the company; or
2. the holders of a majority of the creditors‟ voting interests.

Section 152(4) of the Act states that a plan that is adopted is binding on the company, and on each of the creditors of the company and every holder of the company’s securities, whether or not such a person- (a) was present at the meeting; (b) voted in favour of adoption of the plan; or (c) in the case of creditors, had proven their claims against the company.

What are the legal consequences of business rescue proceedings?

When a company has been placed under business rescue – whether voluntarily or by way of a court order - there are legal consequences regarding a few of the company’s activities and stakeholders, including creditors. The objective is to protect a company while the BRP attempts to return it to a viable position.

To summarise, the primary consequences of business rescue proceedings at set out in Sections 133 – 136 are as follows:

• General moratorium on legal proceedings against company - civil legal proceedings against the company, including enforcement action, are stayed until the end of the business rescue process;
• Protection of property interests - the disposal of the company’s property is restricted;
• Post-commencement finance - the refinancing of the company is facilitated by allowing for unencumbered company assets to be used to secure loans;
• Effect of business rescue on employees and contracts - employment contracts are generally protected while other contracts of the company may be cancelled, or the company’s obligations may in certain circumstances be entirely, partially, or conditionally suspended by the BRP.

When do Business Rescue proceedings end?

Section 132(2) sets out that Business Rescue proceedings will end when:

(a) the court-

(i) sets aside the resolution or order that began those proceedings; or

(ii) has converted the proceedings to liquidation proceedings;

(b) the practitioner has filed with the Commission a notice of the termination of business rescue proceedings; or

(c) a business rescue plan has been-

(i) proposed and rejected in terms of Part D (Development and approval of business rescue plan) of this Chapter, and no affected person has acted to extend the proceedings in any manner contemplated in section 153 (failure to adopt a business rescue plan); or

(ii) adopted in terms of Part D of this Chapter, and the practitioner has subsequently filed a notice of substantial implementation of that plan.

Although we have taken the utmost care to ensure that this information is correct – having taken this information directly from the Companies Act 71 0f 2008 – we urge you to consult with a suitably qualified legal practitioner who will be able to guide you through the process of business rescue proceedings and the best way forward.

Please feel free to contact us to see how we can best help you.

We are a law firm that considers honesty to be core to our business. We are a law firm that will provide you with clear advice and smart strategies - always keeping your best interests at heart!

(Sources used and to whom we give thanks – Businesstech; Companies Act 71 of 2008).