It is an unfortunate reality that in today’s economic climate, more and more companies are in financial distress. There is a global increase in companies having to restructure. As a result, Chapter 6 of the new Companies Act, No. 71 of 2008 has introduced Business Rescue to the South African business landscape.

South African companies who are trading in insolvent circumstances now have the opportunity to reorganise and restructure. This restructuring affects creditors, financial institutions, shareholders, employees and restructuring specialists. The purpose of Business Rescue is to help the company to continue trading instead of shutting down.

Here’s a brief overview of Overview of Chapter 6 of the Companies Act no.71 of 2008, the full act can is available here: http://www.cipc.co.za/files/2413/9452/7679/CompaniesAct71_2008.pdf

Nowadays, more and more companies are finding themselves experiencing financial distress. Business Rescue aims to change that.

Chapter 6 of the Companies Act no.71 of 2008

The new Companies Act No. 71 of 2008 (“the Act”) became official in April 2009 and became effective on 1 May 2011. The act rewrote South African company law. Chapter 6 specifically deals with Business Rescue, compromising with companies’ creditors. This modern Business Rescue regime replaced the Companies Act No. 61 of 1973 (“the old Act”).

What is Business Rescue?

Business Rescue means that proceedings to help rehabilitate a financially distressed company. Financial distress means that a company is unlikely to be able to pay all of its debts as they are due within 6 months of them being due. It can also mean that it is likely that a company will become insolvent in the next six months. The company is temporarily supervised in the management of its affairs, business and property. The Business Rescue process develops and implements a plan of action to rescue the company by restructuring its ways of business. The plan is to help the company become likely to continue in existence on a solvent basis, but this isn’t always possible. If not, the plan will help the company’s creditors or shareholders get a better outcome than if the company immediately liquidated.

The proceedings of Business Rescue is usually implemented by the company itself, under supervision. Sometimes the court will implement the process if someone affected makes an application. These affected people could be creditors, shareholders, employees or trade unions. The interests of these affected persons are recognised and their opinions and participation is a priority.

Under certain conditions, the board may elect to begin the rescue process. Upon reaching this consensus, the court appoints a practitioner.

Sections 129 and 130: Company Resolution to Voluntarily Begin Business Rescue Proceedings

If a company is in financial distress but there appears to be a chance of saving the company, the board may volunteer to begin Business Rescue Proceedings and appoint a practitioner. The company must notify anyone affected by these proceedings of this appointment. After the company has begun Business Rescue Proceedings, they are not allowed to start liquidation proceedings.

Before the Business Rescue plan is put in place, an affected person can apply to the court for a court order regarding the resolution, appointment of the practitioner or requesting the practitioner to provide security for the affected people. If it seems likely that the company is beyond saving, these orders can an order affecting resolution can be granted. If the appointed practitioner does not seem qualified in the position, an order can be granted to change practitioners.

Applications against the company have to be served on both the company and Intellectual Property Commission (“Commission”). Each and every affected person has the right to take part in the hearing of such application.

Section 131: Court order to begin Business Rescue Proceedings

If a company is unwilling to begin Business Rescue Proceedings on their own, an affected person can at any time apply for a court to order the company to begin these proceedings. This application has to be served on the both the company and the Commission and every single affected person has to be notified. There will then be a court hearing where the company will be placed under supervision and Business Rescue Proceedings will begin. For the court to grant this order, they must be sure that:

• The company is in financial distress;
• The company has failed to pay any amount related to employment matters;
• It is fair to do so for financial reasons; or
• There is no foreseeable chance of the company’s rescue

Once an order is granted, an affected person may appoint a practitioner to supervise the Business Rescue Proceedings. There is the chance that court will dismiss the application and place the company under liquidation instead.

The court can appoint an interim practitioner to help with the Business Rescue Proceedings nominated by the applicant. The majority vote of the affected creditors is essential in nominating this practitioner.

If liquidation proceedings have already begun at the time of filing for Business Rescue Proceedings, the liquidation will be suspended until the courts reach a decision or the Business Rescue Proceedings have ended. The court may make any of the above-mentioned orders at any time during any liquidation proceedings or proceedings to ensure security for the company.