Understand Business Rescue as a Business Owner

Understand Business Rescue as a Business Owner

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In ancient times, in Northern Italy, bankrupt debtors hit their naked backsides against a rock three times before a jeering crowd and cried out, “I declare bankruptcy.” Sounds fun, doesn’t it?

Donald Trump described his second Chapter 11 reorganisation as a sign of success, not failure, and more recently, the chief executive of Chrysler stated that a Chapter 11 reorganization of the company did not signify that he or Chrysler had failed. The cup was half full, not half empty, he said.

The South African context

In South Africa, on the other hand, insolvency is generally regarded as a sign of failure. There is a significant stigma attached to it and insolvent debtors are suspected of being either reckless or dishonest, or both.

I believe that this view was a major contributing factor to the failure of judicial management in South Africa (Under our Old Companies Act of 1973): the decisions of the courts in judicial management applications displayed a mistrust of this procedure which was regarded as an infringement on the rights of creditors because it prevented them from exercising their right to liquidate a company to obtain payment of their claims.

Related: 5 Reasons To Drop the Recession Mentality

Our new South African model (Companies Act 71 of 2008) defines ‘business rescue’ as proceedings to facilitate the rehabilitation of a company that is financially distressed (see below) by providing for:

  • The temporary supervision and management of the company by a business rescue practitioner;
  • A temporary moratorium on the rights of claimants against the company or property in its possession: and
  • The development and implementation (if approved) by a plan to rescue the company by restructuring its affairs, business, property, debt, other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis, or provides a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

A company is ‘financially distressed’ when 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 six months, or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

An affected person, in relation to business rescue plans of a company is:

  • a shareholder or creditor of the company;
  • any registered trade union representing employees of the company; and
  • Each employee of the company or their representatives, if any of the employees are not represented by a registered trade union.

Related: Anatomy Of a Failure

How does the business rescue model work?

There are two ways of initiating business rescue proceedings:

1. Proceedings may be initiated by the company when the board resolves that the company voluntarily begins business rescue proceedings and is placed under supervision. This will happen if the board has reason to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. Such a resolution may not be adopted if liquidation proceedings have already been initiated by or against the company and takes effect only when it is filed with the Companies and Intellectual Property Commission (hereafter referred to as the ‘Commission’).

After adoption of the resolution, the company must publish a notice of the resolution in the prescribed manner to every affected person (shareholders, creditors and all employees, whether represented by a registered trade union or not), appoint a business rescue practitioner and notify the Commission and those affected of the appointment.

2. Court order to begin business rescue proceedings. In the absence of a resolution by the board of directors to voluntarily begin business rescue proceedings, an affected person may apply to a court for an order placing the company under supervision and commencing business rescue proceedings. A copy of an application brought by an affected party must be served on the company and the Commission, and each affected person must be duly notified.

What you should know

Each affected person has the right to participate in the hearing of an application to begin business rescue proceedings.

After considering an application by an affected person, the court may either make an order placing the company under supervision and commencing business rescue proceedings if there is a reasonable prospect for rescuing the company or dismiss the application. If the court makes an order placing the company under supervision  the court must  also make a further order appointing an interim practitioner, subject to ratification by the holders of a majority of the independent creditors’ voting interest at the first meeting of creditors.

After the adoption of a resolution by the board to implement business rescue proceedings, but before the adoption of a business rescue plan, an affected person may apply to a court with the requisite jurisdiction for an order setting aside the resolution; setting aside the appointment of the practitioner; or requiring the practitioner to provide security to secure the interests of the company and any affected persons

Rights of affected persons during business rescue proceedings

  • For purposes of business rescue proceedings, the employee will, in certain circumstances, be a preferred unsecured creditor of the company.
  • Each creditor is entitled to notice of, and participation in, each court proceeding, decision or meeting. Each creditor also has the right to vote to amend, approve or reject a proposed business rescue plan and if such business rescue plan is rejected, a further right to either propose an alternative business rescue plan or present an offer to acquire the interests of any / all of the other creditors (who voted against the approval of the business rescue plan).
  • Creditors may form a creditor’s committee and are entitled to consult with the practitioner during the preparation of the business rescue plan. Voting by creditors occurs as follows:
  • a secured or unsecured creditor has a voting interest equal to the value of the amount owed; and
  • A concurrent creditor who would be subordinated in a liquidation has a voting interest equal to the amount that the creditor could reasonably expect to receive (the practitioner will request such amount to be independently and expertly appraised and valued).
  • Each shareholder (holder of any issued security) of the company is entitled to receive notice of, and to participate in, each court proceeding, decision or meeting. If a proposed business rescue plan alters the rights of any class of holders of securities in the company, at a meeting of such holders each person is entitled to vote to approve or reject such business rescue plan. If the business rescue plan is rejected, such holders may either propose the preparation of an alternative business rescue plan or present an offer to acquire the interests of any or all of the creditors or other holders, who voted against the approval of the business rescue plan, of the company’s securities.

What you should know

Creditors and employees and/or its recognised trade union may form  committee and are entitled to consult with the practitioner during the preparation of the business rescue plan

In my next column I will unpack the Business Rescue Plan, various time periods that must be adhered too and the courts view and rulings on business rescue.

Juan Engelbrecht
Juan Engelbrecht is the founder and owner of Business Rescue Solutions, which specializes in business rescue. He has 20 yrs of corporate retailing, manufacturing and HR management experience and holds a fellow membership with the Business Advisors Association (IBA). For more information contact Juan on +27 (0)716799226 or email juan@businessrescuesolutions.co.za