With the advent of the Covid-19 pandemic, many businesses are experiencing financial distress. In South Africa, this is no exception. Business rescue saw its introduction to our legal landscape relatively recently. It aims to encourage recovery in these companies.

Business rescue saw its introduction as a part of Chapter 6 of the New Companies Act. Thanks to this, many financially distressed companies have an alternative to insolvency. Practitioners in this field specialise in facilitating the rehabilitation of failing businesses. The process includes restructuring and organising the business. The end goal is to allow the business to achieve a stable and profitable state of operations.

How Business Rescue Helps

Business rescue is often misconstrued and misunderstood. This is mostly due to its relative “new-ness” to our legal landscape. It can be difficult to understand how the process itself affects a company and its stakeholders.

Business rescue is a relatively new system within South Africa’s legal landscape.

There are laws, regulations, and requirements set out by the legal system. For example, a company must be in “financial distress” to apply for rescue. This means that the business must be unable to pay its creditors. Additionally, it must be unlikely to be able to do so within the following 6 months. Once approved, though, the rescue practitioner will oversee and supervise the company’s affairs.

The practitioner provides several services, including but not limited to:

• Devising, preparing, developing, and implementing a business rescue plan.
• Overseeing and supervising the company’s affairs during the rescue process.
• Investigating the company’s financial situation.

Business rescue is often a viable alternative to insolvency.

The Practitioner’s Role

The main duty of the practitioner is reducing or eliminating the debt owed by the company. To achieve this, the practitioner must first investigate the company’s financial situation. This means observing its affairs, property, financial standing, and operations. From there, they will determine if there is any reasonable chance to rescue the business.

The practitioner takes responsibility over the business rescue process. As such, they have considerable powers over the business itself. These powers are essential in implementing an effective rescue plan. The practitioner is also regarded as an officer of the court. As a result, they may delegate responsibilities to the company’s shareholders and management body.

The Business Resolution

A practitioner involved in the rescue process needs to investigate the company’s affairs. This is an urgent matter, and they must reveal the results of the investigation to the company’s creditors and employees. After conducting a meeting with these parties, the practitioner informs them of the viability of rescue for the business.

After this point, the practitioner must create a business rescue plan. The company must publish this plan within 25 days of receiving it from the practitioner. Then, a meeting must occur between the creditors and other affected parties. Here, they must vote to approve or reject the plan within 10 days of its publication.

This tight time frame conveys the urgency of the rescue process. Despite this, there can be certain leeway made for these reporting periods, under certain conditions. This mostly depends on the size of the business itself.

The Affected Parties

When the business rescue process is underway, there will be considerable changes. The directors will remain directors, though with more restricted powers over the business. This status quo continues until the process concludes, and no longer affects the company.

The shareholder’s interests and agreements are set before the process begins in earnest. But, they must be in like with the terms and conditions set out at the same time. This may change alongside circumstances in the rescue process changing as well. Regardless, the company must still meet its agreements between the affected parties.

Viability

Business rescue in South Africa has not yet fully established its viability. It is a relatively new system on our legal landscape. As such, it has yet to yield conclusive results. But, within South Africa, it’s worth noting that it has enjoyed a higher success rate than the global average. International success rates average at about 5%, while South African estimates are 10-12%.

While it is still developing, it still serves as an aternative to insolvency. Businesses in financial distress have an option to turn to outside of liquidation. Additionally, we can expect higher success rates as the system continues to evolve.

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