15 June 2010

Business Rescue - The Role of Creditors

It does not bode well for creditors that the directors of a company can commence business rescue process by resolution. In contrast to judicial management, this allows directors of a financially distressed company to obtain a moratorium on all legal proceedings against the company without first having to obtain a court order to that effect.

Creditors must be notified of the resolution and of the identity of the business rescue practitioner appointed. A creditor may then apply to court to have the resolution or the appointment of the practitioner set aside or require that the practitioner must provide security. Creditors may also apply for a court order placing the company under supervision and commencing business rescue proceedings.

Once rescue proceedings have commenced, the course and outcome of the proceedings are primarily decided by the creditors who are entitled to both formally and informally participate in the process. The Companies Act (the Act) provides expressly that the company and each creditor is entitled to notice of all court proceedings, meetings or other relevant events concerning the rescue proceedings.

Within 10 business days of being appointed, the practitioner must convene the first meeting of creditors. At this meeting claims may be proved and the creditors may determine whether or not to appoint a committee of creditors. If a committee of creditors is appointed, the committee is entitled to give input and be consulted by the practitioner in the development of the business rescue plan. If business rescue proceedings were instituted by an affected person, the appointment of the practitioner nominated by the affected person will be subject to ratification by the majority of creditors' voting rights, at the first creditors meeting.

The practitioner and the management of the company must prepare a business rescue plan for consideration and possible adoption by creditors and, if applicable, shareholders and employees, at a meeting convened for this purpose. At this meeting, creditors are entitled to vote to amend the proposed plan, or to direct the practitioner to adjourn the meeting in order to revise the plan for further consideration. The proposed plan must be approved by the holders of more than 75% of the creditors' voting interests that were voted and at least 50% of the independent creditors voting interests, if any, that were voted.

Once a rescue plan has been adopted, it becomes binding on each and every creditor and shareholder of the company irrespective of whether they were present at the meeting or voted in favour of the adopted plan.

If the proposed plan is rejected, the practitioner, failing which any creditor, may call for a vote of approval from the holders of voting interest to prepare and publish a revised plan for adoption at a further meeting. If this is not done, a creditor may apply to court to set aside the result of the vote rejecting the plan. Alternatively, any creditor or other affected person/s may make a binding offer to purchase the voting interests of such persons, who opposed adoption of the rescue plan at a value which is a fair and reasonable estimate of the return to those persons if the company were to be liquidated. If none of the above leads to the adoption of a rescue plan, the rescue proceedings will terminate and the company will thereafter in all likelihood be liquidated.

To encourage financiers to assist companies to rehabilitate, the Act introduces the concept of 'post commencement finance'. This means that the claims of creditors who provided companies with finance during rescue proceedings would be paid in preference and in the order in which they were incurred over all unsecured claims against the company. The claims of the creditors may also be secured to the lender by utilising any asset of the company to the extent that it is not otherwise encumbered.

Consequently, creditors of financially distressed companies are afforded considerable latitude in deciding the direction of business rescue proceedings and can use this process as an effective mechanism to achieve returns that could exceed expected returns in a liquidation.

Johan Green, Senior Associate
Corporate and Commercial

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