Relevant to LW-ZAF
This article briefly deals with the following:
- The meaning of business rescue
- A brief overview of the relevant procedure
- Legal consequences of business rescue proceedings
- The business rescue practitioner
- The business rescue plan
The business rescue provisions (sections 128–154) are some of the most important, new provisions brought about by the Companies Act (CA) 2008 applying to companies and close corporations. Section 7(k) (CA) states that one of the purposes of the Act is to ‘provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders’. Business rescue provisions apply to financially distressed companies – thus, companies that are not yet insolvent.
A company is financially distressed when it appears that the company is reasonably unlikely to be able to pay its debts as they fall due and payable over a period of six months, or when it appears that the company will be reasonably likely to become insolvent within the ensuing six months (see s128(1)(f)).
The idea with business rescue proceedings is to restore a company to a profitable entity and to avoid liquidation. Business rescue does not necessarily entail a complete recovery of a company in the sense that the company will have regained its solvency, its business restored and its creditors paid. Sometimes a business rescue process can result in a management buy-out or a takeover of the distressed company (see Cassim et al, p863).
The meaning of business rescue
‘Business rescue’ is defined in section 128(1)(b) (CA) as:
'proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
(i) the temporary supervision of the company, and of the management of its affairs, business and property
(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and
(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.'
The primary objective with business rescue provisions is to save the company as a going concern. If this is not possible, then the secondary object or goal is to restructure the company in such a way that shareholders and creditors will still get a return on their investments, which is better than the return that they would have received should the company be liquidated.
Commencement of the proceedings
A company has to be ‘financially distressed’ before business rescue proceedings can commence. There are three stages during the business rescue process:
- The temporary supervision of the company’s affairs
- The temporary moratorium on claims and proceedings against the company
- The development and the implementation of a business rescue plan.
(For a detailed discussion of business rescue proceedings, refer to Cassim et al, Chapter 18.)
Business rescue proceedings are commenced in one of two ways:
- By way of a voluntary board resolution, with a majority vote. The can be done if the board has reasonable grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. The company must therefore be able to achieve the goals of a business rescue. This is dealt with in section 129(1)(a) and (b). Once the board has resolved to place a company under business rescue it is their duty to implement it. The board resolution must also be filed with the Companies and Intellectual Property Commission to be of effect. If there are reasonable grounds to believe that a company is financially distressed and the board does not take a resolution to commence with business rescue proceedings, the board has to deliver a written notice to all affected parties with the relevant reasons for not adopting a resolution (see s129(7)).
An affected person may also apply to court to set aside a resolution to commence with business rescue proceedings if there is, for example, no reasonable basis for believing that the company is financially distressed (see s130(1)(a)(i)–(iii)).
- An affected person may also apply to a court at any time for an order placing the company under business rescue proceedings. This is dealt with in section 131(1). This may even be possible if the company is under liquidation proceedings. The applicant must serve a copy of the application on the company and the Companies Commission and notify each affected person in the prescribed manner (see s131(2)(a)). The relevant grounds in terms of which a court may make an order to commence with business rescue proceedings are (s131(4)(a)):
- The company is financially distressed
- The company has failed to pay over any amount in terms of an obligation under a public regulation or contract in respect of employment matters, or
- It is otherwise just and equitable to do so for financial reasons.
These grounds are therefore wider than the grounds relevant for a board resolution.
If the proceedings commenced due to a board resolution, then the actual proceedings will begin when the resolution has been filed with the Commission. If it commenced in terms of a court order, the relevant date is when the applicant applies to court.
The first important consequence is the general moratorium: this entails a freeze or stay on any legal proceedings (s133(1)(a)) or executions against the company. There is also a moratorium on the disposal of a company’s property (s134). A company may only dispose of property if it is in the ordinary course of business or it is a bona fide transaction at arms’ length for fair value, approved in advance and in writing by the business rescue practitioner or it is a transaction that is part of an approved business rescue plan.
Creditors would be reluctant to finance a company that is placed under business rescue. Such finance is, however, critical to the survival of the company. Section 135(2) is relevant in this regard. It is held that a company may obtain financing that is unrelated to employment. This financing may be secured to the lender by utilising any unencumbered asset of the company and will be paid in the order of preference as determined in section 135(3)(b). The relevant order is:
- the practitioner’s remuneration and expenses and all claims arising from the costs of the business rescue proceedings
- all claims for post-commencement financing obligations relating to employment matters
- post-commencement finance not employ-related
- unsecured pre-commencement finance.
