Business Rescue

Business rescue: the Companies Act 71 of 2008

Source: Lexis Nexis (Companies Act 71 of 2008: Overview)
Business rescue can take two forms.
1.    Voluntary
 
·         If there are reasonable grounds to believe that the company is “financially distressed” and there appears to be a reasonable prospect of rescuing the company, the board can take a resolution to place a company under business rescue and must file a notice with the CIPC and send a copy of the notice to every “affected person”, who is a shareholder or creditor of the company and any trade union representing the employees and if any employees are not represented by a trade union, each of those employees (s 128(1)(a) and appoint a practitioner. The resolution to place the company under business rescue cannot be taken if the company is in liquidation (s 129).
 
·         A company is “financially distressed” if it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing 6 months or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months (s 128(1)(f)).
 
·         An affected person can apply to court to set aside the resolution and/or the appointment of the practitioner (s 130). If the board does not take the resolution in the event of the company being “financially distressed”, it must notify every affected person and indicate on what basis the company is financially distressed and also give reasons why it did not take the resolution (s 129).
 
2.    Court order
 
·         Any affected person can at any time, even during the course of liquidation proceedings, apply to court to place the company under business rescue if the company is financially distressed or if 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 if it is otherwise just and equitable to do so for financial reasons. The application cannot be brought if the company was voluntarily placed under business rescue (s 131).
 
·         If there is a reasonable prospect for rescuing the company, the court can place the company under business rescue and appoint an interim practitioner recommended by the affected person who made the application (subject to creditors’ ratification) (s 131). The practitioner must have the qualifications as set out in section 138.
 
 
Business rescue process
·         After appointment, the practitioner investigates the affairs of the company and determines if there is a reasonable prospect of the company being rescued. If it is not the case, s/he must apply to court for cessation of the proceeding and placing the company in liquidation (s141). If the practitioner determines that there is a reasonable prospect of the company being rescued, s/he must hold meetings with creditors and employees to inform them that there is a reasonable prospect of rescuing the company and representative committees. 
 
·         The practitioner must prepare a business rescue plan, after consultation with management of the company, affected persons and creditors and the plan must contain at least the information in section 150(2) as well as other information to assist persons to accept or reject the plan and the company must publish the plan.
 
·         Within 10 business days after the publication of the plan the practitioner must convene a meeting of creditors and any other holders of a voting interest (as determined by section 145(4) to (6)) for the purpose of considering the proposed rescue plan and the practitioner must also inform the meeting whether s/he continues to believe that there is a reasonable prospect of the company being rescued. S/he must provide an opportunity for the employees’ representatives to address the meeting and must invite discussion on, and conduct a vote for preliminary approval of the plan and/or on any motions to amend the proposed plan or to adjourn the meeting and to direct the practitioner to revise the plan.
 
·         Approval of a plan is by a vote of more than 75% of the creditors’ voting interests of which at least 50% must be by independent creditors (ie not related to company and or practitioner). A secured and unsecured creditor has a voting right equal to the claim against the company, while a concurrent creditor will have a vote equal to the amount which s/he could reasonably expect to receive upon liquidation (s 145(4)-(6)). If the adopted business plan alters the rights of securities holders, a separate meeting of securities holders must also approve the plan with a 50% + 1 majority. An adopted business plan binds all creditors, securities holders and also the company (s 152).
 
·         If the business plan is not approved, the practitioner can ask the holders of voting interests to vote for submission of a revised plan, or can inform the meeting that the company will apply to court to set the result of the vote aside because it is “inappropriate”. If the practitioner does not take these steps, any affected person can act in that manner and may also make an offer to buy the voting interests of those who voted against the plan at a value independently and expertly determined (subject to court review on application by holder of the dissenting rights) to be a fair and reasonable estimate of the return if the company were to be liquidated (s 152).
 
·         The effect of an adopted business plan is that no legal proceedings against the company can be commenced or proceeded with without written consent of the practitioner or leave of the court. Any guarantee or surety by the company is only enforceable with leave of the court and any claim against the company subject to a time limit, is suspended for the period of the business rescue (s133). Property dealings must be at arm’s length and in the ordinary course of business at fair values with written prior permission of the practitioner (s 134). The practitioner may partially or conditionally suspend any obligation of the company under any agreement that existed prior to the business rescue or apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any agreement to which the company is a party (s 136(2)). Employees are employed on existing terms and conditions as before the commencement of the business rescue and neither the practitioner, nor a court can terminate those contracts, except in accordance with applicable labour laws (s 136(2A)).
 
·         Directors continue to exercise the “functions of director(s)” but subject to the authority of the practitioner. Management functions are exercised under the express instructions of the practitioner and if acting under such instructions, the directors are exempt from duties under section 76 and certain liabilities under section 77 but section 75 still applies (s 136(1)). The practitioner, however, is subject to duties and liabilities under sections 75, 76 and 77 (s 140(3)). Acts by the board of director/s on behalf of the company that require the approval of practitioner are void without that approval (s 137).
 
·         Business rescue is terminated if the resolution to commence business rescue is set aside by court order or if the court converts the business rescue to liquidation (s 132) or if the proposed business plan is rejected and the practitioner files a notice of termination (s 153(5)). If the business plan has been adopted and implemented, business rescue ends with the filing of a notice of substantial implementation (ss 132 and 152 (8)).