Business rescue offers a very useful alternative to the liquidation or winding-up of a company. During and after the pandemic, many companies may have to consider whether business rescue is an appropriate response to the economic impact that COVID-19 may have had on their business.
Here are 10 things to know when considering business rescue:
1. Business rescue entails the rehabilitation of a company that is financially distressed. A company is deemed to be financially distressed if it is reasonably unlikely that:
the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, or
the company will become insolvent within the immediately ensuing six months.
2. When a company begins to experience financial difficulties, the directors must determine whether the company should continue trading or whether such trading would be reckless as contemplated in section 22 of the Companies Act. Whilst the Companies and Intellectual Property Commission (CIPC) has issued a practice note regarding not penalising businesses that continue to trade despite being in financial difficulty due to COVID-19, this is a temporary measure, and businesses in financial difficulty will still need to explore whether business rescue is a more sustainable solution.
3. Where the board of directors has established that the company is under financial distress, the next decision they need to make is whether there is a reasonable prospect of rescuing the company. A reasonable prospect that a company can be rescued will only exist where there are reasonable prospects of either restoring the company to a solvent state or at least facilitating a better deal for creditors and shareholders than they would secure from liquidation.
4. If the board of directors has reasonable grounds to believe that the company is financially distressed but the board has not placed the company under business rescue, the board must deliver a written notice to each affected person (shareholder, creditor, registered trade union, and employee) setting out its reasons for not placing the company under business rescue. A decision to send out notice must be given due consideration since it advises the world at large that the company is financially distressed. This notice may affect the trading activities of the business, for example:
Creditors may change their payment terms;
any negotiations for rescue finance with banking creditors may be affected; and
it can lead to labour action as it may cause concern amongst employees and trade unions.
5. Where the board of directors has not chosen to place a financially distressed company under business rescue, the shareholders, creditors, registered trade unions, and any of the employees are within their rights to apply to place the company under business rescue.
6. The resolution by the board of directors to commence business rescue proceedings has no effect until it has been filed with the CIPC. The business rescue proceedings only formally commence on the date of the filing of the board resolution.
7. On 13 March 2020, the CIPC issued a practice note regarding an updated business rescue filing procedure to be followed when placing a company under business rescue. The practice note took effect from 1 April 2020. The practice note outlines the forms and supporting documents to be submitted to the CIPC during the various stages of the business rescue proceedings. In addition to the filing requirements, the Companies Act outlines the requirements for placing a company under business rescue.
8. Once business rescue proceedings commence, the appointed business rescue practitioner is conferred full managerial control of the company in substitution for the board of directors and pre-existing management. The pre-existing management will continue to function during the process but under the authority of the business rescue practitioner. The business rescue practitioner has to develop and implement the business rescue plan. In addition, the business rescue practitioner has the power to remove from office any person who forms part of the pre-existing management of the company or appoint a person as part of the management of a company.
9. The business rescue provisions of the Companies Act do not apply to unincorporated associations or entities such as sole traders, partnerships, business trusts, or co-operatives.
10. Not all companies are suitable for business rescue. Depending on the particular circumstances of a company, there is a possibility that liquidation will in fact be more advantageous to creditors and shareholders. Sometimes a sale of the business to an interested purchaser would be quicker, more effective, and less expensive. Even a compromise with creditors in terms of section 155 of the Companies Act may in certain circumstances be more appropriate than business rescue.