Brief Overview Of Business Rescue In South Africa
In South Africa, it is important for business owners and directors to be aware of the tools available to them should they face financial distress.
One of the tools that business owners and directors may consider is business rescue, which was incorporated in our law to aid financially distressed companies or companies that foresee looming financial challenges.
The main purpose of business rescue is to resuscitate a company and revive its financial health and enable it to continue operating on a solvent basis, providing a better return to creditors.
Indications That A Business Might Need Business Rescue
It is highly recommended that a company should consider business rescue should they notice signs of financial distress, such as:
• If it appears that the company is reasonably unlikely to pay its debts as they become due and payable within six months;
• If it appears that that the company will become insolvent within six months;
• If the company is facing severe cashflow problems;
• When the company has overwhelming debt obligations;
Usually, directors of companies that are financially distressed are reluctant to accept the circumstances that they face and often experience panic. Therefore, to avoid such panic it is often advisable that they seek professional guidance or legal assistance as matter of urgency to avoid the situation getting worse.
Therefore, directors and owners who act decisively can prevent worsening solvency issues which might lead to liquidation.
How Business Rescue Commences
Business rescue can be initiated in two main ways:
• Voluntarily: In terms of Section 129 of the Companies Act, a company’s board of directors may initiate voluntary business rescue proceedings if there are reasonable grounds to believe the company is financially distressed and that there is a prospect of rescuing the business.
• Court Order: Any affected person may apply to the court at any time to place a company under business rescue.
Benefits Of Business Rescue For Struggling Businesses
• Preservation of Jobs and Continued Operations: A company may continue its operations during business rescue proceedings this in turn helps to safeguard employee’s jobs. A recent example of this is the West Pack Lifestyle matter whereby 1,100 jobs across its corporate and franchise stores where saved.
• Debt Restructuring and Improved Cash Flow: As the saying goes, “Revenue is vanity, profit is sanity, but cash flow is reality.” Cash flow plays a crucial role in business rescue proceedings. Business Rescue Practitioners ought to have intelligent restructuring strategies which include negotiating extended payment terms or reducing debt obligations with the main intention to improve cash flow.
• Post-Commencement Financing: Post commencement financing enables a financial distressed company to obtain funding from various sources for its ongoing operations to be funded, this ensures that the company stabilises its cashflow and maintain its operations. A recent example was when the Industrial Development Corporation (IDC) advanced post-commencement finance to Tongaat Hullet.
• Higher Returns for Creditors Compared to Liquidation: Generally, creditors in business rescue usually get better returns than they would in liquidation, because business rescue aims to rehabilitate a company one of the responsibilities of a Business Rescue Practitioner should be preserve and strategically manage assets, negotiate with all various stakeholders for creditors have greater returns.
Step-by-Step Overview Of The Corporate Business Rescue Process in South Africa
Appointment of Business Rescue Practitioner
When a company is financially distressed, it is essential to appoint Business Rescue Practitioner urgently, to investigate the company’s affairs, business, property and financial situation, and thereafter consider whether there is any reasonable prospect of rescuing the company.
Section 140 of the Companies grants a Business Rescue Practitioner with various powers, one of the main powers being that a Business Rescue Practitioner has full management and control over the company. Directors must deliver all books and records of the company’s affairs to the Business Rescue Practitioner.
The key critical competencies of a Business Rescue Practitioner include:
• Strong management skills;
• Ability to restructure the company to focus on the core profitable parts;
• Ability to act with speed and extreme urgency as time is of crucial importance in business rescue proceedings.
Powers of Directors
During business rescue proceedings the directors remain in their roles, however their powers and duties are restricted since the Business Rescue Practitioner has full control over the company. Directors must seek the Business Rescue Practitioner approval for any decisions affecting the company.
Effect of Business Rescue on Various Stakeholders
Employees
One of the aims of business rescue is to retain jobs, employees who were employed prior to the commencement of business rescue will continue to remain employed on the same terms and conditions on which they were employed prior to the commencement except were:
• Changes occur in the ordinary course of attrition;
• The employees and the company, in accordance with the labour laws agree to different terms and conditions.
Creditors
The rights for creditors to enforce their claims are temporarily suspended (moratorium), which means they cannot initiate or proceed with any legal action against the company. This is because one of the aims for business rescue is to achieve greater returns for creditors. As would be the norm in insolvency proceedings secured creditors have a higher priority, while unsecured creditors may face considerable reductions in the amounts recoverable
Important Aspects Of Corporate Business Rescue
Moratorium
Section 133 of the Companies Act provides for a moratorium (period of grace) on legal proceedings against a company. This is one of the most important elements of the business rescue process, this moratorium stays all legal proceedings, including any enforcement action, against a company, or in relation to any property belonging to the company.
This temporary halt gives the Business Rescue Practitioner the time needed to assess and restructure the business without external pressures.
Adoption of a Business Rescue Plan
A business rescue plan must be approved by creditors, once the plan is approved, the plan is implemented by the Business Rescue Practitioner.
Some of the key considerations in a business rescue plan are:
• Debt Restructuring: To enhance cash flow, the plan should address debt restructuring, such as renegotiating payment terms or reducing the company’s debt.
• Asset Management and Disposal: Business Rescue Practitioner may choose to sell non-core assets to generate liquidity, enabling the company to prioritise its core operations and meet essential obligations.
A business rescue plan that is adopted it is binding on the company, the intention is to allow the company to operate on a sound financial footing.
Conclusion
It is critical for businesses facing, or anticipating, financial distress to seek legal assistance promptly, as early intervention can be the key to survival. Business rescue plays a vital role in sustaining South Africa’s economy by supporting the solvency of businesses and preserving jobs.
Barnard Incorporated Attorneys is well-equipped to guide business owners and directors through business rescue proceedings and provide the legal advice necessary to make informed decisions.
This structured approach to corporate business rescue in South Africa helps companies prevent liquidation, rehabilitate their finances, and emerge stronger to contribute to the country’s economy.
It is also vital for business who face or foresee such financial distressed for them to contact their lawyers as soon as possible, prevention is better than cure.
The principle of solvency is an essential element our economy, the more business which can have their doors open, the better it is for our economy.
