Business rescue is not simply for the asking

The debate as to whether business rescue or liquidation is appropriate for a company in financial distress ultimately comes down to which process is likely to yield a higher return for creditors and/or stakeholders. We often hear of failed business rescue proceedings where the company ends up being liquidated, but it is seldom the case that liquidation proceedings are converted to a business rescue.

6 Jun 2023 4 min read Dispute Resolution Alert Article

At a glance

  • The Western Cape High Court denied an application to place Golden Harvest, a company under final liquidation, in business rescue. The court found that there was no reasonable prospect of rescuing the company based on the evidence presented.
  • Factors contributing to the denial included major creditors' refusal to support the proposed business rescue plan, cancellation of company leases, depletion of the workforce and top management, severe reputational damage, inadequate post commencement finance, and a lengthy proposed duration for the business rescue plan.
  • The court concluded that the application lacked good faith and highlighted the need to prove the viability of business rescue proceedings in court. Business rescue is not guaranteed and requires substantial evidence.

The Western Cape High Court in Forty Squares (Pty) Ltd and Another v Noris Fresh Produce (Pty) Ltd t/a Golden Harvest and Others (4200/2023) [2023] ZAWCHC 78, dealt with an application to place a company that was under final liquidation, in business rescue. In early 2022, Golden Harvest ran into severe cash flow problems, resulting in it defaulting on several of its payments due to suppliers and creditors. A disgruntled supplier applied for the liquidation of Golden Harvest. A provisional liquidation order was granted, however on the return date, Golden Harvest’s counsel appeared and sought a postponement to prepare an application to place the company under business rescue. The application for postponement was denied, and Golden Harvest was placed under final liquidation.

In March 2023, the sole shareholder of Golden Harvest, Forty Squares (Pty) Ltd (Forty Squares) and certain employees of Golden Harvest lodged an application for an order placing the company under business rescue in terms of section 131 of the Companies Act 71 of 2008 (Act). The application was opposed by the liquidators of Golden Harvest and by Erfco, the latter having intervened by virtue of its claim in Golden Harvest’s insolvent estate for over R44 million. In support of the business rescue application, a business rescue plan was prepared by a senior business rescue practitioner. The plan proposed the introduction of post commencement finance of R20 million, which was to be contributed to the company by its sole shareholder, Forty Squares.

Reasonable prospect of rescue

The main consideration in business rescue applications is that a court must be satisfied that there is a reasonable prospect of rescuing the company. It has been held that a “reasonable prospect” requires more than a mere prima facie case or an arguable possibility. Furthermore, the prospect must be based on reasonable grounds, and not on a mere speculative suggestion. In order to successfully prove that there is a reasonable prospect of rescuing the company, the applicant will need to provide a substantial measure of detail about the proposed plan. To allege that there is a proposed plan is not sufficient. Such detail would include, inter alia, concrete and objectively ascertainable details of the likely costs of rendering the company able to resume its business, and the likely availability of the necessary cash resources in order to enable the company to meet its day-to-day expenditure.

A further important factor is that during liquidation, where evidence becomes available that business rescue proceedings will yield a better return for creditors and jobs will be retained, such business rescue proceedings should not be denied. However, a guiding factor is that the application for business rescue must be dismissed where it is not genuine or in good faith, or where it does not establish that the benefits of a successful business rescue will be achieved.

No prospect of solvency and commercial viability

In considering this application, the court held that the evidence presented to the court demonstrated that there were no anticipated circumstances which would radically improve the prospects of Golden Harvest being returned to solvency and commercial viability. Firstly, the major creditors had all stated that they would not vote in favour of the proposed business rescue plan or any other proposed plan. This is significant, as in terms of the Act, the proposed business rescue plan will be approved only if it is supported by the holders of more than 75% of the creditors’ voting interests. The court found that this factor alone rendered the application for business rescue problematic.

Secondly, the liquidators had cancelled all of the company’s leases, meaning that the company no longer had any premises from which to trade. Thirdly, the company’s workforce had depleted and many of the top managers had moved on. Fourthly, the company had suffered severe reputational damage and would undoubtedly experience difficulty in procuring produce from suppliers.

Fifthly, the court noted that the post commencement finance provided for in the plan was vague and the amount was manifestly insufficient as it amounted to approximately 12% of the company’s liabilities. Finally, it was highlighted that a business rescue plan with a proposed duration of three years was an extraordinarily long time given that business rescue is meant to be a speedy process aimed at a “quick-fix solution”, and the proposed return of 30c in the rand to creditors was based on skewed calculations and was overly ambitious. The court concluded that the haste with which the application was brought, together with the inadequate plan, left the impression that the application was not in fact brought in good faith.

While the judgment confirms the principle that business rescue may be granted after a company has been placed in final liquidation, it also highlights the extent to which the viability of the business rescue proceedings needs to be proven in court. Business rescue is not simply for the asking.

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