Effect on employment contracts, employees, contracts, shareholders and directors
One of the main objectives of business rescue is to protect the employees. Section 136(1)(a) is relevant, employees will be employed on the same basis as they were employed prior to the commencement of the business rescue proceedings. This is subject to a few exceptions like changes that occur in the ordinary course of attrition.
With regards to general contracts, the practitioner has the right to suspend any obligation arising under an agreement to which the company is a party at the commencement of the proceedings and the agreement will become due during the proceedings. Employment contracts are excluded. The consent of the court is, however, needed for a cancellation of such a contract (s136(2A)).
No alteration in the classification of any issued securities is permitted during business rescue proceedings, unless if the court approves or it is done in terms of an approved business rescue plan (s137(1)). Directors are also not removed from office during rescue proceedings. They are, however, subject to the authority of the business rescue practitioner (see s137(2)(a)).
The business rescue practitioner
The business rescue practitioner supervises and advises management and has complete control of the company in the place of the board of directors (s140(1)(a)). The practitioner may be appointed by the board of directors, if commencement happened by way of a board resolution, discussed above. If proceedings commenced by way of a court order, then the court will appoint a practitioner on an interim basis. This is then subject to ratification by the holders of the majority of the independent creditors’ voting interests at the first meeting of creditors (s131(5) and 147(1)).
The practitioner needs to have the relevant professional and practical experience. The relevant qualifications are dealt with in Section 138(1)(a)–(e).
The practitioner can only be removed from office by way of a court order based on any one of six grounds (s139(2)(a)–(f)). Grounds of removal include: incompetence or failure to perform duties, failure to exercise a proper degree of care, engaging in illegal acts.
The practitioner’s remuneration can be determined by way of an agreement between the practitioner and the company or it can be determined by way of a resolution of creditors or in terms of a tariff laid down in statute (s143(1)). A practitioner may also negotiate an additional contingency fee.
The business rescue plan
The ultimate function of the practitioner is to prepare a business rescue plan. The plan has to be divided into three parts. Part A deals with the background, Part B with the proposals and Part C with the assumptions and conditions (s 150(2)).
Part A must at least include a list of all of the material assets of the company, an indication of the probable dividend that would be received by the creditors, a list of the holders of the company’s issued securities, a copy of the written agreement of the practitioner’s remuneration and a statement on whether or not the plan include any proposals informally made by a creditor of the company (s150(2)). Part B deals with the relevant proposal steps to be taken to resolve the company’s difficulties must include, inter alia, the nature and duration of the moratorium, the ongoing role of the company, the order of preference of which the proceeds of the property will be applied, the effect that the plan will have on the holders of each class of the company’s issued securities. Part C must set out the assumptions and conditions that must be fulfilled for the plan to be implemented. The effect on the plan on the employees must also be mentioned. This part will also deal with the circumstances under which the plan will come to an end and also provides the projected balance sheet as well as a statement of income and expenses for the next three years.
The practitioner must then provide a certificate that the information in the plan is accurate and correct. The plan must be published within 25 business days after the appointment of the practitioner (s150(5)).
Consideration and adoption of the business rescue plan
Ten days after the publication of the business rescue plan the practitioner must convene and preside over a meeting of creditors and any other holders with voting interests. He must deliver a notice, at least five days prior to the meeting, to all affected persons. A decision will then be taken at the meeting to adopt or reject the plan. The practitioner must inform the parties at the meeting whether he or she thinks that there is a reasonable prospect of the company being rescued. Employee representatives must also get an opportunity to address the meeting. (Sections 151 and 152).
More than 75% of the holders of the creditors’ voting interests as well as 50% of the independent creditors’ voting interests must support the plan for it to be accepted on a preliminary basis. The plan will then be regarded as finally approved only if the rights of any class of shareholders or the holders of the company’s securities are not altered by the rescue plan. If it does alter their rights then a meeting must be called by the practitioner to call for a vote by them to approve the plan, this is done by way of a majority of the voting rights exercised. If they do not accept it, then the plan is considered to be rejected (see s153).
A business rescue plan that has been accepted is then binding on each creditor and on every holder of securities of the company.
The termination of the business rescue proceedings
Business rescue proceedings will terminate when (s132(2)(a)–(c)):
- the court sets aside the order of resolution that commenced the proceedings
- the practitioner filed with the Commission a notice of termination
- a business rescue plan was proposed, but rejected and no affected person tried to extend the proceedings.
Written by a member of the Corporate and Business Law examining team