Navigating Troubled Waters: The Significance of Business Rescue
November 17, 2023
Part One
Business rescue offers businesses a useful alternative to business closure or liquidation. During and after the COVID-19 pandemic, many businesses have fallen into financial difficulties. During this time, they have had to consider whether rescue is an appropriate option. This is especially prevalent, given the impact that the pandemic has had on their businesses.
Here, we’ll go over some of the essentials of business rescue and its impact on businesses in financial difficulties.
Business Rescue serves as a potential alternative to liquidation or outright business closure.
What is it?
Business rescue serves as a potential means for avoiding business closure. It entails the rehabilitation of a company experiencing financial distress. But, what is a financially distressed company? A financially distressed company falls under the following definitions:
- The company will be unable to pay all its debts as they become due and payable within the following six months. This is the immediately ensuing six months from which the debts become payable.
- The company experiencing financial difficulties is likely to become insolvent. Specifically, within the immediately following six months.
What Must the Company Do?
When a company is in financial distress, the directors must determine a few factors:
- Whether to continue trading, and attempt to reverse the situation without business rescue.
- Whether the above situation would be reckless, as contemplated in section 22 of the Companies Act.
The Companies and Intellectual Property Commission has issued a practice note on this. They do not penalise businesses that continue to trade despite financial difficulties due to COVID-19. But, this is a temporary measure. As such, they will still need to find out whether rescue is a more viable resolution to their situation.
 After establishing that the business is financially distressed, the board of directors must notify all affected persons.
Financial Difficulties and the Board of Directors
At some point, the board of directors may have established that the company is under financial distress. The next thing to establish is whether there is a reasonable chance, or prospect, of rescuing the company. There is no guarantee that a reasonable chance does or does not exist.
The board must know whether there is a reasonable prospect for rescue of the company. There must be a prospect of rescuing the company in financial difficulties to a solvent state. At the very least, they must be able to secure a better deal for creditors and other shareholders. In other words, they need to be secure from liquidation for a minimum period.
Deciding for or Against Rescue
The board may have reasonable grounds to believe that business closure is inevitable. Or, they may have grounds to believe that the company is financially distressed, but not place the company under business rescue. In this case, the board must deliver a written notice to each affected person, detailing reasons for not placing the company under rescue.
An affected person includes shareholders, creditors, registered trade unions, and employees. The decision to send out this notice requires due consideration. Reason being, it informs all relevant parties that the company is financially distressed. The notice may affect the company’s trading activities, for example:
- Creditors could change their payment terms for the company experiencing financial difficulties.
- Negotiations for finance with creditors and financial institutions may alter.
- The notice could lead to labour action on part of the employees and trade unions.
Rights of the Affected Persons
In certain cases, the board of directors may have not chosen to place the company under business rescue. In this case, affected persons are within their rights to apply for rescue on behalf of the company themselves.
