The business rescue process originates from the Companies Act, Act 71 of 2008. It facilitates the rescue of a company considered to be in “financial distress”. The intention is to avoid liquidation, while returning the company to health. But, how does this affect cash flow? The business rescue process may be successful, certain conditions permitting.

This also relies on there being a period where no legal action occurs against the company. That is, legal action which overrules the rescue process. During this time, one must raise an important question. If the company cannot pay its creditors, what happens to the cash flow? How will the business rescue process affect staff salaries, for example? Here, we will explore this

The Business Rescue process originates from the Companies Act, Act 71 of 2008.

Payment to Employees and Creditors

It may be that employees are not earning salaries during the business rescue process. If so, then that money becomes part of “post-commencement financing”. This phrase refers to finances gained after the process has begun (such as loans). Paying the money must occur in the order of preference set out in Section 135(3)(a) of the Companies Act.

To summarise:

1. Payment first goes towards the practitioner’s salary and expenses. It also goes to other professionals providing service during the process, such as accountants.
2. Payment then goes towards employee salaries due after the process began. This includes other amounts that became due after the beginning of the process.
3. After this, payment goes towards creditors loans. Specifically, this is for loans given after the business rescue process began.
4. Payment then goes to unsecured creditors for loans provided after the proceedings began.
5. Secured creditors are then paid for any loan provided after the proceedings began.
6. Salaries owed before the process began then go to employees.
7. Finally, payment goes to unsecured creditors of the company. This is for loans provided before the beginning of the business rescue proceedings.

For any established business, it’s crucial that the company may be able to gain finance from banks and other institutions.

Obtaining Finance after Commencement of the Business Rescue Process

Often, gaining cash flow requires obtaining finance. It is possible for the company to get loans after the business rescue process has begun. This relies on their willingness to do so. “Post-commencement finance” describes this process.

Companies may provide loans after the business rescue process has started. If so, they will receive payment over all unsecured claims against the company. This is regardless of whether they provided secured or unsecured loans. This stipulation actually makes it expedient for banks to lend money to the company. Without this, no business or institution would be likely to lend money to the company. In turn, this would often make business rescue impossible, as there is no cash flow available to it. It’s crucial for the company to be able to gain finance from banks and other businesses. This is especially during or after the business rescue process.

The banks and other institutions will need to be co-operative during the proceedings. If so, the company has a substantially higher chance of surviving. And indeed, without a source of finance, business rescue would not be possible.

Have an enquiry? Contact Corporate Business Rescue.