5 December 2010 by and

Business Rescue and the Companies Act

"The drowning man is not troubled by rain." - Persian proverb

  • The Companies Act 46 of 1926 and 1973 adopted a system of judicial management in order to try to restore the liquidity of a company. In practice, however, judicial management has not always been successful and lacks input from relevant stakeholders. In an attempt to remedy this, the Companies Act 71 of 2008 (the Act) gives effect to business rescue regimes to target the restructuring and rehabilitation of a financially distressed company.
  • Chapter 6 of the Act governs business rescue provisions. A financially distressed company is one that is unable to pay all its debts or is likely to become insolvent within the immediately ensuing six months. Such a company would be able to consider using the business rescue procedure.

There are two ways in which business rescue can be implemented:

  • First, by way of resolution in terms of s129 of the Act, where the directors have reason to believe on objective grounds that the company is financially distressed and that there is a reasonable possibility that the company may achieve its goals of rehabilitation through the implementation of business rescue. The directors voluntarily initiate rescue proceedings upon a resolution being passed. Within five days, a business rescue practitioner must be appointed. Notice of the appointment of the practitioner and notice of the resolution must be published to every affected person. An affected person may be a creditor, shareholder, employer and /or registered trade union. It is essential for the company to file a notice of the practitioner's appointment with the Companies and Intellectual Property Registration Office (CIPRO) within two days after the practitioner's appointment.
  • The second method of implementation of business rescue is set out in s 131 of the Act. This occurs when an affected person makes an application to court for an order placing the company under supervision and to initiate business rescue proceedings. A practitioner may be appointed to manage the affairs of the company. If the court is satisfied that a prima facie case is established, an order placing the company under supervision may be granted. The court may dismiss the application if it is not satisfied, and will grant an appropriate order which may include an order placing the company under liquidation.

A practitioner, after consulting creditors, other affected persons and management, must prepare a business rescue plan on behalf of the company and this will involve a comprehensive due diligence. Section 141 requires a practitioner to investigate the company's affairs, business, property and financial situation in order to determine whether there is a reasonable prospect of the company being salvaged. The practitioner must prepare a business rescue plan to present to the affected persons and to the creditors where it will ultimately be decided whether or not the plan will be adopted.

If it is evident that the company cannot be rescued, an application is brought to discontinue the business rescue proceedings, and placing the company in liquidation.

In comparison to judicial management, the practitioner in developing the business rescue plan is entitled to work with the set management structures of the company as opposed to having to replace the existing management of a company. This will increase the probability of a successful business rescue.

The business rescue plan is an important, innovative step for South African business. The business rescue plan affords employees and affected persons the opportunity to express their views and concerns and gives input on a proficient system which aids success and seeks to avoid liquidation in the right circumstances.

Fiona Leppan, Director and Michael Yeates, Senior Associate, Employment

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