The lockdown and subsequent alert level restrictions brought on by by the covid-19 pandemic and Minister of Cooperative Governance and Traditional Affairs, Dr Nkosazana Dlamini Zuma’s regulations in terms of Section 27(2) of the Disaster Management Act, hindered and restrained the trading and operation of business entities across South Africa.
While the regulations have been eased in subsequent alert level phases, the impact of the hard lockdown and slow easing of economic activity has had a disastrous effect on business and industry. A wide range of businesses of have been forced to restructure, retrench or consider the ceasing of operations.
Many of these entities are, for the first time, forced to consider the prospect of Business Rescue proceedings.
Business Rescue (“BR”): What are the basics?
BR is governed by Chapter 6 of the Companies Act 71 of 2008 (“the Act”).
Section 128(1) defines it as “proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for –
- the temporary supervision of the company, and of the management of its affairs, business and property;
- a temporary moratorium/stay 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 to rescue the company by restructuring its affairs… in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or…results in a better return for the company’s creditors or shareholders.”
The purpose of BR in terms of the Act is thus to give ailing companies a chance to return to trading on a solvent basis or alternatively, to maximise the returns of the creditors and stakeholders of the company. This happens by restructuring the entity, under the control of a Business Rescue Practitioner (“BRP”) and subject to the approval and participation of its creditors.
When should Business Rescue be considered?
The BR process may be initiated where a company is in “financial distress” which is defined by section 128(f) of the Act as being when:
“i) it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing six months; or
ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months”
As to exact timing, it is advised that BR be considered when even the very first signs of financial distress appear. In many cases, where the BR process fails, the cause of such failure is the company’s delay in commencing BR.
It’s also important to understand what companies are best suited for BR. BR should not be considered a magic wand with which to turnaround a company’s fortunes. As it was stated in the South Gauteng High Court, in Welman v Marcelle Props 193 CC JDR 0408 (GST): “business rescue proceedings are not for terminally ill close corporations. Nor are they for chronically ill. They are for ailing corporations, which given time will be rescued and become solvent”.
Who applies for BR?
BR proceedings may commence either through the board of directors which, by way of a company resolution, elect to apply voluntarily for BR in terms of section 129 of the Act, or when an ‘affected person’ applies to court for an order placing the entity under compulsory BR in terms of section 131 of the Act.
According to section 1 of the Act, an “affected person” is a shareholder, creditor, employee (or their representatives) or a registered trade union representing employees of the company.
What does the procedure of applying entail?
The Act stipulates the procedural steps which need to be taken for voluntary and involuntary BR in sections 129 and 131 respectively.
In terms of section 129, BR proceeding are commenced when the directors of the company resolve to begin business rescue proceedings and place the company under supervision. The resolution has no force or effect until it has been filed with CIPC.
Non-compliance with the procedural requirements have strict consequences in terms of the Act and the following points should be considered:
- There must be a reasonable prospect that the company may return to solvent trading;
- Sufficient evidence to convince the court of such reasonable prospects are imperative, for example emergency financial resources and human capital; and
- Procedural requirements must substantially and formally be met.
What happens after the entity is placed under BR?
Firstly, the BRP must be appointed, either by the directors passing the resolution during voluntary applications or the court placing the entity under BR during an involuntary application.
Whilst the main objective of the procedure is to restructure the business according to a BR plan drawn up by the BRP, the following aspects which are directly affected by the BR process are worth mentioning:
- The directors remain the directors, with restricted powers and duties as the BRP steps into their shoes (section 137);
- Employees remain in the position they were prior to the BR proceedings, with certain exceptions (section 136);
- Shareholders will see no alteration in the status or class of issued shares unless the court demands it, or if it is strictly in terms of the approved BR plan (section 137);
- The status of creditors remains mainly unaffected (section 135);
- There is a moratorium on legal proceedings, subject to limited exceptions, for the duration of the BR process (section 133);
- Contractual obligations are placed in the hands of the BRP so that decisions may be made on behalf of the company in accordance with the BR plan (section 136).
Once the BRP has been appointed, he is charged with assessing the company’s affairs, liaising and negotiating with creditors and, ultimately, the presentation of a BR plan which can, if accepted by the creditors and successfully implemented, return the company to a healthy trading position.
As per the commentary by Judge Eloff in the Western Cape High Court in Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA423 (WCC), where the BR plan was ultimately set aside:
“…it is difficult to conceive of a rescue plan that will have a reasonable prospect of success of the company concerned continuing on a solvent basis unless it addresses the cause of the demise or failure of the company’s business, and offers a remedy therefor that has a reasonable prospect of being sustainable.”
Interplay between BR and liquidation procedures
BR proceedings may also commence in terms of section 141(2)(a)(ii) of the Companies Act, which allows for the BRP to apply to court to discontinue the BR proceedings and to place the company into liquidation. This becomes relevant when the BRP establishes that BR process will fail, and that the company cannot be resuscitated.
Liquidation remains an option but is preferably a last resort, especially if there is a reasonable prospect that the business or company might recover.
The two processes are inherently intertwined; if a company is placed under liquidation proceedings, an application to court for BR will suspend the liquidation proceedings temporarily (section 131(6) of the Act). Once BR has commenced, the company may not adopt a resolution for liquidation until the proceedings have ended(sections 129(6) and131(8)(a)) .
A natural consequence of failed BR proceedings is for the entity to be placed under liquidation. Whilst section 141(2)(a)(ii) of the Act states that the BRP must place the entity into liquidation upon the termination of BR proceedings, recent case law has found that on a strict interpretation of the section, read with section 132(2)(a) and 132(2)(b) of the Act, there rests no statutory duty on the BRP to do so. This is in line with the position taken by the Supreme Court of Appeal (SCA) in the matter of Diener NO v Minister of Justice and Others (South African Restructuring and Insolvency Practitioners Association (SARIPA) and Others as amici curiae)  1 All SA 317 (SCA) (“Diener”).
In paragraph 28, Plasket AJA states that “Its [the process of business rescue’s] very rationale is that it must end, either when its aim has been attained or when the realisation arises that rescue is not attainable.”.
Notwithstanding this duty, other affected or interested parties may seek an order placing the company into liquidation after failed BR proceedings.
Financial distress of companies is natural during these trying times. Although Government has, to a certain extent, enacted measures to support businesses adversely affected by the pandemic and resultant lockdown, many companies are now forced to make tough decisions and consider the initiation of BR and liquidation proceedings.
If you would like to discuss these proceedings or consider your options further, please contact us for further advice. Enquiries can be addressed to either of this article’s authors: Matthew Thomson or Megan Campher.